ITEM 3. LEGAL PROCEEDINGS
Litigation has arisen in the normal course of the Company's business, none of which is deemed to be material.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the periods indicated, the range of high and low sales prices for the Common Stock. The information is as reported by the American Stock Exchange which listed the Common Stock of the Company on February 11, 1998. Prior to February 11, 1998, it had been traded on the Nasdaq SmallCap Market. As of December 31, 2001, the Common Stock was held by approximately 1,062 holders of record. No dividends on the Common Stock have been declared by the Company since inception and none are anticipated in the foreseeable future. Dividends on Common Stock are subordinate to dividends payable on the Company's Series A and Series C Preferred Stock.
COMMON STOCK ---------------- HIGH LOW ---- --- YEAR ENDED DECEMBER 31, 2000 First Quarter $2.38 $1.38 Second Quarter 2.44 1.50 Third Quarter 2.25 1.63 Fourth Quarter 2.13 1.63 YEAR ENDED DECEMBER 31, 2001 First Quarter 3.65 1.81 Second Quarter 4.25 2.20 Third Quarter 8.25 3.80 Fourth Quarter 7.65 4.20
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated historical financial information set forth below for the five years ended December 31, 2001 has been derived from the consolidated financial statements of the Company, which have been restated to give effect to the one-for-five reverse stock split (the "Reverse Stock Split"), declared effective by the Company on January 12, 1998.
The Selected Consolidated Financial Information should be read in conjunction with the Consolidated Financial Statements and notes thereto included herein, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS FORM 10-K, THE WORDS "ESTIMATE," "PROJECTION," "INTEND," "ANTICIPATES," "EXPECTS," "MAY," "SHOULD," AND SIMILAR TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS THAT RELATE TO THE COMPANY'S FUTURE PERFORMANCE. SUCH STATEMENTS ARE SUBJECT TO SUBSTANTIAL UNCERTAINTY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS SET FORTH BELOW. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
OVERVIEW
ILX Resorts Incorporated was formed in 1986 to enter the Vacation Ownership Interest business. The Company generates revenue primarily from the sale and financing of Vacation Ownership Interests. The Company also generates revenue from the rental of its unused or unsold inventory of units at the ILX Resorts and from the sale of food, beverages or other services at such resorts. The Company currently owns six resorts in Arizona, developable land adjacent to an existing resort in Arizona, one resort in Indiana, one resort in Colorado, 1,500 Vacation Ownership Interests in a resort in San Carlos, Mexico and 810 Vacation Ownership Interests in a resort in Las Vegas.
The Company recognizes revenues from the sale of Vacation Ownership Interests at such time as a minimum of 10% of the purchase price has been received in cash, the statutory rescission period has expired, the buyer is committed to continued payments of the remaining purchase price and the Company's future obligations for the Vacation Ownership Interests have been released. Resort operating revenues are recorded as the rooms are rented or the services are performed.
Costs associated with the acquisition and development of Vacation Ownership Interests, including carrying costs such as interest and taxes, are capitalized and amortized to cost of sales as the respective revenue is recognized.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the Company.
- ---------- (1) Defined as: the sum of Vacation Ownership Interest sales less the cost of Vacation Ownership Interests sold less sales and marketing expenses less a provision for doubtful accounts, divided by sales of Vacation Ownership Interests.
(2) Reflects all Vacation Ownership Interests on an annual basis.
(3) Consists of an aggregate of 2,387, 2,575 and 2,692 biennial and annual Vacation Ownership Interests for the years ended December 31, 1999, 2000 and 2001, respectively.
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO DECEMBER 31, 2001
Sales of Vacation Ownership Interests increased 7.4% or $1.9 million in 2001 to $28.1 million from $26.2 million in 2000, reflecting an increase in sales from the Sedona sales office and increased Upgrades, net of a decrease in sales from the Kohl's Ranch, VCA-South Bend and VCA-Tucson sales offices. The increase in sales from the Sedona sales office is a result of an increase in the number of tours from the marketing venues in Sedona. The decrease in sales from the Kohl's Ranch sales office reflects a reduction in the number of tours to this office. The reduced tour flow reflects primarily a reduction in the number of non-owner guests at the resort due to cessation of certain on-site activities. Non-owner visitors to the resort are offered the opportunity to attend a sales presentation either during their visit, or at a later date. The decrease in sales from the VCA-South Bend sales office reflects the reduction in the third quarter of 2000 from a full scale sales office to a small sales staff that both generates its own tours and sells to such prospects for a percentage of sales. The decrease in sales from the VCA-Tucson sales office is due to a decrease in tours provided by the major tour vendor to this office. Upgrade revenue increased 8.9% to $2.8 million in 2001 from $2.6 million in 2000, reflecting continuation of marketing efforts to existing owners. The average sales price per Vacation Ownership Interest sold (excluding Upgrades) increased 1.9% to $14,118 in 2001 compared to $13,859 in 2000 and the average sales price per Vacation Ownership Interest sold including Upgrades increased 2.0% to $15,720 in 2001 from $15,411 in 2000.
The number of Vacation Ownership Interests sold increased 5.5% to 1,756 in 2001 from 1,665 in 2000. Sales of Vacation Ownership Interests in 2001 included 1,873 biennial Vacation Ownership Interests (counted as 936.5 annual Vacation Ownership Interests) and 819 annual Vacation Ownership Interests compared to 1,821 biennial Vacation Ownership Interests (counted as 910.5 annual Vacation Ownership Interests) and 754 annual Vacation Ownership Interests in 2000.
Resort operating revenues increased 27.2% or $3.8 million from $13.8 million in 2000 to $17.6 million in 2001, largely reflecting the addition of resort inventory in late 2000, with the acquisition of the Bell Rock Inn and Los Abrigados Lodge in the fourth quarter of 2000 as well as the addition of twelve new cabins as Kohl's Ranch Lodge. The cost of resort operations increased at a lesser percentage than the increase in revenues with a 14.1% or $1.8 million increase to $14.6 million in 2001 from $12.8 million in 2000. Cost of resort operations as a percentage of resort operating revenue decreased to 83.4% in 2001 from 93.0% in 2000, as a result of increased revenue, including an increase in rates from vacation interval owners in 2001, increased occupancy, and improved operating efficiencies at Kohl's Ranch Lodge. Certain of these benefits are not expected to recur on a regular basis and cost of resort operation as a percentage of resort operating revenue is expected in the future to be comparable to prior years.
Interest income decreased by 14.1% to $2.7 million in 2001 from $3.1 million in 2000, reflecting greater early pay-offs of Customer Notes in 2001 and a decrease in the percentage of Customer Notes sold, for which the Company recognizes the interest premium upon sale of the note.
Cost of Vacation Ownership Interests sold as a percentage of Vacation Ownership Interest sales increased to 17.0% in 2001 from 14.6% in 2000, reflecting variations in product mix, an increase in cost of sales recognized on Upgrades, and improvements made to resort properties.
Sales and marketing as a percentage of sales of Vacation Ownership Interests increased to 57.0% in 2001 compared to 56.3% in 2000, reflecting the net effect of a lower cost per tour offset by decreased closing rates at the Sedona sales office in 2001.
The provision for doubtful accounts as a percentage of Vacation Ownership Interest sales increased to 4.4% of sales of Vacation Ownership Interests in 2001 from 4.3% in 2000, reflecting the Company's decision to increase the provision on new sales in the second quarter of 2000.
