UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934
For the fiscal year ended December 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Act of 1934
For the transition period from _______________ to _______________
Commission File Number 001-13855
ILX RESORTS INCORPORATED
ARIZONA 86-0564171
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2111 East Highland Avenue, Suite 210, Phoenix, AZ 85016
Registrant's telephone number, including area code (602) 957-2777
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of Class on which registered
- ------------------------------- -----------------------------
Common Stock, without par value American Stock Exchange, Inc.
Securities registered pursuant to Section 12 (g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
stock, as of the latest practicable date.
Class Outstanding at March 21, 2003
- ------------------------------- -----------------------------
Common Stock, without par value 2,918,945 shares
At March 21, 2003, the aggregate market value of Registrant's common shares held
by non-affiliates, based upon the closing price at such date, was approximately
$7.0 million.
Portions of Registrant's definitive Proxy Statement relating to the 2003 Annual
Meeting of Shareholders have been incorporated by reference into Part III, Items
10, 11, 12 and 13.
ILX RESORTS INCORPORATED
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I 3
- -----------------------------------------------------------------------------------------------------------
ITEMS 1 AND 2. BUSINESS AND PROPERTIES 3
ITEM 3. LEGAL PROCEEDINGS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
PART II 19
- -----------------------------------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 19
ITEM 6. SELECTED FINANCIAL DATA 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 25
PART III 26
- -----------------------------------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 26
ITEM 11. EXECUTIVE COMPENSATION 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
ITEM 14. CONTROLS AND PROCEDURES 26
PART IV 26
- -----------------------------------------------------------------------------------------------------------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 26
PART I
This Form 10-K contains certain "forward-looking statements," including
statements regarding, among other items, the Company's growth strategy, industry
and demographic trends, the Company's ability to finance its operations and
anticipated trends in its business. Actual results could differ materially from
these forward-looking statements as a result of a number of factors, including,
but not limited to, the Company's need for additional financing, intense
competition in various aspects of its business, the risks of rapid growth, its
dependence on key personnel and other factors discussed in the Company's public
filings with the Securities and Exchange Commission. Readers are cautioned not
to place undue reliance on such forward-looking statements and no assurances can
be given that such statements will be achieved. The Company undertakes no
obligation to publicly update or revise any of the forward-looking statements
contained herein.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
THE COMPANY
ILX Resorts Incorporated ("ILX" or the "Company") is one of the leading
developers, marketers and operators of timeshare resorts in the western United
States. 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"). The Company also
holds 1,330 weeks at the Carriage House in Las Vegas, Nevada. One of the resorts
in Arizona is not registered with the Arizona Department of Real Estate nor
being marketed for sale as Vacation Ownership Interests and is operated under a
long-term lease arrangement.
At December 31, 2002, the ILX resorts represented an aggregate of 579 units
and 29,336 sold and unsold one-week Vacation Ownership Interests, including
1,500 one-week 25-year right-to-use Sea of Cortez Premiere Vacation Club
Vacation Ownership Interests in San Carlos, Mexico, 169 weeks in the Roundhouse
Resort in Pinetop/Lakeside, Arizona and 1,147 weeks in the Carriage House in Las
Vegas, Nevada, which have been annexed to Premiere Vacation Club. The 29,336
sold and unsold Vacation Ownership Interests exclude the Arizona resort not
currently registered or marketed as Vacation Ownership Interests. The Company
also markets additional interests, which consisted, at December 31, 2002, of an
aggregate of approximately 213 Vacation Ownership Interests in destination
resorts owned by others and located in Arizona, Nevada, Florida, California and
elsewhere (collectively, the "Additional Interests"), including 183 in the
Carriage House which have not yet been annexed to Premiere Vacation Club.
The Company was founded in 1986 and commenced implementation of its current
operating and growth strategies in the fourth quarter of 1991. During the period
from December 31, 1991 through December 31, 2002, the Company increased the
number of ILX resorts from two to nine (excluding the Roundhouse Resort and the
Carriage House), and increased its total inventory of sold and unsold Vacation
Ownership Interests from 9,915 weeks to 29,336 weeks (including the Sea of
Cortez Premiere Vacation Club, the Roundhouse Resort, the Carriage House
Vacation Ownership Interests, and the Additional Interests). The Company's total
revenues increased from $6.1 million in 1991 to $58.6 million in 2002. During
this period, the Company's growth was fueled principally by the acquisition,
redevelopment and expansion of certain ILX resorts and the marketing, sale and
financing of Vacation Ownership Interests in these resorts. The Company believes
it was able to purchase the ILX resorts and the Additional Interests at
relatively attractive prices because of its skill in locating, identifying and
acquiring distressed or underdeveloped resorts and Vacation Ownership Interests.
The Company successfully utilized this strategy in connection with the
acquisition of the Los Abrigados Resort & Spa in Sedona, Arizona (183 units),
the Kohl's Ranch Lodge in Payson, Arizona (66 units), the Bell Rock Inn in the
Village of Oak Creek near Sedona, Arizona (96 units), the development rights to
build additional units adjacent to the existing Roundhouse Resort in
Pinetop/Lakeside, Arizona, the 1,500 Vacation Ownership Interests in San Carlos,
Mexico, and 1,330 vacation ownership interests at the Carriage House in Las
Vegas, Nevada.
Utilizing management's development expertise, the Company developed and
implemented the Varsity Clubs concept. This concept entails ground-up
development of urban vacation ownership properties strategically situated in
tourist destinations that are accessible to major population centers near
prominent colleges and universities. The first Varsity Clubs, VCA-South Bend,
consisting of 62 units, was completed in August 1995 and is located
approximately three miles from the University of Notre Dame in South Bend,
Indiana. The second Varsity Clubs, VCA-Tucson, consisting of 60 units, was
3
completed in July 1998 and is located approximately three miles from the
University of Arizona in Tucson, Arizona. The scope of the Company's activities
since 1991 have enabled the Company's management team, which has significant
experience in the vacation ownership resort and real estate development
industries, to establish substantial in-house capabilities in areas critical to
the Company's operating and growth strategies, including property identification
and acquisition, property development and rehabilitation, and Vacation Ownership
Interest sales and marketing.
The Company is pursuing a two-pronged operating strategy which focuses on
marketing Vacation Ownership Interests in the Company's convenient access
resorts ("CARs") and in its Varsity Clubs. CARs are typically high-quality
vacation ownership resorts situated in settings of natural beauty or other
special locations and within convenient and inexpensive traveling distance from
major population centers (currently Phoenix, Tucson, Las Vegas and Denver). The
Company's CARs are intended to facilitate more frequent "short-stay" getaways,
which the Company believes is an increasingly popular vacation trend. To the
extent Varsity Clubs resorts are located proximate to major population centers,
such resorts may also be CARs. As of December 31, 2002, the Company operated
eight resorts consisting of 579 units and held 10,969 unsold Vacation Ownership
Interests in those resorts, inclusive of unsold interests in Premiere Vacation
Club. Third parties operate the Sea of Cortez Premiere Vacation Club and the
Carriage House. The Company's inventory of CARs has been marketed primarily by
ILX employees at the Company's on-site sales offices located at or near selected
ILX resorts and, an offsite sales office in Las Vegas, Nevada.
Historically the Company had primarily marketed Vacation Ownership
Interests in individual ILX resorts. Commencing in June 1998, the Company began
marketing much of its inventory of CARs through membership interests in its
proprietary branded Premiere Vacation Club. Premiere Vacation Club offers
purchasers a deeded one-week membership interest that may be used at any time
between certain specified dates at any one of the destinations included in
Premiere Vacation Club, or may be split into multiple stays of shorter duration
at any combination of such resorts. Vacation Ownership Interests in individual
ILX resorts and in Premiere Vacation Club may be exchanged for stays at other
resorts through the major national exchange networks in which ILX owners may
participate, such as Resort Condominiums International ("RCI") and Interval
International ("II"). The majority of the Company's inventory of Vacation
Ownership Interests, including those at its Varsity Clubs and those included in
Premiere Vacation Club, qualify as "red time," the highest demand classification
for purposes of participation in such exchange networks. The Company designed
Premiere Vacation Club to respond to customer preferences for flexible use
options (e.g., floating days, two-day uses and the ability to split a purchased
membership interest), locations within convenient driving distances from major
metropolitan areas and other features (e.g., high quality amenities, natural
beauty and food and beverage discounts at its participating ILX resorts).
In addition to marketing through Premiere Vacation Club, the Company
intends to pursue the expansion of its proprietary branded Varsity Clubs
concept. The Company will focus on development of additional Varsity Clubs in
areas with a significant base of existing tourism and access to major population
centers, which are located near prominent colleges and universities in the
western United States. The Company completed construction and commenced
operations of its prototype Varsity Clubs property, VCA-South Bend, located near
the University of Notre Dame, in 1995 and its second Varsity Clubs, VCA-Tucson,
located near the University of Arizona in Tucson, Arizona, in July 1998. The
Company intends to develop its Varsity Clubs properties at attractive locations
for visiting tourists who may rent accommodations or purchase a Vacation
Ownership Interest from the Company. In connection with the purchase of a
Vacation Ownership Interest, Varsity Clubs offer area residents an urban "city
club" experience with unlimited day-use privileges, as well as the opportunity
to participate in the II Vacation Ownership Interest exchange network. The
Company believes that Varsity Clubs offer features common to a "city club",
including a fitness center, swimming pool, bar, restaurant/lounge, billiards and
large sitting/welcome room. In addition, the Varsity Clubs concept enables the
Company to enlarge the Company's target list of potential purchasers by
utilizing an identification with the local university to market Vacation
Ownership Interests to alumni, sports season ticket holders, parents of
university students and corporate sponsors of university events, among others,
who attend the sporting, academic and cultural events regularly hosted by
various universities, thereby enlarging the Company's target base of potential
purchasers. Varsity Clubs offer a flexible ownership structure that permits the
purchase of Vacation Ownership Interests consisting of a single day, a
collection of single days (such as selected days during an entire specified
sports season) or a traditional one-week period, in addition to unlimited use of
the common areas for "city club" use. The Company believes that direct marketing
to a large target base of potential purchasers with university affiliations will
enable the Company to achieve premium pricing with respect to those portions of
its inventory which coincide with high demand for accommodations at prominent
university-sponsored events. The Company also believes that its success in
gaining access to alumni and other targeted potential purchasers with
relationships to the University of Notre Dame or the University of Arizona may
facilitate similar arrangements with other universities in the areas in which
future Varsity Clubs are developed.
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 Company
intends to develop the property, known as Premiere Park, into a mixed use
development, including a vacation ownership sales office, cultural uses,
restaurants, golf, retail and other ancillary uses. The parcel presently
4
includes a 25,000 square foot building which contains a vacation ownership sales
office operated by the Company, provides club facilities for the UNLV golf team,
and the remainder is leased to Greens Worldwide Incorporated ("GWWI"). In
addition to the existing building, the Company intends to lease the remaining
developable space on the 44-acre site, to be built by the Company or by tenants
to specifications approved by the Company.
During 2002, the Company sold 3,019 annual and biennial Vacation Ownership
Interests at the ILX resorts, compared to 2,692 and 2,575 during 2001 and 2000,
respectively. The average sales price for a Vacation Ownership Interest
(excluding sales of Upgrades) was $13,627 for an annual interest and $7,862 for
a biennial interest, resulting in a weighted average price of $14,670 (each
biennial interest is treated as one-half of an annual interest) during the year
ended December 31, 2002 and $13,110 for an annual interest and $7,512 for a
biennial interest, resulting in a weighted average price of $14,118 during the
year ended December 31, 2001. Upgrades are sales to existing owners of Vacation
Ownership Interests in the ILX resorts and may consist of purchases of
additional Vacation Ownership Interests or the exchange of their Vacation
Ownership Interest for a higher demand season; a larger unit; a different ILX
resort; or for Premiere Vacation Club; for which the customer pays an additional
fee. At December 31, 2002, the Company had an existing inventory of 11,182
unsold Vacation Ownership Interests (including Additional Interests and the
unsold interests in Premiere Vacation Club) and a master plan, subject to
consumer demand, receipt of applicable permits and other contingencies generally
applicable to real estate development, to construct up to, approximately, 2,500
additional Vacation Ownership Interests through 2003 and thereafter at the
existing ILX resorts.
5
THE RESORTS
The table below sets forth certain information, as of December 31, 2002,
with respect to the ILX resorts. The information set forth below does not
include the Company's planned expansion of the ILX resorts or development of
additional Varsity Clubs and CARs. As described in Note 8 of the Notes to
Consolidated Financial Statements, all of the Company's resorts except the
Historic Crag's Lodge at the Golden Eagle Resort and the Los Abrigados Lodge(4)
are encumbered by one or more deeds of trust.
SIZE OF RESORT AMENITIES
UNITS(2) -------------------------------------------------------------
----------------- RESTAURANT/ WHIRLPOOL/ SWIMMING FITNESS LOCAL
RESORTS (L) LOCATION S 1BR 2BR LOUNGE SPA POOL CENTER AMENITIES(3)
- ----------- -------- --- --- --- ----------- ----------- -------- ------- ------------
CONVENIENT ACCESS RESORTS
Los Abrigados Resort Sedona, AZ 158 25 4/1 Y Y-2 Y B,BB,BL,
& Spa D,F,FW,G,
H,MT,Sh,
T,TH,V
The Inn at Los Abrigados Sedona, AZ 9 1 4/1 Y Y-2 Y B,BB,BL,
D,F,FW,G,
H,MT,Sh,
T,TH,V
Kohl's Ranch Lodge Payson, AZ 42 5 19 1/1 Y Y Y B,BB,C,D,
F,FW,G,H,
Sh,TH,V
The Historic Crag's Lodge Estes Park, CO 9 21 3 1/1 Y Y N BL,D,F,FW,
at the Golden Eagle Resort G,H,MT,
Sh,TH
Sea of Cortez San Carlos, 8 6 16 4/2 Y Y Y BL,BO,D,F,
Premiere Vacation Club Mexico G,H,Sh,T,
Bell Rock Inn Village of 96 1/1 Y Y-2 N B,BB,BL,
Oak Creek, AZ ---- ---- ---- D,F,FW,G,
H,MT,Sh
T,TH,V
TOTAL CARS CURRENTLY BEING MARKETED
AS VACATION OWNERSHIP INTERESTS 164 190 64
Los Abrigados Lodge (4) Sedona, AZ 39 N N Y N B,BB,BL,
---- ---- ---- D,F,FW,G,
H,MT,Sh,
T,TH,V
TOTAL CARS 203 190 64
VARSITY CLUBS OF AMERICA
VCA-South Bend South Bend, IN 3 54 5 1/1 Y Y Y B,BB,BL,
D,G,M,
MT,Sh,UC
VCA-Tucson Tucson, AZ 4 44 12 1/1 Y Y Y BL,D,G,M,
---- ---- ---- MT,Sh,T,TH
UC
TOTAL VARSITY CLUBS (5) 7 98 17
---- ---- ----
Total 210 288 81
==== ==== ====
- ----------
(1) Information regarding the Additional Interests and Vacation Ownership
Interests in the Carriage House and the Roundhouse Resort has not been
included in the following chart, as the Company only owns a number of, or
has rights to market, Vacation Ownership Interests at such resorts and does
not own any of such resorts.
(2) "S" indicates studio unit; "1 BR" indicates one-bedroom unit; "2 BR"
indicates two-bedroom unit. Units with the same number of bedrooms may vary
in size and amenities.
(3) B - Basketball, BB - Bocce Ball, BL - Billiards, BO - Boating, C - Casino,
D - Dining, F - Fishing, FW - Four Wheel Tours, G - Golf, H - Horseback
Riding, M - Museums, MT - Movie Theater, Sh - Shopping, SS - Snow Skiing, T
- Tennis, TH - Trail Hiking, UC - University Campus, V - Volleyball, W -
Watersports.
6
(4) The Los Abrigados Lodge is not registered nor marketed for sale as Vacation
Ownership Interests. Los Abrigados Lodge is operated under a long-term
lease arrangement that is explained in more detail below.
(5) To the extent Varsity Clubs are proximate to major metropolitan areas, such
resorts can also be considered CARs, but have not been so designated in the
chart.
DESCRIPTION OF ILX RESORTS
CONVENIENT ACCESS RESORTS
LOS ABRIGADOS RESORT & SPA. Los Abrigados Resort & Spa ("Los Abrigados") is
located in Sedona, Arizona, approximately 110 miles from Phoenix, Arizona. This
resort consists of 183 units situated on approximately 20 acres of lush
landscaping and Spanish-styled plazas, winding walkways and bridges. Los
Abrigados offers one- and two-bedroom units, including eight two-bedroom units
completed in August 2002, each with a separate living area, bedroom,
mini-kitchen and balcony or patio. Twenty-eight suites offer a fireplace and
whirlpool spa as well. Seventeen units feature full kitchenettes. Los Abrigados
is designed in southwestern decor and is surrounded by the dramatic red rocks of
Oak Creek Canyon. This resort has an on-site sales office.
Amenities at the resort include four restaurants and a sports bar,
billiards emporium, library, two pools, outdoor whirlpool spa, tennis courts,
sports court, basketball court, bocce ball court, simulated golf, miniature
golf, fitness center and health spa offering a variety of personal care
services, aerobic and yoga classes, indoor whirlpools, steam and sauna rooms,
hydrotherapy and other personal care facilities. In addition, golf, horseback
riding, jeep, helicopter and hot air balloon rides, and other outdoor activities
are easily accessible. Los Abrigados is an II Five-Star resort.
As of December 31, 2002, Los Abrigados contained 9,516 Vacation Ownership
Interests, of which approximately 24 remained available for sale (excluding
3,259.5 Vacation Ownership Interests owned by Premiere Vacation Club). The
Company believes there exist additional expansion opportunities at and
contiguous to Los Abrigados.
THE INN AT LOS ABRIGADOS. The Inn at Los Abrigados is located in Sedona,
Arizona, approximately 110 miles from Phoenix, Arizona. This resort consists of
ten units adjacent to Los Abrigados. The Inn at Los Abrigados includes the main
Morris House and nine bed and breakfast-style units in three buildings situated
amidst a former apple orchard. The Morris House is a multi-level luxury suite
sleeping six, and features a sunken living room, full kitchen with dining area,
a loft, two full bathrooms and a private backyard with patio and barbecue. The
bed and breakfast-style units each feature king beds, a sitting area, microwave,
refrigerator, coffee maker, full bath with shower and balcony or patio. Guests
of the Inn at Los Abrigados have charge privileges at and full use of all Los
Abrigados amenities. The Inn at Los Abrigados is an II Five-Star resort.
As of December 31, 2002, the Inn at Los Abrigados contained 520 Vacation
Ownership Interests, of which approximately 132.5 remained available for sale
(excluding 279.5 Vacation Ownership Interests owned by Premiere Vacation Club).
KOHL'S RANCH LODGE. Kohl's Ranch is a 10.5-acre property located 17 miles
northeast of Payson, Arizona and approximately 105 miles from Phoenix, Arizona.
It is bordered on the eastern side by Tonto Creek and is surrounded by the Tonto
National Forest, which is believed to be the largest stand of Ponderosa Pines in
the world. Kohl's Ranch consists of 66 units, including two new units completed
in December 2002. Forty-one of the units are at the main lodge, 20 units consist
of one- and two-bedroom freestanding cabins along Tonto Creek, three units are
in a triplex cabin and two are in the new duplex cabin also overlooking the
creek. This resort also has an on-site sales office.
