SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended March 31, 2003 Commission File Number 001-13855
ILX RESORTS INCORPORATED
(Exact name of registrant as specified in its charter)
ARIZONA 86-0564171
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2111 East Highland Avenue, Suite 210, Phoenix, Arizona 85016
(Address of principal executive offices)
Registrant's telephone number, including area code 602-957-2777
Former name, former address, and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at March 31, 2003
- ------------------------------- -----------------------------
Common Stock, without par value 2,918,945 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2002 2003
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 2,399,175 $ 2,477,907
Notes receivable, net 34,019,271 35,340,326
Resort property held for Vacation Ownership Interest sales 24,150,438 23,131,590
Resort property under development 263,127 284,536
Land held for sale 811,590 811,590
Deferred assets 84,606 69,207
Property and equipment, net 9,008,973 9,456,493
Other assets 9,683,608 10,583,142
------------ ------------
TOTAL ASSETS $ 80,420,788 $ 82,154,791
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,760,570 $ 1,295,461
Accrued and other liabilities 2,737,844 5,194,033
Income taxes payable 178,071 --
Notes payable 44,729,013 44,282,980
Deferred income taxes 3,268,284 3,579,206
------------ ------------
Total liabilities 52,673,782 54,351,680
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000 shares authorized;
177,591 and 176,145 shares issued and outstanding;
liquidation preference of $1,775,910 and $1,761,450 916,726 912,735
Common stock, no par value; 30,000,000 shares authorized;
4,346,387 and 4,360,107 shares issued 19,497,334 19,589,191
Treasury stock, at cost, 1,414,795 and 1,441,162 shares,
respectively (5,268,277) (5,487,064)
Additional paid in capital 66,050 63,960
Guaranteed ESOP obligation (181,500) (136,125)
Retained earnings 12,716,673 12,860,414
------------ ------------
Total shareholders' equity 27,747,006 27,803,111
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 80,420,788 $ 82,154,791
============ ============
See notes to condensed consolidated financial statements
2
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31,
----------------------------
2002 2003
------------ ------------
REVENUES:
Sales of Vacation Ownership Interests $ 7,184,845 $ 9,478,189
Resort operating revenue 3,629,716 3,971,511
Interest income 1,024,729 1,304,334
------------ ------------
Total revenues 11,839,290 14,754,034
------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership Interests sold 1,048,061 1,272,384
Cost of resort operations 3,365,370 3,705,744
Sales and marketing 4,583,989 6,473,696
General and administrative 1,098,677 1,405,454
Provision for doubtful accounts 314,763 414,013
Depreciation and amortization 222,837 416,108
------------ ------------
Total cost of sales and operating expenses 10,633,697 13,687,399
------------ ------------
Operating income 1,205,593 1,066,635
Income from land and other, net (Related Party) 526,373 311,568
------------ ------------
Total operating income 1,731,966 1,378,203
Interest expense (486,201) (525,787)
Equity in loss of related party investment -- (48,952)
------------ ------------
Income before income taxes 1,245,765 803,464
Income tax expense (498,307) (318,509)
------------ ------------
NET INCOME $ 747,458 $ 484,955
============ ============
NET INCOME PER SHARE
Basic $ 0.25 $ 0.16
============ ============
Diluted $ 0.24 $ 0.16
============ ============
DIVIDENDS PER SHARE $ -- $ 0.10
============ ============
See notes to condensed consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
2002 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 747,458 $ 484,955
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of property and equipment (585,441) --
Undistributed losses of equity investment in a related party -- 48,952
Loss on assumption of Sedona Worldwide Incorporated assets and
liabilities 48,887 --
Income tax expense 498,307 318,509
Provision for doubtful accounts 314,763 414,013
Depreciation and amortization 222,837 416,108
Amortization of guarantee fees 9,932 15,399
Common stock issued to employees for services 220,077 15,546
Change in assets and liabilities:
Decrease in resort property held for Vacation Ownership
Interest sales 594,965 1,018,848
Increase in resort property under development (250,381) (21,409)
Decrease in land held for sale 39,584 --
Increase in other assets (464,125) (828,719)
Increase (decrease) in accounts payable 35,835 (465,109)
Increase in accrued and other liabilities 1,978,925 2,207,580
Decrease in income taxes payable (548,417) (185,658)
Decrease in due to affiliates (24,022) --
----------- -----------
Net cash provided by operating activities 2,839,184 3,439,015
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable, net (1,297,344) (1,735,068)