General and administrative expenses increased 7.7% to $5.0 million in 2001 from $4.6 million in 2000, corresponding to revenue growth between years. General and administrative expenses decreased between years as a percentage of total timeshare revenues from 10.8% in 2000 to 10.3% in 2001.
Interest expense decreased 4.0% from $2.7 million in 2000 to $2.6 million in 2001, reflecting the combined net effect of greater borrowings in 2001 and lower borrowing rates. During 2001, the Company continued to retain and borrow against, rather than sell, more of its Customer Notes. The Company borrows against such notes at variable rates tied to prime and, accordingly, during 2001 a greater percentage of the Company's indebtedness is at lower, variable rates and a lesser percentage at higher fixed rates than in prior years. The increase in Notes Payable at December 31, 2001 compared to December 31, 2000 includes the creation of $4,900,000 in indebtedness to acquire the leasehold interest in Las Vegas, Nevada, for which minimal interest was incurred during 2001.
COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO DECEMBER 31, 2000
Sales of Vacation Ownership Interests increased 10.4% or $2.5 million in 2000 to $26.2 million from $23.7 million in 1999, reflecting an increase in sales from the Sedona sales office, addition of the Phoenix offsite sales office and increased Upgrades, net of a decrease in sales from both the VCA-South Bend and VCA-Tucson sales offices. The increase in sales from the Sedona sales office is a result of an increase in the number of tours and an improved closing rate (sales as a percentage of tours). The decrease in sales from the VCA-South Bend sales office reflects the reduction in the third quarter of 1999 from a full scale sales office to a small sales staff that both generates its own tours and sells to such prospects for a percentage of sales. The decrease in sales from the VCA-Tucson sales office is due to a decrease in tour flow, in part as a result of reducing the operation from seven days to five days a week to gain certain operating efficiencies. Upgrade revenue increased 18.2% to $2.6 million in 2000 from $2.2 million in 1999, reflecting expansion of marketing efforts to existing owners. The average sales price per Vacation Ownership Interest sold (excluding Upgrades) increased 3.0% to $13,859 in 2000 from $13,453 in 1999. The average sales price per Vacation Ownership Interest sold including Upgrades increased by a slightly lower rate between years to $15,411 in 2000 from $15,183 in 1999 in spite of the increase in Upgrade revenue, because of the greater number of sales (excluding Upgrades) in 2000.
The number of Vacation Ownership Interests sold increased 7.8% to 1,665 in 2000 from 1,545 in 1999. Sales of Vacation Ownership Interests in 2000 included 1,821 biennial Vacation Ownership Interests (counted as 910.5 annual Vacation Ownership Interests) and 754 annual Vacation Ownership Interests compared to 1,685 biennial Vacation Ownership Interests (counted as 843 annual Vacation Ownership Interests) and 702 annual Vacation Ownership Interests in 1999.
Resort operating revenues increased 3.3% or $0.4 million from $13.4 million in 1999 to $13.8 million in 2000, reflecting a slight increase in both revenue from vacation interval owners and hotel room rentals. While the cost of resort operations increased 2.5% or $0.3 million to $12.8 million in 2000 from $12.5 million in 1999, due primarily to inflation, cost of resort operations as a percentage of resort operating revenue improved modestly to 93.0% in 2000 from 93.7% in 1999.
Interest income decreased by 8.6% to $3.1 million in 2000 from $3.4 million in 1999, reflecting greater early pay-offs of Customer Notes in 2000.
Cost of Vacation Ownership Interests sold as a percentage of Vacation Ownership Interest sales increased to 14.6% in 2000 from 13.3% in 1999, reflecting variations in product mix, an increase in cost of sales recognized on Upgrades, and improvements made to resort properties.
Sales and marketing as a percentage of sales of Vacation Ownership Interests decreased to 56.3% in 2000 compared to 65.1% in 1999, reflecting generation of a greater number of tours and increased closing rates at the Sedona sales office in 2000, and reduction of less efficient tour generation methods to the VCA-South Bend sales office beginning in the third quarter of 1999 and to the Kohl's Ranch sales office beginning in the first quarter of 2000.
The provision for doubtful accounts as a percentage of Vacation Ownership Interest sales increased to 4.3% of sales of Vacation Ownership Interests in 2000 from 3.4% in 1999, reflecting the Company's decision to increase the provision on new sales in the second quarter of 2000.
General and administrative expenses increased 5.7% to $4.6 million in 2000 from $4.4 million in 1999, corresponding to revenue growth between years. General and administrative expenses were comparable between years as a percentage of total timeshare revenues at 10.8% in both 1999 and 2000.
Interest expense decreased 5.1% from $2.8 million in 1999 to $2.7 million in 2000, reflecting the combined net effect of greater borrowings in 2000 and lower borrowing rates. During 2000, the Company continued to retain and borrow against, rather than sell, more of its Customer Notes. The Company borrows against such notes at variable rates tied to prime and, accordingly, during 2000 a greater percentage of the Company's indebtedness is at lower, variable rates and a lesser percentage at higher fixed rates than in prior years. The increase in Notes Payable at December 31, 2000 compared to December 31, 1999 includes the assumption of $4,472,900 in indebtedness to acquire the Bell Rock Inn in late December 2000, for which minimal interest was incurred during 2000.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH
The Company generates cash primarily from the sale of Vacation Ownership Interests (including Upgrades), the financing of Customer Notes from such sales and resort operations. Because the Company uses significant amounts of cash in the development and marketing of Vacation Ownership Interests, but collects the cash on the Customer Notes receivable over a long period of time, borrowing against and/or selling receivables is necessary to provide sufficient cash to fund its normal operations.
The fluctuations in cash provided by financing activities from $3.7 million in 1999 and $0.4 million in 2001 to cash used in financing activities of $0.1 million in 2000, reflect increased net borrowings on notes payable related to construction costs in Las Vegas, Nevada and the financing of the Sedona Station in 2001, net of the increase in treasury stock purchases during 2001 as compared to 2000 and 1999. In addition, 1999 net cash provided by financing activities reflects greater borrowings against retained Customer Notes receivable , net of repayment of indebtedness with a portion of the proceeds of the offering.
For regular Federal income tax purposes, the Company reports substantially all of its non-factored financed Vacation Ownership Interest sales under the installment method. Under the installment method, the Company recognizes income on sales of Vacation Ownership Interests only when the Company receives cash either in the form of a down payment, as an installment payment or from proceeds from the sale of the Customer Note. The deferral of income tax liability conserves cash resources on a current basis. Interest may be imposed, however, on the amount of tax attributable to the installment payments for the period beginning on the date of sale and ending on the date the related tax is paid. If the Company is otherwise not subject to tax in a particular year, no interest is imposed since the interest is based on the amount of tax paid in that year. The consolidated financial statements do not contain an accrual for any interest expense that would be paid on the deferred taxes related to the installment method, as the interest expense is not estimable.
At December 31, 2001, the Company, excluding its Genesis subsidiary, had net operating loss ("NOL") carryforwards of approximately $5.2 million, which expire in 2002 through 2020. At December 31, 2001, Genesis had federal NOL carryforwards of approximately $2.1 million, which are limited as to usage, because they arise from built-in losses of an acquired company. In addition, such losses can only be utilized through the earnings of Genesis and are limited to a maximum of $189,000 per year. To the extent the entire $189,000 is not utilized in a given year, the difference may be carried forward to future years. Any unused Genesis NOLs will expire in 2008.