Kohl's Ranch offers a variety of common area amenities including an outdoor
heated pool, outdoor whirlpool spa, exercise room, putting green, bocce ball
court, children's playground, gazebos and sport court. Each unit at the resort
offers a mini-kitchenette or full kitchen, and many have a fireplace. In
addition, Kohl's Ranch offers a unique pet resort facility. Kohl's Ranch is both
an RCI and an II resort.
As of December 31, 2002, Kohl's Ranch contained 3,432 Vacation Ownership
Interests, of which approximately 7 were available for sale (excluding 2,823
Vacation Ownership Interests owned by Premiere Vacation Club).
ROUNDHOUSE RESORT. In December 1997, the Company acquired the development
rights to the Roundhouse Resort, a fully sold out 59-unit timeshare resort
located on 9.5 acres in the White Mountains of northeastern Arizona,
approximately 190 miles from Phoenix, Arizona. The resort is an RCI resort and
is proximate to golf courses, skiing, horseback riding and other outdoor
activities. At an elevation of 7,200 feet, the Roundhouse Resort is set in a
location that offers four seasons, a distinct contrast to Arizona's arid
lowlands.
7
During 2000, the Company entered into an agreement with the Roundhouse
Homeowners' Association ("RHA") to deed the property containing the existing 59
units and certain common area amenities to the RHA, for which the RHA will be
solely responsible for the ownership, operation and financing. The Company has
sole ownership of the remaining property and accordingly, may develop such
property without the constraints that would exist without this separation.
The Company delayed construction of approximately 21 new units at the
Roundhouse Resort in 2002 due to forest fires in the surrounding area, but is
now proceeding with the permitting process. Once constructed, the Company
intends to annex this additional inventory into Premiere Vacation Club.
Construction may occur in phases, with only minimal common area amenities
necessary.
As of December 31, 2002, the Company holds 169 Vacation Ownership Interests
in the Roundhouse Resort, all of which are held by Premiere Vacation Club.
THE HISTORIC CRAG'S LODGE AT THE GOLDEN EAGLE RESORT. The Historic Crag's
Lodge at the Golden Eagle Resort ("Golden Eagle") is a four-acre property
located in the town of Estes Park, Colorado, within three miles of Rocky
Mountain National Park and approximately 70 miles from Denver, Colorado. This
resort consists of 33 units and is bounded generally by undeveloped forested
mountainside land, which provides excellent mountain views from the resort.
Golden Eagle is centered around the historic Crag's Lodge, a four-story
wood frame building constructed in the early 1900s, which is listed on the
National Registry of Historic Places by the United States Department of the
Interior, and serves as the resort's main lodge. Amenities offered at this
resort include a restaurant, bar and library, as well as two other freestanding
buildings containing six guest rooms and support facilities. Each unit at Golden
Eagle features a fully equipped kitchenette, living and dining areas, television
and video cassette player. Additional amenities at this resort include a heated
pool and spa as well as local outdoor attractions. Golden Eagle is both an RCI
and an II resort.
As of December 31, 2002, Golden Eagle contained 1,716 one-week Vacation
Ownership Interests, of which 37 were available for sale (excluding 930 Vacation
Ownership Interests owned by Premiere Vacation Club). The Company intends to
construct a minimum of two additional units in the future, which would yield an
additional 102 Vacation Ownership Interests.
BELL ROCK INN. In December 2000, the Company acquired the Bell Rock Inn, an
existing resort in the Village of Oak Creek, Arizona. The property is located
approximately six miles south of Los Abrigados Resort & Spa and consists of 96
lodging units, most of which include a fireplace and mini-kitchen facilities.
The Bell Rock Inn has a full service restaurant and lounge, both of which are
leased to an unaffiliated operator, with a large outdoor dining patio, two
heated pools, two whirlpool spas, outdoor fireplaces and banquet/meeting space.
The Bell Rock Inn is an II resort.
LOS ABRIGADOS LODGE. In September 2000, the Company entered into an
agreement to lease an existing motel in Sedona, Arizona, commencing October 1,
2000 and terminating on December 31, 2021. The lease contains a provision in
which the lease term may be automatically extended for consecutive one-year
periods after December 31, 2021 up to December 31, 2038 if the lease has not
been terminated prior to December 31, 2021. The lessor was required to remodel
and refurbish the existing project, previously known as the Canyon Portal Motel,
as well as construct additional units at the complex. The Company renamed the
property the "Los Abrigados Lodge." The property is used for hotel
accommodations, including accommodations for customers invited to attend a
vacation ownership presentation at the Company's Sedona sales office. As of
December 31, 2002, this resort contains 39 units. These units are not offered
for sale as Vacation Ownership Interests.
VARSITY CLUBS OF AMERICA
VCA-SOUTH BEND. The Company's first Varsity Clubs facility is an
approximately four acre property located three miles from the University of
Notre Dame and Notre Dame Stadium in South Bend, Indiana, which is 90 miles from
Chicago, Illinois. VCA-South Bend offers 62 units, consisting of studio, one-
and two-bedroom suites. This resort has a small on-site sales operation which
operates on a seasonal basis.
Each one- and two-bedroom suite at VCA-South Bend includes a king master
bedroom, living room with sofa sleeper, kitchenette and whirlpool spa as well as
color television with premium movie channels. Common areas at the resort include
the Stadium Sports Lounge, which offers a variety of food and beverages and
features a theater-wall television in a stadium-type setting, fitness center
with whirlpool spa, indoor/outdoor heated pool, bocce ball, children's
playground, billiards room, putting green, library, gift shop, business center
and special events facilities. The Company intends VCA-South Bend to serve as a
prototype, subject to modifications and improvements, for the expansion of the
8
Company's Varsity Clubs concept to other suitable locations, with additional
modifications made as appropriate to suit local tastes and preferences.
VCA-South Bend is an II Five-Star resort.
As of December 31, 2002, this resort contained 3,224 one-week Vacation
Ownership Interests, of which 252 were available for sale (excluding 1,169
Vacation Ownership Interests owned by Premiere Vacation Club). Expansion
capability exists for an additional 24 units (1,248 one-week Vacation Ownership
Interests). The Company is currently evaluating the possibility of such
expansion.
VCA-TUCSON. The second Varsity Clubs resort is a two-acre property located
in Tucson, Arizona, approximately three miles from the University of Arizona and
110 miles from Phoenix, Arizona. VCA-Tucson offers 60 units, consisting of
studio, one- and two-bedroom suites. This resort has an on-site sales office.
VCA-Tucson was designed in accordance with the VCA-South Bend prototype,
with certain modifications made to improve operating efficiencies and satisfy
local tastes. Each of the suites includes a king master bedroom, living room
with sofa sleeper, kitchenette, whirlpool spa, as well as color television with
premium movie channels. Amenities at this resort include a Sports Lounge
designed similar to that at VCA-South Bend, the Twenty-Four Hour Sports Ticker,
Joey Pizza (a restaurant theme originally introduced at Los Abrigados),
billiards room, putting green, library, gift shop, fitness center, outdoor
heated pool, whirlpool spa, steam room, children's playground, business center
and special events facilities. VCA-Tucson is an II Five-Star resort.
At December 31, 2002, this resort contained 3,120 one-week Vacation
Ownership Interests, of which 46 were available for sale (excluding 2,831
Vacation Ownership Interests owned by Premiere Vacation Club).
SEA OF CORTEZ PREMIERE VACATION CLUB
Sea of Cortez Premiere Vacation Club is an ocean front property on the Sea
of Cortez in San Carlos, Sonora, Mexico. The Company, through Premiere Vacation
Club, has acquired 1,500 one-week 25-year right-to-use Vacation Ownership
Interests in 30 studio, one- and two- bedroom units in the Sea of Cortez
Premiere Vacation Club. The Company has the option to extend the right-to-use
period for an additional 25-year period provided it is not in default under the
right-to-use agreement. The option is exercisable by the Company during the last
five years of the initial term, at terms to be negotiated by the parties at that
date. The Company markets such Vacation Ownership Interests exclusively through
Premiere Vacation Club.
Sea of Cortez Premiere Vacation Club was completed in 2001. Each unit has
an ocean view. The Premiere Vacation Club has a swimming pool, outdoor
restaurant and lounge, volleyball court and beach access, a separate living
area, bedroom(s), full kitchen and balcony or patio. Amenities of the adjacent
San Carlos Plaza Resort are also available to Premiere Vacation Club owners.
Such amenities include two outdoor swimming pools, whirlpool spa, fitness
center, three restaurants, several lounges, gift shops and water sports
equipment. In 2002, one of the existing restaurants was converted to a Joey
Bistro, consistent with the restaurant theme originally introduced at Los
Abrigados.
During 1999, the Company annexed the 1,500 Sea of Cortez Premiere Vacation
Club Vacation Ownership Interests into Premiere Vacation Club. Sea of Cortez
Premiere Vacation Club is an II Five-Star resort. This resort has a small
on-site sales office and offers Vacation Ownership Interests in Premiere
Vacation Club.
THE CARRIAGE HOUSE
In June 2001, the Company acquired 600 Vacation Ownership Interests in the
Carriage House in Las Vegas, Nevada and annexed these weeks into Premiere
Vacation Club. In late 2001 and throughout 2002, the Company acquired additional
Vacation Ownership Interests and annexed 547 units into Premiere Vacation Club
in December 2002. The Company continues to acquire additional Vacation Ownership
Interests in the Carriage House that it plans to annex into Premiere Vacation
Club in the future. At December 31, 2002, the Company holds 183 Vacation
Ownership Interests that have not yet been annexed to Premiere Vacation Club.
The Carriage House is a non-gaming suite hotel located one block off the
"Strip" in Las Vegas. The property contains a heated pool, whirlpool, tennis
court and basketball court. The Carriage House is both an II and RCI resort. The
Company opened a Joey Bistro restaurant on the top floor of the hotel in late
November 2002. The restaurant contains spectacular views of the "Strip" and is
consistent with the restaurant concept originally introduced at Los Abrigados.
The Company operates a small on-site Carriage House sales operation which
markets to owners, exchange guests and other guests of the hotel.
9
PREMIERE VACATION CLUB
In January 1998, the Company recorded in Maricopa County, Arizona its
proprietary Premiere Vacation Club Membership Plan and in May 1998 annexed a
total of 5,000 Vacation Ownership Interests into the Club and received
Department of Real Estate approval in the State of Arizona to commence selling
Vacation Ownership Interests in Premiere Vacation Club. During 1999, 2001 and
2002, the Company annexed additional units and as of December 31, 2002, Premiere
Vacation Club included a total of 19,100 Vacation Ownership Interests. The
19,100 Vacation Ownership Interests annexed into the Club consist of 3,259.5
Vacation Ownership Interests in Los Abrigados, 279.5 Vacation Ownership
Interests in the Inn at Los Abrigados, 2,823 Vacation Ownership Interests in
Kohl's Ranch Lodge, 930 Vacation Ownership Interests in Golden Eagle, 1,500
Vacation Ownership Interests in the Sea of Cortez Premiere Vacation Club, 1,169
Vacation Ownership Interests in VCA-South Bend, 2,831 Vacation Ownership
Interests in VCA-Tucson, 4,992 Vacation Ownership Interests in Bell Rock Inn,
169 Vacation Ownership Interests in the Roundhouse Resort and 1,147 Vacation
Ownership Interests in the Carriage House.
At December 31, 2002, 10,386.5 of the 19,100 Premiere Vacation Club
Vacation Ownership Interests were available for sale. Premiere Vacation Club is
affiliated with II and is offered for sale at each of the Company's sales
offices.
ADDITIONAL INTERESTS
In addition to the ILX resorts, ILX owns a designated number of Vacation
Ownership Interests at additional resorts owned by unaffiliated third parties.
At December 31, 2002, the Company owned, in addition to the 1,147 Vacation
Ownership Interests that have been annexed into Premiere Vacation Club as
disclosed above, an additional 183 Vacation Ownership Interests in the Carriage
House, which it intends to annex into Premiere Vacation Club in the future; and
ten deeded Vacation Ownership Interests in the Ventura Resort in Boca Raton,
Florida, ten deeded Vacation Ownership Interests in a resort in South Africa,
six deeded Vacation Ownership Interests in a resort in Palm Springs, California
and one to two Vacation Ownership Interests in each of a number of additional
resorts, all of which it holds for resale.
PHOENIX SALES OFFICE
In the fourth quarter of 2002, the Company utilized temporary facilities in
metropolitan Phoenix to meet with its local vacation owners and offer such
customers the opportunity to upgrade their ownership. Based on the results of
this trial, in March 2003, the Company leased space in the building that
contains the Company's corporate headquarters to be the site of a permanent
sales office to meet with existing owners residing in the Phoenix and
surrounding areas.
LAS VEGAS LEASEHOLD INTEREST
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 Company
intends to develop the property, known as Premiere Park, into a mixed use
development, including a vacation ownership sales office, cultural uses,
restaurants, golf, retail and other ancillary uses. The parcel presently
includes a 25,000 square foot building which contains a vacation ownership sales
office operated by the Company, provides club facilities for the UNLV golf team,
and the remainder is leased to GWWI. In addition to the existing building, the
Company intends to lease the remaining developable space on the 44 acre site, to
be built by the Company or by tenants to specifications approved by the Company.
OPERATING STRATEGIES
The Company's operating strategy seeks to emphasize the following
characteristics, which management believes provide ILX with certain competitive
advantages within the vacation ownership industry.
FLEXIBLE VACATION OWNERSHIP INTEREST PURCHASE OPTIONS. The Company believes
the flexibility associated with its inventory of Vacation Ownership Interests
provides a uniquely appealing opportunity for ILX owners. Unlike many of the
Company's competitors, substantially all of the Company's inventory of Vacation
Ownership Interests at the ILX resorts are intended to be used on dates
specified from time to time by the ILX owner within a broad range of available
dates and not fixed at the time of purchase. Purchasers of a Vacation Ownership
Interest in the Company's proprietary branded Premiere Vacation Club are
entitled to use their Vacation Ownership Interest at any resort in Premiere
Vacation Club or may split up their Vacation Ownership Interest according to the
owner's needs and preferences and it may be used at any number of participating
resorts, as well as thousands of other resorts through the domestic and
international exchange programs in which ILX owners participate. In addition,
Vacation Ownership Interests at Varsity Clubs may be purchased for highly
desirable single-day uses, a collection of single days (such as designated days
10
during an entire football or other sports season) or other packages suited to
meet each ILX owner's preferences.
CUSTOMER SATISFACTION. The Company believes that its inventory of highly
desirable resorts with extensive amenities, combined with flexible purchase
options have resulted in a high level of customer satisfaction. Each of the ILX
resorts is located in an area with unique tourist attractions and offers food,
beverage and other amenities comparable to full-service commercial lodging
facilities, at discounted prices to ILX owners. As a result, the Company
believes ILX owners generally have a high level of satisfaction, resulting in
additional purchases and increased goodwill. The Company intends to capitalize
upon this by directing a portion of its marketing efforts towards increasing
sales of Vacation Ownership Interests to ILX owners.
ENHANCED AMENITIES. Each of the ILX resorts (except the Los Abrigados
Lodge, which does not offer Vacation Ownership Interests and does not have a
restaurant) has at least one full-service restaurant and other food and beverage
facilities in addition to a range of other amenities typically found at
high-quality resorts, such as horseback riding, golf, swimming pools and
exercise facilities. The Company believes that most resorts offering Vacation
Ownership Interests have none or only limited restaurant and other food and
beverage facilities. As a result, management believes ILX owners appreciate the
ability to enjoy traditional full-service commercial hotel amenities and also
maintain the option to use more economical in-room facilities. See "- The
Resorts."
DEMONSTRATED ABILITY TO ACQUIRE AND DEVELOP PROPERTIES. The Company has
historically been successful at acquiring resorts in settings of natural beauty
at relatively low costs. The Company's acquisition strategy is to identify
underutilized or distressed properties in locations with high tourist appeal and
access to major metropolitan centers. Thereafter, the Company's redevelopment
efforts are primarily targeted at improving the amenities and appointments of
such properties. The Company has successfully developed its prototype Varsity
Clubs of America resort, VCA-South Bend, and a second Varsity Clubs facility,
VCA-Tucson. Future Varsity Clubs will be designed and constructed in accordance
with the VCA-South Bend prototype, with appropriate modifications and
improvements. The Company believes that its acquisition and development
strategies have resulted in a portfolio of desirable properties with a
relatively low cost of sales margin.
CONVENIENT ACCESS RESORTS. The Company's CARs are typically located within
a two-hour drive of an ILX owner's principal residence, which accommodates a
demand for more frequent and convenient "short-stay" vacations without the costs
and difficulties of air travel. This proximity also facilitates marketing of the
Company's Premiere Vacation Club, which permits members to divide their Vacation
Ownership Interest into shorter stays at any of the Company's properties
included in Premiere Vacation Club (including the VCAs) or exchange their entire
interest during any year through an exchange network. In addition to the use of
their Vacation Ownership Interest, ILX owners are also entitled to unlimited
day-use of the offered amenities and discounted food, beverage and other
services at their individual ILX resort or, in the case of Premiere Vacation
Club members, at any ILX resort included in Premiere Vacation Club, thereby
facilitating use and enhancing the benefits of ownership by ILX owners.
STANDARD DESIGN, LOWER CONSTRUCTION AND OPERATING COSTS OF VARSITY CLUBS.
The Company's Varsity Clubs concept is based upon its VCA-South Bend prototype.
While each Varsity Club may have aspects uniquely tailored to its targeted
customer base, the Company believes that its standard architectural and interior
designs for Varsity Clubs will significantly reduce associated development and
construction costs. Standardization will also allow the Company to develop new
Varsity Clubs and integrate new resorts in response to demand. The Company
anticipates that new Varsity Clubs can be constructed within one year from
acquisition of the underlying real property.
PREMIUM LOCATIONS. The Company believes that the variety and natural beauty
of the surroundings for its CARs enhance their attraction to customers.
Substantially all of the ILX resorts are located in the western United States,
in part because of the numerous locations in that region which are attractive to
tourists and convenient to major metropolitan areas. The vast majority of the
Company's inventory of Vacation Ownership Interests qualify as "red time," the
highest demand classification for purposes of participation in exchange networks
such as RCI and II. The Company intends to develop additional Varsity Clubs and
Premiere Vacation Club resorts in other western United States sites that offer
natural settings or other attractions to entice tourists to visit such
locations.
INTEGRATED IN-HOUSE OPERATIONS. Substantially all of the Company's
marketing, sales, development, property management, financing and collections
operations are conducted internally, except certain minimal marketing functions
and processing of customer payments and certain collection activities related to
promissory notes given by ILX owners as partial payment for a Vacation Ownership
Interest ("Customer Notes"). In addition, the Company operates all of the ILX
resorts on a centralized basis, with operating and maintenance costs paid from
ILX owners' dues as well as hotel rental revenues. The Company believes that its
internal capabilities result in greater control and consistency of all phases of
its operations that may result in lower overall costs than generally associated
with outsourcing such operations. Such integration also facilitates the
Company's Premiere Vacation Club and the ILX resorts' qualification in the RCI
and II exchange networks, among others.
11
DIRECTED MARKETING. The Company's marketing strategy with respect to its
Premiere Vacation Club is to target potential customers who have a demonstrated
interest in the location of its ILX resorts or a likelihood of frequent travel.
