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. As of December 31, 2002, the Common Stock was held by approximately 890 holders of record. The Company announced its first dividend of $0.40 per share in December 2002. The dividend will be paid in quarterly installments of $0.10 per share commencing April 10, 2003. Dividends on Common Stock are subordinate to dividends payable on the Company's Series A and Series C Preferred Stock.
COMMON STOCK ----------------- HIGH LOW ------ ------ YEAR ENDED DECEMBER 31, 2001 First Quarter $ 3.65 $ 1.81 Second Quarter 4.25 2.20 Third Quarter 8.25 3.80 Fourth Quarter 7.65 4.20 YEAR ENDED DECEMBER 31, 2002 First Quarter 8.55 5.50 Second Quarter 8.01 6.70 Third Quarter 8.35 6.95 Fourth Quarter 8.25 6.10
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated historical financial information set forth below for the five years ended December 31, 2002 has been derived from the consolidated financial statements of the Company, which have been restated to give effect to the one-for-five reverse stock split (the "Reverse Stock Split"), declared effective by the Company on January 12, 1998.
The Selected Consolidated Financial Information should be read in conjunction with the Consolidated Financial Statements and notes thereto included herein, and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
DECEMBER 31, ----------------------------------------------- 1998 1999 2000 2001 2002 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues $36,858 $40,439 $43,053 $48,309 $58,593 Net income 62 703 1,533 2,032 3,083 Net income per share - basic .00 .16 .40 .62 1.03 Net income per share - diluted .00 .16 .39 .61 1.00 Total assets 51,997 57,389 65,545 74,125 80,421 Notes payable 23,002 28,121 33,851 41,619 44,729 Shareholders' equity 25,764 25,239 25,835 25,785 27,747
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 1,330 Vacation Ownership Interests in a resort in Las Vegas, Nevada.
The Company recognizes revenues from the sale of Vacation Ownership Interests at such time as a minimum of 10% of the purchase price has been received in cash, the statutory rescission period has expired, the buyer is committed to continued payments of the remaining purchase price and the Company's future obligations for the Vacation Ownership Interests have been released. Resort operating revenues are recorded as the rooms are rented or the services are performed.
Costs associated with the acquisition and development of Vacation Ownership Interests, including carrying costs such as interest and taxes, are capitalized and amortized to cost of sales as the respective revenue is recognized.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the Company.
- ---------- (1) Defined as: the sum of Vacation Ownership Interest sales less the cost of Vacation Ownership Interests sold less sales and marketing expenses less a provision for doubtful accounts, divided by sales of Vacation Ownership Interests.
(2) Reflects all Vacation Ownership Interests on an annual basis.
(3) Consists of an aggregate of 2,575, 2,692 and 3,019 biennial and annual Vacation Ownership Interests for the years ended December 31, 2000, 2001 and 2002, respectively.
COMPARISON OF YEAR ENDED DECEMBER 31, 2001 TO DECEMBER 31, 2002
Sales of Vacation Ownership Interests increased 29.0% or $8.1 million in 2002 to $36.2 million from $28.1 million in 2001, reflecting sales from the Las Vegas sales office which opened in mid January 2002 and greater sales to existing owners, net of decreased sales to first time buyers from the Sedona sales office and Tucson sales office due to planned reductions in tour flow. In 2002, the Sedona sales office eliminated or reduced its use of less effective outside vendors and telemarketing programs and as a result generated fewer tours. While tour flow decreased by approximately 10%, sales volume per tour increased with total sales volume declining by only 5% and profits from this office increasing by more than 13% over the prior year. Upgrade revenue increased 112% to $6.0 million in 2002 from $2.8 million in 2001, reflecting expansion of marketing efforts to existing owners. The average sales price per Vacation Ownership Interest sold (excluding Upgrades) increased 3.9% to $14,670 in 2002 compared to $14,118 in 2001 and the average sales price per Vacation Ownership Interest sold including Upgrades increased 12.1% to $17,629 in 2002 from $15,720 in 2001.
The number of Vacation Ownership Interests sold increased 14.8% to 2,016 in 2002 from 1,756 in 2001. Sales of Vacation Ownership Interests in 2002 included 2,006 biennial Vacation Ownership Interests (counted as 1,003 annual Vacation Ownership Interests) and 1,013 annual Vacation Ownership Interests compared to 1,873 biennial Vacation Ownership Interests (counted as 936.5 annual Vacation Ownership Interests) and 819 annual Vacation Ownership Interests in 2001. The increase reflects the opening of the Las Vegas sales office, net of fewer sales at the Sedona sales office and the closure of the Phoenix Sales office in May 2001.
Resort operating revenues decreased 5.6% or $1.0 million from $17.6 million in 2001 to $16.6 million in 2002, largely reflecting a decrease in business and tourist travel by non-owners during 2002, as well as timing differences in revenue from vacation interval owners. The cost of resort operations increased slightly with a 1.2% or $0.2 million increase to $14.8 million in 2002 from $14.6 million in 2001. This increase was due to initial costs incurred for the opening of the Joey Bistro restaurant at the Carriage House in Las Vegas, Nevada, which opened in late November 2002. Cost of resort operations as a percentage of resort operating revenue increased to 89.4% in 2002 from 83.4% in 2001. Because of the large fixed cost component of resort operations and the startup expenses associated with the Las Vegas Joey Bistro, reductions in revenue resulted in greater costs as a percentage of revenue.
Interest income increased by 117.7% to $5.8 million in 2002 from $2.7 million in 2001, reflecting an increase in the percentage of Customer Notes sold, for which the Company recognizes the interest premium upon sale of the note and the increased portfolio of interest bearing retained notes.
Cost of Vacation Ownership Interests sold as a percentage of Vacation Ownership Interest sales decreased to 14.5% in 2002 from 17.0% in 2001, reflecting favorable costs for the acquisition of vacation ownership interests in the Carriage House and the Bell Rock Inn, net of improvements made to resort properties.
Sales and marketing as a percentage of sales of Vacation Ownership Interests increased to 62.6% in 2002 compared to 57.0% in 2001, reflecting the start-up of the Las Vegas sales office which opened in January 2002, and reduced closing rates and efficiency for first time buyers at the Tucson sales office. In the first quarter of 2003 the scale of the VCA-Tucson sales operation for first time buyers was reduced, and less effective marketing programs eliminated. Upgrade sales to existing owners from the VCA-Tucson office are not affected by these changes.
The provision for doubtful accounts as a percentage of Vacation Ownership Interest sales was consistent at 4.4% of sales of Vacation Ownership Interests in 2001 and 2002.
General and administrative expenses increased 27.0% to $6.3 million in 2002 from $5.0 million in 2001. General and administrative expenses increased between years as a percentage of total timeshare revenues from 10.3% in 2001 to 10.8% in 2002. The increase reflects increased professional fees, including fees for development of an enhanced website, operating expenses for the Sedona Spa retail operations effective January 2002, and expenses for Premiere Park in Las Vegas.
Interest expense decreased 20.1% from $2.6 million in 2001 to $2.1 million in 2002, reflecting the combined net effect of interest rate reductions on the Company's variable rate notes, capitalized interest related to construction in Las Vegas and Arizona in 2002 and greater borrowings in 2002.
