Overview

ILX Resorts Incorporated (“ILX” or the “Company”) is one of the leading developers, marketers and operators of timeshare resorts in the western United States and Mexico.  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 its unused or unsold inventory of units at its vacation ownership resorts, 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 adjacent to an existing resort in Arizona on which the Company has commenced construction (Premiere Vacation Club at the Roundhouse Resort) (collectively, the “ILX Resorts”).  One of the resorts in Arizona is not at this time registered with the Arizona Department of Real Estate nor is being marketed for sale as Vacation Ownership Interests, and is operated under a long-term lease arrangement.  The Company also owns 1,865 Vacation Ownership Interests in a resort in Las Vegas, Nevada, 1,795 of which have been annexed into Premiere Vacation Club and 150 Vacation Ownership Interests in a resort in Phoenix, Arizona all of which have been annexed into Premiere Vacation Club.  

The Company recognizes revenue from the sale of Vacation Ownership Interests at such time as a minimum of 10% of the purchase price has been received in cash, the statutory rescission period has expired, the buyer is committed to continued payments of the remaining purchase price and the Company’s future obligations for the Vacation Ownership Interests have been released.  Resort operating revenues are recorded as the rooms are rented or the services are performed.

Costs associated with the acquisition and development of Vacation Ownership Interests, including carrying costs such as interest and taxes, are capitalized and amortized to cost of sales as the respective revenue is recognized.

Significant Accounting Policies

Principles of Consolidation and Business Activities

The condensed consolidated financial statements include the accounts of ILX Resorts Incorporated, and its wholly owned and majority-owned subsidiaries (“ILX” or the “Company”).  All significant intercompany transactions and balances have been eliminated in consolidation.

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The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Registration S-X.  Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature.  Operating results for the three-month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.  The accompanying financial statements should be read in conjunctio n with the Company’s most recent audited financial statements.

The Company’s significant business activities include developing, operating, marketing and financing ownership interests (“Vacation Ownership Interests”) in resort properties located in Arizona, Colorado, Indiana, Nevada and Mexico.

Revenue Recognition

Revenue from sales of Vacation Ownership Interests is recognized in accordance with Statement of Financial Accounting Standard No. 66, Accounting for Sales of Real Estate (“SFAS 66”).  No sales are recognized until such time as a minimum of 10% of the purchase price has been received in cash, the statutory rescission period has expired, the buyer is committed to continued payments of the remaining purchase price and the Company has been released of all future obligations for the Vacation Ownership Interest.  Resort operating revenue represents daily room rentals (inclusive of homeowner’s dues) and revenues from food and other resort services.  Such revenues are recorded as the rooms are rented or the services are performed.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 152, “Accounting for Real-Estate Time-Sharing Transactions.”  SFAS No. 152 amends SFAS No. 66 “Accounting for Sales of Real Estate,” to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, “Accounting for Real-Estate Time-Sharing Transactions.”  The Company will be required to apply this statement prospectively for real estate time-sharing transactions entered into after December 31, 2005.  The Company is currently evaluating what effect this statement will have on the Company’s revenue recognition, financial position and results of operations.

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Results of Operations

The following table sets forth certain operating information for the Company:

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Comparison of the Three Months Ended March 31, 2004 to the Three Months March 31, 2005

Sales of Vacation Ownership Interests increased 0.7% or $56,308 to $8,018,519 for the three months ended March 31, 2005, from $7,962,211 for the same period in 2004.  The slight increase reflects sales from the Rancho Mañana sales office which opened in September 2004, offset by the planned decrease in the Las Vegas sales operation.

The average sales price per Vacation Ownership Interest sold (excluding revenues from Upgrades) increased 9.5% or $1,389 in 2005 to $16,085 for the three months ended March 31, 2005 from $14,696 for the same period in 2004.  The increase in the average sales price is primarily due to a change in the product mix sold.  The number of Vacation Ownership Interests sold decreased 4.5% from 422 in the three months ended March 31, 2004 to 403 for the same period in 2005 due to inclement weather in Sedona as well as the reduced scale of the Las Vegas sales office, offset by the Rancho Mañana office, as described above.  The three months ended March 31, 2005 included 490 biennial Vacation Ownership Interests (counted as 245 annual Vacation Ownership Interests) compared to 398 biennial Vacation Ownership Interests (counted as 199 annual Vacation Ownership Interests) in the same period in 2004.  T he increase in the percentage of sales of biennial interests, which are priced at premiums of 35% more than 50% the price of the same annual interests, contributed to the increase in average sales price.

