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 June 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 June 30, 2002
----- ----------------------------
Common Stock, without par value 2,927,293 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2001 2002
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,548,058 $ 2,815,129
Notes receivable, net 30,365,225 32,082,514
Resort property held for Vacation Ownership Interest sales 20,270,872 23,698,556
Resort property under development 5,116,227 902,477
Land held for sale 830,686 793,100
Deferred assets 131,794 109,261
Property and equipment, net 6,189,082 7,224,040
Other assets 7,672,891 8,984,699
------------ ------------
TOTAL ASSETS $ 74,124,835 $ 76,609,776
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,488,456 $ 1,231,785
Accrued and other liabilities 2,354,911 3,385,813
Income taxes payable 689,923 141,506
Due to affiliates 24,022 --
Notes payable 40,619,303 40,903,119
Notes payable to affiliates 1,000,000 --
Deferred income taxes 2,163,207 3,477,580
------------ ------------
Total liabilities 48,339,822 49,139,803
------------ ------------
Shareholders' Equity
Preferred stock, $10 par value; 10,000,000 shares authorized;
284,816 and 241,933 shares issued and outstanding;
liquidation preference of $2,878,920 and $2,419,330 1,117,025 997,510
Common stock, no par value; 30,000,000 shares authorized;
4,132,702 and 4,225,988 shares issued 18,405,576 19,007,188
Treasury stock, at cost, 1,200,700 and 1,298,695 shares,
respectively (3,688,083) (4,410,288)
Additional paid in capital 269,869 270,699
Retained earnings 9,680,626 11,604,864
------------ ------------
Total shareholders' equity 25,785,013 27,469,973
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 74,124,835 $ 76,609,776
============ ============
See notes to condensed consolidated financial statements
2
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2001 2002 2001 2002
------------ ------------ ------------ ------------
REVENUES:
Sales of Vacation Ownership Interests $ 7,978,808 $ 9,706,137 $ 14,499,032 $ 16,890,982
Resort operating revenue 4,627,334 4,523,454 8,674,558 8,153,170
Interest income 551,077 1,831,437 1,242,599 2,856,166
------------ ------------ ------------ ------------
Total revenues 13,157,219 16,061,028 24,416,189 27,900,318
------------ ------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership Interests sold 1,358,800 1,409,789 2,467,446 2,457,850
Cost of resort operations 3,846,927 3,653,890 7,095,357 7,019,260
Sales and marketing 4,369,893 5,847,783 8,451,761 10,431,772
General and administrative 1,174,123 1,874,177 2,221,762 2,972,854
Provision for doubtful accounts 349,947 427,368 636,142 742,131
Depreciation and amortization 202,407 271,647 300,461 494,484
------------ ------------ ------------ ------------
Total cost of sales and operating expenses 11,302,097 13,484,654 21,172,929 24,118,351
------------ ------------ ------------ ------------
Operating income 1,855,122 2,576,374 3,243,260 3,781,967
Income from land and other, net 38,764 (54,622) 35,497 471,751
------------ ------------ ------------ ------------
Total operating income 1,893,886 2,521,752 3,278,757 4,253,718
Interest expense (638,745) (481,585) (1,382,229) (967,786)
------------ ------------ ------------ ------------
Income before income taxes 1,255,141 2,040,167 1,896,528 3,285,932
Income tax expense (491,646) (816,066) (751,524) (1,314,373)
------------ ------------ ------------ ------------
NET INCOME $ 763,495 $ 1,224,101 $ 1,145,004 $ 1,971,559
============ ============ ============ ============
NET INCOME PER SHARE
Basic $ 0.23 $ 0.41 $ 0.34 $ 0.66
============ ============ ============ ============
Diluted $ 0.22 $ 0.40 $ 0.33 $ 0.64
============ ============ ============ ============
See notes to condensed consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
----------------------------
2001 2002
------------ ------------
Cash flows from operating activities:
Net income $ 1,145,004 $ 1,971,559
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss (gain) on sale of property and equipment 12,499 (571,634)
Loss on assumption of Sedona Worldwide Incorporated assets
and liabilities -- 48,887
Income tax expense 751,524 1,314,373
Provision for doubtful accounts 636,142 742,131
Depreciation and amortization 300,461 494,484
Amortization of guarantee fees 18,743 22,533
Contribution of common stock to ESOP Plan 41,904 --
Common stock issued to employees for services 4,210 403,697
Change in assets and liabilities:
Decrease (increase) in resort property held for Vacation
Ownership Interest sales 421,478 (3,427,684)
(Increase) decrease in resort property under development (240,801) 4,213,750
(Increase) decrease in land held for sale (11,578) 37,586