As opposed to traditional marketing strategies which often emphasize
telemarketing and direct mail activities focused on promotional inducements
unrelated to travel, the Company's marketing activities primarily offer
travel-related inducements (such as discounted or complimentary vacations at
nearby ILX resorts or at non-affiliated hotels in popular destinations in the
western United States and Mexico). By offering travel-related inducements, the
Company believes it is better able to identify customers who like to travel,
which results in a higher percentage of sales per contact. In addition, the
Company developed its proprietary Varsity Clubs of America concept to capitalize
upon affinity marketing strategies. The Company believes that a high-quality
"city club" experience combined with the traditional benefits associated with
Vacation Ownership Interests, such as the opportunity to participate in exchange
networks, will appeal to consumers in the local markets of each Varsity Clubs.
Further, the Varsity Clubs concept is intended to take advantage of a marketing
base of alumni, sports enthusiasts, parents of students, corporate sponsors and
others affiliated with each university next to which a Varsity Clubs will be
developed. For example, alumni of the University of Arizona, to whom the Company
is marketing Vacation Ownership Interests at its VCA-Tucson, currently number
approximately 200,000. The Company believes that these marketing strategies
permit it to take advantage of existing affinities, resulting in a higher rate
of closings per customer contacts.
PREMIERE VACATION CLUB
Sales of Vacation Ownership Interests in Premiere Vacation Club commenced
in June 1998. Purchasers are offered deeded membership interests that provide
rights to accommodations which may be used each use year in their entirety at
one time or may be divided into shorter stays at one or a variety of the
Company's resorts or may be exchanged through a participating exchange network.
The Company's Premiere Vacation Club emphasizes CARs (i) that facilitate
short-stay vacations with relatively low cost and time associated with travel to
the ILX resort, (ii) located near settings of natural beauty, (iii) with high
quality amenities and resort services and (iv) that facilitate flexible use
options. The Company believes that its proprietary branded Premiere Vacation
Club will capitalize upon affinity marketing strategies and increase the
goodwill associated with the ILX resorts. In addition, membership interests in
Premiere Vacation Club are marketed at an average higher gross sales price than
sales of Vacation Ownership Interests in a single ILX resort. The Company also
markets membership interests in its Premiere Vacation Club to existing ILX
owners, thereby expanding its sales volume without increasing its sales and
marketing costs in the same proportion as generally associated with sales to
first-time buyers.
Initially, the Company's Premiere Vacation Club inventory consisted of
Vacation Ownership Interests in the ILX resorts. New resorts are expected to be
added through the Company's pursuit of selected acquisition opportunities, as
occurred with the addition of the 1,500 one-week 25-year right-to-use Vacation
Ownership Interests in Sea of Cortez Premiere Vacation Club in San Carlos,
Mexico and 1,330 Vacation Ownership Interests in the Carriage House in Las
Vegas, of which 1,147 have been annexed to Premiere Vacation Club as of December
31, 2002. By marketing its inventory of Vacation Ownership Interests through
Premiere Vacation Club, the Company believes it has greater flexibility with
respect to potential acquisition opportunities than generally associated with
the sale of Vacation Ownership Interests in a single vacation resort, to the
extent that small or remote resorts which may be inefficient to market as a
single location resort may enhance the consumer appeal of a membership interest
in Premiere Vacation Club. With its existing and planned resorts in Arizona and
Nevada, the Company is seeking to build a critical mass of CARs within driving
distance of the Phoenix and Tucson metropolitan markets. The Company may develop
additional networks of CARs proximate to other major metropolitan areas in the
western United States. In January 2002, the Company opened a sales office in Las
Vegas to market Premiere Vacation Club to both tourists and local residents of
Las Vegas. Further capitalizing on the flexibility of Premiere Vacation Club,
the Company has an agreement with a Scottsdale, Arizona resort whereby -Premiere
Vacation Club members may utilize the resort's facilities on a day use basis,
thereby enhancing the benefits of ownership in Premiere Vacation Club.
VARSITY CLUBS OF AMERICA
The Company intends to pursue the expansion of its proprietary branded
Varsity Clubs concept. The Company will focus on development of additional
Varsity Clubs near prominent colleges and universities in the western United
States located in areas with a significant base of existing tourism and access
to major population centers. The Varsity Clubs of America concept is primarily
intended to offer residents in major population centers a "city club" experience
with day-use privileges regularly available, as well as the opportunity to
exchange their Vacation Ownership Interest through the exchange networks in
which ILX owners participate. The Varsity Clubs concept also seeks to maximize
the appeal of such urban timeshare resorts by strategically locating each of
them proximate to one or more prominent colleges and universities with
nationally recognized athletic, cultural and other events. Large universities
host a variety of sporting, recreational, academic and cultural events that
create a substantial and relatively constant influx of participants, attendees
and spectators. The Varsity Clubs concept is designed to address the specific
needs of these individuals and entities by creating specialty vacation ownership
resorts that have a flexible ownership structure, enabling the purchase of
anything from a single day, a collection of single days (such as an entire
12
football or other sports' season) or a traditional one-week period. Each Varsity
Clubs facility will operate as a hotel to the extent of unsold or unused
vacation ownership inventory.
The prototype VCA-South Bend facility is an all-suite, 62-unit lodging
facility that features amenities such as The Stadium (a sports-themed atrium
lounge serving a variety of food and beverages and featuring a theater-wall
television), a private Member's Lounge, exercise facilities, a swimming pool and
whirlpool spa, complete business services and other facilities popular with the
target market of likely purchasers. The prototype Varsity Clubs facility is
based on a four-acre configuration expandable to as many as 90 units, without
the need to acquire additional real property, and can be built in smaller
configurations if warranted by a particular market or if dictated by the
availability of land.
The first Varsity Clubs facility was completed in August 1995, and is
located three miles from the University of Notre Dame and Notre Dame Stadium in
South Bend, Indiana, and approximately 90 miles from Chicago, Illinois.
Customers purchase deed and title to a floating period's use of a unit and
unlimited day-use privileges at the common areas of the property. Purchasers may
also receive the right to use the facility on specified dates, such as dates of
home football games, for which they pay a premium. A total of 62 units, or 3,224
one-week intervals, have been constructed at VCA-South Bend and, at December 31,
2002, 252 one-week intervals were available for sale (excluding 1,169 Vacation
Ownership Interests owned by Premiere Vacation Club) and expansion capacity
exists for up to an additional 24 units (1,248 one-week Vacation Ownership
Interests). To date, VCA-South Bend has been able to compete favorably for
commercial guests because of its superior facilities and amenities relative to
other lodging accommodations in the area.
The second Varsity Clubs facility is located in Tucson, Arizona, less than
three miles from the University of Arizona. This second Varsity Clubs was
completed in July 1998 and offers 60 suites, or 3,120 one-week intervals. At
December 31, 2002, 46 one-week intervals were available for sale (excluding
2,831 Vacation Ownership Interests owned by Premiere Vacation Club). VCA-Tucson
was designed in accordance with the VCA-South Bend prototype, with certain
modifications made to improve efficiency and incorporate local design themes.
The Company chose Tucson as a site for its Varsity Clubs concept because of its
status as a year-round destination location, a large residential population base
of approximately 900,000 and the proximity to the University of Arizona, which
has a current alumni base in excess of 200,000 people. The Company believes that
all of these factors increase the appeal of VCA-Tucson to prospective buyers as
well as provide increased trading power for purchasers of Vacation Ownership
Interests in the resort for purposes of participation in exchange networks. The
VCA-Tucson on-site sales office offers customers both Premiere Vacation Club and
VCA-Tucson Vacation Ownership Interests. Premiere Vacation Club Interests
provide the buyer with local city club privileges, access to all resorts in
Premiere Vacation Club, as well as a variety of additional benefits.
The Company is considering various other sites for development of
additional Varsity Clubs facilities in the next five to seven years. Management
believes there exist numerous sites in the western United States that are
attractive for the development of additional Varsity Clubs. The Company intends
to expand its Varsity Clubs concept to up to three of these areas in the next
five years. The Company also believes that Varsity Clubs will establish their
own brand name recognition as additional facilities are offered. Varsity Clubs
expansion efforts will initially be primarily focused on metropolitan areas in
the western United States, each located near one or more large universities, but
the Company will assess other potential opportunities as they arise. Ideally,
the Company will seek to place additional Varsity Clubs near universities that
are located in or convenient to popular tourist destination locations in or near
large metropolitan areas.
SALES AND MARKETING
Marketing is the process by which the Company attracts potential customers
to visit and tour an ILX resort or attend a sales presentation. Sales is the
process by which the Company seeks to sell a Vacation Ownership Interest to a
potential customer once he or she arrives for a tour at an ILX resort or attends
a sales presentation. The Company believes it has the marketing and sales
infrastructure necessary to sell Vacation Ownership Interests on a competitive
basis. All of the Company's sales and the majority of the Company's marketing
functions are currently performed in-house and the Company invests significant
resources in attracting, training and seeking to retain its sales and marketing
employees. The Company believes this strategy provides it with greater control
over these critical functions, resulting in greater consistency of customer
relations and improved customer satisfaction. In addition, management believes
that its practice of hiring employees to staff its sales and marketing
functions, as opposed to using independent contractors as has been the industry
norm, results in a higher retention rate among its sales force and provides a
pool of experienced staff from which to draw upon as the Company's business
expands. The Company expends substantial resources identifying, attracting and
training its sales and marketing personnel and offers a full package of
employment benefits to its sales and marketing personnel. Management believes
that consistency and high quality in its sales and marketing operations is
crucial to its success. The Company believes that the package of benefits
offered to its sales and marketing employees, including an Employee Stock
Ownership Plan, is uncommon in the vacation ownership industry and, as a result,
attracts high quality personnel and provides an incentive for their performance.
13
MARKETING. The Company's marketing activities are devoted primarily toward
(i) hotel guests at the ILX resorts, (ii) RCI and II exchange program
participants staying at the ILX resorts, (iii) off-premise contacts with
visitors to the local surroundings of the ILX resorts and in the metropolitan
areas within driving distances of the ILX resorts (iv) telemarketing, electronic
and other contact with residents of metropolitan areas within driving distance
of the ILX resorts and (v) existing customer base. The Company's marketing
strategy seeks to target prospective buyers who respond favorably to
travel-related inducements because the Company believes such consumers are more
likely to travel and therefore have a greater likelihood of purchasing a
Vacation Ownership Interest. The Company identifies potential purchasers through
internally developed marketing techniques, and sells Vacation Ownership
Interests through its five sales offices located at ILX resorts and from an
offsite sales office in Las Vegas, Nevada. For its on-site sales offices, as
well as its Las Vegas office, the Company primarily targets customers who live
within driving distance of the ILX resort or who are vacationing at or near the
ILX resort. This practice allows the Company to invite potential purchasers to
experience the ILX resorts and avoid the more expensive marketing costs of
subsidized airfare and lodging which are typically associated with the vacation
ownership industry. In addition, the Company believes that its marketing
strategy results in a higher percentage of sales per prospective customer
contacts as compared to many of its competitors because its targeted customer
base has a demonstrated interest in the locale of an ILX resort and/or a greater
likelihood to take vacations. The Company also targets local residents to its
Las Vegas offsite sales office by offering these prospective customers travel
incentives in exchange for their attendance at the sales presentation. The
Company believes that prospective customers who respond to such travel offers
have strong sales potential because of the attractiveness of the convenient
access of the ILX resorts to their homes, and because of their interest in
travel. The Company has also increased its marketing emphasis to current ILX
owners. Marketing costs to existing owners are generally lower than costs
associated with first time buyers.
Similar to branding techniques utilized by some of its competitors, the
Company also seeks to capitalize upon affinity marketing concepts in attracting
prospective buyers to its Varsity Clubs concept by seeking to develop a branded
"city club" experience for flexible use by local residents. In addition,
marketing of Varsity Clubs seeks to focus on alumni, parents of university
students and other persons or entities who have a preexisting affiliation with
or other attraction to the local university. All of the Company's marketing
activities emphasize the convenience of the ILX resorts, coupled with the
opportunity to participate in exchange networks, as well as the quality and
breadth of amenities available at each of the ILX resorts.
SALES. The Company actively sells its inventory of Vacation Ownership
Interests primarily through a sales staff of approximately 200 employees at
December 31, 2002, including approximately 145 sales agents at the sales offices
located at selected ILX resorts and its off-site sales office in Las Vegas,
Nevada. Prospective first-time purchasers at sales offices located at an ILX
resort participate in a tour of the facilities as well as its related amenities,
guided by a salesperson. In the Las Vegas offsite sales office, the "tour" of
the facilities consists of a photo tour of the ILX resorts, a tour of a model
unit and viewing of a video on vacation ownership. At the conclusion of the
tour, the terms of making a purchase, including financing alternatives, are
explained to the customer. Approximately 20% of the Company's sales have
historically been made on a cash basis. However, for those customers seeking
financing, the Company conducts credit pre-approval research. The Company's
point-of-sale credit pre-approval process typically includes a review of the
customer's credit history, and may include verification of employment. The
Company waits until expiration of the applicable statutory waiting period,
generally from three to seven days, prior to recognizing a sale as complete.
In addition to generating sales to first-time buyers, the Company's sales
force seeks to generate sales of additional Vacation Ownership Interests or
Upgrades to ILX owners. Sales to ILX owners generally have lower marketing costs
associated with them as these buyers tend to be more familiar with the nature of
purchasing a Vacation Ownership Interest and the amenities offered at the ILX
resorts. Sales to ILX owners accounted for 16.7% of Vacation Ownership Interest
sales by the Company during 2002. During 2001 and 2000, sales to ILX owners
accounted for 10.7% and 10.6% of the Company's total sales, respectively.
Prior to June 1998, the Company's inventory of Vacation Ownership Interests
had historically consisted of a one-week interval that could be used on an
annual or an alternate-year basis in a specified ILX resort during a specified
range of dates. ILX owners could also participate in exchange networks such as
RCI and II. Commencing in June 1998, the Company began offering deeded
membership interests in its Premiere Vacation Club, which permit a member to
stay at one or more of the participating ILX resorts for up to one week on an
annual or alternate-year basis. Premiere Vacation Club members may divide their
stays into shorter vacations at any time between a specified period of time,
enjoy unlimited day use and discounted goods and services at any ILX resort, as
well as a variety of other benefits. The Company believes that the variety and
flexibility of use options associated with its inventory of Vacation Ownership
Interests are uniquely attractive to customers.
14
CUSTOMER FINANCING
The Company currently provides financing for approximately 80% to 85% of
its Vacation Ownership Interest sales. On financed sales, the Company receives
at least 10% of the aggregate sales price of Vacation Ownership Interests as a
down payment. The Company typically makes financing for the remainder available
to the buyer for a term of seven years at a fixed rate of interest, which is
currently approximately 15.9% to 17.9% per annum. The Company also offers
reduced rates of interest on shorter financing terms and with a 50% down payment
requirement. At December 31, 2002, the Company had a portfolio of retained
Customer Notes with an aggregate principal amount of $33.8 million, of which
$27.0 million were serviced by an outside vendor and had a weighted average
yield of 14.8% per annum, which compared favorably to the Company's weighted
average cost of borrowings for such Customer Notes of 5.8% per annum.
The Company believes that providing available financing is essential to the
successful sales and marketing of its Vacation Ownership Interest inventory.
However, the Company seeks to minimize the risks associated with its financing
activities by emphasizing the credit pre-approval process. In addition, the
Company expends significant resources negotiating alternative repayment programs
for past due accounts, so as to minimize its actual losses. Collection
activities with respect to Customer Notes that the Company has hypothecated are
managed internally and serviced by a third party on behalf of the lenders and
the Company. In addition, the Company utilizes third party collection agencies
for difficult accounts.
Prior to 1995, the Company sold the majority of its Customer Notes and
retained the small remaining portion, most of which were hypothecated. Since
1995, the Company has increased the amount of Customer Notes that it retains,
most of which it hypothecates, and, as a result, at December 31, 2002, the
Company retained Customer Notes in an aggregate principal amount of $33.8
million as compared to $7.9 million at December 31, 1995.
Although the terms of each Customer Note vary, typically such notes are
deemed past due when a scheduled payment is 30 days or more past due. In
addition, a delinquency occurs when an account becomes more than 90 days past
due. The Company seeks to avoid defaults by working closely with the lender and
its collection agent with respect to ILX owners who become delinquent. The first
collection contact typically occurs within 16 to 30 days of a payment's due
date.
At December 31, 2002, the Company had 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 10% 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. At December 31, 2002, $11.6 million of the $40
million commitment was available to the Company. In December 2002, this
agreement was amended so that the Company can sell up to $30 million of
conforming Customer Notes, effective January 1, 2003. The Company also has a
financing commitment in the aggregate amount of $30.0 million, pursuant to which
the Company may hypothecate Customer Notes that are pledged to the lender as
collateral. This borrowing bears interest at prime plus 1.5%, has a draw period
which expires in 2003, and a maturity date of 2008. At December 31, 2002, $10.7
million was available to the Company under this commitment. The Company
currently reserves approximately 4.5% of gross sales (including cash sales) as
an allowance for doubtful accounts. At December 31, 2000, 2001 and 2002, the
aggregate amount of these reserves was $3.2 million, $3.5 million and $3.1
million, respectively. During 2000 and 2002, the Company's actual write-offs
exceeded the provision for doubtful accounts by $0.1 million and $0.5 million,
respectively. In 2001, the Company's provision for doubtful accounts exceeded
actual write-offs by $0.3 million. The Company generally writes off receivables
only at such time as it accepts back a deed to the underlying property and
determines the remainder uncollectible or as required for tax purposes. The
timing of such write-offs is neither indicative of the date delinquency
commenced nor of the date the likelihood of noncollectibility was determined. To
the extent that the Company's losses as a result of bad debt exceed its
corresponding reserves, its financial condition and results of operations may be
materially adversely affected.
OTHER OPERATIONS
RESORT OPERATIONS. The Company also receives revenues from (i) the rental
of its unsold or unused inventory of units at the ILX resorts, (ii) the sale of
food, beverages and other amenities at such resorts and (iii) the management and
operation of the ILX resorts. During 2002, the Company received $16.6 million in
net revenues from these operations, consisting of $10.8 million in room rental
revenue, $3.7 million in food and beverage revenue and $2.1 million in other
revenue. Of these amounts, Los Abrigados contributed $8.7 million, or 52% of the
Company's total resort operations revenues in 2002. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Historically, the Company's resort operation activities have not generated
a material portion of the Company's net profits on a consolidated basis.
Revenues from resort operations typically vary significantly from one ILX resort
to another. In addition, changes in revenue received from these operations have
not typically correlated with fluctuations in the Company's revenues from sales
15
of Vacation Ownership Interests. Management expects this trend to continue in
the future as resort occupancy by owners of Vacation Ownership Interests, who
pay a lower rate through their dues than the rate charged traditional resort
guests, increases; the Company acquires or builds new resorts that are in
different phases of the sales life cycle and therefore have different use
patterns between vacation owners and resort guests than the existing portfolio
of resorts; and because future resorts may have different rate structures,
reflective of their location and amenities, than existing resorts. The Company
believes that its resort management activities directly complement the Company's
efforts with respect to the marketing and sales of Vacation Ownership Interests.
SEDONA SPA. Prior to December 31, 1999, the Company's operations included
the sale of personal care products through its majority-owned subsidiary Sedona
Worldwide Incorporated ("SWI"). Effective December 31, 1999, the Company spun
off its entire ownership interest in SWI to the shareholders of ILX Resorts
common stock through a prorata distribution of the 3,360,000 common shares of
SWI held by the Company (representing 80% of the then total common shares of
SWI).
