SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended June 30, 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 June 30, 2003
- ------------------------------- ----------------------------
Common Stock, without par value 2,883,435 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2002 2003
- -------------------------------------------------------------------------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 2,399,175 $ 2,413,499
Notes receivable, net 34,019,271 37,120,540
Note receivable from related party -- 1,656,308
Resort property held for Vacation Ownership 24,150,438 21,928,069
Interest sales
Resort property under development 263,127 305,100
Land held for sale 811,590 813,409
Deferred assets 84,606 54,155
Property and equipment, net 9,008,973 9,772,274
Other assets 9,683,608 11,038,257
- -------------------------------------------------------------------------------
TOTAL ASSETS $80,420,788 $85,101,611
===============================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,760,570 $ 1,761,136
Accrued and other liabilities 2,737,844 4,572,292
Income taxes payable 178,071 --
Notes payable 44,729,013 46,407,234
Deferred income taxes 3,268,284 4,262,176
- -------------------------------------------------------------------------------
Total liabilities 52,673,782 57,002,838
- -------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000
shares authorized; 177,591 and 173,322
shares issued and outstanding; liquidation 916,726 904,943
preference of $1,775,910 and $1,733,220
Common stock, no par value; 30,000,000
shares authorized; 4,346,387 and 4,378,950 19,497,334 19,667,905
shares issued
Treasury stock, at cost, 1,414,795 and
1,495,515 shares, respectively (5,268,277) (5,922,854)
Additional paid in capital 66,050 61,485
Guaranteed ESOP obligation (181,500) (90,750)
Retained earnings 12,716,673 13,478,044
- -------------------------------------------------------------------------------
Total shareholders' equity 27,747,006 28,098,773
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $80,420,788 $85,101,611
===============================================================================
See notes to condensed consolidated financial statements
2
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended, Six months ended
June 30, June 30,
-------------------------- ---------------------------
2002 2003 2002 2003
- ------------------------------------------------------------------------------------------------------
REVENUES:
Sales of Vacation Ownership Interests $ 9,706,137 $11,087,310 $16,890,982 $20,565,499
Resort operating revenue 4,523,454 4,848,631 8,153,170 8,820,142
Interest income 1,831,437 1,521,274 2,856,166 2,825,608
- ------------------------------------------------------------------------------------------------------
Total revenues 16,061,028 17,457,215 27,900,318 32,211,249
- ------------------------------------------------------------------------------------------------------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership Interests sold 1,409,789 1,485,785 2,457,850 2,758,169
Cost of resort operations 3,653,890 4,183,647 7,019,260 7,889,391
Sales and marketing 5,847,783 7,344,946 10,431,772 13,818,643
General and administrative 1,874,177 1,211,354 2,972,854 2,616,807
Provision for doubtful accounts 427,368 487,684 742,131 901,697
Depreciation and amortization 271,647 417,088 494,484 833,196
- ------------------------------------------------------------------------------------------------------
Total cost of sales and operating expenses 13,484,654 15,130,504 24,118,351 28,817,903
- ------------------------------------------------------------------------------------------------------
Operating income 2,576,374 2,326,711 3,781,967 3,393,346
Income from land and other, net
(Related Party) (54,622) 74,074 471,751 385,642
- ------------------------------------------------------------------------------------------------------
Total operating income 2,521,752 2,400,785 4,253,718 3,778,988
Interest expense (481,585) (559,963) (967,786) (1,085,750)
Equity in loss of related party
investment -- (102,147) -- (151,099)
- ------------------------------------------------------------------------------------------------------
Income before income taxes 2,040,167 1,738,675 3,285,932 2,542,139
Income tax expense (816,066) (695,469) (1,314,373) (1,013,978)
- ------------------------------------------------------------------------------------------------------
NET INCOME $1,224,101 $ 1,043,206 $ 1,971,559 $ 1,528,161
======================================================================================================
NET INCOME PER SHARE
Basic $ 0.41 $ 0.35 $ 0.66 $ 0.51
======================================================================================================
Diluted $ 0.40 $ 0.35 $ 0.64 $ 0.51
======================================================================================================
DIVIDENDS PER SHARE $ -- $ 0.10 $ -- $ 0.20
======================================================================================================
See notes to condensed consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
-----------------------------
2002 2003
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,971,559 $ 1,528,161
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of property and equipment (571,634) --
Gain on extinguishment of debt -- (82,294)
Undistributed losses of equity investment in a related -- 151,099
party
Loss on assumption of Sedona Worldwide Incorporated assets
and liabilities 48,887 --
Income tax expense 1,314,373 1,013,978
Provision for doubtful accounts 742,131 901,697
Depreciation and amortization 494,484 833,196
Amortization of guarantee fees 22,533 30,451
Common stock issued to employees for services 403,697 18,733
Change in assets and liabilities:
(Increase) decrease in resort property held for Vacation
Ownership Interest sales (3,427,684) 2,222,369