Upgrade revenue, included in Vacation Ownership Interest sales, decreased 18.0% to $1,264,552 for the three months ended March 31, 2005 from $1,542,651 for the same period in 2004, reflecting a reduction in marketing efforts to existing owners at the VCA–South Bend and VCA–Tucson sales offices.  Lower owner occupancy in Sedona due to inclement weather also contributed to the decrease.  Upgrades generally do not involve the sale of additional Vacation Ownership Interests (merely their exchange) and, therefore, such Upgrades increase the average sales price per Vacation Ownership Interest sold.  The average sales price per Vacation Ownership Interest sold (including Upgrades) increased 4.7% or $870 to $19,222 for the three months ended March 31, 2005 from $18,352 in 2004 even though total Upgrade revenue decreased, due to the increase in average sales price per Vacation Ownership Interest sold (excluding Upgrades) described above.

Resort operating revenue decreased 2.5% or $101,989 to $3,997,856 for the three months ended March 31, 2005, reflecting decreased occupancy in Arizona resorts due to inclement weather in January and February.  Cost of resort operations as a percentage of resort operating revenue decreased from 93.1% in 2004 to 92.7% in 2005.

Interest and finance income decreased 1.6% to $1,044,951 for the three months ended March 31, 2005 from $1,062,096 for the same period in 2004 reflecting decreased spreads on sales of Customer Notes.

Cost of Vacation Ownership Interests sold as a percentage of Vacation Ownership Interest sales increased from 12.5% for the three months ended March 31, 2004 to 14.8% for the three months ended March 31, 2005, reflecting the addition of Rancho Mañana inventory.

Sales and marketing as a percentage of sales of Vacation Ownership Interests decreased to 64.0% for the three months ended March 31, 2005 from 68.8% for the same period in 2004, reflecting improvement in efficiency due to greater closing rates in the Sedona sales office.

The provision for doubtful accounts as a percentage of Vacation Ownership Interest sales was consistent at 4.4% of sales of Vacation Ownership Interests for both the three month periods ended March 31, 2004 and 2005.

General and administrative expenses decreased 12.3%, or $186,822, to $1,326,513.  General and administrative expense also decreased as a percentage of total revenues.  The decrease resulted from rental income on the Company’s 44-acre parcel of land in Las Vegas as well as a recovery in litigation.

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Income from land and other, net for the three months ended March 31, 2005 and 2004 includes gains of $42,145 and $93,238, respectively on bulk sales of Vacation Ownership Interests owned by the Company’s subsidiary Genesis.  

The 9.4% increase in interest expense to $605,010 for the three months ended March 31, 2005 from $553,248 for the same period in 2004 reflects the combined net effect of higher interest rates on the Company’s variable rate notes and a lower average balance in 2005.

Liquidity and Capital Resources

Sources of Cash

The Company generates cash primarily from the sale of Vacation Ownership Interests (including Upgrades), from the financing of Customer Notes from such sales and from resort operations.  During the three months ended March 31, 2004 and 2005, cash provided by operations was $1,493,556 and $866,948, respectively.  The decrease in cash provided by operations reflects an increase in resort property under development for development of Premiere Vacation Club at the Roundhouse Resort, a decrease in accrued and other liabilities reflecting timing differences between years and a decrease in income taxes payable, offset by a decrease in resort property held for Vacation Ownership Interest sales due to greater additions in the first quarter of 2004.

In April 2005, the Company sold its leasehold interest in a 44-acre parcel located proximate to the Las Vegas Airport, UNLV and the “Strip” in Las Vegas, Nevada.  The Company acquired the 50-year leasehold interest in July 2001 and sold it to Streets Las Vegas, L.L.C. for $18.0 million.  In conjunction with the closing, the note payable secured by the leasehold interest was paid in full for $3.4 million.  In addition, the Company used proceeds from the sale of its Las Vegas leasehold interest to pay $2.0 million in principal on an existing construction loan and $1.0 million in principal on an existing note payable.

