| ILX RESORTS INC Item 1A Risk Factors 5 Item 1A Risk Factors We face a variety of risks related to the operation of our business and the execution of our business strategy |
| WE FACE A VARIETY OF RISKS RELATED TO THE RAPID GROWTH OF OUR BUSINESS WE MAY NOT SUCCESSFULLY EXECUTE OUR GROWTH STRATEGY A principal component of our growth strategy is to acquire additional improved and unimproved real estate for the construction and development of new convenient access resorts and Varsity Clubs, which are urban vacation ownership properties strategically situated in tourist destinations that are accessible to major population centers near prominent colleges and universities |
| Our ability to execute our growth strategy will depend upon a number of factors, including the following: · the availability of attractive resort development opportunities; · our ability to acquire and/or construct properties for such development opportunities on economically feasible terms; · our ability to market and sell vacation ownership interests at newly developed or acquired resorts; and · our ability to manage newly developed or acquired resorts in a manner that results in customer satisfaction |
| In particular, the success of our Premiere Vacation Club will depend upon our ability to continue to acquire and develop a sufficient number of participating resorts to make membership interests attractive to consumers |
| In addition, the success of our Varsity Clubs concept will be enhanced by our ability to successfully negotiate with universities proximate to our Varsity Clubs for access to the alumni, parents, and other persons affiliated with such universities |
| We cannot provide assurance that we will be successful with respect to any or all of these factors |
| WE MAY NOT BE ABLE TO FINANCE OUR GROWTH We intend to selectively acquire and develop new vacation ownership resorts and to continue to expand our existing resorts |
| Our plans include the: development of approximately 22 acres of land in Sedona, adjacent to our Los Abrigados Resort, to be known as Heritage Park |
| Acquiring and developing new resorts and Heritage Park will place substantial demands on our liquidity and capital resources, as well as on our personnel and administrative capabilities |
| Risks associated with our development and construction activities include, but are not limited to, the following: · construction costs or delays may exceed original estimates, which could make the development or expansion uneconomical or unprofitable; · sales of vacation ownership interests or other revenue from newly completed facilities may not be sufficient to make the resort or development profitable; 5 · financing may not be available on terms favorable for development of a project; and · financing may not be available on terms favorable for the continued sales of vacation ownership interests in a particular project |
| We project that currently planned development and expansion at our resorts, and land in the planning stages (including Heritage Park), may cost in excess of dlra50 million |
| Although we have preliminarily secured adequate financing for the projects currently under development, we cannot provide assurance that adequate financing for future development projects will be available on terms and conditions favorable to our Company |
| Our ability to obtain needed financing and to repay any indebtedness at maturity may depend on refinancing or future sales of debt or equity, which may not be available on terms favorable to our company |
| Factors that could affect our access to the capital markets, or the cost of such capital, include the following: · changes in interest rates, · general economic conditions, · the threat of war or terrorist activities, · the perception in the capital markets of the vacation ownership industry, our business, and our business prospects, · our results of operations, and · the amount of debt we have outstanding and our financial condition |
| WE FACE RISKS ASSOCIATED WITH OUR ABILITY TO ACQUIRE PROPERTIES THAT ARE SUITABLE FOR DEVELOPMENT Our ability to execute our growth strategy will depend to a significant degree on the existence of attractive project acquisition opportunities |
| Currently, there are numerous potential buyers for these properties |
| Many of these potential buyers have a stronger capital structure and greater resources with which to acquire attractive resort opportunities than we have |
| We cannot provide assurance that we will be able to compete successfully against such buyers |
| A variety of comprehensive federal, state, and local laws regulate our development and construction activities, as well as our ownership, sales, and management of real estate |
| These laws relate to many issues that directly or indirectly affect our business, including the following: · marketing and sales, · building design and construction, · zoning, land use, and development, · water supplies, · environmental and health concerns, and · protection of endangered species |
| Any difficulties in or delays in obtaining, or our inability to obtain, the requisite licenses, permits, allocations, authorizations, and other entitlements pursuant to such laws could adversely impact our ability to develop and operate our projects |
| The enactment of "e slow growth "e or "e no- growth "e initiatives or changes in labor or other laws in any area where our projects are located also could delay, affect the cost or feasibility of, or preclude entirely the development or expansion of our resorts |