Decrease (increase) in resort property under development 4,213,750 (41,973)
Decrease (increase) in land held for sale 37,586 (1,819)
Increase in other assets (1,390,478) (1,520,588)
(Decrease) increase in accounts payable (256,671) 566
Increase in accrued and other liabilities 946,725 1,548,979
Decrease in income taxes payable (548,417) (198,157)
Decrease in due to affiliates (24,022) --
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,976,819 6,404,398
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable, net (2,459,420) (4,002,966)
Increase in note receivable from related party -- (1,656,308)
Cash acquired from Sedona Worldwide Incorporated 30,457 --
Purchases of plant and equipment, net (2,368,650) (1,345,978)
- ---------------------------------------------------------------------------------------------
Net cash used in investing activities (4,797,613) (7,005,252)
- ---------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 11,140,322 11,871,334
Principal payments on notes payable (10,062,161) (10,353,113)
Principal payments on notes payable to affiliates (300,000) --
Preferred stock dividends (47,321) (47,321)
Common stock dividends including offering costs -- (226,169)
Redemption of preferred stock (770) --
Proceeds from exercise of stock options 80,000 23,000
Acquisition of treasury stock and other (722,205) (652,553)
- ---------------------------------------------------------------------------------------------
Net cash provided by financing activities 87,865 615,178
- ---------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (732,929) 14,324
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,548,058 2,399,175
- ---------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,815,129 $ 2,413,499
=============================================================================================
See notes to condensed consolidated financial statements
4
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Business Activities
The condensed consolidated financial statements include the accounts of ILX
Resorts Incorporated, formerly ILX Incorporated, and its wholly owned and
majority-owned subsidiaries ("ILX" or the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments and reclassifications considered
necessary for a fair and comparable presentation have been included and are of a
normal recurring nature. Operating results for the six-month period ended
June 30, 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 June 30, Six Months Ended June 30,
-------------------------- ------------------------
2002 2003 2002 2003
- ----------------------------------------------------------------------------------
Interest paid $ 472,257 $ 560,545 $ 973,254 $1,088,241
Income taxes paid 332,266 302,834 880,683 495,431
Interest capitalized 85,093 50,112 174,961 98,231
Accounting Policies-- In January 2003, the Financial Accounting Standards Board
("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities", an Interpretation of Accounting Research Bulletin No. 51 ("FIB 46").
FIN 46 defined variable interest entities and modified the requirements for
their consolidation from ownership of a controlling voting interest to holding
a majority variable interest and being the primary beneficiary of the variable
interest entity. The Company is currently evaluating whether this standard will
have any effect on the Company.
5
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2. Net Income Per Share
In accordance with SFAS No. 128, "Earnings Per Share," the following
presents the computation of basic and diluted net income per share:
Basic Net Income Per Share
Three Months Ended June 30, Six Months Ended June 30,
2002 2003 2002 2003
- ------------------------------------------------------------------------------------------
Net income $1,224,101 $1,043,206 $1,971,559 $1,528,161
Less: Series A preferred stock
dividends (11,830) (11,830) (23,660) (23,660)
- ------------------------------------------------------------------------------------------
Net income available to common
stockholders - basic $1,212,271 $1,031,376 $1,947,899 $1,504,501
==========================================================================================
Weighted average shares of
common stock outstanding -
basic 2,932,535 2,910,676 2,933,689 2,922,990
==========================================================================================
Basic net income per share $ 0.41 $ 0.35 $ 0.66 $ 0.51
Diluted Net Income Per Share
Three Months Ended June 30, Six Months Ended June 30,
2002 2003 2002 2003
- ------------------------------------------------------------------------------------------
Net income $1,224,101 $11,043,206 $1,971,559 $1,528,161
Less: Series A preferred stock
dividends (11,830) (11,830) (23,660) 23,660)
- ------------------------------------------------------------------------------------------
Net income available to common
stockholders - diluted $1,212,271 $ 1,031,376 $1,947,899 $1,504,501
==========================================================================================
Weighted average shares of common
stock outstanding 2,932,535 2,910,676 2,933,689 2,922,990
Add: Convertible preferred stock
(Series B and C) dilutive effect 71,796 38,656 75,078 38,868
Stock options dilutive effect 44,895 7,205 44,993 7,532
- ------------------------------------------------------------------------------------------
Weighted average shares of common
stock outstanding - dilutive 3,049,226 2,956,537 3,053,760 2,969,390
==========================================================================================
Diluted net income per share $ 0.40 $ $0.35 $ 0.64 $ 0.51
==========================================================================================
Stock options to purchase 13,200 and 30,700 shares of common stock at a
price of $8.125 per share were outstanding for the three and six months ended at
June 30, 2003 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
2004.
