SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended March 31, 2002 Commission File Number 001-13855
ILX RESORTS INCORPORATED
(Exact name of registrant as specified in its charter)
ARIZONA 86-0564171
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2111 East Highland Avenue, Suite 210, Phoenix, Arizona 85016
(Address of principal executive offices)
Registrant's telephone number, including area code 602-957-2777
Former name, former address, and former fiscal year,
if changed since last report.
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. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at March 31, 2002
Common Stock, without par value 2,907,481 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2001 2002
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,548,058 $ 2,324,842
Notes receivable, net 30,365,225 31,347,806
Resort property held for Vacation Ownership Interest sales 20,270,872 19,675,907
Resort property under development 5,116,227 5,366,608
Land held for sale 830,686 791,102
Deferred assets 131,794 121,862
Property and equipment, net 6,189,082 6,141,724
Other assets 7,672,891 8,117,521
------------ ------------
TOTAL ASSETS $ 74,124,835 $ 73,887,372
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,488,456 $ 1,524,291
Accrued and other liabilities 2,354,911 4,418,013
Income taxes payable 689,923 141,506
Due to affiliates 24,022 --
Notes payable 40,619,303 38,829,318
Notes payable to affiliates 1,000,000 --
Deferred income taxes 2,163,207 2,661,514
------------ ------------
Total liabilities 48,339,822 47,574,642
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000 shares authorized;
284,816 and 279,905 shares issued and outstanding;
liquidation preference of $2,848,160 and $2,799,050 1,117,025 1,103,471
Common stock, no par value; 30,000,000 shares authorized;
4,132,702 and 4,166,381 shares issued 18,405,576 18,639,207
Treasury stock, at cost, 1,200,700 and 1,258,900 shares,
respectively (3,688,083) (4,127,901)
Additional paid in capital 269,869 269,869
Retained earnings 9,680,626 10,428,084
------------ ------------
Total shareholders' equity 25,785,013 26,312,730
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 74,124,835 $ 73,887,372
============ ============
See notes to condensed consolidated financial statements
2
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31,
----------------------------
2001 2002
------------ ------------
TIMESHARE REVENUES:
Sales of Vacation Ownership Interests $ 6,520,224 $ 7,184,845
Resort operating revenue 4,047,224 3,629,716
Interest income 691,522 1,024,729
------------ ------------
Total timeshare revenues 11,258,970 11,839,290
------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership Interests sold 1,108,646 1,048,061
Cost of resort operations 3,248,430 3,365,370
Sales and marketing 4,081,868 4,583,989
General and administrative 1,047,639 1,098,677
Provision for doubtful accounts 286,195 314,763
Depreciation and amortization 98,054 222,837
------------ ------------
Total cost of sales and operating expenses 9,870,832 10,633,697
------------ ------------
Timeshare operating income 1,388,138 1,205,593
Income (expense) from land and other, net (3,267) 526,373
------------ ------------
Total operating income 1,384,871 1,731,966
Interest expense (743,484) (486,201)
------------ ------------
Income before income taxes 641,387 1,245,765
Income tax expense (259,878) (498,307)
------------ ------------
NET INCOME $ 381,509 $ 747,458
============ ============
NET INCOME PER SHARE
Basic $ 0.11 $ 0.25
============ ============
Diluted $ 0.11 $ 0.24
============ ============
See notes to condensed consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
----------------------------
2001 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 381,509 $ 747,458
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of property and equipment -- (585,441)
Loss on assumption of Sedona Worldwide Incorporated assets and
liabilities -- 48,887
Income tax expense 259,878 498,307
Provision for doubtful accounts 286,195 314,763
Depreciation and amortization 98,054 222,837
Amortization of guarantee fees 150 9,932
Contribution of common stock to ESOP Plan 18,104 --
Common stock issued to employees for services 4,000 220,077
Change in assets and liabilities:
Decrease in resort property held for Vacation Ownership
Interest sales 621,301 594,965
Increase in resort property under development (98,317) (250,381)
Decrease in land held for sale -- 39,584
Increase in other assets (121,597) (464,125)
(Decrease) increase in accounts payable (267,732) 35,835
Increase in accrued and other liabilities 994,215 1,978,925
Decrease in income taxes payable -- (548,417)
Increase (decrease) in due to affiliates 23,500 (24,022)
----------- -----------
Net cash provided by operating activities 2,199,260 2,839,184
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable, net (1,573,812) (1,297,344)
Purchases of plant and equipment, net (340,004) (1,060,055)
Cash acquired from Sedona Worldwide Incorporated -- 30,457
----------- -----------
Net cash used in investing activities (1,913,816) (2,326,942)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 4,253,336 3,810,652
Principal payments on notes payable (4,199,562) (4,806,292)
Principal payments on notes payable to affiliates -- (300,000)
Acquisition of treasury stock and other (293,109) (439,818)
----------- -----------
Net cash used in financing activities (239,335) (1,735,458)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 46,109 (1,223,216)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,518,122 3,548,058
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,564,231 $ 2,324,842
=========== ===========
See notes to condensed consolidated financial statements
4
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS ACTIVITIES
The condensed consolidated financial statements include the accounts of ILX
Resorts Incorporated, formerly ILX Incorporated, and its wholly owned and
majority-owned subsidiaries ("ILX" or the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
The 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, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. The accompanying
financial statements should be read in conjunction 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 and revenues from food and other resort services.