| WE MAY FACE A VARIETY OF RISKS WHEN WE EXPAND OUR RESORTS Our growth strategy includes the expansion of a number of units at our resorts, when appropriate |
| Risks associated with such expansion include, but are not limited to, the following: · construction costs may exceed original estimates, which could make the expansion uneconomical; 6 · we may not complete construction or conversion as scheduled, which could result in delayed recognition of revenue and increased interest expense; · we may be delayed in obtaining, or we may not be able to obtain, applicable governmental permits and authorizations; · we may not be able to obtain necessary financing on favorable terms and; · market demand may not be sufficient to make such expansion profitable |
| Accordingly, we cannot provide assurance that we will complete all of our planned expansion of our resorts or, if completed, that such expansion will be profitable |
| WE MAY FACE ADDITIONAL RISKS AS WE EXPAND INTO NEW MARKETS Our growth strategy consists of acquiring and developing additional convenient access resorts and Varsity Clubs in the western United States and Mexico, including markets in which we currently do not have an ILX resort or conduct any sales or marketing activities |
| Our prior success in the geographic locations in which we currently operate does not ensure our continued success as we acquire, develop or operate future resorts or Varsity Clubs |
| Accordingly, in connection with expansion into new markets, we may be exposed to a number of risks, including, but not limited to, the following: · our lack of familiarity and understanding of local consumer preferences; · our inability to attract, hire, train, and retain additional sales, marketing, and resort staff at competitive costs; · our inability to obtain, or to obtain in a timely manner, necessary permits and approvals from state and local government agencies and qualified construction services at acceptable costs; · our inability to capitalize on new marketing relationships and development agreements; and · the uncertainty involved in, and additional costs associated with, marketing vacation ownership interests prior to completion of marketed units |
| OUR PRACTICE OF FINANCING CUSTOMER BORROWINGS EXPOSES US TO LIQUIDITY RISKS We typically finance approximately 80prca of our overall sales of vacation ownership interests |
| Although we conduct credit pre-approval due diligence with respect to each financed sale, there are significant risks associated with such transactions, including those set forth below |
| WE COULD INCUR SUBSTANTIAL LOSSES IF PURCHASERS OF VACATION OWNERSHIP INTERESTS DEFAULT ON THEIR OBLIGATIONS TO PAY THE BALANCE OF THE PURCHASE PRICE We require purchasers to make a down payment of at least 10prca of the aggregate purchase price of the vacation ownership interest and to deliver a promissory note to us for the balance |
| Although we conduct credit pre-approval due diligence with respect to each purchaser, we bear the risk of default associated with customer notes that we retain and those that we sell with recourse to our company |
| If a buyer of a vacation ownership interest defaults, we generally will pursue collection remedies to the extent legally permitted |
| Although in many cases we may have recourse against a buyer for the unpaid purchase price, certain states, including Arizona and Indiana, have laws that limit our ability to recover personal judgments against customers who have defaulte d on their loans |
| If we are unable to collect the defaulted amount or to obtain a voluntary quitclaim deed to the mortgaged interest, we likely will foreclose on and then remarket the recovered vacation ownership interest |
| Irrespective of our remedy in the event of a default, we cannot recover the marketing, selling, and administrative costs associated with the original sale and we must incur such costs again to resell the vacation ownership interest |
| In addition, the costs associated with exercising collection and foreclosure remedies can be high relative to the value of the underlying asset |
| We generally do not carry private mortgage insurance or its equivalent to cover defaults on customer notes |
| We sell or hypothecate (that is, borrow against) the majority of our customer notes |
| When we sell customer notes, the purchasers generally have recourse to our company |
| As a result, we may be required to repurchase or replace any such customer note that becomes delinquent |
| We take these contingent obligations into account in establishing our allowance for uncollectible notes |
| We cannot provide assurance that such allowances will be adequate to offset actual defaults under customer notes, including notes that we have sold with recourse to our company |
| Our financial condition and results of operations could be materially adversely affected if our allowances are inadequate to cover actual defaults |
| 7 OUR BORROWING BASE AND/OR OUR ABILITY TO SELL CUSTOMER NOTES MAY BE ADVERSELY AFFECTED BY THE NATURE AND QUALITY OF THE CUSTOMER NOTES We typically finance our working capital needs either by selling or by hypothecating customer notes that meet certain criteria established by third-party lenders |
| As of December 31, 2005, we had agreements with one lender to borrow up to dlra30dtta0 million against conforming retained customer notes, of which approximately dlra11dtta4 million remained available for borrowing |
| In addition, as of December 31, 2005, we had an agreement with one lender under which we can sell up to dlra30dtta0 million of conforming customer notes, of which approximately dlra25dtta7 million remained available |