Purchases of plant and equipment, net (1,060,055) (738,395)
Cash acquired from Sedona Worldwide Incorporated 30,457 --
----------- -----------
Net cash used in investing activities (2,326,942) (2,473,463)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 3,810,652 4,059,867
Principal payments on notes payable (4,806,292) (4,750,900)
Principal payments on notes payable to affiliates (300,000) --
Proceeds from exercise of stock options -- 23,000
Acquisition of treasury stock and other (439,818) (218,787)
----------- -----------
Net cash used in financing activities (1,735,458) (886,820)
----------- -----------
(DECREASE) INCREASE in cash and cash equivalents (1,223,216) 78,732
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,548,058 2,399,175
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,324,842 $ 2,477,907
=========== ===========
See notes to condensed consolidated financial statements
4
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS ACTIVITIES
The condensed consolidated financial statements include the accounts of ILX
Resorts Incorporated, formerly ILX Incorporated, and its wholly owned and
majority-owned subsidiaries ("ILX" or the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Registration S-X. Accordingly, they do not
include all of the information and notes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments and reclassifications
considered necessary for a fair and comparable presentation have been included
and are of a normal recurring nature. Operating results for the three-month
period ended March 31, 2003 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2003. The accompanying
financial statements should be read in conjunction with the Company's most
recent audited financial statements.
The Company's significant business activities include developing,
operating, marketing and financing ownership interests ("Vacation Ownership
Interests") in resort properties located in Arizona, Colorado, Indiana, Nevada
and Mexico.
REVENUE RECOGNITION
Revenue from sales of Vacation Ownership Interests is recognized in
accordance with Statement of Financial Accounting Standard No. 66, Accounting
for Sales of Real Estate ("SFAS 66"). No sales are recognized until such time as
a minimum of 10% of the purchase price has been received in cash, the statutory
rescission period has expired, the buyer is committed to continued payments of
the remaining purchase price and the Company has been released of all future
obligations for the Vacation Ownership Interest. Resort operating revenue
represents daily room rentals and revenues from food and other resort services.
Such revenues are recorded as the rooms are rented or the services are
performed.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash equivalents are liquid investments with an original maturity of three
months or less. The following summarizes interest paid, income taxes paid and
capitalized interest.
Three Months Ended March 31,
----------------------------
2002 2003
--------- ---------
Interest paid $ 500,997 $ 527,697
Income taxes paid $ 548,417 $ 191,597
Interest capitalized $ 89,868 $ 48,119
5
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2. NET INCOME PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," the following
presents the computation of basic and diluted net income per share:
BASIC NET INCOME PER SHARE
Three Months Ended March 31
---------------------------
2002 2003
----------- -----------
Net income $ 747,458 $ 484,955
Less: Series A preferred stock dividends (11,862) (11,830)
----------- -----------
Net income available to common stockholders - basic $ 735,596 $ 473,125
=========== ===========
Weighted average shares of common stock outstanding - basic 2,934,855 2,935,442
=========== ===========
Basic net income per share $ 0.25 $ 0.16
=========== ===========
DILUTED NET INCOME PER SHARE
Three Months Ended March 31
---------------------------
2002 2003
----------- -----------
Net income $ 747,458 $ 484,955
Less: Series A preferred stock dividends (11,862) (11,830)
----------- -----------
Net income available to common stockholders - diluted $ 735,596 $ 473,125
=========== ===========
Weighted average shares of common stock outstanding 2,934,855 2,935,442
Add: Convertible preferred stock (Series B and C) dilutive effect 78,397 39,083
Stock options dilutive effect 55,171 8,088
----------- -----------
Weighted average shares of common stock outstanding - dilutive 3,068,423 2,982,613
=========== ===========
Diluted net income per share $ 0.24 $ 0.16
=========== ===========
Stock options to purchase 30,700 shares of common stock at a price of
$8.125 per share were outstanding for the three months ended March 31, 2002, but
were not included in the computation of diluted net income per share because the
options' exercise prices were greater than the average market price of common
shares. These options expire at various dates in 2004.