The SWI personal care products had historically been marketed under its
proprietary Red Rock Collection brand name through the ILX resorts. Commencing
in the second quarter of 1998, these products were marketed under the brand name
"Sedona Spa" and, in connection with such change, certain modifications to the
product line were implemented. Sedona Spa products have, and continue to be,
utilized at the ILX resorts as in-room amenities and are also offered for retail
sale in the resort gift shops and at the Sedona Spa at Los Abrigados. Sedona Spa
products are also used by the Company as promotion incentives to potential
purchasers who attend the Company's sales tours and presentations. The Company
uses direct mail to market Sedona Spa products to resort customers and tour
participants who have previously used the products. Pursuant to an agreement to
provide SWI financing to fund working capital shortfalls through November 30,
2001, 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 full satisfaction of this advance. The Company anticipates
continuing to utilize Sedona Spa products for in-room amenities, promotional
incentives and in its retail outlets, as well as continuing to expand marketing
efforts outside the Company.
LAND SALES. Since l993, the Company has also received revenues from the
sale of primarily unimproved real property. These operations originated as a
result of the Company's acquisition of its wholly owned subsidiary, Genesis
Investment Group, Inc. ("Genesis"), in November 1993. The sale of real property
is not a core business function for the Company and, as such, the Company has
not historically and does not intend in the future to devote a material portion
of its resources to these operations. Typically, the Company has sold these
assets as subdivided lots or large unimproved parcels. The Company intends to
sell substantially all of the remaining assets during the next twenty-four
months, although there can be no assurance that it will be able to sell these
assets at attractive prices, if at all, during this time. Following the sale of
these assets, management does not expect to regularly engage in the sale of real
property.
RESALE OPERATIONS. In June 1998, the Company acquired a 51% interest and in
June 2000, the 49% remaining minority interest, in Timeshare Resale Brokers,
Inc. ("TRBI"), an Arizona company engaged in the resale of Vacation Ownership
Interests on behalf of consumers and others, for which it earns a commission
upon sale. The operation is based in Sedona, Arizona. To date, the operations of
TRBI have not been material to the Company.
GREENS WORLDWIDE INCORPORATED. In August 2002, the Company invested
$1,000,000 in cash for 8,000,000 shares, or an approximately 36.4% ownership
interest in GWWI. GWWI subleases and plans to develop 23-acres of the Company's
44-acre parcel in Las Vegas, Nevada. The facility will include a sports themed
restaurant and bar, pro-shop, and six 18-hole natural grass putting courses.
Four of the putting courses will be developed using 24 full-sized championship
putting greens, each inspired by famous greens known around the world. The
investment in GWWI is included in other assets and the Company is accounting for
its interest in GWWI on the equity method.
PARTICIPATION IN EXCHANGE NETWORKS
The Company believes that consumers are more likely to purchase from its
inventory of Vacation Ownership Interests as a result of the Company's
participation in the Vacation Ownership Interest exchange networks operated by
RCI and II, the leading exchange network operators. In a 1995 study sponsored by
the Alliance for Timeshare Excellence and the American Resort Development
Association, exchange opportunity was cited by purchasers of interval interests
as one of the most significant factors in their decision to purchase an
interest. Membership in RCI or II allows ILX owners to exchange in a particular
year their occupancy right in the unit in which they own a Vacation Ownership
Interest for an occupancy right at the same time or a different time in another
participating resort, based upon availability and the payment of a variable
exchange fee. A participating ILX owner may exchange his or her Vacation
Ownership Interest for an occupancy right in another participating resort by
listing the Vacation Ownership Interest as available with the exchange network
operator and by requesting occupancy at another participating resort, indicating
the particular resort or geographic area to which the owner desires to travel,
16
the size of the unit desired and the period during which occupancy is desired.
The exchange network assigns a rating to each listed Vacation Ownership
Interest, based upon a number of factors, including the location and size of the
unit, the quality of the resort and the period of the year during which the
Vacation Ownership Interest is available, and attempts to satisfy the exchange
request by providing an occupancy right in another Vacation Ownership Interest
with a similar rating. Approximately 93% of the Vacation Ownership Interests at
the ILX resorts qualify as "red time," the highest demand classification,
thereby increasing the exchange opportunities available to ILX owners. If RCI or
II is unable to meet the member's initial request, the network operator may
suggest alternative resorts, based on availability. ILX also offers certain
interested purchasers enrollment in a cruise exchange program in which the
customer may exchange his or her Vacation Ownership Interest for or receive
discounts on cruises worldwide. Exchanges and discounts through this program are
offered on a variety of cruise lines to a broad selection of destinations. In
addition, ILX's Centralized Owner Services Department has established
arrangements with additional resorts and smaller exchange networks through which
it offers exchange opportunities and discounted vacation getaways to ILX owners.
The Company believes that its direct participation in the exchange process,
coupled with these additional services, provides ILX with a competitive
advantage and tends to increase customer satisfaction.
COMPETITION
ILX's Vacation Ownership Interest plans compete both with other Vacation
Ownership Interest plans as well as hotels, motels, condominium developments and
second homes. ILX considers the direct competitors of individual resorts to also
include alternative accommodations, including hotels, motels, bed-and-breakfasts
and small vacation ownership operators located within the immediate geographic
vicinity of such resort. This is particularly true with respect to its CARs that
tend to attract purchasers whose decision to buy a Vacation Ownership Interest
is likely to be influenced by the convenience of the resort to their principal
residence.
The Vacation Ownership Interest industry consists of a large number of
local and regional resort developers and operators. In addition, some of the
world's most widely-recognized lodging, hospitality and entertainment companies
sell vacation ownership interests under their brand names, including Marriott
Ownership Resorts, Walt Disney Company, Hilton Hotels Corporation, Hyatt
Corporation, Four Seasons Hotels & Resorts, Cendant Corporation, Starwood Hotels
& Resorts Worldwide Inc. and Promus Hotel Corporation. In addition, other
publicly traded companies such as, Silverleaf Resorts, Inc. and Bluegreen
Corporation currently compete or may compete in the future with the Company.
Furthermore, significant competition exists in other markets in which the
Company currently operates or is developing vacation ownership resorts. Many
entities with which the Company competes have significantly greater access to
financial, sales and marketing and other resources than those of the Company and
may be able to grow at a more rapid rate or more profitably as a result. In
recent years there has been significant consolidation in the industry and in
addition several entities have encountered challenges, resulting in their
attempt to reorganize through either consolidation or bankruptcy. Management
anticipates competition to increase in the future as a result of consolidation
in the vacation ownership industry. There can be no assurance that the Company
will be able to successfully compete with such companies.
GOVERNMENTAL REGULATION
GENERAL. The Company's marketing and sales activities and other resort
operations are subject to extensive regulation by the federal government and the
states in which the Company's resorts are located and in which its Vacation
Ownership Interests are marketed and sold. Federal legislation to which the
Company is or may be subject includes the Federal Trade Commission Act, the Fair
Housing Act, the Truth-in-Lending Act, the Real Estate Settlement Procedures
Act, the Equal Credit Opportunity Act, the Interstate Land Sales Full Disclosure
Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act and the Civil
Rights Acts of 1964, 1968 and 1991. Many states have adopted legislation as well
as specific laws and regulations regarding the sale of Vacation Ownership
Interests. The laws of most states, including Arizona, require a designated
state authority to approve a detailed offering statement describing the Company
and all material aspects of the resort and sale of Vacation Ownership Interests
at such resort. In addition, the laws of most states in which the Company sells
Vacation Ownership Interests grant the purchaser of a Vacation Ownership
Interest the right to rescind a contract of purchase at any time within a
statutory rescission period. Furthermore, most states have other laws which
regulate the Company's activities, such as real estate licensure laws, travel
sales licensure laws, anti-fraud laws, consumer protection laws, telemarketing
laws, prize, gift and sweepstakes laws, and labor laws. The Company believes
that it is in material compliance with all applicable federal, state, local and
foreign laws and regulations to which it is currently subject.
ENVIRONMENTAL MATTERS. Under applicable federal, state and local
environmental laws and regulations, a current or previous owner or operator of
real estate may be required to investigate, remediate and remove hazardous or
toxic substances at such property, and may be held liable for property damage
and for investigation, remediation and removal costs incurred by such parties in
connection with the contamination. Such laws typically impose such liability
without regard to whether the owner or operator knew of or caused the presence
of the contaminants, and the liability under such laws has been interpreted to
be joint and several unless the harm is divisible and there is a reasonable
17
basis for allocation of responsibility. The costs associated with compliance
with such regulations may be substantial, and the presence of such substances,
or the failure to properly remediate the contamination on such property, may
adversely affect the owner's or operator's ability to sell or rent such property
or to borrow against such property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances at a disposal or
treatment facility also may be liable for the costs of removal or remediation of
a release of hazardous or toxic substances at such disposal or treatment
facility, whether or not such facility is owned or operated by such person. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. Finally, the owner or operator of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. In connection with its
ownership and operation of its properties, the Company may be potentially liable
for such costs.
The Company does not always conduct Phase I environmental assessments at
the ILX resorts, properties under development and properties subject to
acquisition. Because many of the Company's resorts are typically found in remote
locations, it does not consider the risks of environmental liabilities
significant enough to warrant the performance of Phase I assessments at such
locations. Failure to obtain such reports may result in the Company acquiring or
developing unusable property or assuming certain liabilities which could have
been avoided if the Company had the information typically discovered in a Phase
I report. However, when appropriate, the Company has in the past and will in the
future obtain Phase I, or more elaborate, reports. To date, the Company has
obtained environmental reports with respect to three of the ILX resorts. In
addition, the Company does conduct significant in-house due diligence prior to
the acquisition of any real property interests. To date, the Company's
investigations of its properties have not revealed any environmental liability
that the Company believes would have a material adverse effect on the Company,
its business, assets, financial condition or results of operations, nor is the
Company aware of any such material environmental liability.
The Company believes that its properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances. The Company has not been notified by
any governmental authority or any third party, and is not otherwise aware, of
any material noncompliance, liability or claim relating to hazardous or toxic
substances or petroleum products in connection with any of its present
properties.
OTHER REGULATIONS. Under various state and federal laws governing housing
and places of public accommodation, the Company is required to meet certain
requirements related to access and use by disabled persons. Although management
believes that the Company's resorts are substantially in compliance with present
requirements of such laws, the Company may incur additional costs of compliance
in connection with the development of new resorts, or conversion or renovation
of ILX resorts. Future legislation may impose additional requirements on owners
with respect to access by disabled persons. The aggregate costs associated with
compliance with such regulations are not currently known, and, while such costs
are not expected to have a material effect on the Company, such costs could be
substantial. Limitations or restrictions on the completion of certain
renovations may limit application of the Company's growth strategy in certain
instances or reduce profit margins on the Company's operations.
EMPLOYEES
As of December 31, 2002, the Company had approximately 1,020 employees, of
which approximately 800 were employed on a full-time basis (including
approximately 220 employed on a full-time equivalent basis of 20 hours per
week). The Company believes relations with its employees are good and none of
its employees are represented by labor unions. The Company has adopted an
Employee Stock Ownership Plan for the benefit of its employees.
INSURANCE
The Company carries comprehensive liability, business interruption, title,
fire and storm insurance with respect to the ILX resorts, with policy
specifications, insured limits and deductibles customarily carried for similar
properties, which the Company believes are adequate. There are, however, certain
types of losses (such as losses caused by floods, acts of terrorism, or acts of
war) that are not generally insured because they are either uninsurable or not
economically insurable. Should an uninsured loss or a loss in excess of insured
limits occur, the Company could lose its capital invested in a resort, as well
as the anticipated future revenues from such resort and would continue to be
obligated on any mortgage indebtedness or other obligations related to the
property. Any such loss could have a material adverse effect on the Company.
18
CORPORATE HEADQUARTERS
The Company leases 8,437 square feet for its corporate offices in Phoenix,
Arizona, under a lease that expires on January 31, 2006.
ITEM 3. LEGAL PROCEEDINGS
Litigation has arisen in the normal course of the Company's business, none
of which is deemed to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the periods indicated, the range of
high and low sales prices for the Common Stock. The information is as reported
by the American Stock Exchange, which listed the Common Stock of the Company on
February 11, 1998. As of December 31, 2002, the Common Stock was held by
approximately 890 holders of record. The Company announced its first dividend of
$0.40 per share in December 2002. The dividend will be paid in quarterly
installments of $0.10 per share commencing April 10, 2003. Dividends on Common
Stock are subordinate to dividends payable on the Company's Series A and Series
C Preferred Stock.
COMMON STOCK
-----------------
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 2001
First Quarter $ 3.65 $ 1.81
Second Quarter 4.25 2.20
Third Quarter 8.25 3.80
Fourth Quarter 7.65 4.20
YEAR ENDED DECEMBER 31, 2002
First Quarter 8.55 5.50
Second Quarter 8.01 6.70
Third Quarter 8.35 6.95
Fourth Quarter 8.25 6.10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated historical financial information set forth below
for the five years ended December 31, 2002 has been derived from the
consolidated financial statements of the Company, which have been restated to
give effect to the one-for-five reverse stock split (the "Reverse Stock Split"),
declared effective by the Company on January 12, 1998.
The Selected Consolidated Financial Information should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included herein, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DECEMBER 31,
-----------------------------------------------
1998 1999 2000 2001 2002
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues $36,858 $40,439 $43,053 $48,309 $58,593
Net income 62 703 1,533 2,032 3,083
Net income per share - basic .00 .16 .40 .62 1.03
Net income per share - diluted .00 .16 .39 .61 1.00
Total assets 51,997 57,389 65,545 74,125 80,421
Notes payable 23,002 28,121 33,851 41,619 44,729
Shareholders' equity 25,764 25,239 25,835 25,785 27,747
19
ITEM 7. 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-K, 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 was formed in 1986 to enter the Vacation Ownership
Interest business. The Company generates revenue primarily from the sale and
financing of Vacation Ownership Interests. The Company also generates revenue
from the rental of its unused or unsold inventory of units at the ILX resorts
and from the sale of food, beverages or other services at such resorts. The
Company currently owns six resorts in Arizona, developable land adjacent to an
existing resort in Arizona, one resort in Indiana, one resort in Colorado 1,500
Vacation Ownership Interests in a resort in San Carlos, Mexico and 1,330
Vacation Ownership Interests in a resort in Las Vegas, Nevada.
The Company recognizes revenues 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.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company.
YEAR ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
------- ------- -------
As a percentage of total revenues:
Sales of Vacation Ownership Interests 60.8% 58.2% 61.9%
Resort operating revenue 32.0% 36.3% 28.3%
Interest income 7.2% 5.5% 9.8%
------- ------- -------
Total revenues 100.0% 100.0% 100.0%
======= ======= =======
As a percentage of sales of Vacation Ownership Interests:
Cost of Vacation Ownership Interests sold 14.6% 17.0% 14.5%
Sales and marketing 56.3% 57.0% 62.6%
Provision for doubtful accounts 4.3% 4.4% 4.4%
Contribution margin percentage from sale of Vacation
Ownership Interests (1) 24.8% 21.6% 18.6%
As a percentage of resort operating revenue:
Cost of resort operations 93.0% 83.4% 89.4%
As a percentage of total revenues:
General and administrative 10.8% 10.3% 10.8%
Depreciation and amortization 1.4% 1.7% 2.0%
Operating income 12.3% 12.1% 11.5%
YEAR ENDED DECEMBER 31,
-----------------------------
2000 2001 2002
------- ------- -------
Selected operating data:
Vacation Ownership Interests sold (2)(3) 1,665 1,756 2,016
Average sales price per Vacation Ownership Interest sold
(excluding revenues from Upgrades) (2) $13,859 $14,118 $14,670
Average sales price per Vacation Ownership Interest sold
(including revenues from Upgrades) (2) $15,411 $15,720 $17,629
- ----------
(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 2,575, 2,692 and 3,019 biennial and annual
Vacation Ownership Interests for the years ended December 31, 2000, 2001
and 2002, respectively.
20
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO DECEMBER 31, 2002
Sales of Vacation Ownership Interests increased 29.0% or $8.1 million in
2002 to $36.2 million from $28.1 million in 2001, reflecting sales from the Las
Vegas sales office which opened in mid January 2002 and greater sales to
existing owners, net of decreased sales to first time buyers from the Sedona
sales office and Tucson sales office due to planned reductions in tour flow. In
2002, the Sedona sales office eliminated or reduced its use of less effective
outside vendors and telemarketing programs and as a result generated fewer
tours. While tour flow decreased by approximately 10%, sales volume per tour
increased with total sales volume declining by only 5% and profits from this
office increasing by more than 13% over the prior year. Upgrade revenue
increased 112% to $6.0 million in 2002 from $2.8 million in 2001, reflecting
expansion of marketing efforts to existing owners. The average sales price per
Vacation Ownership Interest sold (excluding Upgrades) increased 3.9% to $14,670
in 2002 compared to $14,118 in 2001 and the average sales price per Vacation
Ownership Interest sold including Upgrades increased 12.1% to $17,629 in 2002
from $15,720 in 2001.
The number of Vacation Ownership Interests sold increased 14.8% to 2,016 in
2002 from 1,756 in 2001. Sales of Vacation Ownership Interests in 2002 included
2,006 biennial Vacation Ownership Interests (counted as 1,003 annual Vacation
Ownership Interests) and 1,013 annual Vacation Ownership Interests compared to
1,873 biennial Vacation Ownership Interests (counted as 936.5 annual Vacation
Ownership Interests) and 819 annual Vacation Ownership Interests in 2001. The
increase reflects the opening of the Las Vegas sales office, net of fewer sales
at the Sedona sales office and the closure of the Phoenix Sales office in May
2001.
Resort operating revenues decreased 5.6% or $1.0 million from $17.6 million
in 2001 to $16.6 million in 2002, largely reflecting a decrease in business and
tourist travel by non-owners during 2002, as well as timing differences in
revenue from vacation interval owners. The cost of resort operations increased
slightly with a 1.2% or $0.2 million increase to $14.8 million in 2002 from
$14.6 million in 2001. This increase was due to initial costs incurred for the
opening of the Joey Bistro restaurant at the Carriage House in Las Vegas,
Nevada, which opened in late November 2002. Cost of resort operations as a
percentage of resort operating revenue increased to 89.4% in 2002 from 83.4% in
2001. Because of the large fixed cost component of resort operations and the
startup expenses associated with the Las Vegas Joey Bistro, reductions in
revenue resulted in greater costs as a percentage of revenue.
Interest income increased by 117.7% to $5.8 million in 2002 from $2.7
million in 2001, reflecting an increase in the percentage of Customer Notes
sold, 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 to 14.5% in 2002 from 17.0% in 2001,
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 62.6% in 2002 compared to 57.0% in 2001, reflecting the
start-up of the Las Vegas sales office which opened in January 2002, and reduced
closing rates and efficiency for first time buyers at the Tucson sales office.
In the first quarter of 2003 the scale of the VCA-Tucson sales operation for
first time buyers was reduced, and less effective marketing programs eliminated.
Upgrade sales to existing owners from the VCA-Tucson office are not affected by
these changes.
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 2001 and 2002.
General and administrative expenses increased 27.0% to $6.3 million in 2002
from $5.0 million in 2001. General and administrative expenses increased between
years as a percentage of total timeshare revenues from 10.3% in 2001 to 10.8% in
2002. The increase reflects increased professional fees, including fees for
development of an enhanced website, operating expenses for the Sedona Spa retail
operations effective January 2002, and expenses for Premiere Park in Las Vegas.
Interest expense decreased 20.1% from $2.6 million in 2001 to $2.1 million
in 2002, reflecting the combined net effect of interest rate reductions on the
Company's variable rate notes, capitalized interest related to construction in
Las Vegas and Arizona in 2002 and greater borrowings in 2002.