| Once hypothecated or sold, our customers make payments on their notes directly to the lenderapstas collection center or agent |
| All of a customerapstas payments on hypothecated notes are applied to our loan balance, both principal and interest |
| Historically, our borrowings and sales of notes have not approached the maximum amount available under our existing credit facilities |
| We cannot provide assurance, however, that our future working capital needs will not exceed amounts available under our credit facilities |
| To the extent that we generate additional customer notes through our sales efforts, we may pledge or sell the applicable customer notes, subject to applicable restrictions |
| WE GENERALLY EXPERIENCE NEGATIVE CASH FLOW UPON THE SALE OF FINANCED VACATION OWNERSHIP INTERESTS On financed sales, we ordinarily receive only 10prca of the purchase price on the sale of a vacation ownership interest, but we must pay in full the costs associated with the development, marketing, and sale of the vacation ownership interest |
| These costs generally exceed the downpayment we receive at the time of sale |
| Maximum borrowings and sales of notes available under our existing credit facilities may not be sufficient to cover these costs, which could limit our available capital resources, liquidity, and capacity to grow |
| Our existing credit facilities expire at various dates through 2007 |
| We presently do not have binding agreements to extend the terms of our existing credit facilities or for any replacement financing upon the expiration of our existing credit facilities |
| Moreover, we cannot provide ass urance that we will be able to arrange alternative or additional credit facilities on terms that are satisfactory to our company in the future |
| Accordingly, future sales of vacation ownership interests may be limited by the availability of funds to finance the initial negative cash flow that often results from sales that we finance |
| Although we currently are selling customer notes at a premium, to the extent that we finance our negative cash flow by selling customer notes to lenders in the future we may be able to sell such notes only at a discount from the face value of such notes |
| In addition, we cannot provide assurance that we will be able to negotiate the sale of such customer notes at favorable rates, or at all |
| FLUCTUATIONS IN INTEREST RATES AND INTEREST RATE MISMATCHES COULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS, LIQUIDITY, AND FINANCIAL POSITION We currently derive a portion of income from the spread between the interest rates we charge our customers and the interest rates at which we borrow against customer notes or at which we sell customer notes |
| We cannot provide assurance, however, that the present interest rate spread will continue in the future |
| We may not be able to maintain these spreads as a result of decreases in the rates we are able to charge customers or increases in the prime lending rate, or upon the expiration of our current credit facilities and our inability to replace such facilities at existing terms |
| In addition, our indebtedness bears interest at variable rates while the retained customer notes bear interest at fixed rates |
| Moreover, we currently do not engage in interest rate hedging transactions |
| Therefore, any increase in interest rates, particularly if sustained, could have a material adverse effect on our results of operations, liquidity, and financial position |
| If there were a one-percentage point change, based on the dlra21dtta7 million balance of variable rate debt at December 31, 2005, interest expense would increase or decrease by approximately dlra217cmam000 (before income taxes) per annum |
| Further, to the extent interest rates generally decrease on third-party financing available to our customers, we face an increased risk that customers will pre-pay their customer notes and reduce our income, if any, from financing activities |
| In addition, if a customer prepays a note that we have sold, we are required to repay the unearned interest premium, if any, on the note |
| THE MISMATCH BETWEEN CUSTOMER NOTES AND OUR CREDIT FACILITIES COULD CREATE SIGNIFICANT LIQUIDITY RISKS Customer notes typically have a seven-year term, while our related revolving credit facilities mature or expire on different dates over the next six years |
| Accordingly, a mismatch exists between our anticipated cash receipts and cash disbursements |
| Although we historically have been able to secure financing sufficient to fund our operations, we currently do not have agreements with our lenders to extend the respective terms of our existing credit facilities or to replace such credit facilities upon their expiration |
| Our failure to obtain such refinancing or replacement credit facilities could require us to sell our portfolio of retained customer notes, potentially at a discount, or to seek other alternatives to enable us to continue in business |
| While we have been successful in obtaining financing to date, we cannot provide assurance that we will be able to do so in the future |
| The failure to do so in the future could have a material adverse effect on our results of operations and liquidity |
| 8 WE FACE SUBSTANTIAL COMPETITION IN THE VACATION OWNERSHIP INDUSTRY The vacation ownership industry consists of a large number of local and regional resort developers and operators |