Decrease (increase) in other assets 11,748 (1,390,478)
Decrease in accounts payable (152,560) (256,671)
Increase in accrued and other liabilities 611,612 946,725
Decrease in income taxes payable -- (548,417)
Decrease in due to affiliates -- (24,022)
------------ ------------
Net cash provided by operating activities 3,550,386 3,976,819
------------ ------------
Cash flows from investing activities:
Increase in notes receivable, net (2,837,794) (2,459,420)
Cash acquired from Sedona Worldwide Incorporated -- 30,457
Purchases of plant and equipment, net (499,883) (2,368,650)
------------ ------------
Net cash used in investing activities (3,337,677) (4,797,613)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 9,040,109 11,140,322
Principal payments on notes payable (9,030,815) (10,062,161)
Principal payments on notes payable to affiliates -- (300,000)
Preferred stock dividends (47,448) (47,321)
Redemption of preferred stock (105) (770)
Exercise of options by ESOP Plan -- 80,000
Acquisition of treasury stock and other (634,452) (722,205)
------------ ------------
Net cash (used in) provided by financing activities (672,711) 87,865
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (460,002) (732,929)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,518,122 3,548,058
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,058,120 $ 2,815,129
============ ============
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 six-month period ended June
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 June 30, Six Months ended June 30,
--------------------------- -------------------------
2001 2002 2001 2002
---------- ---------- ---------- ----------
Interest paid $ 651,375 $ 472,257 $1,361,375 $ 973,254
Income taxes paid -- 332,266 -- 880,683
Interest capitalized -- 85,093 -- 174,961
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 June 30 Six Months Ended June 30
-------------------------- --------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
Net income $ 763,495 $ 1,224,101 $ 1,145,004 $ 1,971,559
Less: Series A preferred stock dividends (11,969) (11,830) (23,938) (23,660)
----------- ----------- ----------- -----------
Net income available to common
stockholders - basic $ 751,526 $ 1,212,271 $ 1,121,066 $ 1,947,899
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding - basic 3,280,072 2,932,535 3,337,501 2,933,689
=========== =========== =========== ===========
Basic net income per share $ 0.23 $ 0.41 $ 0.34 $ 0.66
=========== =========== =========== ===========
DILUTED NET INCOME PER SHARE
Three Months Ended June 30 Six Months Ended June 30
-------------------------- --------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
Net income $ 763,495 $ 1,224,101 $ 1,145,004 $ 1,971,559
Less: Series A preferred stock dividends (11,969) (11,830) (23,938) (23,660)
----------- ----------- ----------- -----------
Net income available to common
stockholders - diluted $ 751,526 $ 1,212,271 $ 1,121,066 $ 1,947,899
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding 3,280,072 2,932,535 3,337,501 2,933,689
Add: Convertible preferred stock (Series
B and C) dilutive effect 80,141 71,796 80,420 75,078
Stock options dilutive effect -- 44,895 -- 44,993
----------- ----------- ----------- -----------
Weighted average shares of common
stock outstanding - dilutive 3,360,213 3,049,226 3,417,921 3,053,760
=========== =========== =========== ===========
Diluted net income per share $ 0.22 $ 0.40 $ 0.33 $ 0.64
=========== =========== =========== ===========
Stock options to purchase 30,700 shares of common stock at a price of
$8.125 per share were outstanding for the three and six months ended at June 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. These options expire in 2004.
NOTE 3. SHAREHOLDERS' EQUITY
During the six months ended June 30, 2002, the Company issued 300 shares of
restricted common stock, valued at $1,035 and 58,745 shares of common stock,
valued at $402,662, 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 six months ended June 30, 2002 and
2001, the Company recorded the exchange of 42,723 and 3,639 Series C Convertible
6
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
shares for 14,241 and 1,213 common shares, respectively. Also during the six
months ended June 30, 2002, the Company purchased 97,995 shares of its common
stock for $722,205.
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.
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 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 discount of $1,575,000 is
included in notes payable and will be amortized to income over the term of the
Note. 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.
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.