21
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO DECEMBER 31, 2001
Sales of Vacation Ownership Interests increased 7.4% or $1.9 million in
2001 to $28.1 million from $26.2 million in 2000, reflecting an increase in
sales from the Sedona sales office and increased Upgrades, net of a decrease in
sales from the Kohl's Ranch, VCA-South Bend and VCA-Tucson sales offices. The
increase in sales from the Sedona sales office is a result of an increase in the
number of tours from the marketing venues in Sedona. The decrease in sales from
the Kohl's Ranch sales office reflects a reduction in the number of tours to
this office. The reduced tour flow reflects primarily a reduction in the number
of non-owner guests at the resort due to cessation of certain on-site
activities. Non-owner visitors to the resort are offered the opportunity to
attend a sales presentation either during their visit, or at a later date. The
decrease in sales from the VCA-South Bend sales office reflects the reduction in
the third quarter of 2000 from a full scale sales office to a small sales staff
that both generates its own tours and sells to such prospects for a percentage
of sales. The decrease in sales from the VCA-Tucson sales office is due to a
decrease in tours provided by a major tour vendor to this office. Upgrade
revenue increased 8.9% to $2.8 mission in 2001 from $2.6 million in 2000,
reflecting continuation of marketing efforts to existing owners. The average
sales price per Vacation Ownership Interest sold (excluding Upgrades) increased
1.9% to $14,118 in 2001 compared to $13,859 in 2000 and the average sales price
per Vacation Ownership Interest sold including Upgrades increased 2.0% to
$15,720 in 2001 from $15,411 in 2000.
The number of Vacation Ownership Interests sold increased 5.5% to 1,756 in
2001 from 1,665 in 2000. Sales of Vacation Ownership Interests in 2001 included
1,873 biennial Vacation Ownership Interests (counted as 936.5 annual Vacation
Ownership Interests) and 819 annual Vacation Ownership Interests compared to
1,821 biennial Vacation Ownership Interests (counted as 910.5 annual Vacation
Ownership Interests) and 754 annual Vacation Ownership Interests in 2000.
Resort operating revenues increased 27.2% or $3.8 million from $13.8
million in 2000 to $17.6 million in 2001, largely reflecting the addition of
resort inventory in late 2000, with the acquisition of the Bell Rock Inn and Los
Abrigados Lodge in the fourth quarter of 2000 as well as the addition of twelve
new cabins at Kohl's Ranch Lodge, and also timing differences in revenue from
vacation interval owners. The cost of resort operations increased at a lesser
percentage than the increase in revenue with a 14.1% or $1.8 million increase to
$14.6 million in 2001 from $12.8 million in 2000. Cost of resort operations as a
percentage of resort operating revenue decreased to 83.4% in 2001 from 93.0% in
2000, as a result of increased revenue, including an increase in rates from
vacation interval owners in 2001, increased occupancy and improved operating
efficiencies at Kohl's Ranch Lodge. Certain of these benefits are not expected
to recur on a regular basis and cost of resort operations as a percentage of
resort operating revenue is expected in the future to be comparable to prior
years.
Interest income decreased by 14.1% to $2.7 million in 2001 from $3.1
million in 2000, reflecting greater early pay-offs of Customer Notes in 2001 and
a decrease in the percentage of Customer Notes sold, 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 increased to 17.0% in 2001 from 14.6% in 2000,
reflecting variations in product mix, an increase in cost of sales recognized on
Upgrades, and improvements made to resort properties.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests increased to 57.0% in 2001 compared to 56.3% in 2000, reflecting the
net effect of a lower cost per tour offset by decreased closing rates at the
Sedona sales office in 2001.
The provision for doubtful accounts as a percentage of Vacation Ownership
Interest sales increased to 4.4% of sales of Vacation Ownership Interests in
2001 from 4.3% in 2000, reflecting the Company's decision to increase the
provision on new sales in the second quarter of 2000.
General and administrative expenses increased 7.7% to $5.0 million in 2001
from $4.6 million in 2000, corresponding to revenue growth between years.
General and administrative expenses decreased between years as a percentage of
total timeshare revenues from 10.8% in 2000 to 10.3% in 2001.
Interest expense decreased 4.0% from $2.7 million in 2000 to $2.6 million
in 2001, reflecting the combined net effect of greater borrowings in 2001 and
lower borrowing rates. During 2001, the Company continued to retain and borrow
against, rather than sell, more of its Customer Notes. The Company borrows
against such notes at variable rates tied to prime and, accordingly, during 2001
a greater percentage of the Company's indebtedness is at lower, variable rates
and a lesser percentage at higher fixed rates than in prior years.
22
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH
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. Cash provided by
operating activities was $5.7 million in 2002 as compared to $6.4 million in
2001 and as compared to $6.2 million in 2000. The decrease in cash provided by
operations in 2002 reflects cash paid for 2002 estimated tax payments, increased
escrow balances on notes payable, and an increase in other assets for the
investment in GWWI for which the Company accounts on the equity method, net of
increased net income and related income tax expense, and the effect of common
stock issued in lieu of cash compensation.
The Company generates cash primarily from the sale of Vacation Ownership
Interests (including Upgrades), the financing of Customer Notes from such sales
and resort operations. Because the Company uses significant amounts of cash in
the development and marketing of Vacation Ownership Interests, but collects the
cash on the Customer Notes receivable over a long period of time, borrowing
against and/or selling receivables is necessary to provide sufficient cash to
fund its normal operations.
The fluctuations in cash used in financing activities from $0.1 million in
2000 to cash provided by financing activities of $0.4 million in 2001 and $3.2
million in 2002, reflect greater borrowings against Customer Notes and increased
net borrowings on notes payable related to construction costs in Las Vegas,
Nevada, Los Abrigados and Kohl's Ranch as well as the financing of the Sedona
Station in 2001, net of the increase in treasury stock purchases during 2001 as
compared to 2000 and the decrease in treasury stock purchases in 2002 as
compared to 2001.
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 the Company receives cash
either 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
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, 2002, the Company, excluding its Genesis subsidiary, had
net operating loss ("NOL") carryforwards of approximately $1.3 million, which
expire in 2017 through 2020. At December 31, 2002, 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 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. See Note 7 of Notes to Consolidated Financial Statements.
USES OF CASH
Investing activities typically reflect a net use of cash because of capital
additions and loans to customers in connection with the Company's Vacation
Ownership Interest sales. Net cash used in investing activities in 2000, 2001
and 2002 was $6.6 million, $5.9 million and $10.0 million, respectively. The
decrease in cash used in investing activities in 2001 reflects the cash portion
of the purchase of the Bell Rock Inn and of Sedona Station in 2000. The increase
in cash used in investing activities in 2002 is reflective of the costs incurred
in Las Vegas, Nevada for the sales office, the Joey Bistro restaurant at the
Carriage House and Premiere Park.
23
Customer defaults have a significant impact on cash available to the
Company from financing Customer Notes receivables, 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 2000 and 2001, the Company
contributed $250,000 each year to the ESOP and in 2001, the Company also issued
20,000 shares of restricted common stock to the ESOP. During the year ended
December 31, 2002, the Company contributed $400,000 to the ESOP and the ESOP
used these funds to exercise options to purchase 100,000 shares of stock from
the Company. In addition, in 2002, the ESOP acquired 22,000 shares of common
stock through a note guaranteed by the Company (see Note 12 of Financial
Statements). Of the total shares held by the ESOP at December 31, 2002, 22,000
were purchased with borrowed funds and have not been allocated to participant
accounts. The unallocated shares are collateral for the outstanding indebtedness
on the note payable. At December 31, 2002, the unallocated shares are reflected
at cost as a contra equity account, Guaranteed ESOP Obligation.
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 December 31, 2001, 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 provided 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 December 31, 2002, $11.6 million of the
$40 million commitment was available to the Company. In December 2002, the
Company renewed this agreement so it can sell up to an additional $30 million in
Customer Notes, effective January 1, 2003.
The Company also has a financing commitment aggregating $30.0 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
borrowing period expires in 2003 and the maturity is in 2008. At December 31,
2002, approximately $10.7 million is available under this commitment.
In December 1999, the Company completed the spin-off of its 80% ownership
interest in SWI 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 and recognized a net loss of $48,887.
In December 1999, the Company guaranteed a $1,000,000 operating line of
credit for the Sedona Vacation Club, the owners' association of the members who
own Vacation Ownership Interests in Los Abrigados. Sedona Vacation Club used the
proceeds for renovations at Los Abrigados and has repaid the principal and
interest from collections from a special assessment of its owners for this
purpose and from owner reserve payments. The line of credit bore interest at
prime plus 2.5%. As of December 31, 2002, approximately $72,000 was outstanding
on this line, which was fully repaid in January 2003.
In February 2000, the Company borrowed $600,000 for the purpose of using
the funds to purchase treasury stock. In 2001, the note was modified and the
Company borrowed an additional $500,000 for the same purpose. The note payable
bears interest at 12% and is due through 2004. At December 31, 2002,
approximately $510,000 was outstanding on the note. During 2002, the Company
purchased 214,095 shares of its Common Stock for $1,580,194. In March 2003, this
note was consolidated with another note to the same lender and amended. The
amendment provided an additional $1.45 million in funds, decreased the interest
rate to 10% per year and extended the maturity to 2008.
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
completed a transaction with Edward John Martori ("EJM"). EJM had been a
creditor of the Company and was 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,
24
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 $123,751
in rent expense for the twelve months ended December 31, 2002.
In December 2000, the Company acquired the Bell Rock Inn in the Village of
Oak Creek, Arizona, for a purchase price of $4,972,997, including assumption of
the existing mortgage balance of $4,472,997. The mortgage bears interest at
7.49%, and is payable in equal monthly payments of principal and interest
through 2023.
In January 2001, the Company refinanced the construction note payable on
VCA-Tucson. In August 2001, the note was amended to provide for the borrowing of
an additional $1.0 million. The terms include extension of the maturity date to
June 2004, modification of the interest rate to prime plus 1% from a 12% fixed
rate, and a change in the principal payments and release provisions to include a
$134,000 minimum monthly principal payment. In December 2002, the note was
further amended to provide for the borrowing of an additional $1.0 million and
an extension of the maturity date to February 2005.
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% with a minimum
interest rate of 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 registered with the Arizona Department of Real
Estate and annexed to Premiere Vacation Club 96 studio Vacation Ownership
Interests in the Bell Rock Inn. This property was acquired through the
assumption of an existing mortgage which does not provide for release
provisions. In order to facilitate the registration, the Company secured a
guaranty commitment from one of its lenders, opened an escrow account and makes
monthly release payments. The balance of this escrow account of $460,747 is
included in other assets.
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 7.0%. The debt is payable in equal monthly
payments of principal and interest over a five-year term ending June 2007.
In the future, the Company may negotiate additional credit facilities,
including leases, 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. 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 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 12 months.
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. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information set forth on Index to Consolidated Financial Statements
appearing on page F-1 of this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
25
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2003 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2003 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2003 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2003 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this annual 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 the 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.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS PAGE OR METHOD OF FILING
--------------------------------- ------------------------
(i) Report of Hansen, Barnett & Maxwell, Page F-2
a professional corporation
(ii) Consolidated Financial Statements Pages F-3 through F-20
and Notes to Consolidated Statements
of the Registrant, including
Consolidated Balance Sheets as of
December 31, 2002 and 2001 and
Consolidated Statements of Operations,
Shareholders' Equity and Cash Flows
for each of the three years ended
December 31, 2002, 2001 and 2000.
(a) (2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedules other than those mentioned above are omitted because the
conditions requiring their filing do not exist or because the required
information is given in the financial statements, including the notes
thereto.
(a) (3) EXHIBITS
The Exhibit Index attached to this report is hereby incorporated by
reference.
(b) REPORTS ON FORM 8-K
None
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
March, 2003.
ILX Resorts Incorporated,
an Arizona corporation
(Registrant)
By: /s/ Joseph P. Martori
------------------------------------
Joseph P. Martori
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Joseph P. Martori Chairman of the Board and March 28, 2003
- ---------------------------- Chief Executive Officer
Joseph P. Martori (principal executive officer)
/s/ Nancy J. Stone President, Chief Operating March 28, 2003
- ---------------------------- Officer and Director
Nancy J. Stone
/s/ Margaret M. Eardley Executive Vice President and March 28, 2003
- ---------------------------- Chief Financial Officer
Margaret M. Eardley (principal financial officer)
/s/ Taryn L. Chmielewski Vice President and Chief March 28, 2003
- ---------------------------- Accounting Officer
Taryn L. Chmielewski
/s/ Edward S. Zielinski Executive Vice President March 28, 2003
- ---------------------------- and Director
Edward S. Zielinski
/s/ Joseph P. Martori, II Executive Vice President March 28, 2003
- ---------------------------- and Director
Joseph P. Martori, II
/s/ Steven R. Chanen Director March 28, 2003
- ----------------------------
Steven R. Chanen
/s/ Patrick J. McGroder III Director March 28, 2003
- ----------------------------
Patrick J. McGroder III
/s/ Steven A. White Director March 28, 2003
- ----------------------------
Steven A. White
27
FORM OF CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
I, Joseph P. Martori, Chairman, and Chief Executive Officer of ILX Resorts
Incorporated (the "Company") certify that:
1. I have reviewed this annual report on Form 10-K of ILX Resorts
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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 annual report whether 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: March 28, 2003
/s/ Joseph P. Martori
----------------------------------------
Joseph P. Martori
Chairman and Chief Executive Officer
28
FORM OF CERTIFICATION FOR FORM 10-K
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 annual report on Form 10-K of ILX Resorts
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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 annual report whether 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: March 28, 2003
/s/ Margaret M. Eardley
----------------------------------------
Margaret M. Eardley
Executive Vice President and
Chief Financial Officer
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 2001 and 2002 F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 2001 and 2002 F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000, 2001 and 2002 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 2001 and 2002 F-6
Notes to Consolidated Financial Statements F-7
F-1
[LETTERHEAD OF HANSEN, BARNETT & MAXWELL]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders of ILX Resorts Incorporated
We have audited the accompanying consolidated balance sheets of ILX Resorts
Incorporated and Subsidiaries (the "Company") as of December 31, 2001 and 2002
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2001 and 2002 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002 in conformity
with accounting principles generally accepted in the United States of America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
February 19, 2003
F-2
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
2001 2002
------------ ------------
ASSETS
Cash and cash equivalents $ 3,548,058 $ 2,399,175
Notes receivable, net (Notes 2 and 8) 30,365,225 34,019,271
Resort property held for Vacation Ownership Interest sales
(Notes 2, 3, and 8) 20,270,872 24,150,438
Resort property under development 5,116,227 263,127
Land held for sale 830,686 811,590
Deferred assets (Note 5) 131,794 84,606
Property and equipment, net (Notes 6, 8, 16 and 17) 6,189,082 9,008,973
Other assets 7,672,891 9,683,608
------------ ------------
TOTAL ASSETS $ 74,124,835 $ 80,420,788
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 1,488,456 $ 1,760,570
Accrued and other liabilities 2,354,911 2,737,844
Income taxes payable (Note 7) 689,923 178,071
Due to affiliates (Note 9) 24,022 --
Notes payable (Note 8) 40,619,303 44,729,013
Notes payable to affiliates (Notes 9 and 16) 1,000,000 --
Deferred income taxes (Note 7) 2,163,207 3,268,284
------------ ------------
Total liabilities 48,339,822 52,673,782
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 11 and 18)
SHAREHOLDERS' EQUITY (Notes 12, 13 and 14):
Preferred stock, $10 par value; 10,000,000 shares authorized;
284,816 and 177,591 shares issued and outstanding;
liquidation preference of $2,848,160 and $1,775,910 1,117,025 916,726
Common stock, no par value; 30,000,000 shares authorized;
4,132,702 and 4,346,387 shares issued (Note 1) 18,405,576 19,497,334
Treasury stock, at cost, 1,200,700 and 1,414,795 shares, respectively (3,688,083) (5,268,277)
Additional paid in capital 269,869 66,050
Guaranteed ESOP obligation (Note 13) -- (181,500)
Retained earnings 9,680,626 12,716,673
------------ ------------
Total shareholders' equity 25,785,013 27,747,006
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 74,124,835 $ 80,420,788
============ ============
See notes to consolidated financial statements
F-3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 2001 2002
------------ ------------ ------------
REVENUES:
Sales of Vacation Ownership Interests $ 26,169,022 $ 28,105,558 $ 36,243,392
Resort operating revenue 13,797,418 17,550,095 16,574,963
Interest income 3,087,403 2,652,868 5,775,113
------------ ------------ ------------
Total revenues 43,053,843 48,308,521 58,593,468
------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership
Interests sold 3,810,323 4,788,270 5,252,378
Cost of resort operations 12,825,576 14,639,246 14,820,915
Sales and marketing 14,741,036 16,027,410 22,678,519
General and administrative 4,630,201 4,985,957 6,333,518
Provision for doubtful accounts 1,116,813 1,230,974 1,588,749
Depreciation and amortization 614,882 813,565 1,159,437
------------ ------------ ------------
Total cost of sales and
operating expenses 37,738,831 42,485,422 51,833,516
------------ ------------ ------------
Operating income 5,315,012 5,823,099 6,759,952
Income from land and other, net (Related Party) 6,340 136,140 570,628
------------ ------------ ------------
Total operating income 5,321,352 5,959,239 7,330,580
Interest expense (Notes 8 and 9) (2,692,516) (2,585,030) (2,066,047)
Equity in loss of related party investment
(Note 16) -- -- (125,587)
------------ ------------ ------------
Income before income taxes and minority interests 2,628,836 3,374,209 5,138,946
Income tax expense (Note 7) (1,025,176) (1,342,595) (2,055,578)
------------ ------------ ------------
Income before minority interests 1,603,660 2,031,614 3,083,368
Minority interests (Note 10) (70,422) -- --
------------ ------------ ------------
NET INCOME $ 1,533,238 $ 2,031,614 $ 3,083,368
============ ============ ============
NET INCOME PER SHARE (Notes 1 and 4):
Basic $ 0.40 $ 0.62 $ 1.03
============ ============ ============
Diluted $ 0.39 $ 0.61 $ 1.00
============ ============ ============
See notes to consolidated financial statements
F-4
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK TREASURY STOCK
---------------------------- ---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 1999 305,978 $ 1,179,298 3,921,173 $ 18,069,840
Net income
Issuance of common stock 71,600 64,066
Contribution of common stock to
ESOP Plan 100,000 146,094
Issuance of cumulation shares for
dividend arrearage 7,653 13,871
Exchange of preferred stock for
common stock (14,298) (39,462) 4,766 39,462
Exchange of preferred stock for
lodging certificates (127) (1,270)
Acquisition of treasury shares (657,500) (1,308,655)
Payment of dividends
Reduction in guaranteed ESOP
contribution
Cost of ESOP shares released
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 2000 291,553 1,138,566 4,105,192 18,333,333 (657,500) (1,308,655)
Net income
Issuance of common stock 4,100 4,210
Contribution of common stock to
ESOP and Profit Sharing Plans 21,300 50,562
Exchange of preferred stock for
common stock (6,330) (17,471) 2,110 17,471
Exchange of preferred stock for
lodging certificates (407) (4,070)
Acquisition of treasury shares (543,200) (2,379,428)
Payment of dividends
Reduction in guaranteed ESOP
contribution
Cost of ESOP shares released
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 2001 284,816 1,117,025 4,132,702 18,405,576 (1,200,700) (3,688,083)
Net income
Issuance of common stock 74,330 493,059
Exercise of options by ESOP Plan 100,000 400,000
Exchange of preferred stock for
common stock (107,065) (198,699) 39,355 198,699
Exchange of preferred stock for
lodging certificates (160) (1,600)
Acquisition of treasury shares (214,095) (1,580,194)
Payment of dividends
Elimination of liquidation
preference
Guaranteed ESOP Obligation
------------ ------------ ------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 2002 177,591 $ 916,726 4,346,387 $ 19,497,334 (1,414,795) $ (5,268,277)
============ ============ ============ ============ ============ ============
ADDITIONAL GUARANTEED
PAID IN ESOP RETAINED
CAPITAL OBLIGATION EARNINGS TOTAL
------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 1999 279,450 $ (500,000) $ 6,210,581 $ 25,239,169
Net income 1,533,238 1,533,238
Issuance of common stock 64,066
Contribution of common stock to
ESOP Plan 146,094
Issuance of cumulation shares for
dividend arrearage (13,871) --
Exchange of preferred stock for
common stock --
Exchange of preferred stock for
lodging certificates 1,025 (245)
Acquisition of treasury shares (1,308,655)
Payment of dividends (47,359) (47,359)
Reduction in guaranteed
ESOP contribution 250,000 250,000
Cost of ESOP shares released (40,862) (40,862)
------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 2000 225,742 (250,000) 7,696,460 25,835,446
Net income 2,031,614 2,031,614
Issuance of common stock 4,210
Contribution of common stock to
ESOP and Profit Sharing Plans 50,562
Exchange of preferred stock for
common stock --
Exchange of preferred stock for
lodging certificates 3,265 (805)
Acquisition of treasury shares (2,379,428)
Payment of dividends (47,448) (47,448)
Reduction in guaranteed
ESOP contribution 250,000 250,000
Cost of ESOP shares released 40,862 40,862
------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 2001 269,869 0 9,680,626 25,785,013
Net income 3,083,368 3,083,368
Issuance of common stock 493,059
Exercise of options by ESOP Plan 400,000
Exchange of preferred stock for
common stock --
Exchange of preferred stock for
lodging certificates 830 (770)
Acquisition of treasury shares (1,580,194)
Payment of dividends (47,321) (47,321)
Elimination of liquidation
preference (204,649) (204,649)
Guaranteed ESOP Obligation (181,500) (181,500)
------------ ------------ ------------ ------------
BALANCES, DECEMBER 31, 2002 $ 66,050 $ (181,500) $ 12,716,673 $ 27,747,006
============ ============ ============ ============
See notes to consolidated financial statements
F-5
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------------
2000 2001 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,533,238 $ 2,031,614 $ 3,083,368
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on the sale of property -- (88,947) (646,949)
Undistributed minority interest (23,778) -- --
Undistributed losses of equity investment in a related party -- -- 125,587
Loss on assumption of Sedona Worldwide Incorporated
assets and liabilities -- -- 48,887
Income tax expense 1,025,176 1,342,595 2,055,578
Provision for doubtful accounts 1,116,813 1,230,974 1,588,749
Depreciation and amortization 614,882 813,565 1,159,437
Amortization of guarantee fees 1,750 38,646 47,188
Contribution of common stock to ESOP and Profit
Sharing Plans 146,094 50,562 --
Common stock issued in exchange for services 64,066 4,210 493,059
Change in assets and liabilities:
Decrease (increase) in resort property held for Vacation
Ownership Interest sales 79,082 1,392,921 (3,879,566)
Decrease in resort property under development 92,345 147,510 4,853,100
(Increase) decrease in land held for sale (70,539) (76,356) 19,096
Decrease (increase) in other assets 607,702 (489,141) (2,380,323)
Increase in accounts payable 297,771 267,669 272,114
Increase (decrease) in accrued and other liabilities 766,107 (245,057) 298,756
(Decrease) increase in due to affiliates (26,282) 24,022 (24,022)
Decrease in deferred income taxes -- -- (985,337)
Decrease in income taxes payable -- -- (477,016)
------------ ------------ ------------
Net cash provided by operating activities 6,224,427 6,444,787 5,651,706
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable, net (4,591,283) (4,305,957) (5,242,795)
Decrease in deferred assets 55,743 -- --
Cash acquired from Sedona Worldwide Incorporated -- -- 30,457
Purchases of property and equipment, net (2,042,995) (1,549,448) (4,932,487)
Proceeds from sale of property -- -- 153,012
------------ ------------ ------------
Net cash used in investing activities (6,578,535) (5,855,405) (9,991,813)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 16,994,924 21,993,373 25,852,491
Principal payments on notes payable (15,637,800) (19,125,138) (20,928,333)
Principal payments on notes payable to affiliates (100,000) -- (300,000)
Elimination of Series B preferred stock liquidation provision -- -- (204,649)
Exercise of options by ESOP Plan -- -- 400,000
Acquisition of treasury stock and other equity payments (1,308,900) (2,380,233) (1,580,964)
Preferred stock dividend payments (47,359) (47,448) (47,321)
------------ ------------ ------------
Net cash (used in) provided by financing activities (99,135) 440,554 3,191,224
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (453,243) 1,029,936 (1,148,883)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,971,365 2,518,122 3,548,058
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,518,122 $ 3,548,058 $ 2,399,175
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Notes payable issued or assumed to purchase assets or
minority interest 4,472,997 4,900,000 --
See notes to consolidated financial statements
F-6
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS ACTIVITIES
The 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 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.