| In addition, we face competition from some of the worldapstas most recognized national and international lodging, hospitality, and entertainment companies, such as Marriott Ownership Resorts, The Walt Disney Company, Hilton Hotels Corporation, Hyatt Corporation, Four Seasons Hotels & Resorts, Starwood Hotels & Resorts Worldwide, Inc, Cendant Corporation, and their subsidiaries and affiliates |
| Many of these companies have much greater access to capital and other resources than we do |
| As a result, we may be at a competitive disadvantage with our competitors for access to marketing, personnel, and other resources that we require to compete successfully |
| In addition, competition from other vacation ownership resort developers and operators may limit our ability to acquire additional resorts and to obtain access to affinity groups |
| Our business and results of operations may be materially adversely affected if we are unable to compete successfully against such companies |
| In addition to the competitors named above, our resorts and sales offices may face direct competition from smaller, local vacation ownership companies with resorts or sales offices within the vicinity of our resorts, as well as from resales of vacation ownership interests |
| We also are subject to competition from other entities engaged in the commercial lodging business, including condominiums, hotels and motels, and others engaged in the leisure business who compete with us by offering easy access, including online through proprietary web sites and internet travel intermediaries, to competitive nightly rates on luxury resort accommodations in desirable locations, which could reduce demand for our vacation ownership interests |
| We anticipate that we will continue to face substantial competition in all aspects of our operations from organizations that are more experienced in the leisure industry and that have gr eater access to financial, marketing, and other resources |
| As a result, these competitors may have greater negotiating leverage to acquire properties or other resources required to compete or may be able to take advantage of greater gross sales and thereby reduce the retail price of their vacation ownership interests |
| Our profit margins and operating results could be adversely affected if we find it necessary to reduce our prices in order to remain competitive |
| A reduction in our profit margins as a result of competitive pressures, or an increase in our costs relative to such competitors &apos costs, could have a material adverse effect on our results of operations, liquidity, and financial position |
| OUR SUCCESS WILL DEPEND UPON OUR KEY MANAGEMENT EMPLOYEES We rely upon certain key management employees |
| The loss of any key employee could materially and adversely affect our business |
| We cannot provide assurance that we will be able to retain key members of our current management team or that we will be able to attract experienced personnel in the future |
| Our success also will depend upon our ability to attract and maintain qualified property acquisition, development, marketing, management, administrative, and sales personnel |
| Our ability to attract, train, and retain such personnel will become particularly important as we grow and develop additional resorts, and we cannot provide assurance that we will be successful in attracting or retaining such personnel |
| Our business and results of operations could be materially adversely affected if we are not able to attract and retain such key personnel |
| OUR BUSINESS COULD BE ADVERSELY AFFECTED BY OUR GEOGRAPHIC CONCENTRATION WITHIN THE WESTERN UNITED STATES, PARTICULARLY ARIZONA As of the date of this Form 10-K, a majority of our customers and resort accommodations are located in Arizona |
| As a result, our financial condition and results of operations may be materially adversely affected by local Arizona economic downturns, changing demographics or regulatory changes |
| Further, our growth strategy includes expansion of sales centers and vacation ownership interests in the western United States and Mexico |
| Although expansion into markets other than Arizona may reduce our susceptibility to downturns in the Arizona market, we cannot provide assurance that we will be able to successfully apply our current operating strategy to new markets beyond Arizona |
| In addition, because we intend to execute our growth strategy primarily in the western United States, we will continue to be particularly susceptible to adverse changes in economic circumstances, demographic trends or regulatory changes af fecting the western United States in general and, in particular, the local markets that we enter |
| We cannot provide assurance that we will be able to offset or minimize the adverse effects of such circumstances upon our business, financial condition or results of operations |
| OUR ABILITY TO SUCCESSFULLY MARKET OUR PROPERTIES WILL DEPEND UPON CONTINUED AVAILABILITY OF VIABLE EXCHANGE NETWORKS Our ability to successfully market and sell vacation ownership interests will depend in part upon the availability of "e exchange networks, "e which allow owners of our vacation ownership interests to "e trade "e the time they have purchased for time at another participating vacation ownership resort |
| All vacation ownership interests that we currently offer are qualified for inclusion in one or more exchange networks |
| We cannot provide assurances, however, that we will be able to continue to qualify additional properties or that such exchange networks will 9 continue to be available for our existing portfolio of vacation ownership interests |