6
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. SHAREHOLDERS' EQUITY
During the three months ended March 31, 2003, the Company issued 100 shares
of restricted common stock, valued at $386 and 1,895 shares of common stock,
valued at $15,160, to an employee and a professional service provider in
exchange for services provided. The shares of common stock issued to employees
are exempt from registration under Section 4(2) of the Securities Act of 1933.
For the three months ended March 31, 2003, the Company recorded the exchange of
1,446 Series C Convertible shares for 482 common shares. Also during the three
months ended March 31, 2003, the Company purchased 26,367 shares of its common
stock for $218,787.
During the three months ended March 31, 2003, the Company issued 6,243
shares of common stock as a Cumulation Share dividend on prior conversions of
Series C Convertible Preferred Stock to common stock. Series C Convertible
shareholders received one share of common stock for every ten shares of Series C
Convertible Preferred Stock converted.
During the three months ended March 31, 2003, the Company made an advance
to the ESOP of $45,375, which was used to repay a portion of the note payable
guaranteed by the Company and reduced the Guaranteed ESOP obligation. In
accordance with SOP 93-6, Employer's Accounting for Employee Stock Ownership
Plans, the difference of $2,090 between the fair market value of the leveraged
shares at the time of the debt repayment and the actual cost when the shares
were purchased in 2002, was charged to Paid in Capital.
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. The first installment of $291,894 has been recorded as a
reduction in retained earnings and an accrued liability at March 31, 2003. In
March 2003, the Company adopted the ILX Resorts Incorporated Dividend
Reinvestment Plan ("DRIP"). Under the terms of the DRIP, shareholders may elect
to reinvest dividends in shares of the Company's common stock, with no brokerage
or other fees to the shareholder.
In January 2003, 5,000 options to purchase 5,000 shares of common stock
priced at $4.60 per share were exercised.
NOTE 4. RELATED PARTY TRANSACTIONS
During the first quarter of 2003, the Company's wholly owned subsidiary,
Genesis Investment Group, Inc. ("Genesis"), recorded the sale of 252 Vacation
Ownership Interests to Premiere Vacation Club, an Arizona nonprofit corporation
("PVC"). PVC purchased the intervals at $2,415 per interval, the same price at
which it has historically acquired intervals in arms-length negotiations with
unaffiliated third parties. PVC is owned by the holders of its vacation
ownership interests, including the Company. A gain of $274,825 was recorded on
the sales. At March 31, 2003 deeds of trust for 210 of the Vacation Ownership
Interests secure outstanding indebtedness from PVC to Genesis of $501,644.
During the first quarter 2003, the Company advanced $272,168 to Greens
Worldwide Incorporated ("GWW") for construction and operations costs. GWW is a
publicly traded company in which the Company holds a 36.4% equity interest at
March 31, 2003.
NOTE 5. OTHER
In March 2003 the Company renegotiated the terms of two notes payable. A
10% note with an outstanding principal balance of $100,000 maturing in June 2003
and a 12% note with an outstanding principal balance of $453,000 maturing
through 2004 were consolidated in a new note for $2,000,000. The new note bears
interest at 10%, with principal and interest in the amount of $20,000 payable
monthly through March 2008.
7
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. SUBSEQUENT EVENTS
In April 2003, the Company entered into a guaranty agreement with GWW. The
Company has agreed to guarantee an equipment lease entered into by GWW in the
amount of $350,542. The Company will receive a fee equal to 2% of the amount
guaranteed.
In April 2003, the Company amended one of its revolving lines of credit.
