Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended September 30, 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 September 30, 2003
----- ---------------------------------
Common Stock, without par value 2,893,194 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, September 30,
2002 2003
----------- ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 2,399,175 $ 1,877,075
Notes receivable, net 34,019,271 39,181,420
Note receivable from related party -- 2,693,857
Resort property held for Vacation Ownership Interest sales 24,150,438 20,578,172
Resort property under development 263,127 340,306
Land held for sale 811,590 681,673
Deferred assets 84,606 38,973
Property and equipment, net 9,008,973 10,155,011
Other assets 9,683,608 10,947,773
----------- -----------
TOTAL ASSETS $80,420,788 $86,494,260
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,760,570 $ 1,816,671
Accrued and other liabilities 2,737,844 3,887,510
Income taxes payable 178,071 --
Notes payable 44,729,013 47,388,247
Deferred income taxes 3,268,284 4,711,618
----------- -----------
TOTAL LIABILITIES 52,673,782 57,804,046
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000 shares
authorized; 177,591 and 166,803 shares issued and
outstanding; liquidation preference of $1,775,910
and $1,668,030
916,726 886,625
Common stock, no par value; 30,000,000 shares
authorized; 4,346,387 and 4,403,755 shares issued 19,497,334 19,884,978
Treasury stock, at cost, 1,414,795 and 1,510,561
shares, respectively
(5,268,277) (6,046,885)
Additional paid in capital 66,050 63,560
Guaranteed ESOP obligation (181,500) (45,375)
Retained earnings 12,716,673 13,947,311
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 27,747,006 28,690,214
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $80,420,788 $86,494,260
=========== ===========
See notes to condensed consolidated financial statements
2
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended December 30, Nine months ended September 30,
------------------------------- -------------------------------
2002 2003 2002 2003
----------- ----------- ----------- -----------
REVENUES
Sales of Vacation Ownership
Interests
$ 9,629,403 $11,200,739 $26,520,385 $31,766,238
Resort operating revenue 4,091,017 4,800,706 12,244,187 13,620,848
Interest income 1,484,663 1,615,546 4,340,829 4,441,154
----------- ----------- ----------- -----------
Total revenues 15,205,083 17,616,991 43,105,401 49,828,240
----------- ----------- ----------- -----------
COST OF SALES AND OPERATING EXPENSES
Cost of Vacation Ownership
Interests sold 1,398,031 1,481,581 3,855,881 4,239,750
Cost of resort operations 3,842,998 4,548,460 10,862,258 12,437,851
Sales and marketing 6,120,823 7,379,344 16,552,596 21,197,987
General and administrative 1,583,769 1,592,026 4,556,622 4,208,833
Provision for doubtful accounts 423,063 496,471 1,165,194 1,398,168
Depreciation and amortization 304,621 441,114 799,105 1,274,310
----------- ----------- ----------- -----------
Total cost of sales and operating
expenses 13,673,305 15,938,996 37,791,656 44,756,899
----------- ----------- ----------- -----------
Operating income 1,531,778 1,677,995 5,313,745 5,071,341
Income from land and other, net
(Related Party) 122,331 277,834 594,082 663,476
----------- ----------- ----------- -----------
Total operating income 1,654,109 1,955,829 5,907,827 5,734,817
----------- ----------- ----------- -----------
Interest expense (552,209) (579,943) (1,519,995) (1,665,693)
Equity in loss of related party
investment (45,396) (252,510) (45,396) (403,609)
----------- ----------- ----------- -----------
Income before income taxes 1,056,504 1,123,376 4,342,436 3,665,515
Income tax expense (422,601) (449,443) (1,736,974) (1,463,421)
----------- ----------- ----------- -----------
NET INCOME $ 633,903 $ 673,933 $ 2,605,462 $ 2,202,094
=========== =========== =========== ===========
NET INCOME PER SHARE
Basic $ 0.21 $ 0.23 $ 0.88 $ 0.74
=========== =========== =========== ===========
Diluted $ 0.20 $ 0.23 $ 0.85 $ 0.73
=========== =========== =========== ===========
DIVIDENDS PER SHARE $ -- $ 0.10 $ -- $ 0.30
=========== =========== =========== ===========
See notes to condensed consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
-------------------------------
2002 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,605,462 $ 2,202,094
Adjustments to reconcile net income to net cash provided by
operating activities:
(Gain) loss on sale of property and equipment (564,658) 962
Gain on extinguishment of debt -- (82,294)
Undistributed losses of equity investment in a related party 45,396 403,609
Loss on assumption of Sedona Worldwide Incorporated assets
and liabilities 48,887 --
Income tax expense 1,736,974 1,463,421
Provision for doubtful accounts 1,165,194 1,398,168