| If such networks cease to function effectively or if we are unable to respond to consumer demand for greater choices of desirable locations, we will be at a competitive disadvantage with respect to competitors that can offer such choices |
| As a result of such disadvantages, we may be unable to sell a sufficient number of vacation ownership interests or we may be unable to make sales at prices that will enable us to remain profitable |
| Our results of operations could be materially adversely affected as a result of such risks |
| OUR COMPANY FACES SIGNIFICANT RISKS ASSOCIATED WITH LEVERAGE We anticipate that we will finance our future business activities, in whole or in part, with indebtedness that we obtain pursuant to additional borrowings under our existing credit facilities or under credit facilities that we will obtain in the future |
| The definitive agreements with respect to these credit facilities do and could contain restrictive covenants that limit our ability to, among other things, make capital expenditures, incur additional indebtedness, and dispose of assets or that require us to maintain certain financial ratios |
| The indebtedness incurred under these credit facilities may be secured by mortgages on all or a portion of our resorts, customer notes, and other assets |
| If we default under one or more of these credit facilities, our lenders could foreclose on the vacation ownership properties secured by a mortgage or deed of trust or take possession of other assets pledged as collateral |
| In addition, future credit facilities may not provide for the lender to release liens on our vacation ownership interests when we sell such interests |
| Such restrictions could impair the marketability of our vacation ownership interests |
| The extent of our leverage and the terms of our indebtedness, such as requirements that we maintain certain debt-to-equity ratios, also could impair our ability to obtain additional financing in the future, to make acquisitions, or to take advantage of significant business opportunities that may arise |
| Furthermore, our indebtedness and related debt service obligations may increase our vulnerability to adverse general economic and vacation ownership industry conditions and to increased competitive pressures |
| We cannot provide assurance that we will not require additional indebtedness in the foreseeable future to execute our growth strategy |
| EXTENSIVE FEDERAL, STATE, AND LOCAL LAWS AND REGULATIONS AFFECT THE WAY WE CONDUCT OUR BUSINESS The federal government and the states and local jurisdictions in which we conduct business have enacted extensive regulations that affect the manner in which we market and sell vacation ownership interests and conduct our other business operations |
| 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 |
| In addition, many states, including Arizona, have adopted specific laws and regulations regarding the sale of vacation ownership interests |
| These laws and regulations require us, among other things, to obtain and file numerous documents and supporting information with the responsible state agency, to obtain the agencyapstas approval for an offering statement that describes all material aspects of the sale of vacation ownership interests, and to deliver an offering statement or public report, together with certain additional information concerning the terms of the purchase, to all prospective purchasers of a vacation ownership interest |
| Laws in each state where we currently sell vacation ownership interests generally grant the purchaser of a vacation ownership interest the right to cancel a contract of purchase at any time within three to seven calendar days following the date the purchaser signs the contract |
| Most states also have other laws that regulate our activities and protect purchasers, such as the following: · real estate licensure laws, · travel sales licensure laws, · anti-fraud laws, · consumer protection laws, · telemarketing laws, and · prize, gift, and sweepstakes laws |
| We currently are authorized to market and sell interests in all states in which our resorts are located and all states in which we market and sell vacation ownership interests |
| We may apply for the right to conduct sales operations in additional states throughout the United States |
| We cannot provide assurance, however, that any state will grant, or continue to grant, our company the right to sell our vacation ownership interests in such states or that, if such right to conduct sales operations is granted, it will be granted on terms and conditions 10 acceptable to us |
| Further, if agents or employees of our company violate such regulations or licensing requirements, such acts or omissions could cause the states where the violations occurred to revoke or refuse to renew the licenses required to permit us to sell vacation ownership interests in such states |
| We believe we are in material compliance with applicable federal, state, and local laws and regulations relating to the sale and marketing of vacation ownership interests to which we currently are subject |
| From time to time, however, consumers file complaints against our company in the ordinary course of our business |
| We could incur significant costs to resolve such complaints or to qualify under applicable regulations in all jurisdictions in which we desire to conduct sales |
| We cannot provide assurance, however, that we will remain in material compliance with applicable federal, state and local laws and regulations, or that violations of applicable laws will not have adverse implications for our company, including, without limitation, negative public relations, potential litigation, and regulatory sanctions |