The new terms include amending the line to $1,000,000 from $1,500,000, and
changing the maturity to December 31, 2003 from April 30, 2003.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
FORM 10-Q, THE WORDS "ESTIMATE," "PROJECTION," "INTEND," "ANTICIPATES,"
"EXPECTS," "MAY," "SHOULD" AND SIMILAR TERMS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS THAT RELATE TO THE COMPANY'S FUTURE PERFORMANCE. SUCH
STATEMENTS ARE SUBJECT TO SUBSTANTIAL UNCERTAINTY. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS SET FORTH BELOW. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY OF THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
OVERVIEW
ILX Resorts Incorporated ("ILX" or the "Company") is one of the leading
developers, marketers and operators of timeshare resorts in the western United
States and Mexico. The Company's principal operations consist of (i) acquiring,
developing and operating timeshare resorts, marketed by the Company as vacation
ownership resorts, (ii) marketing and selling vacation ownership interests in
the timeshare resorts, which typically have entitled the buyers thereof to
ownership of a fully-furnished unit for a one-week period on either an annual or
an alternate year (i.e., biennial) basis ("Vacation Ownership Interests"), and
(iii) providing purchase money financing to the buyers of Vacation Ownership
Interests at its resorts. In addition, the Company receives revenues from the
rental of its unused or unsold inventory of units at its vacation ownership
resorts, and from the sale of food, beverages and other services at such
resorts. The Company's current portfolio of resorts consists of six resorts in
Arizona, one in Indiana, one in Colorado, one in San Carlos, Mexico, and land
adjacent to an existing resort for which the Company holds development rights
(the Roundhouse Resort) (collectively, the "ILX Resorts"). One of the resorts in
Arizona is not at this time registered with the Arizona Department of Real
Estate nor is being marketed for sale as Vacation Ownership Interests, and is
operated under a long-term lease arrangement. The Company also owns 1,447
Vacation Ownership Interests in a resort in Las Vegas, Nevada, 1,147 of which
have been annexed into Premiere Vacation Club.
The Company recognizes revenue from the sale of Vacation Ownership
Interests at such time as a minimum of 10% of the purchase price has been
received in cash, the statutory rescission period has expired, the buyer is
committed to continued payments of the remaining purchase price and the
Company's future obligations for the Vacation Ownership Interests have been
released. Resort operating revenues are recorded as the rooms are rented or the
services are performed.
Costs associated with the acquisition and development of Vacation Ownership
Interests, including carrying costs such as interest and taxes, are capitalized
and amortized to cost of sales as the respective revenue is recognized.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company:
Three Months Ended March 31,
----------------------------
2002 2003
--------- ---------
As a percentage of total revenues:
Sales of Vacation Ownership Interests 60.7% 64.3%
Resort operating revenue 30.7% 26.9%
Interest income 8.6% 8.8%
--------- ---------
Total revenues 100.0% 100.0%
========= =========
As a percentage of sales of Vacation Ownership Interests:
Cost of Vacation Ownership Interests sold 14.6% 13.4%
Sales and marketing 63.8% 68.3%
Provision for doubtful accounts 4.4% 4.4%
Contribution margin percentage from sale of Vacation
Ownership Interests (1) 17.2% 13.9%
As a percentage of resort operating revenue:
Cost of resort operations 92.7% 93.3%
As a percentage of total revenues:
General and administrative 9.3% 9.5%
Depreciation and amortization 1.9% 2.8%
Operating income 10.2% 7.2%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 420 506
Average sales price per Vacation Ownership Interest
sold (excluding revenues from Upgrades) (2) $ 14,207 $ 14,907
Average sales price per Vacation Ownership Interest
sold (including revenues from Upgrades) (2) $ 16,842 $ 18,043
- ----------
(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 630 and 772 biennial and annual Vacation
Ownership Interests for the three months ended March 31, 2002 and 2003,
respectively.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 TO THE THREE MONTHS ENDED
MARCH 31, 2003
Sales of Vacation Ownership Interests increased 31.9% or $2,293,344 to
$9,478,189 for the three months ended March 31, 2003, from $7,184,845 for the
same period in 2002. The increase reflects primarily sales from the Las Vegas
sales office which opened in mid January 2002, and greater sales to existing
owners.
The average sales price per Vacation Ownership Interest sold (excluding
revenues from Upgrades) increased 4.9% or $700 in 2003 to $14,907 for the three
months ended March 31, 2003 from $14,207 for the same period in 2002. The number
of Vacation Ownership Interests sold increased 20.5% from 420 in the three
months ended March 31, 2002 to 506 for the same period in 2003 due to the
opening of the Las Vegas sales office, as described above. The three months
ended March 31, 2003 included 533 biennial Vacation Ownership Interests (counted
as 266.5 annual Vacation Ownership Interests) compared to 420 biennial Vacation
Ownership Interests (counted as 210 annual Vacation Ownership Interests) in the
same period in 2002.
Upgrade revenue, included in Vacation Ownership Interest sales, increased
43.2% to $1,584,962 for the three months ended March 31, 2003 from $1,106,540
for the same period in 2002, reflecting expansion of marketing efforts to
existing owners. Upgrades generally do not involve the sale of additional
Vacation Ownership Interests (merely their exchange) and, therefore, such
Upgrades increase the average sales price per Vacation Ownership Interest sold.