In addition, Section 382 of the Code imposes additional limitations on the utilization of NOLs by a corporation following various types of ownership changes which result in more than a 50% change in ownership of a corporation within a three-year period. Such changes may result from new Common Stock issuances by the Company or changes occurring as a result of filings with the Securities and Exchange Commission of Schedules 13D and 13G by holders of more than 5% of the Common Stock, whether involving the acquisition or disposition of Common Stock. If such a subsequent change occurs, the limitations of Section 382 would apply and may limit or deny the future utilization of the NOL by the Company, which could result in the Company paying substantial additional federal and state taxes. See Note 7 of Notes to Consolidated Financial Statements.
USES OF CASH
Investing activities typically reflect a net use of cash because of capital additions and loans to customers in connection with the Company's Vacation Ownership Interest sales. Net cash used in investing activities in 1999, 2000 and 2001 was $5.3 million, $6.6 million and $5.9 million, respectively. The decrease in cash used in investing activities in 2001 reflects the cash portion of the purchase of the Bell Rock Inn and of Sedona Station in 2000.
The Company requires funds to finance the acquisitions of property for future resort development and to further develop the existing resorts, as well as to make capital improvements and support current operations. Cash provided by operating activities was $6.4 million in 2001 as compared to $6.2 million in 2000 and as compared to $1.3 million in 1999. The increased cash provided by operating activities in 2000 and 2001 reflects greater net income, and the greater associated deferred income taxes and provision for doubtful accounts. Variations between years also reflect that during 1999, the Company advanced funds toward
the cost of construction of the San Carlos Vacation Ownership Interests, a portion of which was repaid to the Company during 2000 and 2001. The increase in other assets in 2001 was due to the cost incurred to acquire the leasehold interest in Las Vegas, Nevada which will be amortized over the life of the lease. The decrease in accrued and other liabilities was due to timing differences in collection of receivables from the ILX Resorts Homeowner Associations. The decrease in resort property held for vacation ownership interest sales reflects the increase in sales of vacation ownership interests over 2000.
Customer defaults have a significant impact on cash available to the Company from financing Customer Notes receivables, in that notes which are more than 60 to 90 days past due are not eligible as collateral. As a result, the Company in effect must repay borrowings against such notes or buy back such notes if they were sold with recourse.
On April 9, 1999 (effective January 1, 1999), the Company formed the ILX Resorts Incorporated Employee Stock Ownership Plan and Trust (the "ESOP"). The intent of the ESOP is to provide a retirement program for employees that aligns their interests with those of the Company. During 1999, the Company declared, and funded in cash, contributions of $250,000 to the ESOP. In August 1999, the ESOP entered into an agreement with Litchfield Financial Corporation for a $500,000 line of credit, which was secured by the Company's stock purchased with the funds and guaranteed by the Company. During 2000 and 2001, the Company contributed $250,000 each year to the ESOP and such funds were used by the ESOP to repay the line of credit.
During 1999, the ESOP purchased a total of 375,300 shares of the Company's common stock in the open market and during 2000, the Company issued to the ESOP 100,000 shares of restricted common stock. During the year ended December 31, 2001, the Company issued 20,000 shares of restricted common stock to the ESOP. At December 31, 2000, 257,400 of the shares owned by the ESOP and purchased with borrowed funds remained collateral for the $250,000 principal outstanding on the ESOP line of credit. These shares had not been released to participant accounts, although 128,700 of these shares were committed to be released at that date and were released in early 2001. At December 31, 2000, the unallocated shares are reflected at cost as a contra equity account, Guaranteed ESOP Obligation. At December 31, 2001, all previously unallocated shares have been released to participant accounts.
The ESOP may purchase additional shares for future year contributions through loans made directly to the ESOP and guaranteed by the Company. Such borrowings are not expected to exceed $1,000,000.
CREDIT FACILITIES AND CAPITAL
At December 31, 2001, the Company has an agreement with a financial institution for a commitment of $40 million under which the Company may sell certain of its Customer Notes. The agreement 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 December 31, 2001, $21.9 million of the $40 million commitment was available to the Company.
The Company also has a financing commitment aggregating $30.0 million whereby the Company may borrow against notes receivable pledged as collateral. These borrowings bear interest at a rate of prime plus 1.5%. The $30 million commitment expires in 2002. At December 31, 2001, approximately $12.4 million is available under this commitment.
In July 1999, the Company entered into an agreement with an affiliate to purchase sixty Vacation Ownership Interests for the price of $500,000. The Vacation Ownership Interests consist of four ILX Premiere Vacation Club Platinum memberships, fifty ILX Premiere Vacation Club Gold memberships and six VCA-South Bend Alumni House extended football weekend memberships. The Company issued a promissory note for the purchase price, which bears interest at 8%. The note is recorded as a Note payable to affiliates. The agreement also modified the terms of a previously existing Note payable to a related affiliate. As of December 31, 2001, the balance on this note is $300,000.
In December 1999, the Company completed the spin-off of its 80% ownership interest in SWI to the shareholders of ILX. In conjunction with the spin-off, the Company agreed to provide up to $200,000 of working capital financing to SWI through November 30, 2001 at an interest rate of prime plus 3%, with interest payable monthly, and a maturity date of December 31, 2001. Pursuant to the agreement, the Company had advanced SWI $108,000 as of December 31, 2001. On January 2, 2002, the Company entered into a General Bill of Sale, Assignment and Assumption Agreement with SWI whereby the Company assumed all of the assets and liabilities of SWI.
In December 1999, the Company guaranteed a $1,000,000 operating line of credit for the Sedona Vacation Club, the owners' association of the members who own Vacation Ownership Interests in Los Abrigados. Sedona Vacation Club used the proceeds for renovations at Los Abrigados and is repaying the principal and interest from collections it receives from a special assessment of its owners for this purpose and from current and future year owner reserve payments. The line of credit bears interest at prime plus 2.5% and is due through 2002. As of December 31, 2001, approximately $248,000 was outstanding on this line.
In February 2000, the Company borrowed $600,000 for the purpose of using the funds to purchase treasury stock. In 2001, the note was modified and the Company borrowed an additional $500,000 for the same purpose. The note payable bears interest at 12% and is due through 2004. At December 31, 2001, approximately $714,000 was outstanding on the note. During 2001, the Company purchased 543,200 shares of its Common Stock for $2,379,428.
In December 2000, the Company acquired for $1,010,000 cash the Sedona Station adjacent to Los Abrigados to be the site of its new Sedona sales center. In March 2002, the Company borrowed $808,000, which is secured by the property and bears interest at a fixed rate of 8.625%. The debt is payable in equal monthly payments of principal and interest over a ten-year term, ending April 2011.
In December 2000, the Company acquired the Bell Rock Inn in the Village of Oak Creek, Arizona, for a purchase price of $4,972,997, including assumption of the existing mortgage balance of $4,472,997. The mortgage bears interest at 7.49%, and is payable in equal monthly payments of principal and interest through 2023.
In January 2001, the Company refinanced the construction note payable on VCA-Tucson. In August 2001, the note was amended to provide for the borrowing of an additional $1,000,000. The terms include extension of the maturity date to June 2004, modification of the interest rate to prime plus 1% from a 12% fixed rate, and a change in the principal payments and release provisions to include a $134,000 minimum monthly principal payment.
In October 2001, the Company amended an outstanding construction loan to secure an additional $5.2 million in construction financing for current and planned projects.
In the future, the Company may negotiate additional credit facilities, including leases, issue corporate debt, issue equity securities, or any combination of the above. Any debt incurred or issued by the Company may be secured or unsecured, may bear interest at fixed or variable rates of interest, and may be subject to such terms as management deems prudent. There is no assurance that the Company will be able to secure additional corporate debt or equity at or beyond current levels or that the Company will be able to maintain its current level of debt.