| The expense, negative publicity, and potential sanctions associated with our failure to comply with a pplicable laws or regulations could have a material adverse effect on our results of operations, liquidity or financial position |
| In particular, increased regulations of telemarketing activities could adversely impact the marketing of vacation ownership interests |
| Under certain conditions, vacation ownership interests may be considered "e securities "e under state or federal law, in which case we would be subject to the time-consuming and expensive requirements to register such interests, license our salespeople, and comply with other regulations |
| Although our vacation ownership interests are not considered to be securities in any jurisdiction in which we operate as of the date of this Form 10-K, we cannot guarantee that we can structure vacation ownership interests so as to avoid regulation as "e securities "e under applicable federal or state laws that may be adopted in the future or in any jurisdiction in which we may operate in the future |
| If our vacation ownership interests are deemed to be securities, we cannot provide assurance that we will be able to comply with the applicable state and federal securities requirements or that the liabilities o r contingencies that result from such compliance will be immaterial |
| EXCESSIVE CLAIMS FOR CONSTRUCTION-RELATED DEFECTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OPERATING RESULTS While we typically engage third-party contractors to construct or renovate our resorts, our customers may assert construction claims against our company for construction defects |
| In addition, certain state and local laws may impose liability on property developers with respect to construction defects discovered or repairs made by future owners of such property |
| An excessive number of claims for construction-related defects could adversely affect our liquidity, financial condition, and operating results |
| ENVIRONMENTAL LIABILITIES COULD HAVE A MATERIAL ADVERSE IMPACT ON OUR BUSINESS Under various federal, state and local laws, ordinances and regulations, as well as common law, we may be liable for the costs of removal or remediation of certain hazardous or toxic substances located on, in, or emanating from property that we own, lease, or operate, as well as related costs of investigation and property damage at such property |
| Such laws often impose liability without regard to whether we knew of, or were responsible for, the presence of hazardous or toxic substances |
| The presence of such substances, or the failure to properly remediate such substances, may adversely affect our ability to sell or lease our property or to borrow money using such real property as collateral |
| Noncompliance with environmental, health or safety requirements may require us to cease or alter operations at one or more of our properties |
| Further, we may be subject to common law claims by third parties based on damag es and costs resulting from violations of environmental regulations or from contamination associated with one or more of our properties |
| Although we typically conduct significant due diligence prior to acquiring real property, we may not obtain Phase I environmental reports with respect to each of our properties if management believes that the risk of potential environmental liability does not warrant the performance of Phase I assessments due to the remote location of such property or any other reason |
| If we fail to obtain such reports, we may acquire or develop property and later discover that we cannot operate the property as planned, or we may assume environmental or other liabilities that we could have avoided if we had the information typically revealed in a Phase I report |
| To date, we have obtained environmental reports with respect to four of our resorts |
| Even when we perform due diligence investigations, we cannot provide assurance that our due diligence efforts or Phase I reports, when available, will reveal all environmental liabili ties or that we will identify every material environmental condition |
| Certain environmental laws impose liability on a previous owner of property to the extent hazardous or toxic substances were present during the prior ownership period |
| A transfer of the property may not relieve an owner of such liability |
| Thus, we may have liability with respect to properties that we or our predecessors sold in the past |
| 11 ACCELERATION OF DEFERRED TAXES AND NET OPERATING LOSS CARRYFORWARD LIMITATIONS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND LIQUIDITY While we report sales of vacation ownership interests as income for financial reporting purposes upon closing a sale, federal income tax regulations allow us to report a portion of financed sales on the installment method, if we so elect |
| When we elect the installment method, we recognize income on the sale of a vacation ownership interest (a) when we receive cash in the form of a down payment, and (b) incrementally as we receive payments on retained customer notes or when we factor the customer note |
| As of December 31, 2005, we had deferred taxes (ie, taxes owed to taxing authorities in the future as a consequence of income previously reported in our financial statements) in the amount of dlra8dtta1 million as a result of this method of reporting sales of vacation ownership interests |