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"). 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 1,014
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2002 2001 2002
--------- --------- --------- ---------
As a percentage of total revenues:
Sales of Vacation Ownership Interests 60.6% 60.4% 59.4% 60.6%
Resort operating revenue 35.2% 28.2% 35.5% 29.2%
Interest income 4.2% 11.4% 5.1% 10.2%
--------- --------- --------- ---------
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% 14.6%
Sales and marketing 54.8% 60.2% 58.3% 61.8%
Provision for doubtful accounts 4.4% 4.4% 4.4% 4.4%
Contribution margin percentage from sale of Vacation
Ownership Interests (1) 23.8% 20.8% 20.3% 19.3%
As a percentage of resort operating revenue:
Cost of resort operations 83.1% 80.8% 81.8% 86.1%
As a percentage of total revenues:
General and administrative 8.9% 11.7% 9.1% 10.7%
Depreciation and amortization 1.5% 1.7% 1.2% 1.8%
Operating income 14.1% 16.0% 13.3% 13.6%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 502 558 912 978
Average sales price per Vacation Ownership Interest
sold (excluding revenues from Upgrades) (2) $ 14,263 $ 14,515 $ 14,202 $ 14,383
Average sales price per Vacation Ownership Interest
sold (including revenues from Upgrades) (2) $ 15,607 $ 17,140 $ 15,611 $ 17,012
- ----------
(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 766 and 832 biennial and annual Vacation
Ownership Interests for the three months ended June 30, 2001 and 2002,
respectively, and 1,411 and 1,462 biennial and annual vacation ownership
interests for the six months ended June 30, 2001 and June 30, 2002,
respectively.
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 2002
Sales of Vacation Ownership Interests increased 21.6% or $1,727,329 to
$9,706,137 for the three months ended June 30, 2002, from $7,978,808 for the
same period in 2001 and increased 16.5% or $2,391,950 to $16,890,982 for the six
months ended June 30, 2002 from $14,499,032 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
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
from the Sedona sales office due to reduced tour flow and decreased sales from
the Kohl's Ranch sales office due to lower efficiency (revenue per tour) and
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 1.8% or $252 in 2002 to $14,515 for the three
months ended June 30, 2002 from $14,263 for the same period in 2001 and
increased 1.3% or $181 to $14,383 for the six months ended June 30, 2002 from
$14,202 for the same period in 2001. The number of Vacation Ownership Interests
sold increased 11.2% from 502 in the three months ended June 30, 2001 to 558 for
the same period in 2002 and increased 7.2% from 912 in the six months ended June
30, 2001 to 978 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 six months ended June 30, 2002 included 548 and 968 biennial
Vacation Ownership Interests (counted as 274 and 484 annual Vacation Ownership
Interests) compared to 528 and 998 biennial Vacation Ownership Interests
(counted as 264 and 499 annual Vacation Ownership Interests) in the same periods
in 2001, respectively.
Upgrade revenue, included in Vacation Ownership Interest sales, increased
117.0% to $1,464,797 for the three months ended June 30, 2002 from $674,921 for
the same period in 2001 and increased 100.0% to $2,571,337 for the six months
ended June 30, 2002 from $1,285,115 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 9.8% or $1,533 to $17,140
for the three months ended June 30, 2002 from $15,607 in 2001 and increased 9.0%
or $1,401 to $17,012 for the six months ended June 30, 2002 from $15,611 for the
same period in 2001.
Resort operating revenue decreased 2.2% and 6.0% or $103,880 and $521,388
to $4,523,454 and $8,153,170 for the three and six months ended June 30, 2002,
respectively, reflecting a decrease in business and tourist travel by non-owners
in the first six 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 decreased from 83.1% to 80.8% for the
second quarter ended June 30, 2002 and increased from 81.8% to 86.1% for the six
months ended June 30, 2002. The improvement in cost as a percentage of revenue
in the second quarter reflects increased operating efficiencies. The increase in
cost as a percentage of revenue year to date reflects greater revenue in first
quarter 2001, including non-recurring benefits, with the first quarter 2002 cost
as a percentage of revenue comparable to prior periods.
Interest income increased 232.3% to $1,831,437 for the three months ended
June 30, 2002 from $551,077 for the same period in 2001 and increased 129.9% to
$2,856,166 for the six months ended June 30, 2002 from $1,242,599 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.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales decreased from 17.0% for the three and six months ended
June 30, 2001 to 14.5% and 14.6% for the three and six months ended June 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.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests increased to 60.2% for the three months ended June 30, 2002 from 54.8%
for the same period in 2001 and to 61.8% for the six months ended June 30, 2002
from 58.3% for the same period in 2001, reflecting the start-up of the Las Vegas
sales office which opened in January 2002. Excluding the Las Vegas start up
operation, sales and marketing as a percentage of sales of Vacation Ownership
Interests decreased from prior year in both the first and second quarters of
2002.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 six month periods ended June 30, 2001 and 2002.