For regular federal income tax purposes, the Company reports substantially all of its non-factored financed Vacation Ownership Interest sales under the installment method.  Under the installment method, the Company recognizes income on sales of Vacation Ownership Interests only when cash is received by the Company in the form of a down payment, as 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 condensed consolidated financial statements do not contain an accrual for any interest expense that would be paid on the deferred taxes related to the installment method, as the interest expense is not estimable.

At December 31, 2004, the Company, excluding its Genesis subsidiary, had no NOL carryforwards.  At December 31, 2004, Genesis had federal NOL carryforwards of approximately $900,000, which are limited as to usage because they arise from built in losses of an acquired company.  In addition, such losses can only be utilized through the earnings of Genesis and are limited to a maximum of $189,000 per year.  To the extent the entire $189,000 is not utilized in a given year, the difference may be carried forward to future years.  Any unused Genesis NOLs will expire in 2008.  

In addition, Section 382 of the Internal Revenue Code imposes additional limitations on the utilization of NOLs by a corporation following various types of ownership changes, which result in more than a 50% change in ownership of a corporation within a three-year period.  Such changes may result from new common stock issuances by the Company or changes occurring as a result of filings with the Securities and Exchange Commission of Schedules 13D and 13G by holders of more than 5% of the common stock, whether involving

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the acquisition or disposition of common stock.  If such a subsequent change occurs, the limitations of Section 382 would apply and may limit or deny the future utilization of the NOL by the Company, which could result in the Company paying substantial additional federal and state taxes.

Uses of Cash

Investing activities typically reflect a net use of cash because of capital additions.  Net cash used in investing activities in the three months ended March 31, 2004 and 2005 was $294,588 and $238,718, respectively.  The decrease reflects proceeds from the sale of a parcel of land in Arizona in 2005, offset by increased purchases of property and equipment.

Net cash used in financing activities in the three months ended March 31, 2004 and 2005 was $1,091,776 and $839,564, respectively.  The decrease reflects reduced repayments on notes payable offset by reduced borrowings.

The Company requires funds to finance the acquisitions of property for future resort development and to further develop the existing resorts, as well as to make capital improvements and support current operations.

Customer defaults have a significant impact on cash available to the Company from financing Customer Notes receivable in that notes which are more than 60 to 90 days past due are not eligible as collateral.  As a result, the Company in effect must repay borrowings against such notes or buy back such notes if they were sold with recourse.

On April 9, 1999 (effective January 1, 1999), the Company formed the ILX Resorts Incorporated Employee Stock Ownership Plan and Trust (the “ESOP”).  The intent of the ESOP is to provide a retirement program for employees that aligns their interests with those of the Company.  

Credit Facilities and Capital  

At March 31, 2005, the Company had an agreement with a financial institution for a commitment of $30 million, under which the Company may sell certain of its Customer Notes. The agreement provides for sales on a recourse basis with a percentage of the amount sold held back by the financial institution as additional collateral.  Customer Notes may be sold at discounts or premiums to the principal amount in order to yield the consumer market rate, as defined by the financial institution.  If a customer pays off a note prior to maturity of the note, the financial institution may recover from the Company the unearned interest premium, if any.  At March 31, 2005, $6.6 million of such commitment was available to the Company.

The Company also has a financing commitment aggregating $30 million whereby the Company may borrow against notes receivable pledged as collateral.  These borrowings bear interest at a rate of prime plus 1.5%.  The $30 million commitment was amended in March 2005 and, under the amended agreement, the borrowing period expires in 2005 and the maturity is in 2010.  At March 31, 2005, approximately $10.3 million was available under this commitment.

At March 31, 2004 and 2005, the Company had approximately $14.2 million and $14.1 million, respectively, in outstanding notes receivable sold on a recourse basis.  Portions of the notes receivable are secured by deeds of trust on Los Abrigados Resort & Spa, VCA–South Bend and VCA–Tucson.

In March 2005 the Company entered into a $400,000, 36-month equipment lease.

