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 September 30, 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 September 30, 2002
----- ---------------------------------
Common Stock, without par value 2,940,286 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2001 2002
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,548,058 $ 2,466,297
Notes receivable, net 30,365,225 33,333,797
Resort property held for Vacation Ownership Interest sales 20,270,872 24,235,517
Resort property under development 5,116,227 466,831
Land held for sale 830,686 793,100
Deferred assets 131,794 97,383
Property and equipment, net 6,189,082 8,473,767
Other assets 7,672,891 10,128,751
------------ ------------
TOTAL ASSETS $ 74,124,835 $ 79,995,443
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,488,456 $ 1,222,245
Accrued and other liabilities 2,354,911 3,734,966
Income taxes payable 689,923 --
Due to affiliates 24,022 --
Notes payable 40,619,303 43,553,006
Notes payable to affiliates 1,000,000 --
Deferred income taxes 2,163,207 3,936,279
------------ ------------
Total liabilities 48,339,822 52,446,496
------------ ------------
Shareholders' Equity
Preferred stock, $10 par value; 10,000,000 shares authorized;
284,816 and 182,310 shares issued and outstanding;
liquidation preference of $2,848,160 and $1,823,100 1,117,025 929,750
Common stock, no par value; 30,000,000 shares authorized;
4,132,702 and 4,277,381 shares issued 18,405,576 19,201,143
Treasury stock, at cost, 1,200,700 and 1,337,095 shares,
respectively (3,688,083) (4,718,769)
Guaranteed ESOP obligation -- (181,500)
Additional paid in capital 269,869 79,556
Retained earnings 9,680,626 12,238,767
------------ ------------
Total shareholders' equity 25,785,013 27,548,947
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 74,124,835 $ 79,995,443
============ ============
See notes to condensed consolidated financial statements
2
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
REVENUES:
Sales of Vacation Ownership Interests $ 7,405,043 $ 9,629,403 $ 21,904,075 $ 26,520,385
Resort operating revenue 4,236,122 4,091,017 12,910,680 12,244,187
Interest income 658,261 1,484,663 1,900,860 4,340,829
------------ ------------ ------------ ------------
Total revenues 12,299,426 15,205,083 36,715,615 43,105,401
------------ ------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership Interests sold 1,257,615 1,398,031 3,725,061 3,855,881
Cost of resort operations 3,834,829 3,842,998 10,930,186 10,862,258
Sales and marketing 3,890,638 6,120,823 12,342,399 16,552,596
General and administrative 1,274,569 1,583,769 3,496,331 4,556,622
Provision for doubtful accounts 323,930 423,063 960,072 1,165,194
Depreciation and amortization 245,281 304,621 545,742 799,105
------------ ------------ ------------ ------------
Total cost of sales and operating expenses 10,826,862 13,673,305 31,999,791 37,791,656
------------ ------------ ------------ ------------
Operating income 1,472,564 1,531,778 4,715,824 5,313,745
Income from land and other, net (Related Party) 7,233 122,331 42,730 594,082
------------ ------------ ------------ ------------
Total operating income 1,479,797 1,654,109 4,758,554 5,907,827
Interest expense (615,492) (552,209) (1,997,721) (1,519,995)
Equity in loss of related party -- (45,396) -- (45,396)
------------ ------------ ------------ ------------
Income before income taxes 864,305 1,056,504 2,760,833 4,342,436
Income tax expense (345,722) (422,601) (1,097,246) (1,736,974)
------------ ------------ ------------ ------------
NET INCOME $ 518,583 $ 633,903 $ 1,663,587 $ 2,605,462
============ ============ ============ ============
NET INCOME PER SHARE
Basic $ 0.16 $ 0.21 $ 0.50 $ 0.88
============ ============ ============ ============
Diluted $ 0.16 $ 0.20 $ 0.49 $ 0.85
============ ============ ============ ============
See notes to condensed consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
----------------------------
2001 2002
------------ ------------
Cash flows from operating activities:
Net income $ 1,663,587 $ 2,605,462
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (gain) on sale of property and equipment 13,373 (564,658)
Undistributed losses of equity investment in a related party -- 45,396
Loss on assumption of Sedona Worldwide Incorporated assets
and liabilities -- 48,887
Income tax expense 1,097,246 1,736,974
Provision for doubtful accounts 960,072 1,165,194
Depreciation and amortization 545,742 799,105
Amortization of guarantee fees 29,286 34,411
Contribution of common stock to ESOP Plan 41,905 --