The average sales price per Vacation Ownership Interest sold (including
Upgrades) increased 7.1% or $1,201 to $18,043 for the three months ended March
31, 2003 from $16,842 in 2002.
Resort operating revenue increased 9.4% or $341,795 to $3,971,511 for the
three months ended March 31, 2003, reflecting increased revenue from vacation
interval owners, including increased rates, and revenue from the Joey Bistro
restaurant at the Carriage House in Las Vegas which opened in late November
2002. Cost of resort operations as a percentage of resort operating revenue
increased from 92.7% in 2002 to 93.3% in 2003. The increase reflects startup and
initial operating losses at Joey Bistro in Las Vegas.
Interest income increased 27.3% to $1,304,334 for the three months ended
March 31, 2003 from $1,024,729 for the same period in 2002 reflecting the
increase in interest bearing notes receivable between years as well as greater
sales of Customer Notes in 2003, for which the Company recognizes the interest
premium upon sale of the note.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales decreased from 14.6% for the three months ended March
31, 2002 to 13.4% for the three months ended March 31, 2003, 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 68.3% for the three months ended March 31, 2003 from
63.8% for the same period in 2002, reflecting the greater scale of the Las Vegas
sales center in 2003. The Las Vegas sales center opened in the first quarter of
2002 and the Company continues to adjust and refine the sales and marketing
methods of this new operation. The office has generated substantially increased
tours and sales between years. However, sales are at a greater sales and
marketing cost as a percentage of sales than the Company's established offices.
In addition, closing rates at the Sedona sales office have decreased between
years.
The provision for doubtful accounts as a percentage of Vacation Ownership
Interest sales was consistent at 4.4% of sales of Vacation Ownership Interests
for both the three month periods ended March 31, 2002 and 2003.
General and administrative expenses increased to 9.5% of total revenue for
the three months ended March 31, 2003 from 9.3% for the same period in 2002. The
increase reflects increased professional fees, including fees for the
enhancement of the Company's core timeshare operating system.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Income from land and other, net for the three months ended March 31, 2003
includes a gain of $274,825 on bulk sales of Vacation Ownership Interests owned
by the Company's subsidiary Genesis. In the first quarter of 2002, income from
land and other, net includes a gain of $586,111 on the sale and leaseback of the
Sedona Station (the Sedona sales office) offset by a loss of $48,887 on the
assumption of the assets and liabilities of Sedona Worldwide Incorporated.
The 8.1% increase in interest expense to $525,787 for the three months
ended March 31, 2003 from $486,201 for the same period in 2002 reflects the
combined net effect of greater borrowings in 2003 and lower interest rates on
the Company's variable rate notes.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH
The Company generates cash primarily from the sale of Vacation Ownership
Interests (including Upgrades), from the financing of Customer Notes from such
sales and from resort operations. During the three months ended March 31, 2002
and 2003, cash provided by operations was $2,839,184 and $3,439,015,
respectively. The increase in cash provided by operations reflects the non-cash
gain on sale of property and equipment included in 2002 net income, a decrease
in resort property held for Vacation Ownership Interest sales due to increased
sales and fewer additions in 2003 and a decrease in income taxes payable, net of
an increase in other assets. The increase in other assets is a result of an
increase in the escrow balance required by the guaranty commitment for the Bell
Rock Inn.
For regular federal income tax purposes, the Company reports substantially
all of its non-factored financed Vacation Ownership Interest sales under the
installment method. Under the installment method, the Company recognizes income
on sales of Vacation Ownership Interests only when cash is received by the
Company in the form of a down payment, as an installment payment, or from
proceeds from the sale of the Customer Note. The deferral of income tax
liability conserves cash resources on a current basis. Interest may be imposed,
however, on the amount of tax attributable to the installment payments for the
period beginning on the date of sale and ending on the date the related tax is
paid. If the Company is otherwise not subject to tax in a particular year, no
interest is imposed since the interest is based on the amount of tax paid in
that year. The condensed consolidated financial statements do not contain an
accrual for any interest expense that would be paid on the deferred taxes
related to the installment method, as the interest expense is not estimable.