Depreciation and amortization 799,105 1,274,310
Amortization of guarantee fees 34,411 45,633
Common stock issued for services provided 449,892 24,013
Change in assets and liabilities:
(Increase) decrease in resort property held for Vacation
Ownership Interest sales (3,964,645) 3,572,266
Decrease (increase) in resort property under development 4,649,396 (77,179)
Decrease in land held for sale 37,586 129,917
Increase in other assets (2,666,232) (1,823,706)
(Decrease) increase in accounts payable (266,211) 56,101
Increase in accrued and other liabilities 1,295,878 1,000,447
Decrease in income taxes payable (653,825) (198,158)
Decrease in due to affiliates (24,022) --
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,728,588 9,389,604
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable, net (4,133,766) (6,560,317)
Increase in note receivable from related party -- (2,693,857)
Cash acquired from Sedona Worldwide Incorporated 30,457 --
Purchases of plant and equipment, net (3,843,668) (2,029,699)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (7,946,977) (11,283,873)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 18,860,642 18,243,983
Principal payments on notes payable (15,314,094) (15,744,749)
Principal payments on notes payable to affiliates (300,000) --
Preferred stock dividends (47,321) (47,321)
Common stock dividends including offering costs -- (365,259)
Redemption of preferred stock (770) (300)
Elimination of Series B preferred stock liquidation provision (191,143) --
Proceeds from exercise of stock options 160,000 23,000
Acquisition of treasury stock and other (1,030,686) (737,185)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,136,628 1,372,169
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,081,761) (522,100)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,548,058 2,399,175
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,466,297 $ 1,877,075
=========== ===========
See notes to condensed consolidated financial statements
4
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Business Activities
The condensed consolidated financial statements include the accounts of
ILX Resorts Incorporated, formerly ILX Incorporated, and its wholly owned and
majority-owned subsidiaries ("ILX" or the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by accounting
principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the nine-month period ended September 30, 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 September 30, Nine Months ended September 30,
-------------------------------- -------------------------------
2002 2003 2002 2003
--------- --------- ---------- ----------
Interest paid $ 582,315 $ 580,539 $1,555,569 $1,668,781
Income taxes paid 335,409 154,972 1,216,092 650,403
Interest capitalized 83,339 42,375 258,300 140,607
Accounting Matters
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 ("FIN 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2003 2002 2003
----------- ----------- ------------ -----------
Net income $ 633,903 $ 673,933 $ 2,605,462 $ 2,202,094
Less: Series A preferred stock dividends (11,830) (11,830) (35,491) (35,491)
----------- ----------- ------------ -----------
Net income available to common
stockholders - basic $ 622,073 $ 662,103 $ 2,569,971 $ 2,166,603
=========== =========== ============ ===========
Weighted average shares of common
stock outstanding - basic 2,940,462 2,893,723 2,935,972 2,913,127
=========== =========== ============ ===========
Basic net income per share $ 0.21 $ 0.23 $ 0.88 $ 0.74
=========== =========== ============ ===========
DILUTED NET INCOME PER SHARE
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2002 2003 2002 2003
----------- ----------- ------------ -----------
Net income $ 633,903 $ 673,933 $ 2,605,462 $ 2,202,094
Less: Series A preferred stock dividends (11,830) (11,830) (35,491) (35,491)
----------- ----------- ------------ -----------
Net income available to common
stockholders - diluted $ 622,073 $ 662,103 $ 2,569,971 $ 2,166,603
=========== =========== ============ ===========
Weighted average shares of common
stock outstanding 2,940,462 2,893,723 2,935,972 2,913,127
Add: Convertible preferred stock (Series
B and C) dilutive effect 55,620 37,479 68,521 38,400
Stock options dilutive effect 38,760 7,154 36,329 7,406
----------- ----------- ------------ -----------
Weighted average shares of common
stock outstanding - dilutive 3,034,842 2,938,356 3,040,822 2,958,933
=========== =========== ============ ===========
Diluted net income per share $ 0.20 $ 0.23 $ 0.85 $ 0.73
=========== =========== ============ ===========
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 nine months ended
September 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.