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO DECEMBER 31, 2001
Sales of Vacation Ownership Interests increased 7.4% or $1.9 million in 2001 to $28.1 million from $26.2 million in 2000, reflecting an increase in sales from the Sedona sales office and increased Upgrades, net of a decrease in sales from the Kohl's Ranch, VCA-South Bend and VCA-Tucson sales offices. The increase in sales from the Sedona sales office is a result of an increase in the number of tours from the marketing venues in Sedona. The decrease in sales from the Kohl's Ranch sales office reflects a reduction in the number of tours to this office. The reduced tour flow reflects primarily a reduction in the number of non-owner guests at the resort due to cessation of certain on-site activities. Non-owner visitors to the resort are offered the opportunity to attend a sales presentation either during their visit, or at a later date. The decrease in sales from the VCA-South Bend sales office reflects the reduction in the third quarter of 2000 from a full scale sales office to a small sales staff that both generates its own tours and sells to such prospects for a percentage of sales. The decrease in sales from the VCA-Tucson sales office is due to a decrease in tours provided by a major tour vendor to this office. Upgrade revenue increased 8.9% to $2.8 mission in 2001 from $2.6 million in 2000, reflecting continuation of marketing efforts to existing owners. The average sales price per Vacation Ownership Interest sold (excluding Upgrades) increased 1.9% to $14,118 in 2001 compared to $13,859 in 2000 and the average sales price per Vacation Ownership Interest sold including Upgrades increased 2.0% to $15,720 in 2001 from $15,411 in 2000.
The number of Vacation Ownership Interests sold increased 5.5% to 1,756 in 2001 from 1,665 in 2000. Sales of Vacation Ownership Interests in 2001 included 1,873 biennial Vacation Ownership Interests (counted as 936.5 annual Vacation Ownership Interests) and 819 annual Vacation Ownership Interests compared to 1,821 biennial Vacation Ownership Interests (counted as 910.5 annual Vacation Ownership Interests) and 754 annual Vacation Ownership Interests in 2000.
Resort operating revenues increased 27.2% or $3.8 million from $13.8 million in 2000 to $17.6 million in 2001, largely reflecting the addition of resort inventory in late 2000, with the acquisition of the Bell Rock Inn and Los Abrigados Lodge in the fourth quarter of 2000 as well as the addition of twelve new cabins at Kohl's Ranch Lodge, and also timing differences in revenue from vacation interval owners. The cost of resort operations increased at a lesser percentage than the increase in revenue with a 14.1% or $1.8 million increase to $14.6 million in 2001 from $12.8 million in 2000. Cost of resort operations as a percentage of resort operating revenue decreased to 83.4% in 2001 from 93.0% in 2000, as a result of increased revenue, including an increase in rates from vacation interval owners in 2001, increased occupancy and improved operating efficiencies at Kohl's Ranch Lodge. Certain of these benefits are not expected to recur on a regular basis and cost of resort operations as a percentage of resort operating revenue is expected in the future to be comparable to prior years.
Interest income decreased by 14.1% to $2.7 million in 2001 from $3.1 million in 2000, reflecting greater early pay-offs of Customer Notes in 2001 and a decrease in the percentage of Customer Notes sold, for which the Company recognizes the interest premium upon sale of the note.
Cost of Vacation Ownership Interests sold as a percentage of Vacation Ownership Interest sales increased to 17.0% in 2001 from 14.6% in 2000, reflecting variations in product mix, an increase in cost of sales recognized on Upgrades, and improvements made to resort properties.
Sales and marketing as a percentage of sales of Vacation Ownership Interests increased to 57.0% in 2001 compared to 56.3% in 2000, reflecting the net effect of a lower cost per tour offset by decreased closing rates at the Sedona sales office in 2001.
The provision for doubtful accounts as a percentage of Vacation Ownership Interest sales increased to 4.4% of sales of Vacation Ownership Interests in 2001 from 4.3% in 2000, reflecting the Company's decision to increase the provision on new sales in the second quarter of 2000.
General and administrative expenses increased 7.7% to $5.0 million in 2001 from $4.6 million in 2000, corresponding to revenue growth between years. General and administrative expenses decreased between years as a percentage of total timeshare revenues from 10.8% in 2000 to 10.3% in 2001.
Interest expense decreased 4.0% from $2.7 million in 2000 to $2.6 million in 2001, reflecting the combined net effect of greater borrowings in 2001 and lower borrowing rates. During 2001, the Company continued to retain and borrow against, rather than sell, more of its Customer Notes. The Company borrows against such notes at variable rates tied to prime and, accordingly, during 2001 a greater percentage of the Company's indebtedness is at lower, variable rates and a lesser percentage at higher fixed rates than in prior years.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH
The Company requires funds to finance the acquisitions of property for future resort development and to further develop the existing resorts, as well as to make capital improvements and support current operations. Cash provided by operating activities was $5.7 million in 2002 as compared to $6.4 million in 2001 and as compared to $6.2 million in 2000. The decrease in cash provided by operations in 2002 reflects cash paid for 2002 estimated tax payments, increased escrow balances on notes payable, and an increase in other assets for the investment in GWWI for which the Company accounts on the equity method, net of increased net income and related income tax expense, and the effect of common stock issued in lieu of cash compensation.
The Company generates cash primarily from the sale of Vacation Ownership Interests (including Upgrades), the financing of Customer Notes from such sales and resort operations. Because the Company uses significant amounts of cash in the development and marketing of Vacation Ownership Interests, but collects the cash on the Customer Notes receivable over a long period of time, borrowing against and/or selling receivables is necessary to provide sufficient cash to fund its normal operations.
The fluctuations in cash used in financing activities from $0.1 million in 2000 to cash provided by financing activities of $0.4 million in 2001 and $3.2 million in 2002, reflect greater borrowings against Customer Notes and increased net borrowings on notes payable related to construction costs in Las Vegas, Nevada, Los Abrigados and Kohl's Ranch as well as the financing of the Sedona Station in 2001, net of the increase in treasury stock purchases during 2001 as compared to 2000 and the decrease in treasury stock purchases in 2002 as compared to 2001.
For regular Federal income tax purposes, the Company reports substantially all of its non-factored financed Vacation Ownership Interest sales under the installment method. Under the installment method, the Company recognizes income on sales of Vacation Ownership Interests only when the Company receives cash either in the form of a down payment, as an installment payment or from proceeds from the sale of the Customer Note. The deferral of income tax liability conserves cash resources on a current basis. Interest may be imposed, however, on the amount of tax attributable to the installment payments for the period beginning on the date of sale and ending on the date the related tax is paid. If the Company is otherwise not subject to tax in a particular year, no interest is imposed since the interest is based on the amount of tax paid in that year. The consolidated financial statements do not contain an accrual for any interest expense that would be paid on the deferred taxes related to the installment method, as the interest expense is not estimable.