Common stock issued in exchange for services 4,210 449,892
Change in assets and liabilities:
Decrease (increase) in resort property held for Vacation Ownership
Interest sales 1,109,274 (3,964,645)
(Increase) decrease in resort property under development (9,459) 4,649,396
(Increase) decrease in land held for sale (21,137) 37,586
Increase in other assets (256,912) (2,666,232)
Decrease in accounts payable (54,853) (266,211)
Increase in accrued and other liabilities 104,042 1,295,878
Decrease in income taxes payable -- (653,825)
Increase (decrease) in due to affiliates 24,022 (24,022)
------------ ------------
Net ash provided by operating activities 5,250,398 4,728,588
------------ ------------
Cash flows from investing activities:
Increase in notes receivable, net (3,771,056) (4,133,766)
Cash acquired from Sedona Worldwide Incorporated -- 30,457
Purchases of plant and equipment, net (986,644) (3,843,668)
------------ ------------
Net cash used in investing activities (4,757,700) (7,946,977)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 15,217,156 18,860,642
Principal payments on notes payable (13,519,300) (15,314,094)
Principal payments on notes payable to affiliates -- (300,000)
Preferred stock dividends (47,448) (47,321)
Redemption of preferred stock (805) (770)
Elimination of preferred stock liquidation preference -- (191,143)
Exercise of options by ESOP Plan -- 160,000
Acquisition of treasury stock and other (2,021,593) (1,030,686)
------------ ------------
Net cash (used in) provided by financing activities (371,990) 2,136,628
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 120,708 (1,081,761)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,518,122 3,548,058
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,638,830 $ 2,466,297
============ ============
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 Regulation 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 nine-month period ended
September 30, 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
Interest paid $ 623,698 $ 582,315 $ 1,985,073 $ 1,555,569
Income taxes paid -- 335,409 -- 1,216,092
Interest capitalized -- 83,339 -- 258,300
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 Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Net income $ 518,583 $ 633,903 $ 1,663,587 $ 2,605,462
Less: Series A preferred stock dividends (11,969) (11,830) (35,907) (35,491)
------------ ------------ ------------ ------------
Net income available to common
stockholders - basic $ 506,614 $ 622,073 $ 1,627,680 $ 2,569,971
============ ============ ============ ============
Weighted average shares of common
stock outstanding - basic 3,132,475 2,940,462 3,268,408 2,935,972
============ ============ ============ ============
Basic net income per share $ 0.16 $ 0.21 $ 0.50 $ 0.88
============ ============ ============ ============
DILUTED NET INCOME PER SHARE
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
Net income $ 518,583 $ 633,903 $ 1,663,587 $ 2,605,462
Less: Series A preferred stock dividends (11,969) (11,830) (35,907) (35,491)
------------ ------------ ------------ ------------
Net income available to common
stockholders - diluted $ 506,614 $ 622,073 $ 1,627,680 $ 2,569,971
============ ============ ============ ============
Weighted average shares of common
stock outstanding 3,132,475 2,940,462 3,268,408 2,935,972
Add: Convertible preferred stock (Series
B and C) dilutive effect 78,603 55,620 79,808 68,521
Stock options dilutive effect 34,127 38,760 593 36,329
------------ ------------ ------------ ------------
Weighted average shares of common stock
outstanding - dilutive 3,245,205 3,034,842 3,348,809 3,040,822
============ ============ ============ ============
Diluted net income per share $ 0.16 $ 0.20 $ 0.49 $ 0.85
============ ============ ============ ============
Stock options to purchase 30,700 shares of common stock at a price of
$8.125 per share were outstanding for the three and nine months ended at
September 30, 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. Stock options to purchase 70,700 shares
of common stock at prices ranging from $6.82 per share to $8.125 per share and
options to purchase 170,700 shares of common stock at prices ranging from $4.00
per share to $8.125 per share were outstanding for the three and nine months
ended September 30, 2001, respectively but were not included in the computation
of diluted net income per share because the options' exercise prices were
greater than the average market prices of common shares. These options expire in
2004.