Such revenues are recorded as the rooms are rented or the services are
performed.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash equivalents are liquid investments with an original maturity of three
months or less. The following summarizes interest paid, income taxes paid and
capitalized interest.
Three Months Ended March 31,
----------------------------
2001 2002
-------- --------
Interest paid $710,431 $500,997
Income taxes paid -- $548,417
Interest capitalized -- $ 89,868
5
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. NET INCOME PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," the following
presents the computation of basic and diluted net income per share:
BASIC NET INCOME PER SHARE
Three Months Ended March 31
----------------------------
2001 2002
----------- -----------
Net income $ 381,509 $ 747,458
Less: Series A preferred stock dividends (11,969) (11,862)
----------- -----------
Net income available to common stockholders - basic $ 369,540 $ 735,596
=========== ===========
Weighted average shares of common stock outstanding - basic 3,395,543 2,934,855
=========== ===========
Basic net income per share $ 0.11 $ 0.25
=========== ===========
DILUTED NET INCOME PER SHARE
Three Months Ended March 31
----------------------------
2001 2002
----------- -----------
Net income $ 381,509 $ 747,458
Less: Series A preferred stock dividends (11,969) (11,862)
----------- -----------
Net income available to common stockholders - diluted $ 369,540 $ 735,596
=========== ===========
Weighted average shares of common stock outstanding 3,395,543 2,934,855
Add: Convertible preferred stock (Series B and C) dilutive effect 80,752 78,397
Stock options dilutive effect -- 55,171
----------- -----------
Weighted average shares of common stock outstanding - dilutive 3,476,295 3,068,423
=========== ===========
Diluted net income per share $ 0.11 $ 0.24
=========== ===========
Stock options to purchase 30,700 shares of common stock at a price of
$8.125 per share were outstanding for the three months ended March 31, 2002, but
were not included in the computation of diluted net income per share because the
options' exercise prices were greater than the average market price of common
shares. These options expire at various dates between 2002 and 2006.
6
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. SHAREHOLDERS' EQUITY
During the three months ended March 31, 2002, the Company issued 300 shares
of restricted common stock, valued at $1,035 and 31,742 shares of common stock,
valued at $219,042, to employees in exchange for services provided. The shares
of common stock issued to employees are exempt from registration under Section
4(2) of the Securities Act of 1933. For the three months ended March 31, 2002,
the Company recorded the exchange of 4,911 Series C Convertible shares for 1,637
common shares. Also during the three months ended March 31, 2002, the Company
purchased 58,200 shares of its common stock for $439,818.
NOTE 4. OTHER
In December 2000, the Company acquired for $1,010,000 cash the Sedona
Station adjacent to Los Abrigados to be the site of a new Sedona sales center.
In March 2001, the Company borrowed $808,000, which was secured by the property
and bore interest at a fixed rate of 8.625%. In March 2002, the Company sold the
property for $1,650,000 and is leasing the space back under a nine year
agreement. The loan secured by the property, which had a balance of $794,345,
was assumed by the purchaser and a note payable to affiliates of $700,000 was
relieved as part of the transaction. The Company recorded a gain of $586,111 on
the sale.
NOTE 5. SUBSEQUENT EVENT
In April 2002, the Company borrowed $2.0 million to finance the
construction of 21 new units on land owned by the Company in Pinetop, Arizona.
The promissory note payable bears interest at prime plus 1.5%. The debt is
payable in equal monthly installments of principal and interest over a five year
term ending May 2007.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
FORM 10-Q, 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.