The Company believes available borrowing capacity, together with cash generated from operations, will be sufficient to meet the Company's liquidity, operating and capital requirements for at least the next 12 months.
SEASONALITY
The Company's revenues are moderately seasonal with the volume of ILX owners, hotel guests and Vacation Ownership Interest exchange participants typically greatest in the second and third fiscal quarters. As the Company expands into new markets and geographic locations it may experience increased or additional seasonality dynamics which may cause the Company's operating results to fluctuate.
INFLATION
Inflation and changing prices have not had a material impact on the Company's revenues, operating income and net income during any of the Company's three most recent fiscal years. However, to the extent inflationary trends affect short-term interest rates, a portion of the Company's debt service costs may be affected as well as the rates the Company charges on its Customer Notes.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information set forth on Index to Consolidated Financial Statements appearing on page of this Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is set forth in the Company's Definitive Proxy Statement relating to the 2002 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is set forth in the Company's Definitive Proxy Statement relating to the 2002 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is set forth in the Company's Definitive Proxy Statement relating to the 2002 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is set forth in the Company's Definitive Proxy Statement relating to the 2002 Annual Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS PAGE OR METHOD OF FILING --------------------------------- ------------------------
(i) Report of Hansen, Barnett & Maxwell, Page a professional corporation
(ii) Consolidated Financial Statements and Pages through Notes to Consolidated Statements of the Registrant, including Consolidated Balance Sheets as of December 31, 2001 and 2000 and Consolidated Statements of Operations, Shareholders' Equity and Cash Flows for each of the three years ended December 31, 2001, 2000 and 1999.
(a) (2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedules other than those mentioned above are omitted because the conditions requiring their filing do not exist or because the required information is given in the financial statements, including the notes thereto.
(a) (3) EXHIBITS
The Exhibit Index attached to this report is hereby incorporated by reference.
(b) REPORTS ON FORM 8-K
None
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 29th day of March, 2002.
ILX Resorts Incorporated, an Arizona corporation (Registrant)
By: /s/ Joseph P. Martori ---------------------------------- Joseph P. Martori Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ----
/s/ Joseph P. Martori Chairman of the Board and March 29, 2002 - --------------------------- Chief Executive Officer Joseph P. Martori (principal executive officer)
/s/ Nancy J. Stone President, Chief Operating March 29, 2002 - --------------------------- Officer and Director Nancy J. Stone
/s/ Margaret M. Eardley Executive Vice President and March 29, 2002 - --------------------------- Chief Financial Officer Margaret M. Eardley (principal financial officer)
/s/ Taryn L. Chmielewski Vice President and Chief March 29, 2002 - --------------------------- Accounting Officer Taryn L. Chmielewski
/s/ Edward S. Zielinski Executive Vice President and March 29, 2002 - --------------------------- Director Edward S. Zielinski
/s/ Joseph P. Martori, II Senior Vice President and March 29, 2002 - --------------------------- Director Joseph P. Martori, II
/s/ Steven R. Chanen Director March 29, 2002 - --------------------------- Steven R. Chanen
/s/ James W. Myers Director March 29, 2002 - --------------------------- James W. Myers
/s/ Patrick J. McGroder III Director March 29, 2002 - --------------------------- Patrick J. McGroder III
/s/ Steven A. White Director March 29, 2002 - --------------------------- Steven A. White
PAGE ---- Report of Independent Certified Public Accountants Financial Statements: Consolidated Balance Sheets at December 31, 2000 and 2001 Consolidated Statements of Operations for the years ended December 31, 1999, 2000 and 2001 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 2000 and 2001 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001 Notes to Consolidated Financial Statements
[LETTERHEAD OF HANSEN, BARNETT & MAXWELL]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders of ILX Resorts Incorporated
We have audited the accompanying consolidated balance sheets of ILX Resorts Incorporated and Subsidiaries (the Company) as of December 31, 2000 and 2001 and the related consolidated statements of operations, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2000 and 2001 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah February 15, 2002
ILX RESORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements
ILX RESORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements
ILX RESORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See notes to consolidated financial statements
ILX RESORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS ACTIVITIES
The consolidated financial statements include the accounts of ILX Resorts Incorporated, formerly ILX Incorporated, and its wholly owned and majority-owned subsidiaries ("ILX" or the "Company"). All significant intercompany transactions and balances have been eliminated in consolidation.
The Company's significant business activities include developing, operating, marketing and financing ownership interests ("Vacation Ownership Interests") in resort properties located in Arizona, Colorado, Florida, Indiana, Nevada and Mexico. Until December 31, 1999, the Company's operations also included marketing of skin and hair care products through its then majority owned subsidiary Sedona Worldwide Incorporated ("SWI"). This activity was not considered significant to resort operations (Note 11).
RESORT PROPERTY HELD FOR VACATION OWNERSHIP INTEREST SALES
Resort property held for Vacation Ownership Interest sales is recorded at the lower of historical cost less amounts charged to cost of Vacation Ownership Interests sold or marketed. As Vacation Ownership Interests are sold, the Company amortizes to cost of sales the average carrying value of the property plus estimated future additional costs related to remodeling and construction.
Land held for sale is recorded at the lower of cost or fair value less cost to sell, consistent with the Company's intention to liquidate these properties.
REVENUE RECOGNITION
Revenue from sales of Vacation Ownership Interests is recognized in accordance with Statement of Financial Accounting Standard No. 66, Accounting for Sales of Real Estate ("SFAS 66"). No sales are recognized until such time as a minimum of 10% of the purchase price has been received in cash, the statutory rescission period has expired, the buyer is committed to continued payments of the remaining purchase price and the Company has been released of all future obligations for the Vacation Ownership Interest. Resort operating revenue represents daily room rentals and revenues from food and other resort services. Such revenues are recorded as the rooms are rented or the services are performed.
PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost and are depreciated on the straight-line method over their respective estimated useful lives ranging from 3 to 30 years. Property and equipment under capitalized leases are stated at the lesser of fair value or the present value of future minimum lease payments as of the date placed in service, and amortized on the straight-line method over the term of the lease.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows from the related asset or group of assets over their remaining life in measuring whether the assets are recoverable. As of December 31, 2001, the Company does not consider any of its long-lived assets to be impaired.
SEGMENT REPORTING
The Company has a single segment in the timeshare resort industry. Revenue from products and services are reflected on the income statement under Sales of Vacation Ownership Interests and Resort Operating Revenue.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash equivalents are liquid investments with an original maturity of three months or less. At December 31, 2001 and 2000, the Company had cash in excess of federally insured limits. The following summarizes interest paid and capitalized interest to resort property under development:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1999 2000 2001 ---------- ---------- ---------- Interest paid $2,830,000 $2,726,000 $2,563,000 Capitalized interest -- 86,000 --
ACCOUNTING MATTERS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The standard also provides specific guidance for accounting for derivatives designated as hedging instruments. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of Statement No. 133" ("SFAS No. 137"), which delayed the effective date of SFAS No. 133 for the Company until 2001. There were no derivative instruments or hedging activities in the years ended December 31, 1999, 2000, or 2001.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
The financial statements for prior periods have been reclassified to be consistent with the current period financial statement presentation. These reclassifications had no effect on net income.