6
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. SHAREHOLDERS' EQUITY
During the nine months ended September 30, 2002, the Company issued 4,300
shares of restricted common stock, valued at $16,415 and 62,597 shares of common
stock, valued at $433,477, to employees and a professional service provider 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 nine months ended September 30, 2002 and 2001, the Company recorded the
exchange of 47,346 and 7,770 Series C Convertible shares for 15,782 and 2,590
common shares, respectively. Also during the nine months ended September 30,
2002, the Company purchased 136,395 shares of its common stock for $1,030,686.
In August 2002, the Series B Convertible Preferred shareholders converted
the remaining 55,000 outstanding shares of Series B Convertible Preferred Stock
for 22,000 shares of common stock, and the ILX Resorts Incorporated Employee
Stock Ownership Plan and Trust (the "ESOP") agreed to purchase such common
shares at $8.25 per share in exchange for notes payable of $181,500. The notes
bear interest at 6%, payable in quarterly payments of principal and interest
through 2003, and are secured by the common shares. The principal amount of the
notes is guaranteed by the Company and has been recorded as a guaranteed ESOP
obligation. The transaction eliminated the liquidation preference of $550,000
and the payment of $191,143 has been recorded as a reduction to additional paid
in capital.
NOTE 4. RELATED PARTY TRANSACTION
In March 2002, the Company completed a transaction with Edward John Martori
(EJM). EJM has been a creditor of the company and is a direct and indirect major
shareholder of the Company. EJM purchased the Sedona Station (the Sedona sales
office) for $1,650,000 and the Company recorded a gain of $586,111 on the
transaction. The loan to the Company secured by the property, which had a
balance of $794,345, was assumed by EJM and a note payable from the Company to
EJM of $700,000 was paid in full as part of the transaction. The balance of the
purchase price was paid to the Company in cash. The Company is leasing the space
back from EJM under a nine-year lease agreement (at $165,000 per annum) and has
paid $82,500 in rent expense for the nine months ended September 30, 2002.
NOTE 5. OTHER
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%, however the rate
shall never be less than 7.0%. The debt is payable in equal monthly payments of
principal and interest over a five-year term ending May 2007.
In May 2002, the Company annexed the Bell Rock Inn into Premiere Vacation
Club and consequently transferred $4,975,203 to resort property held for
Vacation Ownership Interest sales from resort property under development.
In July 2001, the Company acquired a 50-year leasehold interest in a
44-acre parcel located proximate to the Las Vegas Airport, University of Nevada
- - Las Vegas ("UNLV") and the "Strip" in Las Vegas, Nevada. The $5 million
purchase price for the leasehold interest consisted of a $100,000 earnest money
deposit made in August 2000 and a $4.9 million promissory note from a subsidiary
of the Company to an unrelated third party ("the Note"). In June 2002, the
Company purchased the Note for $3.325 million. Both the $4.9 million receivable
and the Note are eliminated in consolidation. The original discount of
$1,575,000 is being amortized to income over the term of the Note. That
discount, net of accumulated amortization, is included in notes payable. The
Company amortized $36,432 during the third quarter of 2002. The Company borrowed
$3.8 million in June 2002, a portion of which was used to purchase the Note and
the Note is collateral for the borrowing. The $3.8 million promissory note bears
interest at prime plus 1.0%, with a minimum interest rate of 7%, and is payable
in equal monthly payments of principal and interest over a five-year term ending
June 2007.
7
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In July 2002, the Company invested $1,000,000 in cash for 8,000,000 shares,
or an approximately 36.4% ownership interest, in Greens Worldwide Incorporated
("GWWI"). The investment in GWWI is included in other assets and the Company is
accounting for its interest in GWWI on the equity method.
In August 2002, the Company entered into a sublease with GWWI for
approximately 20 acres of real property and 13,000 square feet of an existing
building on the 44-acre parcel in Las Vegas. The monthly rent of $31,792.50 is
subject to adjustment in future years over the 49 year term of the lease.
In June 2002, the Company acquired land and two buildings adjacent to Los
Abrigados for $444,000 cash. In August 2002, the Company borrowed $337,500 which
is secured by the property, bears interest at a fixed rate of 7.5%, and is
payable in monthly payments of $1,406.25 principal plus accrued interest until
July 2007 when the unpaid balance is due in full.
8
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"). 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 1,128
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.