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 six resorts in
Arizona, one in Indiana, one in Colorado, one in San Carlos, Mexico, and land
adjacent to an existing resort for which the Company holds development rights
(the Roundhouse Resort) (collectively, the "ILX Resorts"). Two of the resorts in
Arizona are not at this time registered with the Arizona Department of Real
Estate nor are being marketed for sale as Vacation Ownership Interests, and one
of the two resorts is operated under a long-term lease arrangement. The Company
also owns 927 Vacation Ownership Interests in a resort in Las Vegas, Nevada, 600
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.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company:
Three Months Ended March 31,
----------------------------
2001 2002
--------- ---------
As a percentage of total timeshare revenues:
Sales of Vacation Ownership Interests 57.9% 60.7%
Resort operating revenue 35.9% 30.7%
Interest income 6.2% 8.6%
--------- ---------
Total timeshare revenues 100.0% 100.0%
========= =========
As a percentage of sales of Vacation Ownership Interests:
Cost of Vacation Ownership Interests sold 17.0% 14.6%
Sales and marketing 62.6% 63.8%
Provision for doubtful accounts 4.4% 4.4%
Contribution margin percentage from sale of Vacation
Ownership Interests (1) 16.0% 17.2%
As a percentage of resort operating revenue:
Cost of resort operations 80.3% 92.7%
As a percentage of total timeshare revenues:
General and administrative 9.3% 9.3%
Depreciation and amortization 0.9% 1.9%
Timeshare operating income 12.3% 10.2%
Selected operating data:
Vacation Ownership Interests sold (2)(3) 410 420
Average sales price per Vacation Ownership Interest
sold (excluding revenues from Upgrades) (2) $ 14,128 $ 14,207
Average sales price per Vacation Ownership Interest
sold (including revenues from Upgrades) (2) $ 15,616 $ 16,842
- ----------
(1) Defined as: the sum of Vacation Ownership Interest sales less the cost of
Vacation Ownership Interests sold less sales and marketing expenses less a
provision for doubtful accounts, divided by sales of Vacation Ownership
Interests.
(2) Reflects all Vacation Ownership Interests on an annual basis.
(3) Consists of an aggregate of 645 and 630 biennial and annual Vacation
Ownership Interests for the three months ended March 31, 2001 and 2002,
respectively.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 TO THE THREE MONTHS ENDED
MARCH 31, 2002
Sales of Vacation Ownership Interests increased 10.2% or $664,621 to
$7,184,845 for the three months ended March 31, 2002, from $6,520,224 for the
same period in 2001. The increase reflects primarily sales from the Las Vegas
sales office which opened in mid January 2002, and greater sales to existing
owners, net of decreased sales from the Sedona sales office due to reduced tour
flow, and the closure of the Phoenix sales office in May 2001. The decrease in
tours to the Sedona office in the first quarter of 2002 reflects fewer tours
generated from outside vendors and the reduction of certain telemarketing
programs. While total revenue decreased to this sales office as a result of
fewer tours, the efficiency (revenue per tour) increased.
The average sales price per Vacation Ownership Interest sold (excluding
revenues from Upgrades) increased 0.6% or $79 in 2002 to $14,207 for the three
months ended March 31, 2002 from $14,128 for the same period in 2001. The number
of Vacation Ownership Interests sold increased 2.4% from 410 in the three months
ended March 31, 2001 to 420 for the same period in 2002 due to the opening of
the Las Vegas sales office, net of reduced sales in the Sedona sales office and
closure of the Phoenix sales office in 2001, as described above. The three
months ended March 31, 2002 included 420 biennial Vacation Ownership Interests
(counted as 210 annual Vacation Ownership Interests) compared to 470 biennial
Vacation Ownership Interests (counted as 235 annual Vacation Ownership
Interests) in the same period in 2001.
Upgrade revenue, included in Vacation Ownership Interest sales, increased
81.3% to $1,106,540 for the three months ended March 31, 2002 from $610,194 for
the same period in 2001, reflecting continuation of marketing efforts to
existing owners. 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 7.9% or $1,226 to $16,842 for the three months ended March
31, 2002 from $15,616 in 2001.
Resort operating revenue decreased 10.3% or $417,508 to $3,629,716 for the
three months ended March 31, 2002, reflecting timing differences in revenue from
vacation interval owners and reduced business and tourist travel by non-owners
in 2002. The difference in cost of resort operations as a percentage of resort
operating revenue from 80.3% in 2001 to 92.7% in 2002 reflect greater revenue in
2001, including non-recurring benefits, with 2002 cost as a percentage of
revenue being comparable to prior periods.