Note 3. Shareholders' Equity
During the six months ended June 30, 2003, the Company issued 100 shares of
restricted common stock, valued at $386 and 2,045 shares of common stock, valued
at $18,347, 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 six
6
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
months ended June 30, 2003, the Company recorded the exchange of 4,269 Series C
Convertible shares for 1,423 common shares. Also during the six months ended
June 30, 2003, the Company purchased 80,467 shares of its common stock for
$652,553.
During the six months ended June 30, 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 six months ended June 30, 2003, the Company made advances to the
ESOP of $90,750, which were used to make principal payments on 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 $4,565 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 second installment of $378,260, which includes $89,925 for
treasury shares held as collateral, has been recorded as a reduction in retained
earnings and an accrued liability at June 30, 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.
For the first quarter dividend paid in April 2003, shareholders elected to
receive 28,752 shares of common stock valued at $154,525, net of legal fees,
under the DRIP and cash dividends of $164,411. Of the 28,752 common shares
issued, 11,000 were purchased in a privately negotiated transaction and 17,752
were newly issued common shares. The 28,752 common shares issued includes
11,253 common shares issued on treasury shares held as collateral.
In January 2003, an option to purchase 5,000 shares of common stock priced
at $4.60 per share was exercised.
Note 4. Related Party Transactions
During 2003, the Company's wholly owned subsidiary, Genesis Investment
Group, Inc. ("Genesis"), recorded the sale of 300 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 $38,837 for the three months ended June 30,
2003 and $313,662 for the six months ended June 30, 2003 was recorded on the
sales and is included in Income from land and other, net. At June 30, 2003
deeds of trust for 254 of the Vacation Ownership Interests secure outstanding
indebtedness from PVC to Genesis of $605,972.
On June 30, 2003, the Company entered into a promissory note agreement with
Greens Worldwide Incorporated ("GWWI") to provide up to $2.5 million in working
capital. The note accrues interest at ten percent per annum with interest only
payments due monthly commencing August 15, 2003 and monthly principal payments
commencing January 15, 2004. The note is convertible into common shares of
publicly traded GWWI at $0.20 per share. The balance on the note at June 30,
2003 is $1,656,308 exclusive of guarantees the Company has provided on equipment
leases. The total of the note receivable and the guarantees aggregate
$2,305,146. The Company holds a 36.4% equity interest in GWWI at June 30, 2003.
In April 2003, the Company entered into a guaranty agreement with GWWI
under which the Company guaranteed an equipment lease entered into by GWWI in
7
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the amount of $350,542. The Company is entitled to a guarantee fee equal to 2%
of the lease amount. The total fee of $7,010.85 has been included as deferred
revenue in accrued and other liabilities.
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.
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.
In May 2003, the Company refinanced the existing mortgage on VCA South
Bend. The Company borrowed $2.75 million, of which $718,000 was used to repay
the existing mortgage which bore interest at 10.0% and had a maturity date of
November 2003. The new note bears interest at prime plus 1.5%, but not less
than 4.0%, with monthly principal payments of $35,000 plus interest through
January 2010.
In May 2003, the Company entered into an agreement to borrow $2.0 million
to replenish working capital that had been used in part to purchase Vacation
Ownership Interests in the Carriage House in Las Vegas. The note bears interest
at prime plus 2.0%, but not less than 7.0%, with principal and interest payments
of $30,000 due monthly until maturity in May 2008, and is secured by Carriage
House Vacation Ownership Interests. As of June 30, 2003 the Company had
borrowed $1.5 million and the remaining $0.5 million was received in July 2003.