At December 31, 2002, the Company, excluding its Genesis subsidiary, had net operating loss ("NOL") carryforwards of approximately $1.3 million, which expire in 2017 through 2020. At December 31, 2002, Genesis had federal NOL carryforwards of approximately $2.1 million, which are limited as to usage, because they arise from built-in losses of an acquired company. In addition, such losses can only be utilized through the earnings of Genesis and are limited to a maximum of $189,000 per year. To the extent the entire $189,000 is not utilized in a given year, the difference may be carried forward to future years. Any unused Genesis NOLs will expire in 2008.
In addition, Section 382 of the Code imposes additional limitations on the utilization of NOLs by a corporation following various types of ownership changes which result in more than a 50% change in ownership of a corporation within a three-year period. Such changes may result from new Common Stock issuances by the Company or changes occurring as a result of filings with the Securities and Exchange Commission of Schedules 13D and 13G by holders of more than 5% of the Common Stock, whether involving the acquisition or disposition of Common Stock. If such a subsequent change occurs, the limitations of Section 382 would apply and may limit or deny the future utilization of the NOL by the Company, which could result in the Company paying substantial additional federal and state taxes. See Note 7 of Notes to Consolidated Financial Statements.
USES OF CASH
Investing activities typically reflect a net use of cash because of capital additions and loans to customers in connection with the Company's Vacation Ownership Interest sales. Net cash used in investing activities in 2000, 2001 and 2002 was $6.6 million, $5.9 million and $10.0 million, respectively. The decrease in cash used in investing activities in 2001 reflects the cash portion of the purchase of the Bell Rock Inn and of Sedona Station in 2000. The increase in cash used in investing activities in 2002 is reflective of the costs incurred in Las Vegas, Nevada for the sales office, the Joey Bistro restaurant at the Carriage House and Premiere Park.
Customer defaults have a significant impact on cash available to the Company from financing Customer Notes receivables, in that notes which are more than 60 to 90 days past due are not eligible as collateral. As a result, the Company in effect must repay borrowings against such notes or buy back such notes if they were sold with recourse.
On April 9, 1999 (effective January 1, 1999), the Company formed the ILX Resorts Incorporated Employee Stock Ownership Plan and Trust (the "ESOP"). The intent of the ESOP is to provide a retirement program for employees that aligns their interests with those of the Company. During 2000 and 2001, the Company contributed $250,000 each year to the ESOP and in 2001, the Company also issued 20,000 shares of restricted common stock to the ESOP. During the year ended December 31, 2002, the Company contributed $400,000 to the ESOP and the ESOP used these funds to exercise options to purchase 100,000 shares of stock from the Company. In addition, in 2002, the ESOP acquired 22,000 shares of common stock through a note guaranteed by the Company (see Note 12 of Financial Statements). Of the total shares held by the ESOP at December 31, 2002, 22,000 were purchased with borrowed funds and have not been allocated to participant accounts. The unallocated shares are collateral for the outstanding indebtedness on the note payable. At December 31, 2002, the unallocated shares are reflected at cost as a contra equity account, Guaranteed ESOP Obligation.
The ESOP may purchase additional shares for future year contributions through loans made directly to the ESOP and guaranteed by the Company. Such borrowings are not expected to exceed $1,000,000.
CREDIT FACILITIES AND CAPITAL
At December 31, 2001, the Company has an agreement with a financial institution for a commitment of $40 million under which the Company may sell certain of its Customer Notes. The agreement provided for sales on a recourse basis with a percentage of the amount sold held back by the financial institution as additional collateral. Customer Notes may be sold at discounts or premiums to the principal amount in order to yield the consumer market rate, as defined by the financial institution. If a customer pays off a note prior to maturity of the note, the financial institution may recover from the Company the unearned interest premium, if any. At December 31, 2002, $11.6 million of the $40 million commitment was available to the Company. In December 2002, the Company renewed this agreement so it can sell up to an additional $30 million in Customer Notes, effective January 1, 2003.
The Company also has a financing commitment aggregating $30.0 million whereby the Company may borrow against notes receivable pledged as collateral. These borrowings bear interest at a rate of prime plus 1.5%. The $30 million borrowing period expires in 2003 and the maturity is in 2008. At December 31, 2002, approximately $10.7 million is available under this commitment.
In December 1999, the Company completed the spin-off of its 80% ownership interest in SWI to the shareholders of ILX. In conjunction with the spin-off, the Company agreed to provide up to $200,000 of working capital financing to SWI through November 30, 2001 at an interest rate of prime plus 3%, with interest payable monthly, and a maturity date of December 31, 2001. Pursuant to the agreement, the Company had advanced SWI $108,000 as of December 31, 2001. On January 2, 2002, the Company entered into a General Bill of Sale, Assignment and Assumption Agreement with SWI whereby the Company assumed all of the assets and liabilities of SWI and recognized a net loss of $48,887.
In December 1999, the Company guaranteed a $1,000,000 operating line of credit for the Sedona Vacation Club, the owners' association of the members who own Vacation Ownership Interests in Los Abrigados. Sedona Vacation Club used the proceeds for renovations at Los Abrigados and has repaid the principal and interest from collections from a special assessment of its owners for this purpose and from owner reserve payments. The line of credit bore interest at prime plus 2.5%. As of December 31, 2002, approximately $72,000 was outstanding on this line, which was fully repaid in January 2003.
In February 2000, the Company borrowed $600,000 for the purpose of using the funds to purchase treasury stock. In 2001, the note was modified and the Company borrowed an additional $500,000 for the same purpose. The note payable bears interest at 12% and is due through 2004. At December 31, 2002, approximately $510,000 was outstanding on the note. During 2002, the Company purchased 214,095 shares of its Common Stock for $1,580,194. In March 2003, this note was consolidated with another note to the same lender and amended. The amendment provided an additional $1.45 million in funds, decreased the interest rate to 10% per year and extended the maturity to 2008.
In December 2000, the Company acquired for $1,010,000 cash the Sedona Station adjacent to Los Abrigados to be the site of its new Sedona sales center. In March 2001, the Company borrowed $808,000, which was secured by the property and bore interest at a fixed rate of 8.625%. In March 2002, the Company completed a transaction with Edward John Martori ("EJM"). EJM had been a creditor of the Company and was a direct and indirect major shareholder of the Company. EJM purchased the Sedona Station (the Sedona sales office) for $1,650,000 and the Company recorded a gain of $586,111 on the transaction. The loan to the Company secured by the property, which had a balance of $794,345,
was assumed by EJM and a note payable from the Company to EJM of $700,000 was paid in full as part of the transaction. The balance of the purchase price was paid to the Company in cash. The Company is leasing the space back from EJM under a nine-year lease agreement (at $165,000 per annum) and has paid $123,751 in rent expense for the twelve months ended December 31, 2002.
In December 2000, the Company acquired the Bell Rock Inn in the Village of Oak Creek, Arizona, for a purchase price of $4,972,997, including assumption of the existing mortgage balance of $4,472,997. The mortgage bears interest at 7.49%, and is payable in equal monthly payments of principal and interest through 2023.
In January 2001, the Company refinanced the construction note payable on VCA-Tucson. In August 2001, the note was amended to provide for the borrowing of an additional $1.0 million. The terms include extension of the maturity date to June 2004, modification of the interest rate to prime plus 1% from a 12% fixed rate, and a change in the principal payments and release provisions to include a $134,000 minimum monthly principal payment. In December 2002, the note was further amended to provide for the borrowing of an additional $1.0 million and an extension of the maturity date to February 2005.