General and administrative expenses increased to 11.7% and 10.7% of total
timeshare revenue for the second quarter and six months ended June 30, 2002,
from 8.9% and 9.1% for the same periods in 2001. The increase for the three and
six month periods reflect 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 for the six months ended June 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 $48,887 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 24.6% and 30.0% decreases in interest expense to $481,585 and $967,786
for the three and six months ended June 30, 2002 from $638,745 and $1,382,229
for the same periods in 2001, respectively, reflect a decrease in borrowings
against Customer Notes receivable, 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 six months ended June 30, 2001 and
2002, cash provided by operations was $3,550,386 and $3,976,819, respectively.
The increase in cash provided by operations reflects increased net income and
related income tax expense and the combined effect of common stock issued to
employees in lieu of cash compensation, a net decrease in resort property held
for Vacation Ownership Interest sales, after consideration of the annexation of
the Bell Rock Inn, from higher sales of Vacation Ownership Interests, net of
cash paid for 2001 income taxes and an increase in other assets. The increase in
other assets is the result of estimated tax payments made for 2002, maintenance
fee payments made to the Carriage House for 2002 which will be amortized over
the entire year, and loan fees paid for the $3.8 million note payable entered
into in June 2002.
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
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 six
months ended June 30, 2001 and 2002 was $3,337,677 and $4,797,613, respectively.
The increase reflects construction activities in Las Vegas, including the
renovation of a portion of the existing building into a sales center and the
addition of a model suite and sales lounge.
Net cash used in financing activities for the six months ended June 30,
2001 was $672,711 compared to net cash provided by financing activities of
$87,865 for the six months ended June 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 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 second quarter 2002, the
Company contributed $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.
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 June 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 June 30, 2002, $17.5 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 2002. At June 30, 2002, approximately $12.6 million is
available under this commitment.
At June 30, 2001 and 2002, the Company had approximately $14.1 million and
$12.2 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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In the first six months of 2002, the Company purchased 97,995 treasury
shares for a cost of $722,205.
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 six months ended June 30, 2002, the Company purchased 272 Vacation
Ownership Interests in the Carriage House in Las Vegas for approximately
$297,000 which it intends to annex into Premiere Vacation Club in the future.
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 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.
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.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CONTRACTUAL CASH OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table presents our contractual cash obligations and
commercial commitments as of June 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 $39,216,000 $ 5,949,000 $12,272,000 $12,613,000 $ 8,382,000
CAPITAL LEASE OBLIGATIONS 112,000 74,000 38,000 -- --
OPERATING LEASES 17,175,000 1,545,000 2,710,000 2,149,000 10,771,000
----------- ----------- ----------- ----------- -----------
TOTAL $56,503,000 $ 7,568,000 $15,020,000 $14,762,000 $19,153,000
=========== =========== =========== =========== ===========
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 six months ended June 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.
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
On Thursday, June 20, 2002, the Company held it Annual Meeting of
Shareholders. At this meeting, the Shareholders were asked to vote on the
following proposal:
To elect eight (8) directors to serve until the next annual meeting of
Shareholders of the Company, or until their successors are duly elected and
qualified.
The voting results were as follows:
Nominees recommended in the Proxy Statement:
Votes For Votes Against Votes Withheld
--------- ------------- --------------
Steven R. Chanen 2,596,647 0 21,742
Joseph P. Martori 2,600,018 0 15,371
Joseph P. Martori, II 2,600,154 0 15,235
Patrick J. McGroder III 2,607,395 0 7,994
James W. Myers 2,598,821 0 16,568
Nancy J. Stone 2,599,982 0 15,407
Steven A. White 2,611,885 0 3,504
Edward S. Zielinski 2,600,142 0 15,247
As a result of the vote, the following eight directors will serve until the
next annual meeting or until his or her successor is elected and qualified:
Steven R. Chanen, Joseph P. Martori, Joseph P. Martori, II, James W. Myers,
Patrick J. McGroder III, Nancy J. Stone, Steven A. White and Edward S.
Zielinski.
15
ITEM V. OTHER INFORMATION
None
ITEM VI. EXHIBITS AND REPORTS ON FORM 8-K
(i) Exhibits
Exhibit No. Description
----------- -----------
10.1 LOAN PURCHASE AND SALE AGREEMENT
between ILX Resorts Incorporated and
Las Vegas Golf Center, L.L.C. dated June 23, 2002
10.2 Allonge dated June 23, 2002,
executed on behalf of Las Vegas
Golf Center, L.L.C., to the order of
ILX Resorts Incorporated
99.1 CERTIFICATION PURSUANT TO 18 U.S.C.ss.1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
16
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 August 12, 2002
17