In May 2003, the Company amended an existing construction loan to secure an
additional $2.0 million in construction financing for current projects.
Note 6. Subsequent Events
In July 2003, the Company entered into a guaranty agreement with GWWI under
which the Company has agreed to guarantee an equipment lease entered into by
GWWI in the amount of $298,296. The Company is entitled to a fee equal to 2% of
the amount guaranteed.
8
Management's Discussion and Analysis of Financial Contition and
Results of Operations
Item II. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the Company's financial condition and results
of operations includes certain forward-looking statements. When used in this
Form 10-Q, the words "estimate," "projection," "intend," "anticipates,"
"expects," "may," "should" and similar terms are intended to identify forward-
looking statements that relate to the Company's future performance. Such
statements are subject to substantial uncertainty. Readers are cautioned not to
place undue reliance on the forward-looking statements set forth below. The
Company undertakes no obligation to publicly update or revise any of the
forward-looking statements contained herein.
Overview
ILX Resorts Incorporated ("ILX" or the "Company") is one of the leading
developers, marketers and operators of timeshare resorts in the western United
States and Mexico. The Company's principal operations consist of (i) acquiring,
developing and operating timeshare resorts, marketed by the Company as vacation
ownership resorts, (ii) marketing and selling vacation ownership interests in
the timeshare resorts, which typically have entitled the buyers thereof to
ownership of a fully-furnished unit for a one-week period on either an annual or
an alternate year (i.e., biennial) basis ("Vacation Ownership Interests"), and
(iii) providing purchase money financing to the buyers of Vacation Ownership
Interests at its resorts. In addition, the Company receives revenues from the
rental of its unused or unsold inventory of units at its vacation ownership
resorts, and from the sale of food, beverages and other services at such
resorts. The Company's current portfolio of resorts consists of six resorts in
Arizona, one in Indiana, one in Colorado, one in San Carlos, Mexico, and land
adjacent to an existing resort for which the Company holds development rights
(the Roundhouse Resort) (collectively, the "ILX Resorts"). One of the resorts
in Arizona is not at this time registered with the Arizona Department of Real
Estate nor is being marketed for sale as Vacation Ownership Interests, and is
operated under a long-term lease arrangement. The Company also owns 1,718
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 June Six Months Ended June
30, 30,
2002 2003 2002 2003
- -------------------------------------------------------------------------------------------
As a percentage of total revenues:
Sales of Vacation Ownership Interests 60.4% 63.5% 60.6% 63.8%
Resort operating revenue 28.2% 27.8% 29.2% 27.4%
Interest income 11.4% 8.7% 10.2% 8.8%
- -------------------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 100.0%
===========================================================================================
As a percentage of sales of Vacation
Ownership Interests:
Cost of Vacation Ownership Interests sold 14.5% 13.4% 14.6% 13.4%
Sales and marketing 60.2% 66.2% 61.8% 67.2%
Provision for doubtful accounts 4.4% 4.4% 4.4% 4.4%
Contribution margin percentage from sale of
Vacation Ownership Interests (1) 20.8% 16.0% 19.3% 15.0%
As a percentage of resort operating
revenue:
Cost of resort operations 80.8% 86.3% 86.1% 89.4%
As a percentage of total revenues:
General and administrative 11.7% 6.9% 10.7% 8.1%
Depreciation and amortization 1.7% 2.4% 1.8% 2.6%
Operating income 16.0% 13.3% 13.6% 10.5%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 558 594 978 1,099
Average sales price per Vacation Ownership
Interest sold (excluding revenues from $14,515 $14,649 $14,383 $14,768
Upgrades) (2)
Average sales price per Vacation Ownership
Interest sold (including revenues from $17,140 $18,013 $17,012 $18,026
Upgrades) (2)
- ------------------------------
(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 832 and 888 biennial and annual Vacation
Ownership Interests for the three months ended June 30, 2002 and 2003,
respectively, and 1,462 and 1,660 biennial and annual vacation ownership
interests for the six months ended June 30, 2002 and June 30, 2003,
respectively.
Comparison of the Three and Six Months Ended June 30, 2002 to the Three and Six
Months Ended June 30, 2003
Sales of Vacation Ownership Interests increased 14.2% or $1,381,173 to
$11,087,310 for the three months ended June 30, 2003, from $9,706,137 for the
same period in 2002 and increased 21.86% or $3,674,517 to $20,565,499 for the
six months ended June 30, 2003 from $16,890,982 for the same period in 2002.