6
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3. SHAREHOLDERS' EQUITY
During the nine months ended September 30, 2003, the Company issued 100
shares of restricted common stock, valued at $386 and 2,705 shares of common
stock, valued at $23,627, 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 nine months ended September 30, 2003, the Company recorded the exchange
of 10,743 Series C Convertible shares for 3,581 common shares. Also during the
nine months ended September 30, 2003, the Company purchased 90,895 shares of
its common stock for $737,285.
During the nine months ended September 30, 2003, the Company issued 6,945
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 nine months ended September 30, 2003, the Company made
contributions to the ESOP of $136,125, which were used to make principal and
interest 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 $2,640 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 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 third installment of $283,319 has been recorded as a reduction in
retained earnings and an accrued liability at September 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 and second quarter dividends paid in
April and July 2003, shareholders elected to receive 55,986 shares of common
stock valued at $329,536 and cash dividends of $300,791. Of the 55,986 common
shares, 16,949 were purchased in privately negotiated transactions and 39,037
were newly issued common shares. The 55,986 common shares issued include
21,820 common shares, valued at $178,739, issued on shares held as collateral.
The Company incurred offering costs of $64,368 under the DRIP which were netted
against common shares issued.
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 385 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 $108,970 for the three months
ended September 30, 2003 and $422,633 for the nine months ended September 30,
2003 was recorded on the sales and is included in Income from land and other,
net. At September 30, 2003 deeds of trust for 346 of the Vacation Ownership
Interests secure outstanding indebtedness from PVC to Genesis of $827,669.
7
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. To date no interest payments
have been received. The note is convertible into common shares of publicly
traded GWWI at $0.20 per share. The balance on the note at September 30, 2003
is $2,693,857 exclusive of guarantees the Company has provided on equipment
leases. The total of the note receivable and the guarantees aggregate
$3,342,695. The Company holds a 36.4% equity interest in GWWI at September 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
the amount of $350,542. The Company is entitled to a guarantee fee equal to 2%
of the lease amount. The total fee of $7,011 has been included as deferred
revenue in accrued and other liabilities.
In July 2003, the Company entered into a guaranty agreement with GWWI
under which the Company guaranteed 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
lease amount. The total fee of $5,966 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 as part of 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.
In May 2003, the Company amended an existing construction loan to secure
an additional $2.0 million in construction financing for current projects.
8
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 6. SUBSEQUENT EVENTS
In October 2003, the Company entered into a revolving line of credit
agreement, secured by certain Customer Notes, with a bank to provide $600,000
of working capital. The line of credit bears interest at prime plus 1.0% with
interest paid monthly and all unpaid principal and interest due in October
2004.
On October 31, 2003 GWWI ceased operation of its putting facility and
ancillary businesses in Las Vegas. The greens and facilities continue to be
maintained while GWWI seeks other business opportunities. The sublease between
GWWI and VCA-NV was terminated in conjunction with the closing. The Company's
note receivable from GWWI is secured by a Pledge Agreement of substantially all
of GWWI's assets (see Note 4). In addition to the note receivable, the Company
holds a 36.4% ownership interest in GWWI which is recorded in other assets at
a value of $554,774 as of September 30, 2003 and guarantees certain GWWI
equipment leases (see Note 4). The Company believes the value of the assets
underlying the leases equal or exceed the outstanding guarantees and that the
value of its ownership interest in GWWI is not less than its carrying value at
September 30, 2003. In November 2003, the Company transferred the assets
underlying the guaranteed equipment leases and will assume payments under those
leases. The Company will again evaluate the note receivable and the value of
its ownership interest in December 2003.
NOTE 7. COMMITMENTS AND CONTINGENCIES
In September 2003, the Company received pleadings indicating that a
lawsuit against the Company and its Sedona Vacation Club and Premiere Vacation
Club businesses was filed by two individuals claiming damages for deceptive and
abusive practices on behalf of a purported class of purchasers of vacation
ownership interests. The suit alleges claims for breach of the Arizona
Consumer Fraud Act, the Arizona Real Estate Timeshare Act, breach of contract
and unjust enrichment. Plaintiffs also seek declaratory relief and imposition
of a constructive trust over timeshare owners' purchase money and maintenance
fee payments. Plaintiffs seek to have their claims certified for class action
treatment. The Company believes that the allegations are without merit and is
vigorously defending plaintiffs' claims. Discovery and motion practice have
not begun.