In April 2002, the Company borrowed $2.0 million to finance the construction of 21 new units on land owned by the Company in Pinetop, Arizona. The promissory note payable bears interest at prime plus 1.5% with a minimum interest rate of 7.0%. The debt is payable in equal monthly payments of principal and interest over a five-year term ending May 2007.
In May 2002, the Company registered with the Arizona Department of Real Estate and annexed to Premiere Vacation Club 96 studio Vacation Ownership Interests in the Bell Rock Inn. This property was acquired through the assumption of an existing mortgage which does not provide for release provisions. In order to facilitate the registration, the Company secured a guaranty commitment from one of its lenders, opened an escrow account and makes monthly release payments. The balance of this escrow account of $460,747 is included in other assets.
In June 2002, the Company borrowed $3.8 million and utilized a portion of the proceeds to purchase for $3.325 million a $4.9 million note payable by a subsidiary to a third party. The promissory note bears interest at prime plus 1.0% with a minimum interest rate of 7.0%. The debt is payable in equal monthly payments of principal and interest over a five-year term ending June 2007.
In the future, the Company may negotiate additional credit facilities, including leases, issue corporate debt, issue equity securities, or any combination of the above. Any debt incurred or issued by the Company may be secured or unsecured, may bear interest at fixed or variable rates of interest, and may be subject to such terms as management deems prudent. There is no assurance that the Company will be able to secure additional corporate debt or equity at or beyond current levels or that the Company will be able to maintain its current level of debt.
The Company believes available borrowing capacity, together with cash generated from operations, will be sufficient to meet the Company's liquidity, operating and capital requirements for at least the next 12 months.
SEASONALITY
The Company's revenues are moderately seasonal with the volume of ILX owners, hotel guests and Vacation Ownership Interest exchange participants typically greatest in the second and third fiscal quarters. As the Company expands into new markets and geographic locations it may experience increased or additional seasonality dynamics which may cause the Company's operating results to fluctuate.
INFLATION
Inflation and changing prices have not had a material impact on the Company's revenues, operating income and net income during any of the Company's three most recent fiscal years. However, to the extent inflationary trends affect short-term interest rates, a portion of the Company's debt service costs may be affected as well as the rates the Company charges on its Customer Notes.
ITEM 8.
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
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 2003 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 2003 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 2003 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 2003 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 14.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing of this annual report, the Company's Chief Executive Officer and its Chief Financial Officer evaluated the Company's disclosure controls and procedures as required pursuant to Rule 13a-14 under the Securities and Exchange Act of 1934, as amended. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer determined that such controls and procedures were effective. There were no significant changes in internal controls that could significantly affect the disclosure controls and procedures since the date of the evaluation.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS PAGE OR METHOD OF FILING --------------------------------- ------------------------
(i) Report of Hansen, Barnett & Maxwell, Page a professional corporation
(ii) Consolidated Financial Statements Pages through and Notes to Consolidated Statements of the Registrant, including Consolidated Balance Sheets as of December 31, 2002 and 2001 and Consolidated Statements of Operations, Shareholders' Equity and Cash Flows for each of the three years ended December 31, 2002, 2001 and 2000.
(a) (2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedules other than those mentioned above are omitted because the conditions requiring their filing do not exist or because the required information is given in the financial statements, including the notes thereto.
(a) (3) EXHIBITS
The Exhibit Index attached to this report is hereby incorporated by reference.
(b) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of March, 2003.
ILX Resorts Incorporated, an Arizona corporation (Registrant)
By: /s/ Joseph P. Martori ------------------------------------ Joseph P. Martori Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ----
/s/ Joseph P. Martori Chairman of the Board and March 28, 2003 - ---------------------------- Chief Executive Officer Joseph P. Martori (principal executive officer)
/s/ Nancy J. Stone President, Chief Operating March 28, 2003 - ---------------------------- Officer and Director Nancy J. Stone
/s/ Margaret M. Eardley Executive Vice President and March 28, 2003 - ---------------------------- Chief Financial Officer Margaret M. Eardley (principal financial officer)
/s/ Taryn L. Chmielewski Vice President and Chief March 28, 2003 - ---------------------------- Accounting Officer Taryn L. Chmielewski
/s/ Edward S. Zielinski Executive Vice President March 28, 2003 - ---------------------------- and Director Edward S. Zielinski
/s/ Joseph P. Martori, II Executive Vice President March 28, 2003 - ---------------------------- and Director Joseph P. Martori, II
/s/ Steven R. Chanen Director March 28, 2003 - ---------------------------- Steven R. Chanen
/s/ Patrick J. McGroder III Director March 28, 2003 - ---------------------------- Patrick J. McGroder III
/s/ Steven A. White Director March 28, 2003 - ---------------------------- Steven A. White
FORM OF CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
I, Joseph P. Martori, Chairman, and Chief Executive Officer of ILX Resorts Incorporated (the "Company") certify that:
1. I have reviewed this annual report on Form 10-K of ILX Resorts Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Joseph P. Martori ---------------------------------------- Joseph P. Martori Chairman and Chief Executive Officer
FORM OF CERTIFICATION FOR FORM 10-K
CERTIFICATIONS
I, Margaret M. Eardley, Executive Vice President and Chief Financial Officer of ILX Resorts Incorporated (the "Company") certify that:
1. I have reviewed this annual report on Form 10-K of ILX Resorts Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
/s/ Margaret M. Eardley ---------------------------------------- Margaret M. Eardley Executive Vice President and Chief Financial Officer
PAGE ---- Report of Independent Certified Public Accountants Financial Statements: Consolidated Balance Sheets at December 31, 2001 and 2002 Consolidated Statements of Operations for the years ended December 31, 2000, 2001 and 2002 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2000, 2001 and 2002 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 2001 and 2002 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, 2001 and 2002 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2002 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah February 19, 2003
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,, Indiana, Nevada and Mexico.
RESORT PROPERTY HELD FOR VACATION OWNERSHIP INTEREST SALES
Resort property held for Vacation Ownership Interest sales is recorded at the lower of historical cost less amounts charged to cost of Vacation Ownership Interests sold or marketed. As Vacation Ownership Interests are sold, the Company amortizes to cost of sales the average carrying value of the property plus estimated future additional costs related to remodeling and construction.
Land held for sale is recorded at the lower of cost or fair value less cost to sell, consistent with the Company's intention to liquidate these properties.
REVENUE RECOGNITION
Revenue from sales of Vacation Ownership Interests is recognized in accordance with Statement of Financial Accounting Standard No. 66, Accounting for Sales of Real Estate ("SFAS 66"). No sales are recognized until such time as a minimum of 10% of the purchase price has been received in cash, the statutory rescission period has expired, the buyer is committed to continued payments of the remaining purchase price and the Company has been released of all future obligations for the Vacation Ownership Interest. Resort operating revenue represents daily room rentals and revenues from food and other resort services. Such revenues are recorded as the rooms are rented or the services are performed.
PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost and are depreciated on the straight-line method over their respective estimated useful lives ranging from 3 to 40 years. Property and equipment under capitalized leases are stated at the lesser of fair value or the present value of future minimum lease payments as of the date placed in service, and amortized on the straight-line method over the term of the lease.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including intangibles, for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The Company uses an estimate of future undiscounted net cash flows from the related asset or group of assets over their remaining life in measuring whether the assets are recoverable. As of December 31, 2002, the Company does not consider any of its long-lived assets to be impaired.
SEGMENT REPORTING
The Company has a single segment in the timeshare resort industry. Revenue from products and services are reflected on the income statement under Sales of Vacation Ownership Interests and Resort Operating Revenue.
STOCK OPTION PLAN
The Company applies APB Opinion 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting for its Stock Option Plans. Accordingly, no compensation cost has been recognized for stock options granted under the Plans. The Company granted 55,000 and 0 options under the Stock Option Plans during the years ended December 31, 2001 and 2002, respectively. Had compensation cost for the Plans been determined and amortized based on the fair value at the grant dates for awards under the Plans consistent with the alternative method of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's net income and income per share would have decreased to the proforma
amounts indicated below. The weighted average assumptions used to estimate the fair value of each option grant, using the Black-Scholes option-pricing model, are also presented:
DECEMBER 31, ------------------------ 2001 2002 ---------- ---------- Net Income to common shareholders As reported $1,984,166 $3,036,047 Proforma 1,852,674 3,004,728
Basic and Diluted Income per share As reported-basic $ 0.62 $ 1.03 As reported-diluted 0.61 1.00 Proforma-basic 0.58 1.02 Proforma-diluted 0.57 1.00
Weighted-Average Assumptions: Dividend yield $ -- $ -- Expected volatility 67.6% -- Risk-free interest rate 4.0% -- Expected life of options, in years 3.45 --
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash equivalents are liquid investments with an original maturity of three months or less. At December 31, 2002 and 2001, the Company had cash in excess of federally insured limits. The following summarizes interest paid and capitalized interest to resort property under development:
YEAR ENDED DECEMBER 31, ------------------------------------ 2000 2001 2002 ---------- ---------- ---------- Interest paid $2,726,000 $2,563,000 $2,102,000 Income taxes paid -- -- 1,461,000 Capitalized interest 86,000 -- 306,000
ACCOUNTING MATTERS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." SFAS No. 144 established a single accounting model for long-lived assets to be disposed of by sale and the recognition of impairment of long-lived assets to be held and used. The company implemented SFAS No. 144 effective January 1, 2002. The adoption of this standard has had no material effect on the Company's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." Among other provisions, the statement modifies the criteria classification of gains and losses on debt extinguishments such that they are not required to be classified as extraordinary items if they do not meet the criteria for classification as extraordinary items in APB Opinion No. 30. The Company elected to adopt this standard during the year ended December 31, 2002. The adoption of this standard has had no material effect on the Company's financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal activities." The statement required companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee plan severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. The Company will be required to apply this statement prospectively for any exit or disposal activities initiated after December 31, 2002. The adoption of this standard is not expected to have a material effect on the Company's financial position or results of operations.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." This statement amends Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock-based employee compensation. It also amends the disclosure provisions of Statement No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Statement No. 148 also requires disclosure about those effects in interim financial information. The Company adopted the disclosure requirements of Statement No. 148 in the accompanying financial statements.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
The financial statements for prior periods have been reclassified to be consistent with the current period financial statement presentation. These reclassifications had no effect on net income.
NOTE 2. NOTES RECEIVABLE, NET
Notes receivable consist of the following:
DECEMBER 31, --------------------------- 2001 2002 ------------ ------------ Vacation Ownership Interest notes receivable $ 31,105,657 $ 33,839,506 Holdbacks by financial institutions 2,119,652 2,412,412 Other receivables 673,399 840,021 Allowance for possible credit losses (3,533,483) (3,072,668) ------------ ------------ $ 30,365,225 $ 34,019,271 ============ ============
Notes generated from the sale of Vacation Ownership Interests generally bear interest at annual rates ranging from 13.9% to 17.9% and have terms of five to ten years. The notes are collateralized by deeds of trust on the Vacation Ownership Interests sold.
At December 31, 2002, the Company had an agreement with a financial institution for a commitment of $40 million under which the Company may sell certain of its Customer Notes. The agreement provided for sales on a recourse basis with a percentage of the amount sold held back by the financial institution as additional collateral. Customer Notes may be sold at discounts or premiums to the principal amount in order to yield the consumer market rate, as defined by the financial institution. At December 31, 2002, $11.6 million of the $40 million commitment was available to the Company. In December 2002, the Company renewed this agreement. Under the renewal terms the Company can sell up to an additional $30 million in Customer Notes, effective January 1, 2003.
For the twelve months ended December 31, 2000, 2001 and 2002, the Company sold with recourse approximately $10 million, $2 million and $10 million of notes receivable generated from sales of Vacation Ownership Interests in the respective years. The Company elected to hypothecate, rather than sell with recourse, the majority of its Customer Notes during 2001 because of uncertainty regarding the ability and intent of the financial institution which purchases such Customer Notes. In 2000 the Company was informed that this financial institution was ceasing the portion of its activities that includes financing of Customer Notes. In 2002 the financial institution was purchased and affirmed its intent to finance Customer Notes on an ongoing basis. As a result, the Company elected to sell with recourse more of its Customer Notes in 2002. The Company recorded an interest premium of approximately $1.0 million, $0 million, and $3.0 million as interest income in the years ended December 31, 2000, 2001 and 2002, respectively, related to notes sold with recourse.
The Company also has a financing commitment for $30.0 million whereby the Company may borrow against notes receivable pledged as collateral. These borrowings bear interest at prime plus 1.5%. The $30 million borrowing period expires in 2003 and the maturity is in 2008. At December 31, 2002, approximately $10.7 million is available under this commitment.
At December 31, 2001 and 2002, the Company had approximately $11.0 million and $13.3 million, respectively, in outstanding notes receivable sold on a recourse basis. Portions of the notes receivable are secured by deeds of trust on Los Abrigados Resort & Spa ("Los Abrigados"), Varsity Clubs of America-South Bend ("VCA-South Bend") and Varsity Clubs of America-Tucson ("VCA-Tucson").
At December 31, 2002, notes receivable in the amount of approximately $195,000 have been contributed to the Company's Series A Preferred Stock sinking fund and therefore their use is restricted (Note 12).
The following summarizes activity in the allowance for possible credit losses:
The Company considers all notes receivable past due in excess of 90 days to be delinquent. Typically, uncollectible accounts are not written off until the underlying inventory is recovered via acceptance of a deed back or foreclosure, the timing of which is determined by the Company. During 2002, the Company deeded back in a bulk transaction 521 Vacation Ownership Interests of delinquent owners. These accounts had become delinquent over a period of several years. The Company subsequently annexed those recovered weeks to Premiere Vacation Club. At December 31, 2002, $8.3 million in principal or $6.2 million net of the historical costs of the underlying property that would be recovered in the event of noncollectibility, or 16.5% and 12.4%, respectively, of the retained notes and notes previously sold, which are recourse to the Company, were more than 90 days past due.