The increases reflect primarily sales from the Las Vegas sales office which
opened in mid January 2002 and greater sales to existing owners.
10
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
The average sales price per Vacation Ownership Interest sold (excluding
revenues from Upgrades) increased 0.9% or $134 in 2003 to $14,649 for the three
months ended June 30, 2003 from $14,515 for the same period in 2002 and
increased 2.7% or $385 to $14,768 for the six months ended June 30, 2003 from
$14,383 for the same period in 2002. The number of Vacation Ownership Interests
sold increased 6.5% from 558 in the three months ended June 30, 2002 to 594 for
the same period in 2003 and increased 12.4% from 978 in the six months ended
June 30, 2002 to 1,099 for the same period in 2003 due to increased
sales in 2003 from the Las Vegas office which opened in January 2002. The
three and six months ended June 30, 2003 included 589 and 1,122 biennial
Vacation Ownership Interests (counted as 294.5 and 561 annual Vacation
Ownership Interests) compared to 548 and 968 biennial Vacation Ownership
Interests (counted as 274 and 484 annual Vacation Ownership Interests) in the
same periods in 2002, respectively.
Upgrade revenue, included in Vacation Ownership Interest sales, increased
36.3% to $1,996,389 for the three months ended June 30, 2003 from $1,464,797 for
the same period in 2002 and increased 39.3% to $3,581,351 for the six months
ended June 30, 2003 from $2,571,337 for the same period in 2002. Upgrades often
do not involve the sale of additional Vacation Ownership Interests (merely their
exchange) and, therefore, such Upgrades increase the average sales price per
Vacation Ownership Interest sold. Upgrade revenue has increased due to expanded
marketing efforts to existing owners. The average sales price per Vacation
Ownership Interest sold (including Upgrades) increased 5.1% or $873 to $18,013
for the three months ended June 30, 2003 from $17,140 in 2002 and increased 6.0%
or $1,014 to $18,026 for the six months ended June 30, 2003 from $17,012 for the
same period in 2002.
Resort operating revenue increased 7.2% and 8.2% or $325,177 and $666,972
to $4,848,631 and $8,820,142 for the three and six months ended June 30, 2003,
respectively, 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 80.8% to
86.3% for the second quarter ended June 30, 2003 and increased from 86.1% to
89.4% for the six months ended June 30, 2003. The increase in cost as a
percentage of revenue for both the three and six months ended June 30, 2003
reflects the start up and initial operating losses at Joey Bistro in Las Vegas.
Interest income decreased 16.9% to $1,521,274 for the three months ended
June 30, 2003 from $1,831,437 for the same period in 2002 and decreased 1.1% to
$2,825,608 for the six months ended June 30, 2003 from $2,856,166 for the same
period in 2002, reflecting greater prepayments of Customer Notes between years
and fluctuations in the mix of hypothecated and sold paper between periods.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales decreased from 14.5% and 14.6%, respectively, for the
three and six months ended June 30, 2002 to 13.4% for the three and six months
ended June 30, 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 66.2% for the three months ended June 30, 2003 from 60.2%
for the same period in 2002 and to 67.2% for the six months ended June 30, 2003
from 61.8% 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
in the three and six month periods ended June 30, 2002 and 2003.
11
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
General and administrative expenses decreased to 6.9% and 8.1% of total
timeshare revenue for the second quarter and six months ended June 30, 2003,
from 11.7% and 10.7% for the same periods in 2002. The decrease for the three
and six month periods reflect greater professional fees in 2002 related to
website development and to Premiere Park and in 2003 earnings from rental income
from GWWI and a gain on the early extinguishment of a note payable which
offset general and administrative expenses, as well as lower accrued
contributions for the ESOP plan in 2003.
Income from land and other, net for the six months ended June 30, 2003
includes a gain of $313,662 on bulk sales of Vacation Ownership Interests owned
by the Company's subsidiary Genesis. In the six months ended June 30, 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 16.3% and 12.2% increases in interest expense to $559,963 and
$1,085,750 for the three and six months ended June 30, 2003 from $481,585 and
$967,786 for the same periods in 2002, respectively, 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 six months ended June 30, 2002 and
2003, cash provided by operations was $3,976,819 and $6,404,398, respectively.