NOTE 2. NOTES RECEIVABLE, NET
Notes receivable consist of the following:
DECEMBER 31, ---------------------------- 2000 2001 ------------ ------------ Vacation Ownership Interest notes receivable $ 26,567,543 $ 31,105,657 Holdbacks by financial institutions 3,153,871 2,119,652 Other receivables 121,950 673,399 Allowance for possible credit losses (3,223,511) (3,533,483) ------------ ------------ $ 26,619,853 $ 30,365,225 ============ ============
Notes generated from the sale of Vacation Ownership Interests generally bear interest at annual rates ranging from 13% to 17.9% and have terms of five to ten years. The notes are collateralized by deeds of trust on the Vacation Ownership Interests sold.
At December 31, 2001, the Company has an agreement with a financial institution for a commitment of $40 million under which the Company may sell certain of its Customer Notes. The agreement 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. At December 31, 2001, $21.9 million of the $40 million commitment was available to the Company.
The Company also has a financing commitment aggregating $30.0 million whereby the Company may borrow against notes receivable pledged as collateral. These borrowings bear interest at prime plus 1.5%. The $30 million commitment expires in 2002. At December 31, 2001, approximately $12.4 million is available under this commitment.
At December 31, 2000 and 2001, the Company had approximately $18 million and $11 million, respectively, in outstanding notes receivable sold on a recourse basis. Portions of the notes receivable are secured by deeds of trust on Los Abrigados Resort & Spa ("Los Abrigados"), Varsity Clubs of America-South Bend ("VCA-South Bend") and Varsity Clubs of America-Tucson ("VCA-Tucson").
For the twelve months ended December 31, 1999, 2000 and 2001, the Company sold with recourse approximately $8 million, $10 million and $2 million of notes receivable generated from sales of Vacation Ownership Interests in the respective years. The Company elected to hypothecate, rather than sell with recourse, the majority of its Customer Notes during 2001 because of uncertainty regarding the ability and intent of the financial institution which purchases such Customer Notes.
At December 31, 2001, notes receivable in the amount of approximately $242,000 have been contributed to the Company's Series A Preferred Stock sinking fund and therefore their use is restricted (Note 12).
The following summarizes activity in the allowance for possible credit losses:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1999 2000 2001 ----------- ----------- ----------- Beginning balance $ 3,474,318 $ 3,332,550 $ 3,223,511 Provision for doubtful accounts 796,548 1,116,813 1,230,974 Amounts written off (938,316) (1,225,852) (921,002) ----------- ----------- ----------- Ending balance $ 3,332,550 $ 3,223,511 $ 3,533,483 =========== =========== ===========
The Company considers all notes receivable past due in excess of 90 days to be delinquent. Typically, uncollectible accounts are not written off until the underlying inventory is recovered via acceptance of a deed back or foreclosure, the timing of which is determined by the Company. During 1999, the Company deeded back in a bulk transaction Vacation Ownership Interests in Sedona Vacation Club of 146 delinquent owners. These accounts had become delinquent over a several year period. The Company subsequently annexed those recovered weeks to Premiere Vacation Club. At December 31, 2001, $7.9 million in principal or $5.7 million net of the historical costs of the underlying property that would be recovered in the event of noncollectibility, or 17.6% and 12.8%, respectively, of the retained notes and notes previously sold, which are recourse to the Company, were more than 90 days past due.
At December 31, 2000 and 2001, the above allowance includes $360,000 and $225,000 respectively, for notes sold with recourse.
NOTE 3. RESORT PROPERTY HELD FOR VACATION OWNERSHIP INTEREST SALES
Resort property held for Vacation Ownership Interest sales consists of the following:
DECEMBER 31, ----------------------------- 2000 2001 ----------- ----------- Premiere Vacation Club $ 9,751,062 $13,165,636 VCA-Tucson 3,526,100 1,682,189 VCA-South Bend 2,346,190 2,374,229 Golden Eagle Resort 1,443,990 1,233,999 Los Abrigados 1,170,430 385,353 Roundhouse Resort 748,755 749,255 Kohl's Ranch Lodge 2,266,514 323,759 The Inn at Los Abrigados 365,167 310,867 Other 45,585 45,585 ----------- ----------- $21,663,793 $20,270,872 =========== ===========
In January 1999, the Company recorded in Maricopa County, Arizona its proprietary Premiere Vacation Club Membership Plan and in May 1999 annexed a total of 5,000 Vacation Ownership Interests into the Club and received Department of Real Estate approval in the State of Arizona to commence selling Vacation Ownership Interests in Premiere Vacation Club. During 1999 and 2001, the Company annexed additional units and as of December 31, 2001, Premiere Vacation Club included a total of 11,000 Vacation Ownership Interests. The 11,000 Vacation Ownership Interests annexed into the Club consisted of 2,381 Vacation Ownership Interests in Los Abrigados, 265 Vacation Ownership Interests in the Inn at Los Abrigados, 2,490 Vacation Ownership Interests in Kohl's Ranch Lodge, 691 Vacation Ownership Interests in the Golden Eagle Resort, 1,500 Vacation Ownership Interests in the Treasures of the Sea of Cortez Beach Club (consisting of 25-year right-to-use Vacation Ownership Interests in San Carlos, Mexico), 695 Vacation Ownership Interests in VCA-South Bend, 2,275 Vacation Ownership Interests in VCA-Tucson, 103 Vacation Ownership Interests in the Roundhouse Resort and 600 Vacation Ownership Interests in the Carriage House.
NOTE 4. 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
Stock options to purchase 85,700 shares of common stock at prices ranging from $4.60 per share to $8.125 per share were outstanding at December 31, 2001 but were not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of common shares. These options expire at various dates between 2002 and 2006.
Series C Convertible Preferred Stock dividends are not required, nor were they declared, subsequent to November 1, 1999.
NOTE 5. DEFERRED ASSETS
As part of the acquisition of Los Abrigados, certain affiliates of the Company guaranteed the underlying mortgage on the resort. As partial consideration for their guarantee, the affiliates earned a $780,000 fee, which is amortized to expense at the rate of $100 per Los Abrigados Vacation Ownership Interest sold. At December 31, 2000 and 2001, deferred assets included $145,785 and $107,139, respectively, of guarantee fees, net of accumulated amortization.
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
DECEMBER 31, --------------------------- 2000 2001 ----------- ----------- Land $ 406,680 $ 403,961 Buildings and improvements 5,228,416 5,682,989 Leasehold improvements 136,602 304,136 Furniture and fixtures 787,522 1,385,341 Office equipment 436,839 636,156 Computer equipment 719,791 850,551 Vehicles 103,939 122,422 ----------- ----------- 7,819,789 9,385,556 Accumulated depreciation (2,678,411) (3,196,474) ----------- ----------- $ 5,141,378 $ 6,189,082 =========== ===========
In December 2000, the Company also acquired a 5,200 square foot art gallery adjacent to Los Abrigados, known as the Sedona Station, for a cost of $1,010,000. In January 2001, the Company completed renovation of Sedona Station into a sales center, thereby increasing the capacity of the Sedona sales office and making the previous Sedona sales office on the grounds of Los Abrigados available for construction of additional units.
NOTE 7. INCOME TAXES
Deferred income tax assets (liabilities) included in the consolidated balance sheets consist of the following:
The provision for income taxes consists of the following:
A reconciliation of the income tax expense (benefit) and the amount that would be computed using statutory federal income tax rates is as follows:
The Company reports substantially all Vacation Ownership Interest sales that it finances on the installment method for Federal income tax purposes. Under the installment method, the Company does not recognize income on the financed portion of sales of Vacation Ownership Interests, until the installment payments on customer receivables are received by the Company or the customer receivables are sold by the Company. Interest will be imposed, however, on the amount of tax attributable to the installment payments for the period beginning on the date of sale and ending on the date the related tax is paid. If the Company is otherwise not subject to tax in a particular year, no interest is imposed since the interest is based on the amount of tax paid in that year. The consolidated financial statements do not contain an accrual for any interest expense that would be paid on the deferred taxes related to the installment method. The amount of interest expense is not estimable as of December 31, 2001.