9
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 Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2001 2002 2001 2002
--------- --------- --------- ---------
As a percentage of total revenues:
Sales of Vacation Ownership Interests 60.2% 63.3% 59.7% 61.5%
Resort operating revenue 34.4% 26.9% 35.2% 28.4%
Interest income 5.4% 9.8% 5.1% 10.1%
--------- --------- --------- ---------
Total revenues 100.0% 100.0% 100.0% 100.0%
========= ========= ========= =========
As a percentage of sales of Vacation Ownership Interests:
Cost of Vacation Ownership Interests sold 17.0% 14.5% 17.0% 14.5%
Sales and marketing 52.5% 63.6% 56.3% 62.4%
Provision for doubtful accounts 4.4% 4.4% 4.4% 4.4%
Contribution margin percentage from sale of Vacation
Ownership Interests (1) 26.1% 17.5% 22.3% 18.7%
As a percentage of resort operating revenue:
Cost of resort operations 90.5% 93.9% 84.7% 88.7%
As a percentage of total revenues:
General and administrative 10.4% 10.4% 9.5% 10.6%
Depreciation and amortization 2.0% 2.0% 1.5% 1.9%
Operating income 12.0% 10.1% 12.8% 12.3%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 448 515 1,360 1,493
Average sales price per Vacation Ownership Interest
sold (excluding revenues from Upgrades) (2) $ 14,258 $ 15,072 $ 14,221 $ 14,621
Average sales price per Vacation Ownership Interest
sold (including revenues from Upgrades) (2) $ 16,249 $ 18,414 $ 15,821 $ 17,495
- ----------
(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 690 and 792 biennial and annual Vacation
Ownership Interests for the three months ended September 30, 2001 and 2002,
respectively, and 2,101 and 2,254 biennial and annual vacation ownership
interests for the nine months ended September 30, 2001 and 2002,
respectively.
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2002
Sales of Vacation Ownership Interests increased 30.0% or $2,224,360 to
$9,629,403 for the three months ended September 30, 2002, from $7,405,043 for
the same period in 2001 and increased 21.1% or $4,616,310 to $26,520,385 for the
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
nine months ended September 30, 2002 from $21,904,075 for the same period in
2001. The increases reflect 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
decreased sales from the Kohl's Ranch sales office due to lower closing rates.
The decrease in tours to the Sedona sales office 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 increased.
The average sales price per Vacation Ownership Interest sold (excluding
revenues from Upgrades) increased 5.7% or $814 to $15,072 for the three months
ended September 30, 2002 from $14,258 for the same period in 2001 and increased
2.8% or $400 to $14,621 for the nine months ended September 30, 2002 from
$14,221 for the same period in 2001. The number of Vacation Ownership Interests
sold increased 15.0% from 448 in the three months ended September 30, 2001 to
515 for the same period in 2002 and increased 9.8% from 1,360 in the nine months
ended September 30, 2001 to 1,493 for the same period in 2002 due to the opening
of the Las Vegas office, net of reduced sales in the Sedona and Kohl's Ranch
sales offices as described above, as well as the closure of the Phoenix sales
office in May 2001. The three and nine months ended September 30, 2002 included
555 and 1,523 biennial Vacation Ownership Interests (counted as 277.5 and 761.5
annual Vacation Ownership Interests) compared to 485 and 1,483 biennial Vacation
Ownership Interests (counted as 242.5 and 741.5 annual Vacation Ownership
Interests) in the same periods in 2001, respectively.
Upgrade revenue, included in Vacation Ownership Interest sales, increased
93.0% to $1,719,459 for the three months ended September 30, 2002 from $890,790
for the same period in 2001 and increased 97.2% to $4,290,796 for the nine
months ended September 30, 2002 from $2,175,905 for the same period in 2001.
Upgrades often 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. Upgrade revenue has
increased due to expanded marketing efforts to existing owners. The average
sales price per Vacation Ownership Interest sold (including Upgrades) increased
13.3% or $2,165 to $18,414 for the three months ended September 30, 2002 from
$16,249 in 2001 and increased 10.6% or $1,674 to $17,495 for the nine months
ended September 30, 2002 from $15,821 for the same period in 2001.
Resort operating revenue decreased 3.4% and 5.2% or $145,105 and $666,493
to $4,091,017 and $12,244,187 for the three and nine months ended September 30,
2002, respectively, reflecting a decrease in business and tourist travel by
non-owners in the first nine months of 2002, as well as timing differences in
revenue from vacation interval owners in the first quarter. Cost of resort
operations as a percentage of resort operating revenue increased from 90.5% to
93.9% for the third quarter ended September 30, 2002 and increased from 84.7% to
88.7% for the nine months ended September 30, 2002. Because of the large fixed
cost component of resort operations, reductions in revenue resulted in greater
costs as a percentage of revenue. Actual resort operating costs were comparable
between quarters and lower year to date September 30, 2002 than the same period
in 2001.