At December 31, 2001 and 2002, the above allowance includes $225,000 and $266,000 respectively, for notes sold with recourse.
NOTE 3. RESORT PROPERTY HELD FOR VACATION OWNERSHIP INTEREST SALES
Resort property held for Vacation Ownership Interest sales consists of the following:
DECEMBER 31, --------------------------- 2001 2002 ------------ ------------ Premiere Vacation Club $ 13,165,636 $ 19,989,013 VCA-Tucson 1,682,189 148,795 VCA-South Bend 2,374,229 1,741,527 Golden Eagle Resort 1,233,999 848,013 Los Abrigados 385,353 307,943 Roundhouse Resort 749,255 749,255 Kohl's Ranch Lodge 323,759 25,449 The Inn at Los Abrigados 310,867 294,858 Other 45,585 45,585 ------------ ------------ $ 20,270,872 $ 24,150,438 ============ ============
In January 1999, the Company recorded in Maricopa County, Arizona its proprietary Premiere Vacation Club Membership Plan and in May 1999 annexed a total of 5,000 Vacation Ownership Interests into the Club and received Department of Real Estate approval in the State of Arizona to commence selling Vacation Ownership Interests in Premiere Vacation Club. During 2001 and 2002, the Company annexed additional units and as of December 31, 2002, Premiere Vacation Club included a total of 19,100 Vacation Ownership Interests. The 19,100 Vacation Ownership Interests annexed into the Club consisted of 3,259.5 Vacation Ownership Interests in Los Abrigados, 279.5 Vacation Ownership Interests in the Inn at Los Abrigados, 2,823 Vacation Ownership Interests in Kohl's Ranch Lodge, 930 Vacation Ownership Interests in the Golden Eagle Resort, 1,500 Vacation Ownership Interests in the Sea of Cortez Premiere Vacation Club (consisting of 25-year right-to-use Vacation Ownership Interests in San Carlos, Mexico), 1,169 Vacation Ownership Interests in VCA-South Bend, 2,831 Vacation Ownership Interests in VCA-Tucson, 169 Vacation Ownership Interests in the Roundhouse Resort, 1,147 Vacation Ownership Interests in the Carriage House, and 4,992 Vacation Ownership Interests in the Bell Rock Inn.
NOTE 4. NET INCOME PER SHARE
The following presents the computation of basic and diluted net income per share:
BASIC NET INCOME PER SHARE
DILUTED 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 and 13,200 shares of common stock at a price of $8.125 per share were outstanding at December 31, 2001 and 2002, respectively but were not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of common shares. These options expire in 2002 and 2006.
Series C Convertible Preferred Stock dividends are not required, nor were they declared, subsequent to November 1, 1998.
NOTE 5. DEFERRED ASSETS
As part of the acquisition of Los Abrigados, certain affiliates of the Company guaranteed the underlying mortgage on the resort. As partial consideration for their guarantee, the affiliates earned a $780,000 fee, which is amortized to expense as Vacation Ownership Interests are sold. At December 31, 2001 and 2002, deferred assets included $107,139 and $59,951, respectively, of guarantee fees, net of accumulated amortization.
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
DECEMBER 31, ---------------------------- 2001 2002 ------------ ------------ Land $ 403,961 $ 415,665 Buildings and improvements 5,682,989 4,970,541 Leasehold improvements 304,136 1,725,651 Furniture and fixtures 1,385,341 3,542,030 Office equipment 636,156 1,208,463 Computer equipment 850,551 1,046,468 Vehicles 122,422 290,969 ------------ ------------ 9,385,556 13,199,787 Accumulated depreciation (3,196,474) (4,190,814) ------------ ------------ $ 6,189,082 $ 9,008,973 ============ ============
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:
DECEMBER 31, ------------------------------------ 2000 2001 2002 ---------- ---------- ---------- Current-federal alternative minimum tax $ -- $ 689,923 $ 950,501 Deferred 1,025,176 652,672 1,105,077 ---------- ---------- ---------- Total $1,025,126 $1,342,595 $2,055,578 ========== ========== ==========
A reconciliation of the income tax expense and the amount that would be computed using statutory federal income tax rates is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 2000 2001 2002 ---------- ---------- ---------- Federal, computed on income before minority interest and income taxes $ 869,854 $1,147,231 $1,747,242 State, computed on income after minority interest and before income taxes 97,117 128,085 191,683 Other 58,205 67,279 116,653 ---------- ---------- ---------- Income tax expense $1,025,176 $1,342,595 $2,055,578 ========== ========== ==========
The Company reports substantially all Vacation Ownership Interest sales that it finances on the installment method for Federal income tax purposes. Under the installment method, the Company does not recognize income on the financed portion of sales of Vacation Ownership Interests, until the installment payments on customer receivables are received by the Company or the customer receivables are sold by the Company.
The Company is subject to Alternative Minimum Tax ("AMT") as a result of the deferred income that results from the installment sales treatment of Vacation Ownership Interest sales for regular tax purposes. The AMT liability creates a deferred tax asset that can be used to offset any future tax liability from regular Federal income tax. This deferred tax asset has an unlimited carryover period.
At December 31, 2002, the Company, excluding its Genesis subsidiary, had NOL carryforwards of approximately $1.3 million, which expire in 2017 through 2020. At December 31, 2002, Genesis had federal NOL carryforwards of approximately $2.1 million, which are limited as to usage because they arise from built in losses of an acquired company. In addition, such losses can only be utilized through the earnings of Genesis and are limited to a maximum of $189,178 per year. To the extent the entire $189,178 is not utilized in a given year, the difference may be carried forward to future years. Any unused Genesis NOLs will expire in 2008.
In addition, Section 382 of the Internal Revenue Code imposes additional limitations on the utilization of NOLs by a corporation following various types of ownership changes which result in more than a 50% change in ownership of a corporation within a three year period. Such changes may occur as a result of new common stock issuances by the Company or changes occurring as a result of filings with the Securities and Exchange Commissions on Schedule 13D and 13G by holders of more than 5% of the Common Stock, whether involving the acquisition or disposition of common stock. If such a subsequent change occurs, the limitations of Section 382 would apply and may limit or deny the future utilization of the net operating loss by the Company, which could result in the Company paying substantial additional federal and state taxes.
NOTE 8. NOTES PAYABLE
Notes payable consist of the following:
At December 31, 2002, approximately $23.7 million of the Company's notes payable have scheduled payment terms that may be accelerated based on established release prices related to future Vacation Ownership Interest sales or are dependent on the amount of mortgage notes receivable pledged as collateral. The maturities of these notes are included below based on their scheduled repayment terms and maturities. Future contractual maturities of notes payable and capitalized leases at December 31, 2002 are as follows:
2003 $ 7,208,648 2004 8,070,937 2005 6,535,244 2006 5,374,101 2007 8,214,635 Thereafter 9,325,448 ------------ $ 44,729,013 ============
NOTE 9. NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates consist of the following:
DECEMBER 31, ----------------------- 2001 2002 ---------- ---------- Note payable, collateralized by LAP partnership interest, interest at 10%, due through 2003 $ 700,000 $ --
Notes payable, collateralized by LAP partnership interest, interest at 8%, due through 2002 300,000 -- ---------- ---------- $1,000,000 $ -- ========== ==========
Total interest expense on notes payable to affiliates for the years ended December 31, 2000, 2001 and 2002 was approximately $107,000, $95,000 and $20,000, respectively. Interest payable to affiliates at December 31, 2001 and 2002 was approximately $24,000 and $0, respectively. The note payable to affiliates of $700,000 was fully repaid in 2002 as part of the sale of the Sedona Station (Note 16).