In the future, the Company may negotiate additional credit facilities, issue corporate debt, issue equity securities, or any combination of the above.  Any debt incurred or issued by the Company may be secured or

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unsecured, may bear interest at fixed or variable rates of interest, and may be subject to such terms as management deems prudent.  While the Company believes it maintains excellent relationships with its lenders and will seek renewal or replacement of existing lines upon their maturity, 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 may negotiate with additional lenders to supplement its existing credit facilities.

The Company believes available borrowing capacity, together with cash generated from operations, will be sufficient to meet the Company’s liquidity, operating and capital requirements for at least the next twelve months.

Contractual Cash Obligations and Commercial Commitments

The following table presents the Company’s contractual cash obligations and commercial commitments as of March 31, 2005.  The Company also sells consumer notes with recourse.  The Company has no other significant contractual obligations or commercial commitments either on or off balance sheet as of this date.  

Seasonality

The Company’s revenues are moderately seasonal with the volume of ILX owners, hotel guests and Vacation Ownership Interest exchange participants typically greatest in the second and third fiscal quarters.  As the Company expands into new markets and geographic locations it may experience increased or additional seasonality dynamics which may cause the Company’s operating results to fluctuate.

Inflation

Inflation and changing prices have not had a material impact on the Company’s revenues, operating income and net income during any of the Company’s three most recent fiscal years or the three months ended March 31, 2005.  However, to the extent inflationary trends affect 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 3. Quantitative and Qualitative Disclosures about Market Risk

None

Item 4. Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of

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the Company’s 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”)).  Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b)  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 Part II

Item 1.

Legal Proceedings

In September 2003, the Company received pleadings indicating that a lawsuit against the Company and its Sedona Vacation Club and Premiere Vacation Club businesses was filed by two individuals claiming damages for deceptive and abusive practices on behalf of a purported class of purchasers of vacation ownership interests.  The Company, Sedona Vacation Club and Premiere Vacation Club received amended complaints in May and June 2004.  In both instances, named plaintiffs were added and deleted.  The amended complaints are considerably more narrow in scope than the initial complaint.  The suit alleges claims for breach of the Arizona Consumer Fraud Act, the Arizona Real Estate Timeshare Act, breach of contract and unjust enrichment.  A motion for class certification was filed in October 2004 which contained the deletion of three existing class members and the proposed addition of three new c lass members.  The Company and its counsel believe that the allegations are without merit and have vigorously defended plaintiffs’ claims.  The Company responded to the complaint, asserted counterclaims and filed certain motions in May 2004 and filed a disclosure statement in July 2004.  The Company deposed the three individuals whom plaintiff’s counsel had identified as purported “class representatives.”  The plaintiffs took no depositions.  In April 2005, the Superior Court of Arizona In and For the County of Coconino granted preliminary approval of a Settlement Agreement (attached as Exhibit 99.1 to the Company’s Form 8-K filed on April 17, 2005 and incorporated herein by reference).  In the Settlement Agreement the Company denied each and every one of the Plaintiffs’ allegations of unlawful or wrongful conduct and injuries.  A Notice to Owners of Timeshare Interests/Memberships in Sedona Vacation Club and/or Premiere Vacation Club describin g the proposed settlement was mailed to Premiere Vacation Club and Sedona Vacation Club members in May 2005.  Class members have an opportunity to opt out or object to the settlement on or before July 19, 2005.  A court hearing is scheduled on July 26, 2005 to consider final approval of the Settlement Agreement.  The ultimate effect to the Company is currently unknown.

Other litigation has arisen in the normal course of the Company’s business, none of which is deemed to be material.

Item 2.

Changes in Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

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None

Item 5.

Other Information

None

Item 6.

Exhibits and Reports on Form 8-K

(i)

Exhibits

Exhibit No.

Description

31

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

32

CERTIFICATION PURSUANT TO 18 U.S.C. § 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(ii)

Reports on Form 8-K

(1)

Registrant’s Form 8-K dated February 18, 2005 and filed with the Securities and Exchange Commission on February 18, 2005 related to a press release announcing the results for the fourth quarter ended December 31, 2004.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused its quarterly report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

Date:  As of May 13, 2005

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