| If we should factor the customer notes, if a lender forecloses on the retained customer notes, or if we otherwise collect or disp ose of the retained customer notes, the deferred gain would be reportable for tax purposes and the deferred taxes, including interest on those taxes, if any, would become due |
| Moreover, we would owe accrued interest on such deferred taxes that would be payable when the taxes are due in the event the deferred taxes reverse in a year when income taxes are payable by our company, the likelihood of which is not now reasonably ascertainable |
| We cannot provide assurance that we will have sufficient cash resources to pay those taxes and interest if and when they become payable |
| Furthermore, if our sales of vacation ownership interests should decrease in the future, our diminished operations may not generate either sufficient tax losses to offset taxable income or funds to pay the deferred tax liability from prior periods |
| Consequently, our liquidity and financial position could be adversely affected |
| At December 31, 2005, our wholly-owned subsidiary, Genesis Investment Group, Inc |
| (“Genesis”), had net operating loss, or "e NOL, "e carryforwards of approximately dlra630cmam000 |
| These NOL carryforwards are limited as to usage because they arise from built-in losses of an acquired company |
| In addition, such losses can only be utilized through the earnings of Genesis and are limited to a maximum of dlra189cmam000 per year |
| To the extent the entire dlra189cmam000 is not utilized in a given year, the difference may be carried forward to future years |
| Any unused Genesis NOLs will expire in 2008 |
| THE LIMITED RESALE MARKET FOR VACATION OWNERSHIP INTERESTS COULD ADVERSELY AFFECT OUR BUSINESS Based on our experience with our resorts and ownership of vacation ownership interests at destination resorts owned by third parties, we believe that resales of vacation ownership interests generally are made at net sales prices below their original customer purchase price |
| The relatively lower sales price is partly attributable to the high marketing and sales costs associated with initial sales of such vacation ownership interests |
| Accordingly, the initial purchase of a vacation ownership interest may be less attractive to prospective buyers |
| Also, buyers who seek to resell their vacation ownership interests may compete with our efforts to sell our vacation ownership interests |
| While vacation ownership interest resale clearing houses or brokers currently do not have a material impact on our business, if a secondary market for vacation ownership interests were to become more organized and liquid, the availabi lity of resale vacation ownership interests at lower prices could adversely affect our prices and the number of sales we can close |
| As a result, our business and results of operations may be adversely affected |
| DOWNTURNS IN GENERAL ECONOMIC CONDITIONS CAN SIGNIFICANTLY IMPACT OUR FINANCIAL CONDITION AND OPERATING RESULTS Any adverse change in general economic conditions, significant price increases, or adverse occurrences affecting the travel and tourism industry, such as the impact of war or terrorist activity, cyclical overbuilding in the hotel and vacation ownership industries and the financial condition of the airline industry and the impact on air travel, could have a material adverse effect on our companyapstas business and results of operations |
| Such conditions or occurrences also may have an adverse effect upon the availability and cost of financing for our company and our customers, which could preclude us from making loans to customers for vacation ownership interest purchases or prevent our customers from paying off outstanding customer notes |
| WE COULD INCUR COSTS TO COMPLY WITH LAWS GOVERNING ACCESSIBILITY OF FACILITIES BY DISABLED PERSONS A number of state and federal laws, including the Fair Housing Act and the Americans with Disabilities Act, impose requirements related to access and use by disabled persons of a variety of public accommodations and facilities |
| Although we believe our resorts are substantially in compliance with laws governing their accessibility by disabled persons, we may incur additional costs to comply with such laws at our existing or subsequently acquired resorts |
| Additional federal, state, and local legislation with respect to access by disabled persons may impose further burdens or restrictions on our company |
| We cannot forecast the ultimate cost of compliance with such legislation, but such costs could be substantial and, as a result, could have a material adverse effect on our results of operations, liquidity or capital resources |
| 12 WE MAY HAVE LOSSES THAT ARE NOT COVERED BY INSURANCE We carry comprehensive liability, business interruption, title, fire and storm insurance with respect to our resorts, with policy specifications, insured limits and deductibles customarily carried for similar properties, which we believe 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, we could lose our 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 our results of operations, liquidity and financial positions |
| INCREASED GASOLINE PRICES, AN OUTBREAK OF WAR, ACTS OF TERRORISM, UNFORESEEN NATURAL DISASTERS OR SIMILAR EVENTS COULD NEGATIVELY IMPACT OUR BUSINESS Increased gasoline prices, war, or acts of terrorism, forest fires, inclement weather or other unforeseen natural disasters or similar events could reduce consumer travel |