At December 31, 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
$189,000 per year. To the extent the entire $189,000 is not utilized in a given
year, the difference may be carried forward to future years. Any unused Genesis
NOLs will expire in 2008.
In addition, Section 382 of the Internal Revenue Code imposes additional
limitations on the utilization of NOLs by a corporation following various types
of ownership changes, which result in more than a 50% change in ownership of a
corporation within a three-year period. Such changes may result from new Common
Stock issuances by the Company or changes occurring as a result of filings with
the Securities and Exchange Commission of Schedules 13D and 13G by holders of
more than 5% of the Common Stock, whether involving the acquisition or
disposition of Common Stock. If such a subsequent change occurs, the limitations
of Section 382 would apply and may limit or deny the future utilization of the
NOL by the Company, which could result in the Company paying substantial
additional federal and state taxes.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
USES OF CASH
Investing activities typically reflect a net use of cash because of capital
additions and loans to customers in connection with the Company's Vacation
Ownership Interest sales. Net cash used in investing activities in the three
months ended March 31, 2002 and 2003 was $2,326,942 and $2,473,463,
respectively. The increase includes greater notes receivable as a result of
increased sales generated by the Las Vegas sales office in the first quarter of
2003. Customer notes generated from this office are retained and hypothecated
against, not sold.
Net cash used in financing activities in the three months ended March 31,
2002 and 2003 was $1,735,458 and $886,820, respectively. The decrease reflects
lower repayments on notes payable, as well as a decrease in treasury stock
purchases in 2003.
The Company requires funds to finance the acquisitions of property for
future resort development and to further develop the existing resorts, as well
as to make capital improvements and support current operations.
Customer defaults have a significant impact on cash available to the
Company from financing Customer Notes receivable in that notes which are more
than 60 to 90 days past due are not eligible as collateral. As a result, the
Company in effect must repay borrowings against such notes or buy back such
notes if they were sold with recourse.
On April 9, 1999 (effective January 1, 1999), the Company formed the ILX
Resorts Incorporated Employee Stock Ownership Plan and Trust (the "ESOP"). The
intent of the ESOP is to provide a retirement program for employees that aligns
their interests with those of the Company. During the three months ended March
31, 2003, the Company made an advance to the ESOP of $45,375 which was used to
repay a portion of a note payable secured by common stock of the Company owned
by the ESOP and guaranteed by the Company.
The ESOP may purchase additional shares for future year contributions
through loans made directly to the ESOP and guaranteed by the Company. Such
borrowings are not expected to exceed $1,000,000.
CREDIT FACILITIES AND CAPITAL
At March 31, 2003, the Company has an agreement with a financial
institution for a commitment of $30 million, under which the Company may sell
certain of its Customer Notes. The agreement provides for sales on a recourse
basis with a percentage of the amount sold held back by the financial
institution as additional collateral. Customer Notes may be sold at discounts or
premiums to the principal amount in order to yield the consumer market rate, as
defined by the financial institution. If a customer pays off a note prior to
maturity of the note, the financial institution may recover from the Company the
unearned interest premium, if any. At March 31, 2003, $27.1 million of such
commitment was available to the Company.
The Company also has a financing commitment aggregating $30 million whereby
the Company may borrow against notes receivable pledged as collateral. These
borrowings bear interest at a rate of prime plus 1.5%. The $30 million borrowing
period expires in 2003 and the maturity is in 2008. At March 31, 2003,
approximately $11.6 million is available under this commitment.
At March 31, 2002 and 2003, the Company had approximately $10.9 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, VCA-South Bend and VCA-Tucson.
In March 2003 the Company renegotiated the terms of two notes payable. A
10% note with an outstanding principal balance of $100,000 maturing in June 2003
and a 12% note with an outstanding principal balance of $453,000 maturing
through 2004 were consolidated in a new note for $2,000,000. The new note bears
interest at 10%, with principal and interest in the amount of $20,000 payable
monthly through March 2008.
In the first three months of 2003, the Company purchased 26,367 treasury
shares for a cost of $218,787.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
In the future, the Company may negotiate additional credit facilities,
issue corporate debt, issue equity securities, or any combination of the above.