Interest income increased 48.2% to $1,024,729 for the three months ended
March 31, 2002 from $691,522 for the same period in 2001 reflecting the increase
in interest bearing notes receivable between years as well as an increase in the
percentage of Customer Notes sold in 2002, for which the Company recognizes the
interest premium upon sale of the note.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales decreased from 17.0% for the three months ended March
31, 2001 to 14.6% for the three months ended March 31, 2002, reflecting
favorable cost for the acquisition of vacation ownership interests in the
Carriage House and the Bell Rock Inn, and variations in product mix and pricing,
net of improvements made to resort properties.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests increased to 63.8% for the three months ended March 31, 2002 from
62.6% for the same period in 2001, reflecting the start-up of the Las Vegas
sales center in January 2002.
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, 2001 and 2002.
General and administrative expenses were comparable at 9.3% of total
timeshare revenues for both the three month periods ended March 31, 2002 and
2001.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Income from land and other, net for the three months ended March 31, 2002
includes a gain of $586,111 on the sale in March 2002 of the Sedona Station (the
Sedona sales office) offset by a loss of $48,887 on the assumption of the assets
and liabilities of Sedona Worldwide Incorporated as of January 2, 2002. The
Sedona Station was sold for $1,650,000 and the Company is leasing the space back
under a nine year agreement.
The 34.6% decrease in interest expense to $486,201 for the three months
ended March 31, 2002 from $743,484 for the same period in 2001 reflects the
combined net effect of greater borrowings in 2002 with lower interest rates on
the Company's variable rate notes, and capitalized interest related to
construction in Las Vegas and Arizona in 2002.
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, 2001
and 2002, cash provided by operations was $2,199,260 and $2,839,184,
respectively. The increase in cash provided by operations reflects the combined
effect of an increase in accrued and other liabilities reflecting timing
differences between years in drawing funds from the homeowners associations for
operating activities, common stock issued to employees in lieu of cash
compensation, net of an increase in other assets. The increase in other assets
is a result of maintenance fee payments made to the Carriage House for 2002
which will be amortized over the entire year, as well as prepaid rent and
deposits for marketing locations in Las Vegas.
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, 2001, the Company, excluding its Genesis subsidiary, had
NOL carryforwards of approximately $5.2 million, which expire in 2002 through
2020. At December 31, 2001, Genesis had federal NOL carryforwards of
approximately $2.1 million, which are limited as to usage because they arise
from built in losses of an acquired company. In addition, such losses can only
be utilized through the earnings of Genesis and are limited to a maximum of
$189,000 per year. To the extent the entire $189,000 is not utilized in a given
year, the difference may be carried forward to future years. Any unused Genesis
NOLs will expire in 2008.
In addition, Section 382 of the Internal Revenue Code imposes additional
limitations on the utilization of NOLs by a corporation following various types
of ownership changes, which result in more than a 50% change in ownership of a
corporation within a three-year period. Such changes may result from new Common
Stock issuances by the Company or changes occurring as a result of filings with
the Securities and Exchange Commission of Schedules 13D and 13G by holders of
more than 5% of the Common Stock, whether involving the acquisition or
disposition of Common Stock. If such a subsequent change occurs, the limitations
of Section 382 would apply and may limit or deny the future utilization of the
NOL by the Company, which could result in the Company paying substantial
additional federal and state taxes.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
USES OF CASH
Investing activities typically reflect a net use of cash because of capital
additions and loans to customers in connection with the Company's Vacation
Ownership Interest sales. Net cash used in investing activities in the three
months ended March 31, 2001 and 2002 was $1,913,816 and $2,326,942,
respectively. The increase is a result of the construction activities in Las
Vegas, including the renovation of a portion of the existing building into a
sales center, as well as the construction of eight new units at Los Abrigados
Resort & Spa.
Net cash used in financing activities in the three months ended March 31,
2001 and 2002 was $239,335 and $1,735,458, respectively. The increase reflects
greater repayments on borrowings to finance Customer Notes as well as an
increase in treasury stock purchases in 2002.
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.
The ESOP may purchase additional shares for future year contributions
through loans made directly to the ESOP and guaranteed by the Company. Such
borrowings are not expected to exceed $1,000,000.
CREDIT FACILITIES AND CAPITAL
At March 31, 2002, the Company has an agreement with a financial
institution for a commitment of $40 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, 2002, $21.0 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 expires in 2002. At March 31, 2002, approximately $12.6 million is
available under this commitment.