RESORT PROPERTY HELD FOR VACATION OWNERSHIP INTEREST SALES
Resort property held for Vacation Ownership Interest sales is recorded at
the lower of historical cost less amounts charged to cost of Vacation Ownership
Interests sold or marketed. As Vacation Ownership Interests are sold, the
Company amortizes to cost of sales the average carrying value of the property
plus estimated future additional costs related to remodeling and construction.
Land held for sale is recorded at the lower of cost or fair value less cost
to sell, consistent with the Company's intention to liquidate these properties.
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.
PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost and are depreciated on the
straight-line method over their respective estimated useful lives ranging from 3
to 40 years. Property and equipment under capitalized leases are stated at the
lesser of fair value or the present value of future minimum lease payments as of
the date placed in service, and amortized on the straight-line method over the
term of the lease.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for
impairment when events or changes in circumstances indicate that the carrying
value of an asset may not be recoverable. The Company evaluates, at each balance
sheet date, whether events and circumstances have occurred which indicate
possible impairment. The Company uses an estimate of future undiscounted net
cash flows from the related asset or group of assets over their remaining life
in measuring whether the assets are recoverable. As of December 31, 2002, the
Company does not consider any of its long-lived assets to be impaired.
SEGMENT REPORTING
The Company has a single segment in the timeshare resort industry. Revenue
from products and services are reflected on the income statement under Sales of
Vacation Ownership Interests and Resort Operating Revenue.
STOCK OPTION PLAN
The Company applies APB Opinion 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations in accounting for its Stock Option Plans.
Accordingly, no compensation cost has been recognized for stock options granted
under the Plans. The Company granted 55,000 and 0 options under the Stock Option
Plans during the years ended December 31, 2001 and 2002, respectively. Had
compensation cost for the Plans been determined and amortized based on the fair
value at the grant dates for awards under the Plans consistent with the
alternative method of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the
Company's net income and income per share would have decreased to the proforma
F-7
amounts indicated below. The weighted average assumptions used to estimate the
fair value of each option grant, using the Black-Scholes option-pricing model,
are also presented:
DECEMBER 31,
------------------------
2001 2002
---------- ----------
Net Income to common shareholders
As reported $1,984,166 $3,036,047
Proforma 1,852,674 3,004,728
Basic and Diluted Income per share
As reported-basic $ 0.62 $ 1.03
As reported-diluted 0.61 1.00
Proforma-basic 0.58 1.02
Proforma-diluted 0.57 1.00
Weighted-Average Assumptions:
Dividend yield $ -- $ --
Expected volatility 67.6% --
Risk-free interest rate 4.0% --
Expected life of options, in years 3.45 --
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash equivalents are liquid investments with an original maturity of three
months or less. At December 31, 2002 and 2001, the Company had cash in excess of
federally insured limits. The following summarizes interest paid and capitalized
interest to resort property under development:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Interest paid $2,726,000 $2,563,000 $2,102,000
Income taxes paid -- -- 1,461,000
Capitalized interest 86,000 -- 306,000
ACCOUNTING MATTERS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets." SFAS No. 144 established a single
accounting model for long-lived assets to be disposed of by sale and the
recognition of impairment of long-lived assets to be held and used. The company
implemented SFAS No. 144 effective January 1, 2002. The adoption of this
standard has had no material effect on the Company's financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other provisions, the statement modifies the criteria
classification of gains and losses on debt extinguishments such that they are
not required to be classified as extraordinary items if they do not meet the
criteria for classification as extraordinary items in APB Opinion No. 30. The
Company elected to adopt this standard during the year ended December 31, 2002.
The adoption of this standard has had no material effect on the Company's
financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal activities." The statement required companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee plan severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. The
Company will be required to apply this statement prospectively for any exit or
disposal activities initiated after December 31, 2002. The adoption of this
standard is not expected to have a material effect on the Company's financial
position or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This statement amends
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that voluntarily changes to the
fair value method of accounting for stock-based employee compensation. It also
amends the disclosure provisions of Statement No. 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. Statement
No. 148 also requires disclosure about those effects in interim financial
information. The Company adopted the disclosure requirements of Statement No.
148 in the accompanying financial statements.
F-8
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
The financial statements for prior periods have been reclassified to be
consistent with the current period financial statement presentation. These
reclassifications had no effect on net income.
NOTE 2. NOTES RECEIVABLE, NET
Notes receivable consist of the following:
DECEMBER 31,
---------------------------
2001 2002
------------ ------------
Vacation Ownership Interest notes receivable $ 31,105,657 $ 33,839,506
Holdbacks by financial institutions 2,119,652 2,412,412
Other receivables 673,399 840,021
Allowance for possible credit losses (3,533,483) (3,072,668)
------------ ------------
$ 30,365,225 $ 34,019,271
============ ============
Notes generated from the sale of Vacation Ownership Interests generally
bear interest at annual rates ranging from 13.9% to 17.9% and have terms of five
to ten years. The notes are collateralized by deeds of trust on the Vacation
Ownership Interests sold.
At December 31, 2002, the Company had 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 provided 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. At December 31, 2002, $11.6 million of the
$40 million commitment was available to the Company. In December 2002, the
Company renewed this agreement. Under the renewal terms the Company can sell up
to an additional $30 million in Customer Notes, effective January 1, 2003.
For the twelve months ended December 31, 2000, 2001 and 2002, the Company
sold with recourse approximately $10 million, $2 million and $10 million of
notes receivable generated from sales of Vacation Ownership Interests in the
respective years. The Company elected to hypothecate, rather than sell with
recourse, the majority of its Customer Notes during 2001 because of uncertainty
regarding the ability and intent of the financial institution which purchases
such Customer Notes. In 2000 the Company was informed that this financial
institution was ceasing the portion of its activities that includes financing of
Customer Notes. In 2002 the financial institution was purchased and affirmed its
intent to finance Customer Notes on an ongoing basis. As a result, the Company
elected to sell with recourse more of its Customer Notes in 2002. The Company
recorded an interest premium of approximately $1.0 million, $0 million, and $3.0
million as interest income in the years ended December 31, 2000, 2001 and 2002,
respectively, related to notes sold with recourse.
The Company also has a financing commitment for $30.0 million whereby the
Company may borrow against notes receivable pledged as collateral. These
borrowings bear interest at prime plus 1.5%. The $30 million borrowing period
expires in 2003 and the maturity is in 2008. At December 31, 2002, approximately
$10.7 million is available under this commitment.
At December 31, 2001 and 2002, the Company had approximately $11.0 million
and $13.3 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 ("Los Abrigados"), Varsity Clubs of America-South
Bend ("VCA-South Bend") and Varsity Clubs of America-Tucson ("VCA-Tucson").
At December 31, 2002, notes receivable in the amount of approximately
$195,000 have been contributed to the Company's Series A Preferred Stock sinking
fund and therefore their use is restricted (Note 12).
F-9
The following summarizes activity in the allowance for possible credit
losses:
YEAR ENDED DECEMBER 31,
------------------------------------------
2000 2001 2002
------------ ------------ ------------
Beginning balance $ 3,332,550 $ 3,223,511 $ 3,533,483
Provision for doubtful accounts 1,116,813 1,230,974 1,588,749
Amounts written off (1,225,852) (921,002) (2,049,564)
------------ ------------ ------------
Ending balance $ 3,223,511 $ 3,533,483 $ 3,072,668
============ ============ ============
The Company considers all notes receivable past due in excess of 90 days to
be delinquent. Typically, uncollectible accounts are not written off until the
underlying inventory is recovered via acceptance of a deed back or foreclosure,
the timing of which is determined by the Company. During 2002, the Company
deeded back in a bulk transaction 521 Vacation Ownership Interests of delinquent
owners. These accounts had become delinquent over a period of several years. The
Company subsequently annexed those recovered weeks to Premiere Vacation Club. At
December 31, 2002, $8.3 million in principal or $6.2 million net of the
historical costs of the underlying property that would be recovered in the event
of noncollectibility, or 16.5% and 12.4%, respectively, of the retained notes
and notes previously sold, which are recourse to the Company, were more than 90
days past due.
At December 31, 2001 and 2002, the above allowance includes $225,000 and
$266,000 respectively, for notes sold with recourse.
NOTE 3. RESORT PROPERTY HELD FOR VACATION OWNERSHIP INTEREST SALES
Resort property held for Vacation Ownership Interest sales consists of the
following:
DECEMBER 31,
---------------------------
2001 2002
------------ ------------
Premiere Vacation Club $ 13,165,636 $ 19,989,013
VCA-Tucson 1,682,189 148,795
VCA-South Bend 2,374,229 1,741,527
Golden Eagle Resort 1,233,999 848,013
Los Abrigados 385,353 307,943
Roundhouse Resort 749,255 749,255
Kohl's Ranch Lodge 323,759 25,449
The Inn at Los Abrigados 310,867 294,858
Other 45,585 45,585
------------ ------------
$ 20,270,872 $ 24,150,438
============ ============
In January 1999, the Company recorded in Maricopa County, Arizona its
proprietary Premiere Vacation Club Membership Plan and in May 1999 annexed a
total of 5,000 Vacation Ownership Interests into the Club and received
Department of Real Estate approval in the State of Arizona to commence selling
Vacation Ownership Interests in Premiere Vacation Club. During 2001 and 2002,
the Company annexed additional units and as of December 31, 2002, Premiere
Vacation Club included a total of 19,100 Vacation Ownership Interests. The
19,100 Vacation Ownership Interests annexed into the Club consisted of 3,259.5
Vacation Ownership Interests in Los Abrigados, 279.5 Vacation Ownership
Interests in the Inn at Los Abrigados, 2,823 Vacation Ownership Interests in
Kohl's Ranch Lodge, 930 Vacation Ownership Interests in the Golden Eagle Resort,
1,500 Vacation Ownership Interests in the Sea of Cortez Premiere Vacation Club
(consisting of 25-year right-to-use Vacation Ownership Interests in San Carlos,
Mexico), 1,169 Vacation Ownership Interests in VCA-South Bend, 2,831 Vacation
Ownership Interests in VCA-Tucson, 169 Vacation Ownership Interests in the
Roundhouse Resort, 1,147 Vacation Ownership Interests in the Carriage House, and
4,992 Vacation Ownership Interests in the Bell Rock Inn.
F-10
NOTE 4. NET INCOME PER SHARE
The following presents the computation of basic and diluted net income per
share:
BASIC NET INCOME PER SHARE
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 2001 2002
----------- ----------- -----------
Net income $ 1,533,238 $ 2,031,614 $ 3,083,368
Less: Series A preferred stock dividends (47,359) (47,448) (47,321)
----------- ----------- -----------
Net income available to common stockholders - basic $ 1,485,879 $ 1,984,166 $ 3,036,047
=========== =========== ===========
Weighted average shares of common stock outstanding - basic 3,692,536 3,190,014 2,934,560
=========== =========== ===========
Basic net income per share $ 0.40 $ 0.62 $ 1.03
=========== =========== ===========
DILUTED NET INCOME PER SHARE
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 2001 2002
----------- ----------- -----------
Net income $ 1,533,238 $ 2,031,614 $ 3,083,368
Less: Series A preferred stock dividends (47,359) (47,448) (47,321)
----------- ----------- -----------
Net income available to common stockholders-- diluted 1,485,879 1,984,166 3,036,047
----------- ----------- -----------
Weighted average shares of common stock outstanding 3,692,536 3,190,014 2,934,560
Add: Convertible preferred stock (Series B and Series C)
dilutive effect 82,551 79,779 61,378
Stock options dilutive effect -- 8,464 43,282
----------- ----------- -----------
Weighted average shares of common stock outstanding-- diluted 3,775,087 3,278,257 3,039,220
=========== =========== ===========
Diluted net income per share $ 0.39 $ 0.61 $ 1.00
=========== =========== ===========
Stock options to purchase 85,700 shares of common stock at prices ranging
from $4.60 per share to $8.125 per share and 13,200 shares of common stock at a
price of $8.125 per share were outstanding at December 31, 2001 and 2002,
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
price of common shares. These options expire in 2002 and 2006.
Series C Convertible Preferred Stock dividends are not required, nor were
they declared, subsequent to November 1, 1998.
NOTE 5. DEFERRED ASSETS
As part of the acquisition of Los Abrigados, certain affiliates of the
Company guaranteed the underlying mortgage on the resort. As partial
consideration for their guarantee, the affiliates earned a $780,000 fee, which
is amortized to expense as Vacation Ownership Interests are sold. At December
31, 2001 and 2002, deferred assets included $107,139 and $59,951, respectively,
of guarantee fees, net of accumulated amortization.
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
DECEMBER 31,
----------------------------
2001 2002
------------ ------------
Land $ 403,961 $ 415,665
Buildings and improvements 5,682,989 4,970,541
Leasehold improvements 304,136 1,725,651
Furniture and fixtures 1,385,341 3,542,030
Office equipment 636,156 1,208,463
Computer equipment 850,551 1,046,468
Vehicles 122,422 290,969
------------ ------------
9,385,556 13,199,787
Accumulated depreciation (3,196,474) (4,190,814)
------------ ------------
$ 6,189,082 $ 9,008,973
============ ============
F-11
NOTE 7. INCOME TAXES
Deferred income tax assets (liabilities) included in the consolidated
balance sheets consist of the following:
DECEMBER 31,
--------------------------
2001 2002
----------- -----------
Deferred Tax Assets:
Nondeductible accruals for uncollectible receivables $ 1,341,000 $ 1,146,000
Tax basis in excess of book on resort property held
for Vacation Ownership Interest sales 142,000 126,000
Net operating loss and minimum tax carryforwards 2,911,000 2,366,000
Other 173,000 417,000
----------- -----------
Total deferred tax assets 4,567,000 4,055,000
----------- -----------
Deferred Tax Liabilities:
Installment receivable gross profit deferred for tax purposes (6,295,000) (6,729,000)
Tax depreciation in excess of book (435,000) (594,000)
----------- -----------
Total deferred tax liabilities (6,730,000) (7,323,000)
----------- -----------
Net deferred tax liability $(2,163,000) $(3,268,000)
=========== ===========
The provision for income taxes consists of the following:
DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Current-federal alternative minimum tax $ -- $ 689,923 $ 950,501
Deferred 1,025,176 652,672 1,105,077
---------- ---------- ----------
Total $1,025,126 $1,342,595 $2,055,578
========== ========== ==========
A reconciliation of the income tax expense and the amount that would be
computed using statutory federal income tax rates is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
Federal, computed on income before
minority interest and income taxes $ 869,854 $1,147,231 $1,747,242
State, computed on income after minority
interest and before income taxes 97,117 128,085 191,683
Other 58,205 67,279 116,653
---------- ---------- ----------
Income tax expense $1,025,176 $1,342,595 $2,055,578
========== ========== ==========
The Company reports substantially all Vacation Ownership Interest sales
that it finances on the installment method for Federal income tax purposes.