9
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 homeowners dues on sold Vacation Ownership Interests, the rental
of 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 1,583 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.
10
Results of Operations
The following table sets forth certain operating information for the
Company:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2003 2002 2003
-------- -------- -------- --------
As a percentage of total revenues:
Sales of Vacation Ownership Interests 63.3% 63.6% 61.5% 63.8%
Resort operating revenue 26.9% 27.2% 28.4% 27.3%
Interest income 9.8% 9.2% 10.1% 8.9%
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% 13.2% 14.5% 13.3%
Sales and marketing 63.6% 65.9% 62.4% 66.7%
Provision for doubtful accounts 4.4% 4.4% 4.4% 4.4%
Contribution margin percentage from sale of Vacation
Ownership Interests (1)
17.5% 16.5% 18.7% 15.5%
As a percentage of resort operating revenue:
Cost of resort operations 93.9% 94.7% 88.7% 91.3%
As a percentage of total revenues:
General and administrative 10.4% 9.0% 10.6% 8.4%
Depreciation and amortization 2.0% 2.5% 1.9% 2.6%
Operating income 10.1% 9.5% 12.3% 10.2%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 515 614 1,493 1,713
Average sales price per Vacation Ownership Interest
sold (excluding revenues from Upgrades) (2) $15,072 $14,899 $14,621 $14,815
Average sales price per Vacation Ownership Interest
sold (including revenues from Upgrades) (2) $18,414 $17,728 $17,496 $17,920
______________________________
(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 792 and 897 biennial and annual Vacation
Ownership Interests for the three months ended September 30, 2002 and 2003,
respectively, and 2,254 and 2,557 biennial and annual vacation ownership
interests for the nine months ended September 30, 2002 and 2003,
respectively.
11
Comparison of the Three and Nine Months Ended September 30, 2002 to the Three
and Nine Months Ended September 30, 2003
Sales of Vacation Ownership Interests increased 16.3% or $1,571,336 to
$11,200,739 for the three months ended September 30, 2003, from $9,629,403 for
the same period in 2002 and increased 19.8% or $5,245,853 to $31,766,238 for
the nine months ended September 30, 2003 from $26,520,385 for the same period
in 2002. The growth in the third quarter reflects primarily increases in sales
from the Las Vegas and San Carlos sales offices and year to date increases in
sales from these offices and greater sales to existing owners.
The average sales price per Vacation Ownership Interest sold (excluding
revenues from Upgrades) decreased 1.1% or $173 in 2003 to $14,899 for the three
months ended September 30, 2003 from $15,072 for the same period in 2002 and
increased 1.3% or $194 to $14,815 for the nine months ended September 30, 2003
from $14,621 for the same period in 2002. The slight decrease in the third
quarter average sales price is due to variation in product mix between years
largely due to the addition and growth of the Las Vegas sales office. The
number of Vacation Ownership Interests sold increased 19.2% from 515 in the
three months ended September 30, 2002 to 614 for the same period in 2003 and
increased 14.7% from 1,493 in the nine months ended September 30, 2002 to 1,713
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 nine months ended September
30, 2003 included 567 and 1,689 biennial Vacation Ownership Interests (counted
as 283.5 and 844.5 annual Vacation Ownership Interests) compared to 555 and
1,523 biennial Vacation Ownership Interests (counted as 277.5 and 761.5 annual
Vacation Ownership Interests) in the same periods in 2002, respectively.
Upgrade revenue, included in Vacation Ownership Interest sales, increased
0.9% to $1,735,554 for the three months ended September 30, 2003 from
$1,719,459 for the same period in 2002 and increased 23.9% to $5,316,905 for
the nine months ended September 30, 2003 from $4,290,796 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 the expansion of marketing efforts to existing owners
commencing in 2002. The average sales price per Vacation Ownership Interest
sold (including Upgrades) decreased 3.7% or $686 to $17,728 for the three
months ended September 30, 2003 from $18,414 in 2002 and increased 2.4% or $424
to $17,920 for the nine months ended September 30, 2003 from $17,496 for the
same period in 2002. The third quarter decrease in average sales price
reflects the combination of the variation in product mix described above, and
comparable upgrade revenue between years coupled with significant growth in
sales to new buyers from the Las Vegas and San Carlos sales offices in 2003.