NOTE 10. MINORITY INTERESTS
In June 1998, the Company acquired a 51% interest and in June 2000 the remaining 49% minority interest in Timeshare Resale Brokers, Inc. ("TRBI"), an Arizona company engaged in the resale of Vacation Ownership Interests on behalf of consumers and others, for which it earns a commission upon sale. The operation is based in Sedona, Arizona. To date the operations of TRBI have not been material to the Company.
NOTE 11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Operating leases are used to lease office space, equipment and vehicles. Future minimum lease payments on noncancelable operating leases at December 31, 2002 are as follows:
2003 $ 1,718,000 2004 1,500,000 2005 1,402,000 2006 1,131,000 2007 1,068,000 Thereafter 11,924,000 ------------ $ 18,743,000 ============
Total rent expense for the years ended December 31, 2000, 2001 and 2002 was approximately $897,000, $1,516,000 and $2,208,000 respectively.
LEGAL PROCEEDINGS
Litigation has arisen in the normal course of the Company's business, none of which is deemed to be material.
OTHER
In December 1999, the Company completed the spin-off of its 80% ownership interest in SWI to the shareholders of ILX. In conjunction with the spin-off the Company agreed to provide up to $200,000 of working capital financing to SWI through November 30, 2001. During 2000, the Company advanced the full $200,000 at an interest rate of prime plus 3%, and at December 31, 2001 the balance of the note receivable was $108,000. On January 2, 2002 the Company entered into a Bill of Sale Assignment and Assumption agreement with SWI whereby the Company assumed all of the assets and liabilities of SWI, in full satisfaction of the note and recognized a net loss of $48,887. The purchase is not deemed material.
In December 1999, the Company guaranteed a $1,000,000 operating line of credit for Sedona Vacation Club, the proceeds of which were used for renovations at Los Abrigados. Sedona Vacation Club repaid the interest and principal on the loan from proceeds from a special assessment of its owners and from their reserve payments. The line of credit bore interest at prime plus 2.5%. At December 31, 2002, approximately $72,000 remained outstanding on the line which was fully repaid in January 2003.
In July 2001, the Company acquired a 50-year leasehold interest in a 44-acre parcel located proximate to the Las Vegas Airport, University of Nevada - - Las Vegas ("UNLV") and the "Strip" in Las Vegas, Nevada. The $5 million purchase price for the leasehold interest consisted of a $100,000 earnest money deposit made in August 2000 and a $4.9 million promissory note from a subsidiary of the Company to an unrelated third party ("the Note"). In June 2002, the Company purchased the Note for $3.325 million. Both the $4.9 million receivable and the Note are eliminated in consolidation. The original discount of $1,575,000 is being amortized to income over the term of the Note. That discount, net of accumulated amortization, is included in notes payable. The Company amortized $73,263 during the twelve months ended December 31, 2002. The Company borrowed $3.8 million in June 2002, a portion of which was used to purchase the Note and the Note is collateral for the borrowing (Note 8).
In September 2000, the Company entered into an agreement to lease an existing motel in Sedona, Arizona, commencing October 1, 2000 and terminating on December 31, 2021. The lease contains a provision in which the lease term may be automatically extended for consecutive one-year periods after December 31, 2021 up to December 31, 2038 if the lease has not been terminated prior to December 31, 2021. The lessor was required to remodel and refurbish the existing project, previously known as the Canyon Portal Motel, as well as construct additional units at the complex. The Company has renamed the property the "Los Abrigados Lodge." The renovations and construction were completed in 2001, and the property is being used for hotel accommodations, including accommodations for customers invited to attend a vacation ownership presentation at the Sedona sales office. Lease payments for the Los Abrigados Lodge in the amount of $779,348 per year through 2021 are included in the above table of future minimum lease payments on noncancelable operating leases.
In October 2001, the Company adopted a stock compensation program for certain of its employees, primarily those earning $50,000 or more per year. Under the program, employees received in the first quarter of 2002 a portion of compensation they would otherwise have earned in cash during the fourth quarter of 2001 in shares of stock of the Company, at a prescribed formula. This program was extended to the first quarter of 2002, with shares issuable in the second quarter of 2002. The total number of shares issued to employees under the program in January 2002 was 31,742 shares valued at $6.90 per share. The total number of shares issued to employees under the program in April 2002 was 27,003 shares valued at $6.80 per share.
In May 2002, the Company registered with the Arizona Department of Real Estate and annexed to Premiere Vacation Club 96 studio Vacation Ownership Interests in the Bell Rock Inn to Premiere Vacation Club. This property was acquired through the assumption of an existing mortgage which does not provide for release provisions. In order to facilitate the registration, the Company secured a guaranty commitment from one of its lenders, opened an escrow account and makes monthly release payments. The balance of this escrow account of $460,747 is included in other assets.
The Company's Genesis subsidiary has a potential obligation for future payment to holders of fund certificates, which arose from the reorganization of Genesis. The holders of the certificates are entitled to receive 50% of the proceeds net of costs from the sale of certain Genesis properties. A liability has been recorded for the possible future payment based on estimated net realizable values of the properties. These potential obligations as well as amounts due fund certificate holders for sales of properties are included in accrued liabilities.
NOTE 12. SHAREHOLDERS' EQUITY
PREFERRED STOCK
At December 31, 2001 and 2002, preferred stock includes 59,311 and 59,151 shares of the Company's Series A Preferred Stock carried at $593,110 and $591,510, respectively. The Series A Preferred Stock has a par value and liquidation preference of $10 per share and, commencing July 1, 1996, is entitled to annual dividend payments of $.80 per share. Dividends were paid of $47,359, $47,448 and $47,321 in 2000, 2001 and 2002, respectively. Commencing January 1, 1993, on a quarterly basis, the Company must contribute $100 per Vacation Ownership Interest sold in Los Abrigados to a mandatory dividend sinking fund. At December 31, 2002, notes receivable in the amount of approximately $195,000 have been designated for the sinking fund. Dividends on the Company's common stock are subordinated to the Series A dividends and to the contributions required by the sinking fund.
At December 31, 2001 and 2002, preferred stock also includes 55,000 and 0 shares of the Company's Series B Convertible Preferred Stock carried at $55,000 and $0. The Series B Convertible Preferred Stock had a $10 par value and a liquidation preference of $10 per share, which was subordinate to the Series A liquidation preference. The Series B Convertible Preferred Stock was not entitled to dividends. Commencing July 1, 1996, the Series B Convertible Preferred Stock was convertible into common stock on the basis of two shares of common for five shares of preferred stock.