| If consumer travel to our resorts and sales centers declines as a result these or other factors, we could experience lower income due to reduced room rentals and/or fewer opportunities for sales presentations to prospective purchasers of vacation ownership interests |
| OUR BUSINESS IS SUBJECT TO SEASONALITY AND VARIABILITY OF QUARTERLY RESULTS We historically have experienced quarterly fluctuations in our gross revenue and net income from operations |
| Our sales of vacation ownership interests typically have been lower during the first and fourth quarters of each year and we expect this trend to continue in the future |
| In addition, our earnings may be adversely affected by our ability to acquire or develop new resorts in a timely manner, fluctuations in travel and vacation patterns, and weather or other natural phenomena |
| As we enter new markets, we may experience additional fluctuations in our quarterly results or an increased impact of seasonality on our business and results of operations |
| CERTAIN OF OUR EXISTING SHAREHOLDERS HAVE THE ABILITY TO EXERT A SIGNIFICANT AMOUNT OF CONTROL OVER OUR COMPANY Under Arizona law, holders of our companyapstas common stock are entitled to cumulative voting rights with respect to the election of our directors |
| Cumulative voting permits each holder of common stock to cast an aggregate number of votes equal to the number of directorships to be filled, multiplied by the number of shares of common stock as to which the holder is entitled to cast votes |
| Each holder may cast all of such votes in favor of any individual nominee or may allocate them among multiple nominees as the holder chooses |
| As a result, a holder of less than a majority of the outstanding common stock may elect one or more directors by casting all of his or her respective votes in favor of a single candidate |
| We currently have nine directors |
| Consequently, a holder of approximately 11dtta1prca of our outstanding common stock will be able to independently elect one director |
| At February 28, 2006, Joseph P Martori beneficially owned approximately 29dtta1prca of our outstanding common stock (and all of our officers and directors as a group beneficially owned approximately 42dtta5prca of our outstanding common stock) |
| Because of his ability to elect at least two of our directors, if the interests of Mr |
| Martori as a shareholder differ from the interests of the other shareholders, such other shareholders may be adversely affected |
| Martori elects to reinvest dividends paid on his shares of common stock and some of our other shareholders do not reinvest their dividends, Mr |
| Martoriapstas percentage ownership of our outstanding common stock will increase, which could further increase Mr |
| Martoriapstas control over our company |
| At February 28, 2006, our Employee Stock Ownership Plan and Trust (ESOP) held approximately 18dtta4prca of our outstanding common stock |
| Joseph P Martori, Nancy J Stone and Joseph P Martori, II are trustees of the ESOP, although the employee beneficiaries of the ESOP have the ability to vote the number of shares in the ESOP that have been allocated to their respective accounts |
| Our ESOP may acquire newly issued shares of common stock from us or already issued shares on the open market |
| As our ESOP continues to acquire shares, and shares are granted to key employees under our Stock Bonus Program, an increasing concentration of our ownership will reside with our employees, including our executive officers |
| 13 IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US As an Arizona corporation, our articles of incorporation and Arizona law contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our company, even when those attempts may be in the best interests of our shareholders |
| Our articles of incorporation also authorize our board of directors, without shareholder approval, to issue one or more series of preferred stock, which could have voting, liquidation, dividend, conversion, or other rights that adversely affect or dilute the voting power of the holders of common stock |
| OUR STOCK PRICE HAS BEEN, AND WILL LIKELY CONTINUE TO BE, HIGHLY VOLATILE, WHICH MAY NEGATIVELY AFFECT OUR ABILITY TO OBTAIN FINANCING IN THE FUTURE The market price of our stock has been and is likely to continue to be highly volatile due to the risks and uncertainties described in this section of the Form 10-K, as well as other factors, including: ¨ fluctuation in interest rates and other conditions that could adversely affect real estate values in general or the market for vacation ownership interests in particular; ¨ price and volume fluctuations in the stock market at large which do not relate to our operating performance; and ¨ any failure to meet market expectations |
| From January 1, 2005 through December 31, 2005, the closing price of our common stock as reported on The American Stock Exchange ranged from a high of dlra10dtta82 to a low of dlra8dtta50 |
| As a result of this volatility, your investment in our stock is subject to substantial risk |
| Furthermore, the volatility of our stock price could negatively impact our ability to raise capital in the future |
| The stock market has from time to time experienced extreme price and volume fluctuations that are unrelated to the operating performance of particular companies |
| In the past, companies that have experienced volatility have sometimes been the subject of securities class action litigation |
| If litigation were instituted on this basis, it could result in substantial costs and a diversion of managementapstas attention and resources |