The Company is subject to Alternative Minimum Tax ("AMT") as a result of the deferred income that results from the installment sales treatment of Vacation Ownership Interest sales for regular tax purposes. The AMT liability creates a deferred tax asset that can be used to offset any future tax liability from regular Federal income tax. This deferred tax asset has an unlimited carryover period.
During 2000, the Company reevaluated its valuation allowance and concluded that based on future revenues, all NOLs will be utilized before expiration.
At December 31, 2001, the Company, excluding its Genesis subsidiary, had NOL carryforwards of approximately $5.2 million, which expire in 2002 through 2020. At December 31, 2001, Genesis had federal NOL carryforwards of approximately $2.1 million, which are limited as to usage because they arise from built in losses of an acquired company. In addition, such losses can only
be utilized through the earnings of Genesis and are limited to a maximum of $189,178 per year. To the extent the entire $189,178 is not utilized in a given year, the difference may be carried forward to future years. Any unused Genesis NOLs will expire in 2008.
In addition, Section 382 of the Internal Revenue Code imposes additional limitations on the utilization of NOLs by a corporation following various types of ownership changes which result in more than a 50% change in ownership of a corporation within a three year period. Such changes may occur as a result of new common stock issuances by the Company or changes occurring as a result of filings with the Securities and Exchange Commissions on Schedule 13D and 13G by holders of more than 5% of the Common Stock, whether involving the acquisition or disposition of common stock. If such a subsequent change occurs, the limitations of Section 382 would apply and may limit or deny the future utilization of the net operating loss by the Company, which could result in the Company paying substantial additional federal and state taxes.
NOTE 8. NOTES PAYABLE
Notes payable consist of the following:
At December 31, 2001, approximately $21.0 million of the Company's notes payable have scheduled payment terms that may be accelerated based on established release prices related to future Vacation Ownership Interest sales or are dependent on the amount of mortgage notes receivable pledged as collateral. The maturities of these notes are included below based on their scheduled repayment terms and maturities. Future contractual maturities of notes payable and capitalized leases at December 31, 2001 are as follows:
2002 $ 7,316,591 2003 7,110,939 2004 5,358,091 2005 4,319,979 2006 4,257,536 Thereafter 12,256,167 ----------- $40,619,303 ===========
NOTE 9. NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates consist of the following:
DECEMBER 31, ------------------------ 2000 2001 ---------- ---------- Note payable, collateralized by LAP partnership interest, interest at 10%, due through 2003 $ 700,000 $ 700,000 Notes payable, collateralized by LAP partnership interest, interest at 8%, due through 2002 300,000 300,000 ---------- ---------- $1,000,000 $1,000,000 ========== ==========
Future maturities of notes payable to affiliates at December 31, 2001 are as follows:
2002 $ 300,000 2003 700,000 ----------- $ 1,000,000 ===========
Total interest expense on notes payable to affiliates for the years ended December 31, 1999, 2000 and 2001 was approximately $89,000, $107,000 and $95,000, respectively. Interest payable to affiliates at December 31, 2000 and 2001 was approximately $0 and $24,000, respectively.
NOTE 10. MINORITY INTERESTS
In June 1998, the Company acquired a 51% interest and in June 2000 the remaining 49% minority interest in Timeshare Resale Brokers, Inc. ("TRBI"), an Arizona company engaged in the resale of Vacation Ownership Interests on behalf of consumers and others, for which it earns a commission upon sale. The operation is based in Sedona, Arizona. To date the operations of TRBI have not been material to the Company.
NOTE 11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Operating leases are used to lease office space, equipment and vehicles. Future minimum lease payments on noncancelable operating leases at December 31, 2001 are as follows:
2002 $ 1,256,000 2003 1,133,000 2004 1,069,000 2005 975,000 2006 749,000 Thereafter 10,969,000 ----------- $16,151,000 ===========
Total rent expense for the years ended December 31, 1999, 2000 and 2001 was approximately $498,000, $897,000 and $1,516,000 respectively.
LEGAL PROCEEDINGS
Litigation has arisen in the normal course of the Company's business, none of which is deemed to be material.
OTHER
In December 1999, the Company completed the spin-off of its 80% ownership interest in SWI to the shareholders of ILX. In conjunction with the spin-off the Company agreed to provide up to $200,000 of working capital financing to SWI through November 30, 2001. During 2000, the Company advanced the full $200,000 at an interest rate of prime plus 3%, and at December 31, 2001 the balance of the note receivable was $108,000. On January 2, 2002 the Company entered into a Bill of Sale Assignment and Assumption agreement with SWI whereby the Company assumed all of the assets and liabilities of SWI in full satisfaction of the note. The purchase is not deemed material.
In December 1999, the Company guaranteed a $1,000,000 operating line of credit for Sedona Vacation Club, the proceeds of which were used for renovations at Los Abrigados. Sedona Vacation Club intends to repay the interest and principal on the loan from proceeds from a special assessment of its owners and from their reserve payments for the year 2000 and future years. The line of credit bears interest at prime plus 2.5% and is due through 2002. At December 31, 2001, approximately $248,000 was outstanding on the line.
In July 2001, the Company acquired a 50 year leasehold interest in a 44-acre parcel located proximate to the Las Vegas Airport, University of Nevada-Las Vegas ("UNLV") and the "Strip" in Las Vegas, Nevada for $5.0 million. The Company intends to develop the property, to be known as Premiere Park, into a mixed use development, including a vacation ownership sales office, museums, restaurants, golf, retail and other ancillary uses. The parcel presently includes a 25,000 square foot building which contains a vacation ownership sales office operated by the Company, provides club facilities for the UNLV golf team, and the remainder is projected for a golf related use. In addition to the existing building, the Company intends to lease the remaining developable space on the 44-acre site, to be built by tenants to specifications approved by the Company. Costs to acquire the leasehold interest will be amortized over the life of the lease.
In September 2000, the Company entered into an agreement to lease an existing motel in Sedona, Arizona, commencing October 1, 2000 and terminating on December 31, 2021. The lease contains a provision in which the lease term may be automatically extended for consecutive one-year periods after December 31, 2021 up to December 31, 2038 if the lease has not been terminated prior to December 31, 2021. The lessor was required to remodel and refurbish the existing project, previously known as the Canyon Portal Motel, as well as construct additional units at the complex. The Company has renamed the property the "Los Abrigados Lodge." The renovations and construction were completed in 2001, and the property is being used for hotel accommodations, including accommodations for customers invited to attend a vacation ownership presentation at the Sedona sales office. Lease payments for the Los Abrigados Lodge in the amount of $731,288 per year through 2021 are included in the above table of future minimum lease payments on noncancelable operating leases.
In October 2001, the Company adopted a stock compensation program for certain of its employees, primarily those earning $50,000 or more per year. Under the program, employees received a portion of compensation they would otherwise have earned in cash during the fourth quarter of 2001 in shares of stock of the Company at a prescribed formula. This program was extended to the first quarter of 2002, with shares issuable in the second quarter of 2002. The total number of shares issued to employees under the program in January 2002 was 31,647 shares valued at $6.90 per share.