The increase in cash provided by operations reflects a net decrease in resort
property held for Vacation Ownership Interest sales and resort property under
development due to increased sales and fewer additions in 2003, the non-cash
gain on sale of property and equipment included in 2002 net income, and an
increase in accrued and other liabilities reflecting timing differences
between years in drawing funds from the homeowners' associations for
operating activities, net of decreased net income and related income tax
expense, and the effect of common stock issued to employees in lieu of cash
compensation in 2002.
For regular federal income tax purposes, the Company reports substantially
all of its non-factored financed Vacation Ownership Interest sales under the
installment method. Under the installment method, the Company recognizes income
on sales of Vacation Ownership Interests only when cash is received by the
Company in the form of a down payment, as an installment payment, or from
proceeds from the sale of the Customer Note. The deferral of income tax
liability conserves cash resources on a current basis. Interest may be imposed,
however, on the amount of tax attributable to the installment payments for the
period beginning on the date of sale and ending on the date the related tax is
paid. If the Company is otherwise not subject to tax in a particular year, no
interest is imposed since the interest is based on the amount of tax paid in
that year. The condensed consolidated financial statements do not contain an
accrual for any interest expense that would be paid on the deferred taxes
related to the installment method, as the interest expense is not estimable.
At December 31, 2002, the Company, excluding its Genesis subsidiary, had
NOL carryforwards of approximately $2.3 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
12
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
the Securities and Exchange Commission of Schedules 13D and 13G by holders of
more than 5% of the Common Stock, whether involving the acquisition or
disposition of Common Stock. If such a subsequent change occurs, the
limitations of Section 382 would apply and may limit or deny the future
utilization of the NOL by the Company, which could result in the Company paying
substantial additional federal and state taxes.
Uses of Cash
Investing activities typically reflect a net use of cash because of capital
additions and loans to customers in connection with the Company's Vacation
Ownership Interest sales. Net cash used in investing activities during the six
months ended June 30, 2002 and 2003 was $4,797,613 and $7,006,252, respectively.
The increase includes the note receivable from GWWI for advances of $1,656,308
during 2003 as well as increased Customer Notes receivable from the greater
sales generated by the Las Vegas sales office in 2003. Customer notes
generated by the Las Vegas sales office are retained and hypothecated
against, not sold. Purchases of plant and equipment decreased between
years, reflecting the construction activity on the Las Vegas sales center
in 2002.
Net cash provided by financing activities for the six months ended June 30,
2002 and 2003 was $87,865 and $615,178, respectively. The increase reflects
borrowings in the second quarter of 2003 and a decrease in treasury stock
purchases in 2003, net of the payment of the first quarter 2003 common stock
dividend.
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 six months ended June 30,
2003, the Company made advances to the ESOP of $90,750 which were used to
make principal payments on the 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 June 30, 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 June 30, 2003, $24.0 million of the $30 million
commitment was available to the Company.
The Company also has a financing commitment aggregating $30 million whereby
the Company may borrow against notes receivable pledged as collateral. These
borrowings bear interest at a rate of prime plus 1.5%. The $30 million
commitment expires in 2003 and the maturity is in 2008. At June 30, 2003,
approximately $11.1 million is available under this commitment.
13
Management's Discussion and Analysis of Financial Condition and
Results of Operations
(continued)
At June 30, 2002 and 2003, the Company had approximately $12.2 million and
$13.8 million, respectively, in outstanding notes receivable sold on a recourse
basis. Portions of the notes receivable are secured by deeds of trust on Los
Abrigados Resort & Spa, VCA-South Bend and VCA-Tucson.
In 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 April 2003, the Company amended one of its revolving lines of credit.
The new terms inlcude amending the line to $1,000,000 from $1,500,000, and
changing the maturity to December 31, 2003 from April 30, 2003.
In May 2003, the Company refinanced the existing mortgage on VCA South
Bend. The Company borrowed $2.75 million, of which $718,000 was used to
repay the existing mortgage which bore interest at 10.0% and had a
maturity date of November 2003. The new note bears interest at prime plus 1.5%,
but not less than 4.0%, with monthly principal payments of $35,000 plus
interest through January 2010.
In May 2003, the Company entered into an agreement to borrowed $2.0 million
to replenish working capital that had been used in part to purchase Vacation
Ownership Interests in the Carriage House in Las Vegas. The note bears
interest at prime plus 2.0%, but not less than 7.0%, with principal and interest
payments of $30,000 due monthly until maturity in May 2008, and is secured by
Carriage House Vacation Ownership Interests. As of June 30, 2003 the Company
had borrowed $1.5 million and the remaining $0.5 million was received in
July 2003.