At March 31, 2001 and 2002, the Company had approximately $16.9 million and
$10.9 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 the first three months of 2002, the Company purchased 58,200 treasury
shares for a cost of $439,818.
In December 2000, the Company acquired for $1,010,000 cash the Sedona
Station adjacent to Los Abrigados to be the site of its new Sedona sales center.
In March 2001, the Company borrowed $808,000, which was secured by the property
and bore interest at a fixed rate of 8.625%. In March 2002, the Company sold the
property for $1,650,000 and is leasing the space back under a nine year
agreement. The loan secured by the property, which had a balance of $794,345,
was assumed by the purchaser and a note payable to affiliates of $700,000 was
relieved as part of the transaction. The Company recorded a gain of $586,111 on
the sale.
In the three months ended, March 31, 2002, the Company purchased 117
Vacation Ownership Interests in the Carriage House in Las Vegas for
approximately $161,000 which it intends to annex into Premiere Vacation Club in
the future.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
In October 2001, the Company amended an outstanding construction loan to
secure an additional $5.2 million in construction financing for current and
planned projects.
In April 2002, the Company borrowed $2.0 million to finance the
construction of 21 new units on land owned by the Company in Pinetop, Arizona.
The promissory note payable bears interest at prime plus 1.5%. The debt is
payable in equal monthly payments of principal and interest over a five year
term ending May 2007.
In December 1999, the Company completed the spin-off of its 80% ownership
interest in Sedona Worldwide Incorporated to the shareholders of ILX. In
conjunction with the spin-off, the Company agreed to provide up to $200,000 of
working capital financing to SWI through November 30, 2001 at an interest rate
of prime plus 3%, with interest payable monthly, and a maturity date of December
31, 2001. Pursuant to the agreement, the Company had advanced SWI $108,000 as of
December 31, 2001. On January 2, 2002, the Company entered into a General Bill
of Sale, Assignment and Assumption Agreement with SWI whereby the Company
assumed all of the assets and liabilities of SWI.
In the future, the Company may negotiate additional credit facilities,
issue corporate debt, issue equity securities, or any combination of the above.
Any debt incurred or issued by the Company may be secured or unsecured, may bear
interest at fixed or variable rates of interest, and may be subject to such
terms as management deems prudent. 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 has been negotiating 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 our contractual cash obligations and
commercial commitments as of March 31, 2002. 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.
PAYMENTS DUE BY PERIOD
CONTRACTUAL CASH -----------------------------------------------------------------------
OBLIGATIONS TOTAL < 1 YEAR 1-3 YEARS 4-5 YEARS > 5 YEARS
- ---------------- ----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT $38,668,000 $ 7,382,000 $11,979,000 $ 8,853,000 $10,454,000
CAPITAL LEASE OBLIGATIONS 162,000 115,000 47,000 -- --
OPERATING LEASES 16,161,000 1,523,000 2,701,000 2,203,000 9,734,000
----------- ----------- ----------- ----------- -----------
TOTAL $54,991,000 $ 9,020,000 $14,727,000 $11,056,000 $20,188,000
=========== =========== =========== =========== ===========
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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, 2002.
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.
14
PART II
ITEM I. LEGAL PROCEEDINGS
Litigation has arisen in the normal course of the Company's business, none
of which is deemed to be material.
ITEM II. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM III. DEFAULTS UPON SENIOR SECURITIES
None
ITEM IV. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM V. OTHER INFORMATION
None
ITEM VI. EXHIBITS AND REPORTS ON FORM 8-K
(i) Exhibits
Exhibit No. Description
----------- -----------
10.1 PURCHASE AND SALE AGREEMENT between ILX Resorts
Incorporated and Edward John Martori, dated March 25,
2002
10.2 SEDONA STATION LEASE between ILX Resorts Incorporated
and Edward John Martori, dated March 25, 2002
(ii) Reports on Form 8-K
None
15
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.
ILX RESORTS INCORPORATED
(Registrant)
/s/ Joseph P. Martori
--------------------------------------------------
Joseph P. Martori
Chief Executive Officer
/s/ Nancy J. Stone
--------------------------------------------------
Nancy J. Stone
President
/s/ Margaret M. Eardley
--------------------------------------------------
Margaret M. Eardley
Executive Vice President & Chief Financial Officer
/s/ Taryn L. Chmielewski
--------------------------------------------------
Taryn L. Chmielewski
Vice President
Corporate Controller
Date: As of May 8, 2002
16