Under the installment method, the Company does not recognize income on the
financed portion of sales of Vacation Ownership Interests, until the installment
payments on customer receivables are received by the Company or the customer
receivables are sold by the Company.
The Company is subject to Alternative Minimum Tax ("AMT") as a result of
the deferred income that results from the installment sales treatment of
Vacation Ownership Interest sales for regular tax purposes. The AMT liability
creates a deferred tax asset that can be used to offset any future tax liability
from regular Federal income tax. This deferred tax asset has an unlimited
carryover period.
At December 31, 2002, the Company, excluding its Genesis subsidiary, had
NOL carryforwards of approximately $1.3 million, which expire in 2017 through
2020. At December 31, 2002, 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
$189,178 per year. To the extent the entire $189,178 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 occur as a result of
new common stock issuances by the Company or changes occurring as a result of
filings with the Securities and Exchange Commissions on Schedule 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 net operating loss by the Company, which could result in the
Company paying substantial additional federal and state taxes.
F-12
NOTE 8. NOTES PAYABLE
Notes payable consist of the following:
DECEMBER 31,
---------------------------
2001 2002
------------ ------------
Note payable, collateralized by consumer notes receivable, interest at
prime plus 1.5% (5.75% at December 31, 2002) due through 2008 $ 17,582,161 $ 19,252,225
Note payable, collateralized by deed of trust on lender's leasehold interest
in real property, interest at 6% to 12%, due through 2011. Note is
eliminated in consolidation in 2002. 2002 balance reflects loan premium
amortized at 4.37% through 2011 (Note 11) 4,900,000 1,501,737
Note payable, collateralized by deed of trust on Bell Rock Inn, interest at
7.49%, due through 2023 4,392,127 4,310,812
Note payable, collateralized by deed of trust and assignment of rent on
Premiere Park, interest at the greater of prime plus 1.0% (5.25% at
December 31, 2002) or 7.0% due through 2007 -- 3,725,673
Construction note payable, collateralized by deed of trust on VCA-Tucson,
interest at prime plus 1.0% (5.25% at December 31, 2002) plus a
minimum principal payment of $134,000 monthly, due through 2005 4,065,596 3,457,596
Construction note payable, collateralized by deed of trust on Kohl's
Ranch Lodge, interest at prime plus 2.5% (6.75% at December 31, 2002),
due through 2006 2,173,515 4,456,323
Note payable collateralized by deed of trust, interest at the greater of prime
plus 1.5% (5.75% at December 31, 2002) or 7.0%, due through 2007 -- 1,811,439
Linesof credit aggregating $2,500,000, interest at prime plus 1.5% to prime
plus 1.75% (5.75% to 6.00% at December 31, 2002), collateralized by 10%
partnership interest in Los Abrigados Partners Limited Partnership
("LAP"), due through 2003 1,399,150 1,650,000
Note payable, collateralized by deed of trust on VCA-South Bend, interest at
10%, due through 2003 983,358 800,218
Note payable, collateralized by deed of trust on Sedona Station, interest at
8.625%, due through 2011 798,382 --
Note payable, collateralized by deed of trust on Los Abrigados, interest at
prime plus 2.5% (6.75% at December 31, 2002), due through 2008 918,842 868,807
Obligations under capital leases with interest at 8.6% to 11% (Note 17) 224,998 56,607
Note payable, collateralized by LAP partnership interest, interest at 8%,
due through 2002 467,719 --
Note payable, collateralized by consumer notes receivable, interest at prime
plus 3% (7.25% at December 31, 2002), due through 2006 370,492 --
Note payable, collateralized by cash or stock of the Company purchased
through Wedbush Morgan Securities, interest at 12%, due through 2004 714,301 510,038
Note payable, collateralized by deed of trust, interest at 8.5%,
due through 2007 358,908 336,383
Note payable, collateralized by deed of trust on 91 Portal Lane, interest at
7.29%, due through 2007 -- 333,281
Note payable, collateralized by an assignment of the Company's general
partnership interest in LAP, interest at 10%, due through 2003 200,000 100,000
Note payable by Employee Stock Ownership Plan and guaranteed by the Company,
collateralized by Company stock purchased by the Plan,
interest at 6.0% , due through 2003 -- 181,500
Note payable, collateralized by deed of trust, interest at 8.5%, due
through 2003 211,565 --
Note payable, collateralized by deed of trust on manager residence at Kohl's
Ranch, interest at 7.75%, due through 2007 92,000 89,014
Note payable, collateralized by LAP partnership interest, interest at prime plus
1.5% (5.75% at December 31, 2002), due through 2002 100,000 --
Notes payable, collateralized by furniture, fixtures and equipment, interest
at 4% to 9%, due through 2006 626,264 1,244,023
Other 39,925 43,337
------------ ------------
$ 40,619,303 $ 44,729,013
============ ============
F-13
At December 31, 2002, approximately $23.7 million of the Company's notes
payable have scheduled payment terms that may be accelerated based on
established release prices related to future Vacation Ownership Interest sales
or are dependent on the amount of mortgage notes receivable pledged as
collateral. The maturities of these notes are included below based on their
scheduled repayment terms and maturities. Future contractual maturities of notes
payable and capitalized leases at December 31, 2002 are as follows:
2003 $ 7,208,648
2004 8,070,937
2005 6,535,244
2006 5,374,101
2007 8,214,635
Thereafter 9,325,448
------------
$ 44,729,013
============
NOTE 9. NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates consist of the following:
DECEMBER 31,
-----------------------
2001 2002
---------- ----------
Note payable, collateralized by LAP partnership
interest, interest at 10%, due through 2003 $ 700,000 $ --
Notes payable, collateralized by LAP partnership
interest, interest at 8%, due through 2002 300,000 --
---------- ----------
$1,000,000 $ --
========== ==========
Total interest expense on notes payable to affiliates for the years ended
December 31, 2000, 2001 and 2002 was approximately $107,000, $95,000 and
$20,000, respectively. Interest payable to affiliates at December 31, 2001 and
2002 was approximately $24,000 and $0, respectively. The note payable to
affiliates of $700,000 was fully repaid in 2002 as part of the sale of the
Sedona Station (Note 16).
NOTE 10. MINORITY INTERESTS
In June 1998, the Company acquired a 51% interest and in June 2000 the
remaining 49% minority interest in Timeshare Resale Brokers, Inc. ("TRBI"), an
Arizona company engaged in the resale of Vacation Ownership Interests on behalf
of consumers and others, for which it earns a commission upon sale. The
operation is based in Sedona, Arizona. To date the operations of TRBI have not
been material to the Company.
NOTE 11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Operating leases are used to lease office space, equipment and vehicles.
Future minimum lease payments on noncancelable operating leases at December 31,
2002 are as follows:
2003 $ 1,718,000
2004 1,500,000
2005 1,402,000
2006 1,131,000
2007 1,068,000
Thereafter 11,924,000
------------
$ 18,743,000
============
Total rent expense for the years ended December 31, 2000, 2001 and 2002 was
approximately $897,000, $1,516,000 and $2,208,000 respectively.
F-14
LEGAL PROCEEDINGS
Litigation has arisen in the normal course of the Company's business, none
of which is deemed to be material.
OTHER
In December 1999, the Company completed the spin-off of its 80% ownership
interest in SWI 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. During 2000, the Company advanced the full $200,000
at an interest rate of prime plus 3%, and at December 31, 2001 the balance of
the note receivable was $108,000. On January 2, 2002 the Company entered into a
Bill of Sale Assignment and Assumption agreement with SWI whereby the Company
assumed all of the assets and liabilities of SWI, in full satisfaction of the
note and recognized a net loss of $48,887. The purchase is not deemed material.
In December 1999, the Company guaranteed a $1,000,000 operating line of
credit for Sedona Vacation Club, the proceeds of which were used for renovations
at Los Abrigados. Sedona Vacation Club repaid the interest and principal on the
loan from proceeds from a special assessment of its owners and from their
reserve payments. The line of credit bore interest at prime plus 2.5%. At
December 31, 2002, approximately $72,000 remained outstanding on the line which
was fully repaid in January 2003.
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 $73,263 during the twelve months ended December 31, 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 (Note 8).
In September 2000, the Company entered into an agreement to lease an
existing motel in Sedona, Arizona, commencing October 1, 2000 and terminating on
December 31, 2021. The lease contains a provision in which the lease term may be
automatically extended for consecutive one-year periods after December 31, 2021
up to December 31, 2038 if the lease has not been terminated prior to December
31, 2021. The lessor was required to remodel and refurbish the existing project,
previously known as the Canyon Portal Motel, as well as construct additional
units at the complex. The Company has renamed the property the "Los Abrigados
Lodge." The renovations and construction were completed in 2001, and the
property is being used for hotel accommodations, including accommodations for
customers invited to attend a vacation ownership presentation at the Sedona
sales office. Lease payments for the Los Abrigados Lodge in the amount of
$779,348 per year through 2021 are included in the above table of future minimum
lease payments on noncancelable operating leases.
In October 2001, the Company adopted a stock compensation program for
certain of its employees, primarily those earning $50,000 or more per year.
Under the program, employees received in the first quarter of 2002 a portion of
compensation they would otherwise have earned in cash during the fourth quarter
of 2001 in shares of stock of the Company, at a prescribed formula. This program
was extended to the first quarter of 2002, with shares issuable in the second
quarter of 2002. The total number of shares issued to employees under the
program in January 2002 was 31,742 shares valued at $6.90 per share. The total
number of shares issued to employees under the program in April 2002 was 27,003
shares valued at $6.80 per share.
In May 2002, the Company registered with the Arizona Department of Real
Estate and annexed to Premiere Vacation Club 96 studio Vacation Ownership
Interests in the Bell Rock Inn to Premiere Vacation Club. This property was
acquired through the assumption of an existing mortgage which does not provide
for release provisions. In order to facilitate the registration, the Company
secured a guaranty commitment from one of its lenders, opened an escrow account
and makes monthly release payments. The balance of this escrow account of
$460,747 is included in other assets.
The Company's Genesis subsidiary has a potential obligation for future
payment to holders of fund certificates, which arose from the reorganization of
Genesis. The holders of the certificates are entitled to receive 50% of the
proceeds net of costs from the sale of certain Genesis properties. A liability
has been recorded for the possible future payment based on estimated net
realizable values of the properties. These potential obligations as well as
amounts due fund certificate holders for sales of properties are included in
accrued liabilities.
F-15
NOTE 12. SHAREHOLDERS' EQUITY
PREFERRED STOCK
At December 31, 2001 and 2002, preferred stock includes 59,311 and 59,151
shares of the Company's Series A Preferred Stock carried at $593,110 and
$591,510, respectively. The Series A Preferred Stock has a par value and
liquidation preference of $10 per share and, commencing July 1, 1996, is
entitled to annual dividend payments of $.80 per share. Dividends were paid of
$47,359, $47,448 and $47,321 in 2000, 2001 and 2002, respectively. Commencing
January 1, 1993, on a quarterly basis, the Company must contribute $100 per
Vacation Ownership Interest sold in Los Abrigados to a mandatory dividend
sinking fund. At December 31, 2002, notes receivable in the amount of
approximately $195,000 have been designated for the sinking fund. Dividends on
the Company's common stock are subordinated to the Series A dividends and to the
contributions required by the sinking fund.
At December 31, 2001 and 2002, preferred stock also includes 55,000 and 0
shares of the Company's Series B Convertible Preferred Stock carried at $55,000
and $0. The Series B Convertible Preferred Stock had a $10 par value and a
liquidation preference of $10 per share, which was subordinate to the Series A
liquidation preference. The Series B Convertible Preferred Stock was not
entitled to dividends. Commencing July 1, 1996, the Series B Convertible
Preferred Stock was convertible into common stock on the basis of two shares of
common for five shares of preferred stock.
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 Company also settled the liquidation preference for $204,649
which has been recorded as a reduction to additional paid in capital.
The Series A preferred stock may, at the holder's election, be exchanged
for Los Abrigados Vacation Ownership Interests at the rate of 1,000 shares of
stock plus $2,100 cash per Vacation Ownership Interest. During 2002, Series A
shares could also have been exchanged for lodging certificates under certain
conditions, and 160 shares were exchanged under this program during the year.
At December 31, 2001 and 2002, preferred stock also includes 170,505 and
118,440 shares of the Company's Series C Convertible Preferred Stock carried at
$468,915 and $325,216. The Series C Convertible Preferred Stock has a $10 par
value and is entitled to dividends at the rate of $.60 per share per annum when
declared by the Board of Directors. If dividends were not declared in any year
prior to the fifth anniversary of the Genesis merger date (November 1, 1993),
such undeclared dividends ("Dividend Arrearage") could have been converted to
"Cumulation Shares" at the rate of $6 of Dividend Arrearage per Cumulation
Share. The Series C Preferred Stock and the Cumulation Shares have a liquidation
preference of $10 per share and $6 per share, respectively, and are subordinate
to the liquidation preference of the Series A stock. Commencing November 1, 1994
through October 31, 2004, the Series C Preferred Stock may be converted to ILX
common stock on the basis of one share of common stock for three shares of
Series C Preferred Stock and one share of ILX common stock for each $30 in
Dividend Arrearages. For the years ended December 31, 2000, 2001 and 2002, the
Company recorded the exchange of 14,298, 6,330 and 52,065 Series C Convertible
shares for 4,766, 2,110 and 17,355 common shares, respectively. ILX may redeem
the Series C Preferred Stock commencing November 1, 1996, at $10 per share plus
payment of all declared but unpaid dividends.
COMMON STOCK
For the years ended December 31, 2000, 2001 and 2002, the Company issued
71,600, 4,100 and 8,400 shares of restricted common stock, valued at $64,066,
$4,210 and $32,918, respectively, to employees in exchange for services
provided. In addition, in 2002 the Company issued 65,930 shares of common stock
valued at $460,141 to employees and a professional service provider in exchange
for services provided.
During 2000, 2001 and 2002, the Company purchased 657,500, 543,200 and
214,095 shares of its Common Stock for $1,308,655, $2,379,428 and $1,580,194.
In December 2002, the Company announced an annual cash dividend of $0.40
per common share to be paid in equal quarterly installments, payable on the
tenth business day of the calendar month following the end of each calendar
quarter, to common shareholders of record as of the last day of each calendar
quarter in 2003.
F-16
NOTE 13. EMPLOYEE STOCK OWNERSHIP PLAN
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 all eligible employees
which aligns their interests with those of the Company. Generally, all employees
who have completed one year of service, have attained the age of 21 and complete
1,000 hours of service during the plan year are eligible to participate in the
ESOP.
In August 1999, the ESOP entered into an agreement with Litchfield
Financial Corporation for a $500,000 line of credit, which was secured by stock
purchased with the funds and guaranteed by the Company. The ESOP borrowed the
full $500,000 in 1999. In 2000 and 2001, the Company paid interest on the line
of credit of $34,029 and $13,979, respectively. The line of credit was fully
repaid in 2001.
During the years ended December 31, 2000 and 2001, the Company contributed
$250,000 each year to the ESOP and such funds were used by the ESOP to repay the
line of credit. In accordance with SOP 93-6, Employer's Accounting for Employee
Stock Option Plan, the difference of $40,862 each year between the fair market
value of the leveraged shares at the time of the debt repayment in 2000 and 2001
and their actual cost when the shares were purchased in 1999, was charged to
Paid in Capital. During the year ended December 31, 2000, the Company also
issued to the ESOP 100,000 shares of restricted common stock valued at $146,094.
During the year ended December 31, 2001, the Company issued to the ESOP 20,000
shares of restricted common stock valued at $41,905. During the year ended
December 31, 2002, the Company contributed $400,000 to the ESOP and the funds
were used to exercise options for 100,000 shares of common stock.
During the years ended December 31, 1999 and 2000, the ESOP purchased a
total of 375,300 shares of the Company's common stock in the open market.
Inclusive of the 22,000 shares of common stock obtained in the transaction with
the Series B shareholders (Note 12), at December 31, 2002, the ESOP held 613,802
shares and $5,460 in cash. The 22,000 shares, valued at $173,800 as of December
31, 2002, were purchased with borrowed funds and at December 31, 2002 had not
been released to participant accounts. These unallocated shares are collateral
for the outstanding indebtedness on the note payable. At December 31, 2002, the
unallocated shares were reflected at cost as a contra equity account, Guaranteed
ESOP Obligation.
NOTE 14. EMPLOYEE STOCK OPTION PLANS
The Company has Stock Option Plans pursuant to which options (which term as
used herein includes both incentive stock options and non-statutory stock
options) may be granted to key employees, including officers, whether or not
they are directors, and non-employee directors and consultants, who are
determined by the Board of Directors to have contributed in the past, or who may
be expected to contribute materially in the future, to the success of the
Company. The exercise price of the options granted pursuant to the Plans shall
be not less than the fair market value of the shares on the date of grant. All
outstanding stock options require the holder to have been a director or employee
of the Company for at least one year before exercising the option. Options are
exercisable over a five-year period from date of grant if the optionee was a
ten-percent or more shareholder immediately prior to the granting of the option
and over a ten-year period if the optionee was not a ten-percent shareholder.
The aggregate number of shares that may be issued under the Plans shall not
exceed 100,000 shares. The number of shares available for grant under the Plans
at December 31, 2001 and December 31, 2002 was 9,300 and 66,800, respectively.
Stock option transactions are summarized as follows:
Exercise Price Weighted Average
Options Range Exercise Price
--------- -------------- ----------------
Outstanding at December 31, 1999 145,700 $3.25-8.125 5.00
Options granted 100,000 4.00 4.00
Options canceled (110,000) 6.25-6.75 6.70
---------
Outstanding at December 31, 2000 135,700 3.25-8.125 4.91
Options issued 55,000 4.60-6.82 6.21
Options canceled -- -- --
---------
Outstanding at December 31, 2001 190,700 3.25-8.125 5.28
Options granted -- -- --
Options exercised (100,000) 4.00 4.00
Options canceled (57,500) 6.82-8.125 7.22
---------
Outstanding at December 31, 2002 33,200 $3.25-8.125 5.80
=========
Exercisable at December 31, 2002 33,200 $3.25-8.125 5.80
=========
Weighted-average fair value of
options granted during year
ended December 31, 2001 2.96
=========
Weighted-average fair value of
options granted during year
ended December 31, 2002 --
=========
F-17
The exercise price for options outstanding at December 31, 2002 ranged from
$3.25 to $8.125 per share. Options outstanding at December 31, 2002 have
expiration dates as follows:
YEAR ENDING OPTIONS FOR
DECEMBER 31, SHARES
------------ -----------
2004 18,200
2006 15,000
--------
33,200
========
The weighted average remaining contractual life for options outstanding as
of December 31, 2001 and 2002 was 1.86 years and 2.47 years respectively.