In May 2003, the Company amended an existing construction loan to secure
an additional $2.0 million in construction financing for current
projects.
In the first six months of 2003, the Company purchased 80,467 treasury
shares for a cost of $652,553.
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 June 30, 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.
Contractual Cash PAYMENTS DUE BY PERIOD
Obligations Total <1 Year 1-3 Years 4-5 Years >5 Years
- -----------------------------------------------------------------------------------------------------
Long-term Debt $46,369,000 $7,453,000 $14,825,000 $16,459,000 $7,632,000
Capital Lease 38,000 34,000 4,000 -- --
Obligations
Operating Leases 17,970,000 1,903,000 3,097,000 2,172,000 10,798,000
- -----------------------------------------------------------------------------------------------------
Total $64,377,000 $9,390,000 $17,926,000 $18,631,000 $18,430,000
=====================================================================================================
Seasonality
The Company's revenues are moderately seasonal with the volume of ILX
owners, hotel guests and Vacation Ownership Interest exchange participants
typically greatest in the second and third fiscal quarters. As the Company
expands into new markets and geographic locations it may experience increased or
additional seasonality dynamics which may cause the Company's operating results
to fluctuate.
Inflation
Inflation and changing prices have not had a material impact on the
Company's revenues, operating income and net income during any of the Company's
three most recent fiscal years or the six months ended June 30, 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
(a) Evaluation of Disclosure Controls and Procedures
Based on their evaluation of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities and Exchange
Act of 1934 (the "Exchange Act")), the Company's principal executive
officer and principal financial officer have concluded that as of the end
of the period covered by this quarterly report on Form 10-Q such disclosure
controls and procedures are effective to ensure that information required
to be disclosed by the Company in reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and
forms.
(b) Changes in Internal Control over Financial Reporting
During the quarter under report, there was no change in the Company's
internal control over financial reporting that has materially affected, or
is reasonably likely to materially affect, the Company's interrnal control
over financial reporting.
15
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
On Thursday, June 19, 2003, the Company held it Annual Meeting of
Shareholders. At this meeting, the Shareholders were asked to vote on the
following proposal:
To elect eight (8) directors to serve until the next annual meeting of
Shareholders of the Company, or until their successors are duly elected and
qualified.
The voting results were as follows:
Nominees recommended in the Proxy Statement:
Votes For Votes Against Votes Withheld
- -------------------------------------------------------------------------------
Steven R. Chanen 2,441,573 0 3,268
Wayne M. Greenholtz 2,441,640 0 3,200
Joseph P. Martori 2,432,834 0 12,007
Joseph P. Martori, II 2,430,789 0 14,052
Patrick J. McGroder III 2,441,581 0 3,259
Nancy J. Stone 2,437,839 0 7,002
Steven A. White 2,440,247 0 4,593
Edward S. Zielinski 2,432,437 0 12,404
As a result of the vote, the following eight directors will serve until
the next annual meeting or until his or her successor is elected and qualified:
Steven R. Chanen, Wayne M. Greenholtz, Joseph P. Martori, Joseph P.
Martori, II, Patrick J. McGroder III, Nancy J. Stone, Steven A. White and Edward
S. Zielinski.
16
Item 5.Other Information
None
Item 6.Exhibits and Reports on Form 8-K
(i) Exhibits
Exhibit No. Description
----------- -----------
10.1 SECURED PROMISSORY NOTE
between VCA Nevada Incorporated and
Greens Worldwide Incorporated dated June 30, 2003
10.2 PLEDGE AGREEMENT
between VCA Nevada Incorporated and
Greens Worldwide Incorporated dated June 30, 2003
31 CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002
32 CERTIFICATION PURSUANT TO 18 U.S.C. 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
(ii) Reports on Form 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused its quarterly report on Form 10-Q to
be signed on its behalf by the undersigned thereunto duly authorized.
ILX RESORTS INCORPORATED
(Registrant)
/s/ Joseph P. Martori
-----------------------
Joseph P. Martori
Chief Executive Officer
/s/ Nancy J. Stone
------------------------
Nancy J. Stone
President
/s/ Margaret M. Eardley
------------------------
Margaret M. Eardley
Executive Vice President &
Chief Financial Officer
/s/ Taryn L. Chmielewski
------------------------
Taryn L. Chmielewski
Vice President
Corporate Controller
Date: As of August 11, 2003
18