NOTE 12. SHAREHOLDERS' EQUITY
PREFERRED STOCK
At December 31, 2000 and 2001, preferred stock includes 59,718 and 59,311 shares of the Company's Series A Preferred Stock carried at $597,180 and $593,110, respectively. The Series A Preferred Stock has a par value and liquidation preference of $10 per share and, commencing July 1, 1996, is entitled to annual dividend payments of $.80 per share. Dividends were paid of $48,207, $47,359 and $47,448 in 1999, 2000 and 2001, respectively. Commencing January 1, 1993, on a quarterly basis, the Company must contribute $100 per Vacation Ownership Interest sold in Los Abrigados to a mandatory dividend sinking fund. At December 31, 2001, notes receivable in the amount of approximately $242,000 have been designated for the sinking fund. Dividends on the Company's common stock are subordinated to the Series A dividends and to the contributions required by the sinking fund.
At December 31, 2000 and 2001, preferred stock also includes 55,000 shares of the Company's Series B Convertible Preferred Stock carried at $55,000. The Series B Convertible Preferred Stock has a $10 par value and a liquidation preference of $10 per share, which is subordinate to the Series A liquidation preference. The Series B Convertible Preferred Stock is not entitled to dividends. Commencing July 1, 1996, the Series B Convertible Preferred Stock may be converted into common stock on the basis of two shares of common for five shares of preferred stock.
Both the Series A and Series B preferred stock may, at the holder's election, be exchanged for Los Abrigados Vacation Ownership Interests at the rate of 1,000 shares of stock plus $2,100 cash per Vacation Ownership Interest. During 2001, Series A shares could also have been exchanged for lodging certificates under certain conditions, and 407 shares were exchanged under this program during the year.
At December 31, 2000 and 2001, preferred stock also includes 176,835 and 170,505 shares of the Company's Series C Convertible Preferred Stock carried at $486,386 and $468,915. The Series C Convertible Preferred Stock has a $10 par value and is entitled to dividends at the rate of $.60 per share per annum when declared by the Board of Directors. If dividends were not declared in any year prior to the fifth anniversary of the Genesis merger date (November 1, 1993), such undeclared dividends ("Dividend Arrearage") could have been converted to "Cumulation Shares" at the rate of $6 of Dividend Arrearage per Cumulation Share. The Series C Preferred Stock and the Cumulation Shares have a liquidation preference of $10 per share and $6 per share, respectively, and are subordinate to the liquidation preferences of the Series A and Series B stock. Commencing November 1, 1994 through October 31, 2004, the Series C Preferred Stock may be converted to ILX common stock on the basis of one share of common stock for three shares of Series C Preferred Stock and one share of ILX common stock for each $30 in Dividend Arrearages. For the years ended December 31, 1999, 2000 and 2001, the Company recorded the exchange of 74,490, 14,298 and 6,330 Series C Convertible shares for 24,830, 4,766 and 2,110 common shares, respectively. ILX may redeem the Series C Preferred Stock commencing November 1, 1996, at $10 per share plus payment of all declared but unpaid dividends.
COMMON STOCK
For the years ended December 31, 1999, 2000 and 2001, the Company issued 89,850, 71,600 and 4,100 shares of restricted common stock, valued at $94,926, $64,066 and $4,210, respectively, to employees in exchange for services provided.
During 1999, 2000 and 2001, the Company purchased 186,400, 657,500 and 543,200 shares of its Common Stock for $368,383, $1,308,655 and $2,379,428.
In December 1999, the Company retired 526,040 shares of treasury stock valued at $1,642,226.
In December 1999, the Company spun off its 80% ownership interest in SWI through a prorata distribution to the common shareholders of ILX of the 3,360,000 common shares of SWI held by the Company. The spin-off was recorded as a reduction in common stock of $406,635. In conjunction with the spin-off, the Company agreed to provide up to $200,000 of working capital financing to SWI through November 30, 2001 (see Note 11).
NOTE 13. EMPLOYEE STOCK OWNERSHIP PLAN
On April 9, 1999 (effective January 1, 1999), the Company formed the ILX Resorts Incorporated Employee Stock Ownership Plan and Trust (the "ESOP"). The intent of the ESOP is to provide a retirement program for all eligible employees which aligns their interests with those of the Company. Generally, all employees who have completed one year of service, have attained the age of 21 and complete 1,000 hours of service during the plan year are eligible to participate in the ESOP. During the twelve months ended December 31, 1999, the Company declared, and funded in cash, contributions of $250,000 to the ESOP and recorded this amount as compensation expense.
In August 1999, the ESOP entered into an agreement with Litchfield Financial Corporation for a $500,000 line of credit, which was secured by stock purchased with the funds and guaranteed by the Company. The ESOP borrowed the full $500,000 in 1999 and the Company paid a total of $43,047 in fees in 1999 on behalf of the ESOP related to the line of credit, consisting of $10,000 in loan fees, $16,231 in legal fees and interest of $16,816. In 2000 and 2001, the Company also paid interest on the line of credit of $34,029 and $13,979, respectively. The line of credit was fully repayed in 2001.
During the years ended December 31, 2000 and 2001, the Company contributed $250,000 each year to the ESOP and such funds were used by the ESOP to repay the line of credit. In accordance with SOP 93-6, Employer's Accounting for Employee Stock Option Plan, the difference of $40,862 each year between the fair market value of the leveraged shares at the time of the debt repayment in 2000 and 2001 and their actual cost when the shares were purchased in 1999, was charged to Paid in Capital. During the year ended December 31, 2000, the Company also issued to the ESOP 100,000 shares of restricted common stock valued at $146,094. During the year ended December 31, 2001, the Company issued to the ESOP 20,000 shares of restricted common stock valued at $41,905.
During the years ended December 31, 1999 and 2000, the ESOP purchased a total of 375,300 shares of the Company's common stock in the open market. Inclusive of the 100,000 restricted shares of common stock issued by the Company to the ESOP in 2000 and the 20,000 restricted shares of common stock issued by the Company to the ESOP in 2001, at December 31, 2001, the ESOP held 495,300 shares and $2,043 in cash. Of the 495,300 shares held by the ESOP, 257,400 were purchased with borrowed funds. Of the 257,400 shares purchased with borrowed funds, one half (or 128,700 shares) had been committed to be released to participant accounts as of December 31, 2000, and were subsequently released. The unallocated shares were collateral for the outstanding principal on the line of credit. At December 31, 2000, the unallocated shares were reflected at cost as a contra equity account, Guaranteed ESOP Obligation. As of December 31, 2001 all previously unallocated shares have been released to participant accounts.
NOTE 14. EMPLOYEE STOCK OPTION PLANS
The Company has Stock Option Plans pursuant to which options (which term as used herein includes both incentive stock options and non-statutory stock options) may be granted to key employees, including officers, whether or not they are directors, and non-employee directors and consultants, who are determined by the Board of Directors to have contributed in the past, or who may be expected to contribute materially in the future, to the success of the Company. The exercise price of the options granted pursuant to the Plans shall be not less than the fair market value of the shares on the date of grant. All outstanding stock options require the holder to have been a director or employee of the Company for at least one year before exercising the option. Options are exercisable over a five-year period from date of grant if the optionee was a ten-percent or more shareholder immediately prior to the granting of the option and over a ten-year period if the optionee was not a ten-percent shareholder. The aggregate number of shares that may be issued under the Plans shall not exceed 200,000 shares. The number of shares available for grant under the Plans at December 31, 2000 and December 31, 2001 was 64,300 and 9,300, respectively.