Interest income increased 125.5% to $1,484,663 for the three months ended
September 30, 2002 from $658,261 for the same period in 2001 and increased
128.4% to $4,340,829 for the nine months ended September 30, 2002 from
$1,900,860 for the same period in 2001, reflecting an increase in the percentage
of Customer Notes sold in 2002, for which the Company recognizes the interest
premium upon sale of the note and the increased portfolio of interest bearing
retained notes.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales decreased from 17.0% for the three and nine months
ended September 30, 2001 to 14.5% for the three and nine months ended September
30, 2002, respectively, reflecting favorable costs for the acquisition of
vacation ownership interests in the Carriage House and the Bell Rock Inn, net of
improvements made to resort properties.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Sales and marketing as a percentage of sales of Vacation Ownership
Interests increased to 63.6% for the three months ended September 30, 2002 from
52.5% for the same period in 2001 and to 62.4% for the nine months ended
September 30, 2002 from 56.3% for the same period in 2001, reflecting the
start-up of the Las Vegas sales office which opened 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
in the three and nine month periods ended September 30, 2001 and 2002.
General and administrative expenses were consistent at 10.4% of total
revenue for the three month periods ended September 30, 2002 and 2001 and
increased to 10.6% of total revenue for the nine months ended September 30,
2002, from 9.5% for the same period in 2001. The increase for the nine month
period reflects increased professional fees, including fees for development of
an enhanced website and expenses for Premiere Park in Las Vegas.
Income from land and other, net (including Related Party) for the nine
months ended September 30, 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 $48,884
on the assumption of the assets and liabilities of Sedona Worldwide Incorporated
as of January 2, 2002. The Sedona Station was sold to EJM, a creditor of the
company and a direct and indirect major shareholder, for $1,650,000 and is
leased back from EJM by the Company under a nine-year lease agreement. The sales
price was negotiated and agreed to by the parties to the transaction based on
current market values. The market price was predicated on the knowledge of the
Company, its counsel and advisors of the Sedona real estate market and the
capitalization of rent. At the time of the transaction, the Company owned five
properties and leased several other locations in Sedona. In connection with the
financing of some of these other transactions, recent appraisals had been
obtained by financial institutions on comparable properties. The Company
compared the sales price and lease rate to comparable properties and found them
within the range of transactions related to those and other properties. This
transaction enabled the Company to pay in full a $700,000 note payable to the
affiliate which otherwise would have been due and payable in full in December
2003. The lease capitalization rate of ten percent is equivalent to the interest
rate on that note.
The 10.3% and 23.9% decreases in interest expense to $552,209 and
$1,519,995 for the three and nine months ended September 30, 2002 from $615,492
and $1,997,721 for the same periods in 2001, respectively, reflect interest rate
reductions 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 nine months ended September 30,
2001 and 2002, cash provided by operations was $5,250,398 and $4,728,588,
respectively. The decrease in cash provided by operations reflects cash paid for
2001 income taxes and an increase in other assets for an investment in a related
party, estimated tax payments for 2002, and increased escrow balances, net of
increased net income and related income tax expense, the effect of common stock
issued in lieu of cash compensation, and an increase in accrued and other
liabilities, reflecting timing differences between years in drawing funds from
the homeowners associations for operating activities.
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,
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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
Net Operating Loss (NOL) carryforwards of approximately $4.7 million, which
expire in 2002 through 2020. At December 31, 2001, Genesis had federal NOL
carryforwards of approximately $2.0 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.
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 during the nine
months ended September 30, 2001 and 2002 was $4,757,700 and $7,946,977,
respectively. The increase reflects construction activities in Las Vegas,
including construction of a restaurant at the Carriage House and renovation of a
portion of the existing building at Premiere Park into a sales center and the
addition of a model suite and sales lounge.
Net cash used in financing activities for the nine months ended September
30, 2001 was $371,990 compared to net cash provided by financing activities of
$2,136,628 for the nine months ended September 30, 2002. Cash provided by
financing activities in 2002 includes the borrowing of $2.0 million to finance
the construction of 21 new units in Pinetop, Arizona, and additional borrowings
to finance the purchase of a building and equipment, net of greater principal
payments on notes payable.