NOTE 15. PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan in which
substantially all employees are eligible to participate. The Company contributes
a discretionary amount to the plan as determined by the Board of Directors. The
Company declared contributions of $50,000 for each of the years ended December
31, 2000, 2001 and 2002. The contributions consisted of $50,000 cash for 2000
and 2002, and cash of $41,342 and 1,300 shares of common stock valued at $8,658
for 2001.
NOTE 16. RELATED PARTY TRANSACTIONS
In addition to the related party transactions described elsewhere in the
financial statements, the Company had the following related party transactions:
In December 1995, the Company sold the building that houses its Phoenix
telemarketing operations, the Sedona Spa warehouse and administrative offices
and certain other ILX administrative offices, to an affiliate for $500,000. The
Company leases the building for $48,000 per year. At December 31, 2002, three
one-year options to renew at the rate of $48,000 per year remain on the existing
lease.
In March 2002, the Company completed a transaction with Edward John Martori
(EJM). EJM had been a creditor of the company and was 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 a 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 $123,751 in rent expense for the twelve months ended December 31,
2002.
In August 2002, the Company invested $1,000,000 in cash for 8,000,000
shares or an approximately 36.4% ownership interest in GWWI. GWWI plans to
develop 23-acres of the Company's 44-acre parcel in Las Vegas, Nevada. The
facility will include a sports themed restaurant and bar, pro-shop, and six
18-hole natural grass putting courses. Four of the putting courses will be
developed using 24 full-sized championship putting greens, each inspired by
famous greens known around the world. The investment in GWWI is included in
other assets and the Company is accounting for its interest in GWWI on the
equity method. Total assets and liabilities at December 31, 2002 and net loss
for the year ended December 31, 2002 for GWWI were $1,408,594, $99,600 and
$344,859, respectively.
NOTE 17. CAPITAL LEASES
Leased assets included in resort property held for Vacation Ownership
Interest sales and property and equipment totaled $693,015 and $693,015 (net of
accumulated amortization of $468,017 and $636,408) at December 31, 2001 and
F-18
2002, respectively. The leases expire through 2004. Future minimum lease
payments at December 31, 2002 are as follows:
2003 $ 40,539
2004 20,591
--------
Total 61,130
Less: Amounts representing interest (4,523)
--------
Net minimum lease payments $ 56,607
========
NOTE 18. CONCENTRATIONS OF RISK
CREDIT RISK
The Company is exposed to on-balance sheet credit risk related to its notes
receivable. The Company is exposed to off-balance sheet credit risk related to
loans sold under recourse provisions.
The Company offers financing to the buyers of Vacation Ownership Interests
at the Company's resorts. These buyers make a down payment of at least 10% of
the purchase price and deliver a promissory note to the Company for the balance;
the promissory notes generally bear interest at a fixed rate, are payable over a
seven-year period and are collateralized by a first mortgage on the Vacation
Ownership Interest. The Company bears the risk of defaults on these promissory
notes. The Company performs credit evaluations prior to Vacation Ownership
Interest sales and the Vacation Ownership Interest deed of trust serves as
collateral on the note receivable. If a buyer of a Vacation Ownership Interest
defaults, the Company generally recovers the Vacation Ownership Interest by
receiving a deed back from the owner or through foreclosure. The Company may
resell the Vacation Ownership Interest; however, marketing, selling and
administrative costs from the original sale are not recovered; and such costs
must be incurred again to resell the Vacation Ownership Interest.
INTEREST RATE RISK
Because the Company's indebtedness bears interest at variable rates and the
Company's customer receivables bear interest at fixed rates, increases in
interest rates could cause the rate on the Company's borrowings to exceed the
rate at which the Company provides financing to its customers. The Company does
not engage in interest rate hedging transactions. Therefore, any increase in
interest rates, particularly if sustained, could have a material adverse effect
on the Company's results of operations, cash flows and financial position.
AVAILABILITY OF FUNDING SOURCES
The Company funds substantially all of the notes receivable, resort
property held for Vacation Ownership Interest sales and land inventory which it
originates or purchases with sales of consumer notes, borrowings through its
financing facilities and internally generated funds. Borrowings are in turn
repaid with the proceeds received by the Company from sales of notes receivable
or from repayments by consumers of such notes receivable. To the extent that the
Company is not successful in maintaining or replacing existing financings, it
would have to curtail its operations or sell assets, thereby having a material
adverse effect on the Company's results of operations, cash flows and financial
condition.
GEOGRAPHIC CONCENTRATION
The Company's notes receivable have been primarily originated in Arizona.
The risk inherent in such concentrations is dependent upon regional and general
economic stability that affects property values and the financial stability of
the borrowers. The Company's resort property held for Vacation Ownership
Interest sales is also concentrated in Arizona. The risk inherent in such
concentration is in the continued popularity of the resort destinations, which
affects the marketability of the Company's products and the collection of notes
receivable. The opening of a sales office in Las Vegas in 2002 reduces the
amount of concentration of notes originated in Arizona.
NOTE 19. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates their fair value because of the short maturity of these
instruments.
F-19
NOTES RECEIVABLE
The carrying amount reported in the balance sheet for notes receivable
approximates its fair value because the interest rates on the portfolio of notes
receivable approximate current interest rates to be received on similar current
notes receivable.
NOTES PAYABLE
The carrying amount reported in the balance sheet for notes payable
approximates its fair value because the interest rates on these instruments
approximate current interest rates charged on similar current borrowings.
NOTES PAYABLE TO AFFILIATES
The fair value of the notes payable to affiliates is not determinable since
these financial instruments are not readily marketable and are payable to
affiliates.
NOTE 20. SUBSEQUENT EVENT
On March 4, 2003, the Company filed a registration statement with the
Securities and Exchange Commission to register 300,000 shares of common stock
that may be issued under a dividend reinvestment plan adopted by the Company's
Board of Directors.
NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is presented in the following summary.
2000
------------------------------------------------------
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
Revenues $10,011,021 $11,007,427 $10,819,149 $11,216,246
Operating income 1,179,376 1,765,813 1,310,833 1,065,330
Net income 265,096 633,562 385,849 260,731
Net income per share - basic .06 .17 .10 .07
Net income per share - diluted .06 .16 .10 .07
2001
------------------------------------------------------
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
Revenues $11,258,970 13,157,219 $12,299,426 11,592,906
Operating income 1,384,871 1,893,886 1,479,797 1,200,685
Net income 381,509 763,495 518,583 368,027
Net income per share - basic .11 .23 .16 .12
Net income per share - diluted .11 .22 .16 .12
2002
------------------------------------------------------
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------- ----------- ------------ -----------
Revenues $11,839,290 $16,061,028 $15,205,083 $15,488,067
Operating income 1,731,966 2,521,752 1,654,109 1,422,753
Net income 747,458 1,224,101 633,903 477,906
Net income per share - basic .25 .41 .21 .16
Net income per share - diluted .24 .40 .20 .16
NOTE 22. SIGNIFICANT FOURTH QUARTER ADJUSTMENT
There were no material fourth quarter adjustments or accounting changes.
F-20
EXHIBIT INDEX
EXHIBIT PAGE NUMBERS OR
NUMBERS DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
1 Form of Underwriting Agreement Incorporated by reference to
Registration Statement on Form
S-1 No. 333-45403
3(i).1 Articles of Incorporation of International Leisure Enterprises Incorporated Incorporated by reference to
(filed October 8, 1986) Registration Statement on Form
S-1 No. 33-16122
3(i).2 Articles of Amendment to the Articles of Incorporation of International Incorporated by reference to
Leisure Enterprises Incorporated (filed August 31, 1987) 1990 10-K
3(i).3 Articles of Amendment to the Articles of Incorporation of International Incorporated by reference to
Leisure Enterprises Incorporated (filed October 19, 1987) 1994 10-K/A-3
3(i).4 Articles of Amendment to the Articles of Incorporation of International Incorporated by reference to
Leisure Enterprises Incorporated (filed May 3, 1990) 1994 10-K/A-3
3(i).5 Articles of Amendment to the Articles of Incorporation of International Incorporated by reference to
Leisure Enterprises Incorporated (Name changed by this Amendment to 1993 10-K
ILX Incorporated), (filed June 28, 1993)
3(i).6 Certificate of Amendment to Articles of Incorporation, filed January 12, Incorporated by reference to
1998 Registration Statement on Form
S-1 No. 333-45403
3(i).7 Articles of Correction, filed January 12, 1998, to correct Certificate of Incorporated by reference to
Amendment to Articles of Incorporation, dated January 12, 1998 Registration Statement on Form
S-1 No. 333-45403
3(i).8 Certificate of Designation, Preferences, Rights, and Limitations Incorporated by reference to
of Series A Preferred Stock, $10.00 par value of International 1991 10-K
Leisure Enterprises Incorporated, filed September 5, 1991
3(i).9 Certificate of Designation, Preferences, Rights, and Limitations of Incorporated by reference to
Series B Preferred Stock, $10.00 par value of International Leisure 1991 10-K
Enterprises Incorporated, filed September 5, 1991
3(ii).10 Certificate of Designation of Series C Preferred Stock, Incorporated by reference to
filed April 30, 1993 1993 10-K
3.(ii) Amended and Restated Bylaws of International Leisure Incorporated by reference to
Enterprises Incorporated, dated October 26, 1987 1990 10-K
4 Form of Common Stock Certificate Incorporated by reference to
Form 8-A, filed February 4,
1998
10.1 1992 Stock Option Plan Incorporated by reference to
1992 10-K
10.2 1995 Stock Option Plan Incorporated by reference to
1995 10-K
EXHIBIT PAGE NUMBERS OR
NUMBERS DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
10.3 Agreement and Plan of Merger among ILE Acquisition Corporation, Incorporated by reference to
International Leisure Enterprises Incorporated and Genesis Investment 1992 10-K
Group, Inc., dated March 15, 1993
10.4 First Amendment to Agreement and Plan of Merger between ILE Incorporated by reference to
Acquisition Corporation, International Leisure Enterprises Incorporated 1993 10-K
and Genesis Investment Group, Inc., dated April 22, 1993
10.5 Lease Agreement between Edward John Martori and Red Rock Collection Incorporated by reference to
Incorporated, dated December 29, 1995 1995 10-K
10.6 Lease Agreement between Edward John Martori and ILX Resorts Incorporated by reference to
Incorporated dated January 1, 2000 1999 10-K
10.7 First Amended Certificate of Limited Partnership and Amended Agreement Incorporated by reference to
of Los Abrigados Partners Limited Partnership, dated September 9, 1991 1991 10-K
10.8 Certificate of Amendment of Limited Partnership for Los Abrigados Incorporated by reference to
Partners Limited Partnership, dated November 11, 1993 1994 10-K/A-3
10.9 First Amendment to Amended Agreement of Los Abrigados Partners Incorporated by reference to
Limited Partnership, dated February 9, 1996 1995 10-K
10.10 Installment Promissory Note ($1,300,000) by ILX Incorporated to Martori Incorporated by reference to
Enterprises Inc., dated August 8, 1997 Form 8-K, filed August 22, 1997
10.11 Security Agreement between ILX Incorporated and Martori Enterprises Incorporated by reference to
Inc., dated August 8, 1997 Form 8-K, filed August 22, 1997
10.12 Amended and Restated Promissory Note ($909,078) by ILX Incorporated Incorporated by reference to
to Edward J. Martori, dated January 1, 1996 Registration Statement on Form
S-1 No. 333-45403
10.13 Agreement to Modify Amended and Restated Promissory Note ($909,078) Incorporated by reference to
by ILX Resorts Incorporated to Edward J. Martori dated January 1, 1996 9/30/99 10Q
and the sale by Martori Enterprises Incorporated to ILX Resorts
Incorporated and/or its nominee of certain vacation ownership interests in
ILX Premiere Vacation Club and VCA South Bend Incorporated
10.14 Agreement for Transfer of Limited Partnership Interest by ILX Incorporated by reference to
Incorporated and Alan R. Mishkin, dated August 29, 1997 Form 8-K, filed August 22, 1997
10.15 Installment Promissory Note ($675,000) by ILX Incorporated to Alan R. Incorporated by reference to
Mishkin dated September 24, 1997 Form 8-K, filed August 22, 1997
10.16 Security (Pledge) Agreement between ILX Incorporated and Alan R. Incorporated by reference to
Mishkin, dated September 24, 1997 Form 8-K, filed August 22, 1997
Form of Employment Agreement among ILX Resorts Incorporated and Incorporated by reference to
10.17 each of Joseph Martori, Nancy Stone and Edward Zielinski Registration Statement on Form
S-1 No. 333-45403
10.18 Secured Line of Credit Lending Agreement between Litchfield Financial Incorporated by reference to
Corporation and ILX Resorts Incorporated, Los Abrigados Partners 6/30/98 10Q
Limited Partnership and Premiere Development Incorporated dated as of
June 12, 1998
EXHIBIT PAGE NUMBERS OR
NUMBERS DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
10.19 Secured Line of Credit Promissory Note between Litchfield Financial Incorporated by reference to
Corporation and ILX Resorts Incorporated, Los Abrigados Partners 6/30/98 10Q
Limited Partnership and Premiere Development Incorporated dated as of
June 12, 1998
10.20 Business Agreement among ILX Resorts Incorporated, Premiere Vacation Incorporated by reference to
Club and Premiere Development Incorporated and Treasures of the Sea of 6/30/98 10Q
Cortez, Promotura de Inversion Turistica, Immobiliaria y Hotelera Los
Algodones and Immobiliaria Cerro Pelon dated as of June 8, 1998
10.21 Amended and Restated Secured Line of Credit Lending Agreement Incorporated by reference to
between ILX Resorts Incorporated, Los Abrigados Partners Limited 9/30/98 10Q
Partnership, ILE Sedona Incorporated, VCA Tucson Incorporated, VCA
South Bend Incorporated, Premiere Development Incorporated and
Litchfield Financial Corporation dated as of September 17, 1998
10.22 Agreement for Sale and Transfer of Promissory Note between ILX Resorts Incorporated by reference to
Incorporated and Martori Enterprises Incorporated dated as of September 9/30/98 10Q
29, 1998
10.23 Contract of Sale of Timeshare Receivables with Recourse between Resort Incorporated by reference to
Funding, Inc. and Premiere Development Incorporated dated as of March 1998 10K
19, 1999
10.24 Guaranty Agreement between ILX Resorts Incorporated and Resort Incorporated by reference to
Funding, Inc. dated as of March 19, 1999 1998 10K
10.25 Rider to Contract between Resort Funding, Inc. and Premiere Development Incorporated by reference to
Incorporated dated March 24, 1999 to supplement the Contract of Sale of 1998 10K
Timeshare Receivables with Recourse dated as of March 19, 1999
10.26 Credit Agreement between Patrick J. McGroder, III, Nancy J. Stone, and Incorporated by reference to
James W. Myers, Trustees for the ILX Resorts Incorporated Employee 9/30/99 10Q
Stock Ownership Plan and Trust and Litchfield Financial Corporation dated
as of August 12, 1999
10.27 Sedona Worldwide Incorporated Form 10-SB Incorporated by reference to
SWI's Form 10-SB on Form
10SB12G No. 000-25025, filed
November 4, 1998
10.28 Sedona Worldwide Incorporated Amendment No. 1 to Form 10-SB Incorporated by reference to
SWI's Amendment No. 1 to
Form 10-SB on Form 1012G/A
No. 000-25025, filed July 2,
1999
10.29 Sedona Worldwide Incorporated Amendment No. 2 to Form 10-SB Incorporated by reference to
SWI's Amendment No. 2 to
Form 10-SB on Form
10SB12G/A No. 000-25025,
filed November 12, 1999
EXHIBIT PAGE NUMBERS OR
NUMBERS DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
10.30 Sedona Worldwide Incorporated Amendment No. 3 to Form 10-SB Incorporated by reference to
SWI's Amendment No. 3 to
Form 10-SB on Form 1012G/A
No. 000-25025, filed
December 8, 1999
10.31 Letter agreement, dated as of October 28, 1999, among ILX Resorts Incorporated by reference to
Incorporated and Sedona Worldwide Incorporated 1999 10K
10.32 Modification Agreement between ILX Resorts Incorporated and Sedona Filed herewith
Worldwide Incorporated, dated January 1, 2001
10.33 Schedule 14C Definitive Information Statement pursuant to Section 14(c) Incorporated by reference to
of the Securities Exchange Act of 1934 for Sedona Worldwide Schedule 14C on Form No. DEF
Incorporated 14C No. 001-13855, filed
January 3, 2000
10.34 Promissory Note ($600,000) by ILX Resorts Incorporated to The Steele Incorporated by reference to
Foundation, Inc. dated February 23, 2000 1999 10K
10.35 Installment Promissory Note ($500,000) by ILX Resorts Incorporated to Incorporated by reference to
Martori Enterprises Incorporated dated August 1, 1999 1999 10K
10.36 Purchase and Sale Agreement between ILX Resorts Incorporated and Las Incorporated by reference to
Vegas Golf Center, LLC, dated August 16, 2000 9/30/2000 10Q
10.37 First Amendment in Total between the County of Clark, a political Incorporated by reference to
subdivision of the State of Nevada, and ILX Resorts Incorporated, dated 9/30/2000 10K
November 15, 2000
10.38 Assignment and Assumption of Lease between ILX Resorts Incorporated Incorporated by reference to
and VCA Nevada Incorporated, dated January 12, 2001 9/30/2000 10K
10.39 First Amendment to Purchase and Sale Agreement between ILX Resorts Incorporated by reference to
Incorporated and Las Vegas Golf Center, LLC, dated February 15, 2001 9/30/2000 10K
10.40 Purchase and Sale Agreement between ILX Resorts Incorporated and John Incorporated by reference to
L. Fox, M.D., dated October 23, 2000 9/30/2001 10Q
10.41 Secured Promissory Note ($4,900,000) by VCA Nevada Incorporated to Incorporated by reference to
Las Vegas Golf Center, L.L.C., dated July 31, 2001 9/30/2001 10Q
10.42 First Modification Agreement dated September 13, 2001 between ILX Incorporated by reference to
Resorts Incorporated and The Steele Foundation, Inc. 9/30/2001 10Q
10.43 Amendment to Loan Documents between ILX Resorts Incorporated, Los Incorporated by reference to
Abrigados Partners Limited Partnership and Premiere Development 2001 10K
Incorporated dated October 31, 2001
10.44 General Bill of Sale, Assignment and Assumption Agreement between ILX Incorporated by reference to
Resorts Incorporated and Sedona Worldwide Incorporated dated January 2, 2001 10K
2002
10.45 Purchase and Sale Agreement between ILX Resorts Incorporated and Incorporated by reference to
Edward John Martori, dated March 25, 2002 3/31/2002 10Q
EXHIBIT PAGE NUMBERS OR
NUMBERS DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
10.46 Sedona Station Lease between ILX Resorts Incorporated and Edward John Incorporated by reference to
Martori, dated March 25, 2002 3/31/2002 10Q
10.47 Loan Purchase and Sale Agreement between ILX Resorts Incorporated and Incorporated by reference to
Las Vegas Golf Center, L.L.C. dated June 23, 2002 6/30/2002 10Q
10.48 Allonge dated June 23, 2002 executed on behalf of Las Vegas Golf Center, Incorporated by reference to
L.L.C., to the order of ILX Resorts Incorporated 6/30/2002 10Q
21 List of Subsidiaries of ILX Resorts Incorporated Filed herewith
23.01 Consent of Hansen, Barnett & Maxwell Independent Certified Public Filed Herewith
Accountants
99.1 Certification pursuant to 18 U.S.C.ss.1350 as adopted pursuant to Section Filed herewith
906 of the Sarbanes-Oxley Act of 2002