Resort operating revenue increased 17.3% and 11.2% or $709,689 and
$1,376,661 to $4,800,706 and $13,620,848 for the three and nine months ended
September 30, 2003, respectively, reflecting increased occupancy at all
resorts, revenue from the Joey Bistro restaurant at the Carriage House in Las
Vegas which opened in late November 2002, and revenue from Bogee's Sports Bar &
Grill in Las Vegas ("Bogee's") which opened in July 2003. Cost of resort
operations as a percentage of resort operating revenue increased from 93.9% to
94.7% for the third quarter ended September 30, 2003 and increased from 88.7%
to 91.3% for the nine months ended September 30, 2003. The increases in cost
as a percentage of revenue for the three and nine months ended September 30,
2003 reflect the start up and operating losses at Joey Bistro and Bogee's both
in Las Vegas. The Company has adjusted its marketing methods and certain of
its operating parameters to reduce costs at Joey Bistro. In addition, the
restaurant will receive additional exposure as a result of the relocation of
the vacation ownership sales operation to the Carriage House further described
below. Effective October 31, 2003, the Company has ceased operating Bogee's.
Interest income increased 8.8% to $1,615,546 for the three months ended
September 30, 2003 from $1,484,663 for the same period in 2002 and increased
2.3% to $4,441,154 for the nine months ended September 30, 2003 from $4,340,829
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 14.5% for the three and nine months
ended September 30, 2002 to 13.2% and 13.3%, respectively, for the three and
nine months ended September 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.
12
Sales and marketing as a percentage of sales of Vacation Ownership
Interests increased to 65.9% for the three months ended September 30, 2003 from
63.6% for the same period in 2002 and to 66.7% for the nine months ended
September 30, 2003 from 62.4% for the same period in 2002, reflecting the
greater scale of the Las Vegas sales center in 2003 and lower closing rates in
the first two quarters of 2003 and higher marketing costs year to date for the
Sedona sales office. 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 October 2003, the Las Vegas sales operation was relocated from its
offsite location to the Carriage House and the scale of the operation was
reduced. The Company plans to generate fewer tours to this office but
anticipates greater sales volume per tour and reduced sales and marketing costs
as a percentage of sales revenue.
The provision for doubtful accounts as a percentage of Vacation Ownership
Interest sales was consistent at 4.4% of sales of Vacation Ownership Interests
in the three and nine month periods ended September 30, 2002 and 2003.
General and administrative expenses decreased to 9.0% and 8.4% of total
timeshare revenue for the third quarter and nine months ended September 30,
2003, from 10.4% and 10.6% for the same periods in 2002. The decrease for the
three and nine 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, a gain on the early extinguishment of a note payable which
offset general and administrative expenses and lower accrued contributions for
the ESOP plan.
Income from land and other, net include gains of $108,970 and $422,633 for
the three and nine months ended September 30, 2003, respectively, on bulk sales
of Vacation Ownership Interests owned by the Company's subsidiary Genesis and a
gain of $131,243 in the third quarter on the sale of a parcel of land owned by
Genesis. In the nine months ended September 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 5.0% and 9.6% increases in interest expense to $579,943 and $1,665,693
for the three and nine months ended September 30, 2003 from $552,209 and
$1,519,995 for the same periods in 2002, respectively, reflects the combined
net effect of a greater average balance 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 nine months ended September 30,
2002 and 2003, cash provided by operations was $4,728,588 and $9,389,604,
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, greater increases in other assets in 2002 for the investment in GWWI
and larger estimated tax payments, and the undistributed losses on the equity
investment in GWWI, 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
13
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 $1.4 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.
Uses of Cash
Investing activities typically reflect a net use of cash because of
capital additions and loans to customers in connection with the Company's
Vacation Ownership Interest sales. Net cash used in investing activities
during the nine months ended September 30, 2002 and 2003 was $7,946,977 and
$11,283,873, respectively. The increase includes the note receivable from GWWI
for advances of $2,693,857 during 2003 as well as greater Customer Notes
receivable due to increased sales of Vacation Ownership Interests in 2003.
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 nine months ended
September 30, 2002 and 2003 was $2,136,628 and $1,372,169, respectively. The
decrease reflects lower borrowings in 2003, and the payment of cash dividends
on common stock for the first and second quarter of 2003, net of 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 nine months ended
September 30, 2003, the Company made contributions to the ESOP of $136,125
which were used to make principal and interest 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.
14
Credit Facilities and Capital
At September 30, 2003, the Company has an agreement through 2005 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 September 30, 2003, $20.7 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 September 30, 2003,
approximately $10.6 million is available under this commitment.