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. During the nine months ended
September 30, 2002, the Company contributed $160,000 to the ESOP and the ESOP
used the funds to exercise options for 40,000 shares of the Company's common
stock at $4.00 per share. In August 2002, the ESOP entered into an agreement to
purchase 22,000 shares of common stock for $181,500 in notes payable secured by
the stock. The notes bear interest at 6% and mature in 2003.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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 September 30, 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 September 30, 2002, $14.3 million of the
$40 million 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 2003. At September 30, 2002, approximately $11.6 million
is available under this commitment.
At September 30, 2001 and 2002, the Company had approximately $12.4 million
and $12.8 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 nine months of 2002, the Company purchased 136,395 treasury
shares for a cost of $1,030,686.
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 to EJM for $1,650,000 and the Company recorded a gain of $586,111 on
the transaction. The loan secured by the property, which had a balance of
$794,345, was assumed by the purchaser and a note payable to EJM of $700,000 was
paid in full as part of the transaction. The balance of the purchase price was
paid to the Company in cash. The Company is leasing the space back from EJM
under a nine-year lease agreement (at $165,000 per annum) and has recognized
$82,500 in rent expense for the nine months ended September 30, 2002.
In the nine months ended September 30, 2002, the Company purchased 386
Vacation Ownership Interests in the Carriage House in Las Vegas for
approximately $424,500, which it intends to annex into Premiere Vacation Club in
the future.
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 June 2002, the Company borrowed $3.8 million and utilized a portion of
the proceeds to purchase for $3.325 million a $4.9 million note payable by a
subsidiary to a third party. The promissory note bears interest at prime plus
1.0% with a minimum interest rate of 7%. The debt is payable in equal monthly
payments of principal and interest over a five-year term ending June 2007.
In June 2002, the Company acquired land and two buildings adjacent to Los
Abrigados for $444,000 cash. In August 2002, the Company borrowed $337,500 which
is secured by the property, bears interest at a fixed rate of 7.5%, and is
payable in monthly payments of $1,406.25 principal plus accrued interest until
July 2007 when the unpaid balance is due in full.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
In October 2002, the Company contributed an additional $80,000 to the ESOP
and the ESOP used the funds to exercise options for 20,000 shares of the
Company's common stock at $4.00 per share.
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 the contractual cash obligations and
commercial commitments as of September 30, 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 $43,489,000 $ 6,315,000 $13,105,000 $13,784,000 $10,285,000
CAPITAL LEASE OBLIGATIONS 64,000 36,000 28,000 -- --
OPERATING LEASES 16,785,000 1,518,000 2,668,000 2,066,000 10,533,000
----------- ----------- ----------- ----------- -----------
TOTAL $60,338,000 $ 7,869,000 $15,801,000 $15,850,000 $20,818,000
=========== =========== =========== =========== ===========
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 nine months ended September 30, 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.
15
CONTROLS AND PROCEDURES
ITEM IV. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this quarterly report, the Company's
Chief Executive Officer and its Chief Financial Officer evaluated the Company's
disclosure controls and procedures as required pursuant to Rule 13a-14 under the
Securities and Exchange Act of 1934, as amended. Based on this evaluation, the
Chief Executive Officer and its Chief Financial Officer determined that such
controls and procedures were effective. There were no significant changes in
internal controls that could significantly affect the disclosure controls and
procedures since the date of the evaluation.
16
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
The Company eliminated the liquidation preference of its Series B preferred
stock.
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
None
17
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 November 11, 2002
18
FORM OF CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
I, Joseph P. Martori, Chairman, and Chief Executive Officer of ILX Resorts
Incorporated (the "Company") certify that:
1. I have reviewed this quarterly report on Form 10-Q of ILX Resorts
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact necessary to make the statements
made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 11, 2002
/s/ Joseph P. Martori
----------------------------------------
Joseph P. Matori
Chairman and Chief Executive Officer
19
FORM OF CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
I, Margaret M. Eardley, Executive Vice President and Chief Financial Officer of
ILX Resorts Incorporated (the "Company") certify that:
1. I have reviewed this quarterly report on Form 10-Q of ILX Resorts
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact necessary to make the statements
made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 11, 2002
/s/ Margaret M. Eardley
----------------------------------------
Margaret M. Eardley
Executive Vice President and
Chief Financial Officer
20