Any debt incurred or issued by the Company may be secured or unsecured, may bear
interest at fixed or variable rates of interest, and may be subject to such
terms as management deems prudent. While the Company believes it maintains
excellent relationships with its lenders and will seek renewal or replacement of
existing lines upon their maturity, there is no assurance that the Company will
be able to secure additional corporate debt or equity at or beyond current
levels or that the Company will be able to maintain its current level of debt.
The Company has been negotiating with additional lenders to supplement its
existing credit facilities.
The Company believes available borrowing capacity, together with cash
generated from operations, will be sufficient to meet the Company's liquidity,
operating and capital requirements for at least the next twelve months.
CONTRACTUAL CASH OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table presents our contractual cash obligations and
commercial commitments as of March 31, 2003. The Company also sells consumer
notes with recourse. The Company has no other significant contractual
obligations or commercial commitments either on or off balance sheet as of this
date.
PAYMENTS DUE BY PERIOD
CONTRACTUAL CASH -------------------------------------------------------------------
OBLIGATIONS TOTAL < 1 YEAR 1-3 YEARS 4-5 YEARS > 5 YEARS
----------- ----------- ----------- ----------- -----------
LONG-TERM DEBT $44,235,000 $ 7,664,000 $13,613,000 $14,682,000 $ 8,276,000
CAPITAL LEASE OBLIGATIONS 48,000 36,000 12,000 -- --
OPERATING LEASES 18,928,000 1,990,000 3,067,000 2,165,000 11,706,000
----------- ----------- ----------- ----------- -----------
TOTAL $63,211,000 $ 9,690,000 $16,692,000 $16,847,000 $19,982,000
=========== =========== =========== =========== ===========
SEASONALITY
The Company's revenues are moderately seasonal with the volume of ILX
owners, hotel guests and Vacation Ownership Interest exchange participants
typically greatest in the second and third fiscal quarters. As the Company
expands into new markets and geographic locations it may experience increased or
additional seasonality dynamics which may cause the Company's operating results
to fluctuate.
INFLATION
Inflation and changing prices have not had a material impact on the
Company's revenues, operating income and net income during any of the Company's
three most recent fiscal years or the three months ended March 31, 2003.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this quarterly report, the Company's
Chief Executive Officer and its Chief Financial Officer evaluated the Company's
disclosure controls and procedures as required pursuant to Rule 13a-14 under the
Securities and Exchange Act of 1934, as amended. Based on this evaluation, the
Chief Executive Officer and the Chief Financial Officer determined that such
controls and procedures are effective. There were no significant changes in
internal controls that could significantly affect the disclosure controls and
procedures since the date of the evaluation.
14
PART II
ITEM 1. LEGAL PROCEEDINGS
Litigation has arisen in the normal course of the Company's business, none
of which is deemed to be material.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(i) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
99.1 CERTIFICATION PURSUANT TO 18 U.S.C.ss.1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(ii) Reports on Form 8-K
None
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused its quarterly report on Form 10-Q to be
signed on its behalf by the undersigned thereunto duly authorized.
ILX RESORTS INCORPORATED
(Registrant)
/s/ Joseph P. Martori
---------------------------------
Joseph P. Martori
Chief Executive Officer
/s/ Nancy J. Stone
---------------------------------
Nancy J. Stone
President
/s/ Margaret M. Eardley
---------------------------------
Margaret M. Eardley
Executive Vice President & Chief Financial Officer
/s/ Taryn L. Chmielewski
---------------------------------
Taryn L. Chmielewski
Vice President
Corporate Controller
Date: As of May 8, 2003
16
FORM OF CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
I, Joseph P. Martori, Chairman, and Chief Executive Officer of ILX Resorts
Incorporated (the "Company") certify that:
1. I have reviewed this quarterly report on Form 10-Q of ILX Resorts
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent 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 quarterly 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: May 8, 2003
/s/ Joseph P. Martori
----------------------------------------
Joseph P. Martori
Chairman and Chief Executive Officer
17
FORM OF CERTIFICATION FOR FORM 10-Q
CERTIFICATIONS
I, Margaret M. Eardley, Executive Vice President and Chief Financial Officer of
ILX Resorts Incorporated (the "Company") certify that:
1. I have reviewed this quarterly report on Form 10-Q of ILX Resorts
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent 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 quarterly 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: May 8, 2003
/s/ Margaret M. Eardley
----------------------------------------
Margaret M. Eardley
Executive Vice President and
Chief Financial Officer
18