At September 30, 2002 and 2003, the Company had approximately $12.8
million and $14.4 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 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.
In May 2003, the Company amended an existing construction loan to secure
an additional $2.0 million in construction financing for current projects.
In October 2003, the Company entered into a revolving line of credit
agreement, secured by certain Customer Notes, with a bank to provide $600,000
of working capital. The line of credit bears interest at prime plus 1.0% with
interest paid monthly and all unpaid principal and interest due in October
2004.
In the first nine months of 2003, the Company purchased 90,895 treasury
shares for a cost of $737,285.
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.
15
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 September 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.
PAYMENTS DUE BY PERIOD
CONTRACTUAL CASH
OBLIGATIONS TOTAL < 1 YEAR 1-3 YEARS 4-5 YEARS > 5 YEARS
- ------------------------- ------------ ------------ ------------ ------------ ------------
LONG-TERM DEBT $ 47,359,000 $ 9,078,000 $ 14,798,000 $ 17,100,000 $ 6,383,000
CAPITAL LEASE OBLIGATIONS 29,000 29,000 -- -- --
OPERATING LEASES 18,081,000 1,741,000 2,857,000 2,158,000 11,325,000
- ------------------------- ------------ ------------ ------------ ------------ ------------
TOTAL $ 65,469,000 $ 10,848,000 $ 17,655,000 $ 19,258,000 $ 17,708,000
============ ============ ============ ============ ============
SEASONALITY
The Company's revenues are moderately seasonal with the volume of ILX
owners, hotel guests and Vacation Ownership Interest exchange participants
typically greatest in the second and third fiscal quarters. As the Company
expands into new markets and geographic locations it may experience increased
or additional seasonality dynamics which may cause the Company's operating
results to fluctuate.
INFLATION
Inflation and changing prices have not had a material impact on the
Company's revenues, operating income and net income during any of the Company's
three most recent fiscal years or the nine months ended September 30, 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 internal control
over financial reporting.
16
PART II
ITEM 1. LEGAL PROCEEDINGS
In September 2003, the Company received pleadings indicating that a
lawsuit against the Company and its Sedona Vacation Club and Premiere Vacation
Club businesses was filed by two individuals claiming damages for deceptive and
abusive practices on behalf of a purported class of purchasers of vacation
ownership interests. The suit alleges claims for breach of the Arizona
Consumer Fraud Act, the Arizona Real Estate Timeshare Act, breach of contract
and unjust enrichment. Plaintiffs also seek declaratory relief and imposition
of a constructive trust over timeshare owners' purchase money and maintenance
fee payments. Plaintiffs seek to have their claims certified for class action
treatment. The Company believes that the allegations are without merit and is
vigorously defending plaintiffs' claims. On the date that the Company's
response to the complaint is due, defendants will answer and file certain
motions. Discovery and motion practice have not begun.
Other 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
----------- -----------
31 CERTIFICATION PURSUANT TO 18 U.S.C. {section} 1350, AS
ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
OF 2002
32 CERTIFICATION PURSUANT TO 18 U.S.C. {section} 1350, AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
17
(ii)Reports on Form 8-K
1. Registrant's Form 8-K dated August 1, 2003 and filed with the
Securities and Exchange Commission on August 1, 2003 related to
a press release regarding the Company's financial results for
the second quarter ended June 30, 2003.
2. Registrant's Form 8-K dated September 29, 2003 and filed with
the Securities and Exchange Commission on September 30, 2003
related to a press release regarding disclosure by the Company
and its Sedona Vacation Club and Premiere Vacation Club
businesses of the receipt of pleadings on September 23, 2003
indicating that a lawsuit was filed by two individuals claiming
damages for deceptive and abusive practices on behalf of a
purported class of purchasers of vacation ownership interests.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused its quarterly report on Form
10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
ILX RESORTS INCORPORATED
(Registrant)
/s/ Joseph P. Martori
---------------------------
Joseph P. Martori
Chief Executive Officer
/s/ Nancy J. Stone
---------------------------
Nancy J. Stone
President
/s/ Margaret M. Eardley
---------------------------
Margaret M. Eardley
Executive Vice President & Chief Financial Officer
/s/ Taryn L. Chmielewski
---------------------------
Taryn L. Chmielewski
Vice President
Corporate Controller
Date: As of November 11, 2003
19