Stock option transactions are summarized as follows:
The exercise price for options outstanding at December 31, 2001 ranged from $3.25 to $8.125 per share. Options outstanding at December 31, 2001 have expiration dates as follows:
YEAR ENDING OPTIONS FOR DECEMBER 31, SHARES ------------ ------ 2002 110,000 2003 10,000 2004 45,700 2005 10,000 2006 15,000 ------- 190,700 =======
The weighted average remaining contractual life for options outstanding as of December 31, 2000 and 2001 was 1.35 years and 1.86 years respectively.
The Company applies APB Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its Plan. Accordingly, no compensation cost has been recognized for stock options granted under the Plan. Had compensation cost for the Plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the alternative method of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net income and income per share would have decreased to the proforma amounts indicated below. The weighted average assumptions used to estimate the fair value of each option grant, using the Black-Scholes option-pricing model, are also presented:
DECEMBER 31, ----------------------------- 2000 2001 ----------- ----------- Net Income As reported $ 1,533,238 $ 2,031,614 Proforma 1,465,238 1,900,122
Basic and Diluted Income per share As reported-basic $ 0.40 $ 0.62 As reported-diluted 0.39 0.61 Proforma-basic 0.38 0.58 Proforma-diluted 0.38 0.57
Weighted-Average Assumptions: Dividend yield $ -- $ -- Expected volatility 67.1% 67.6% Risk-free interest rate 6.4% 4.0% Expected life of options, in years 2.54 3.45
NOTE 15. PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan in which substantially all employees are eligible to participate. The Company contributes a discretionary amount to the plan as determined by the Board of Directors. The Company declared contributions of $50,000 for each of the years ended December 31, 1999, 2000 and 2001. The contribution for 2001 was a cash contribution of $41,342 and 1,300 shares of common stock valued at $8,658.
NOTE 16. RELATED PARTY TRANSACTIONS
In addition to the related party transactions described elsewhere in the financial statements, the Company had the following related party transactions:
In December 1995, the Company sold the building that houses its Phoenix telemarketing operations, the Sedona Spa warehouse and administrative offices and certain other ILX administrative offices, to an affiliate for $500,000. The purchase price consisted of a reduction in the principal balance of the Company's note payable to the affiliate of $320,000 in December 1995, and, in January 1996, payment by the affiliate of the $180,000 note collateralized by a deed of trust on the building. The Company leased the building through SWI for an initial one-year term, with four one-year options to renew through December 2001. Rent of $48,000 per year was paid in each of 1999, 2000 and 2001. Effective January 1, 2001, the Company entered into a new agreement between ILX and the affiliate to lease the building for a two-year term with three one-year options to renew at the rate of $48,000 per year.
In July 1999, the Company entered into an agreement with an affiliate to purchase sixty Vacation Ownership Interests for the price of $500,000, which is approximately equal to the affiliate's historical cost. The Vacation Ownership Interests consist of four Premiere Vacation Club Platinum memberships, fifty Premiere Vacation Club Gold memberships and six VCA-South Bend Alumni House extended football weekend memberships. The Company issued a promissory note for the purchase price, which bears interest at 8%. The note is recorded as a note payable to affiliates (Note 9). The agreement also modified the terms of a previously existing note payable to a related affiliate.
NOTE 17. CAPITAL LEASES
Leased assets included in resort property held for Vacation Ownership Interest sales and property and equipment totaled $2,768,636 and $693,015 (net of accumulated amortization of $2,175,876 and $468,017) at December 31, 2000 and 2001, respectively. The leases expire through 2004. Future minimum lease payments at December 31, 2001 are as follows:
2002 $ 184,789 2003 40,538 2004 17,768 --------- Total 243,095 Less: Amounts representing interest (18,097) ---------
Net minimum lease payments $ 224,998 =========
NOTE 18. CONCENTRATIONS OF RISK
CREDIT RISK
The Company is exposed to on-balance sheet credit risk related to its notes receivable. The Company is exposed to off-balance sheet credit risk related to loans sold under recourse provisions.
The Company offers financing to the buyers of Vacation Ownership Interests at the Company's resorts. These buyers make a down payment of at least 10% of the purchase price and deliver a promissory note to the Company for the balance; the promissory notes generally bear interest at a fixed rate, are payable over a seven-year period and are collateralized by a first mortgage on the Vacation Ownership Interest. The Company bears the risk of defaults on these promissory notes. The Company performs credit evaluations prior to Vacation Ownership Interest sales and the Vacation Ownership Interest deed of trust serves as collateral on the note receivable. If a buyer of a Vacation Ownership Interest defaults, the Company generally recovers the Vacation Ownership Interest by receiving a deed back from the owner or through foreclosure. The Company may resell the Vacation Ownership Interest; however, marketing, selling and administrative costs from the original sale are not recovered; and such costs must be incurred again to resell the Vacation Ownership Interest.
INTEREST RATE RISK
Because the Company's indebtedness bears interest at variable rates and the Company's customer receivables bear interest at fixed rates, increases in interest rates could cause the rate on the Company's borrowings to exceed the rate at which the Company provides financing to its customers. The Company does not engage in interest rate hedging transactions. Therefore, any increase in interest rates, particularly if sustained, could have a material adverse effect on the Company's results of operations, cash flows and financial position.
AVAILABILITY OF FUNDING SOURCES
The Company funds substantially all of the notes receivable, resort property held for Vacation Ownership Interest sales and land inventory which it originates or purchases with sales of consumer notes, borrowings through its financing facilities and internally generated funds. Borrowings are in turn repaid with the proceeds received by the Company from sales of notes receivable or from repayments by consumers of such notes receivable. To the extent that the Company is not successful in maintaining or replacing existing financings, it would have to curtail its operations or sell assets, thereby having a material adverse effect on the Company's results of operations, cash flows and financial condition.
GEOGRAPHIC CONCENTRATION
The Company's notes receivable are primarily originated in Arizona. The risk inherent in such concentrations is dependent upon regional and general economic stability that affects property values and the financial stability of the borrowers. The Company's resort property held for Vacation Ownership Interest sales is also concentrated in Arizona. The risk inherent in such
concentration is in the continued popularity of the resort destinations, which affects the marketability of the Company's products and the collection of notes receivable.
NOTE 19. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash equivalents approximates their fair value because of the short maturity of these instruments.
NOTES RECEIVABLE
The carrying amount reported in the balance sheet for notes receivable approximates its fair value because the interest rates on the portfolio of notes receivable approximate current interest rates to be received on similar current notes receivable.
NOTES PAYABLE
The carrying amount reported in the balance sheet for notes payable approximates its fair value because the interest rates on these instruments approximate current interest rates charged on similar current borrowings.
NOTES PAYABLE TO AFFILIATES
The fair value of the notes payable to affiliates is not determinable since these financial instruments are not readily marketable and are payable to affiliates.
NOTE 20. SUBSEQUENT EVENT
On January 2, 2002 the Company entered into a General Bill of Sale, Assignment and Assumption Agreement with SWI whereby the Company assumed all of the assets and liabilities of SWI. The purchase is not deemed material.
NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is presented in the following summary.
The 1999 net income per share does not equal the summation of the quarters due to rounding and the weighting of average shares.
NOTE 22. SIGNIFICANT FOURTH QUARTER ADJUSTMENT
There were no material fourth quarter adjustments or accounting changes.
EXHIBITS
TO
2001 FORM 10-K
ILX RESORTS INCORPORATED
EXHIBIT INDEX