In August 2002, the Series B Convertible Preferred shareholders converted the remaining 55,000 outstanding shares of Series B Convertible Preferred Stock for 22,000 shares of common stock, and the ILX Resorts Incorporated Employee Stock Ownership Plan and Trust (the "ESOP") agreed to purchase such common shares at $8.25 per share in exchange for notes payable of $181,500. The notes bear interest at 6%, payable in quarterly payments of principal and interest through 2003, and are secured by the common shares. The principal amount of the notes is guaranteed by the Company and has been recorded as a guaranteed ESOP obligation. The Company also settled the liquidation preference for $204,649 which has been recorded as a reduction to additional paid in capital.
The Series A preferred stock may, at the holder's election, be exchanged for Los Abrigados Vacation Ownership Interests at the rate of 1,000 shares of stock plus $2,100 cash per Vacation Ownership Interest. During 2002, Series A shares could also have been exchanged for lodging certificates under certain conditions, and 160 shares were exchanged under this program during the year.
At December 31, 2001 and 2002, preferred stock also includes 170,505 and 118,440 shares of the Company's Series C Convertible Preferred Stock carried at $468,915 and $325,216. The Series C Convertible Preferred Stock has a $10 par value and is entitled to dividends at the rate of $.60 per share per annum when declared by the Board of Directors. If dividends were not declared in any year prior to the fifth anniversary of the Genesis merger date (November 1, 1993), such undeclared dividends ("Dividend Arrearage") could have been converted to "Cumulation Shares" at the rate of $6 of Dividend Arrearage per Cumulation Share. The Series C Preferred Stock and the Cumulation Shares have a liquidation preference of $10 per share and $6 per share, respectively, and are subordinate to the liquidation preference of the Series A stock. Commencing November 1, 1994 through October 31, 2004, the Series C Preferred Stock may be converted to ILX common stock on the basis of one share of common stock for three shares of Series C Preferred Stock and one share of ILX common stock for each $30 in Dividend Arrearages. For the years ended December 31, 2000, 2001 and 2002, the Company recorded the exchange of 14,298, 6,330 and 52,065 Series C Convertible shares for 4,766, 2,110 and 17,355 common shares, respectively. ILX may redeem the Series C Preferred Stock commencing November 1, 1996, at $10 per share plus payment of all declared but unpaid dividends.
COMMON STOCK
For the years ended December 31, 2000, 2001 and 2002, the Company issued 71,600, 4,100 and 8,400 shares of restricted common stock, valued at $64,066, $4,210 and $32,918, respectively, to employees in exchange for services provided. In addition, in 2002 the Company issued 65,930 shares of common stock valued at $460,141 to employees and a professional service provider in exchange for services provided.
During 2000, 2001 and 2002, the Company purchased 657,500, 543,200 and 214,095 shares of its Common Stock for $1,308,655, $2,379,428 and $1,580,194.
In December 2002, the Company announced an annual cash dividend of $0.40 per common share to be paid in equal quarterly installments, payable on the tenth business day of the calendar month following the end of each calendar quarter, to common shareholders of record as of the last day of each calendar quarter in 2003.
NOTE 13. EMPLOYEE STOCK OWNERSHIP PLAN
On April 9, 1999 (effective January 1, 1999), the Company formed the ILX Resorts Incorporated Employee Stock Ownership Plan and Trust (the "ESOP"). The intent of the ESOP is to provide a retirement program for all eligible employees which aligns their interests with those of the Company. Generally, all employees who have completed one year of service, have attained the age of 21 and complete 1,000 hours of service during the plan year are eligible to participate in the ESOP.
In August 1999, the ESOP entered into an agreement with Litchfield Financial Corporation for a $500,000 line of credit, which was secured by stock purchased with the funds and guaranteed by the Company. The ESOP borrowed the full $500,000 in 1999. In 2000 and 2001, the Company paid interest on the line of credit of $34,029 and $13,979, respectively. The line of credit was fully repaid in 2001.
During the years ended December 31, 2000 and 2001, the Company contributed $250,000 each year to the ESOP and such funds were used by the ESOP to repay the line of credit. In accordance with SOP 93-6, Employer's Accounting for Employee Stock Option Plan, the difference of $40,862 each year between the fair market value of the leveraged shares at the time of the debt repayment in 2000 and 2001 and their actual cost when the shares were purchased in 1999, was charged to Paid in Capital. During the year ended December 31, 2000, the Company also issued to the ESOP 100,000 shares of restricted common stock valued at $146,094. During the year ended December 31, 2001, the Company issued to the ESOP 20,000 shares of restricted common stock valued at $41,905. During the year ended December 31, 2002, the Company contributed $400,000 to the ESOP and the funds were used to exercise options for 100,000 shares of common stock.
During the years ended December 31, 1999 and 2000, the ESOP purchased a total of 375,300 shares of the Company's common stock in the open market. Inclusive of the 22,000 shares of common stock obtained in the transaction with the Series B shareholders (Note 12), at December 31, 2002, the ESOP held 613,802 shares and $5,460 in cash. The 22,000 shares, valued at $173,800 as of December 31, 2002, were purchased with borrowed funds and at December 31, 2002 had not been released to participant accounts. These unallocated shares are collateral for the outstanding indebtedness on the note payable. At December 31, 2002, the unallocated shares were reflected at cost as a contra equity account, Guaranteed ESOP Obligation.
NOTE 14. EMPLOYEE STOCK OPTION PLANS
The Company has Stock Option Plans pursuant to which options (which term as used herein includes both incentive stock options and non-statutory stock options) may be granted to key employees, including officers, whether or not they are directors, and non-employee directors and consultants, who are determined by the Board of Directors to have contributed in the past, or who may be expected to contribute materially in the future, to the success of the Company. The exercise price of the options granted pursuant to the Plans shall be not less than the fair market value of the shares on the date of grant. All outstanding stock options require the holder to have been a director or employee of the Company for at least one year before exercising the option. Options are exercisable over a five-year period from date of grant if the optionee was a ten-percent or more shareholder immediately prior to the granting of the option and over a ten-year period if the optionee was not a ten-percent shareholder. The aggregate number of shares that may be issued under the Plans shall not exceed 100,000 shares. The number of shares available for grant under the Plans at December 31, 2001 and December 31, 2002 was 9,300 and 66,800, respectively.
Stock option transactions are summarized as follows:
The exercise price for options outstanding at December 31, 2002 ranged from $3.25 to $8.125 per share. Options outstanding at December 31, 2002 have expiration dates as follows:
YEAR ENDING OPTIONS FOR DECEMBER 31, SHARES ------------ ----------- 2004 18,200 2006 15,000 -------- 33,200 ========
The weighted average remaining contractual life for options outstanding as of December 31, 2001 and 2002 was 1.86 years and 2.47 years respectively.
NOTE 15. PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan in which substantially all employees are eligible to participate. The Company contributes a discretionary amount to the plan as determined by the Board of Directors. The Company declared contributions of $50,000 for each of the years ended December 31, 2000, 2001 and 2002. The contributions consisted of $50,000 cash for 2000 and 2002, and cash of $41,342 and 1,300 shares of common stock valued at $8,658 for 2001.
NOTE 16. RELATED PARTY TRANSACTIONS
In addition to the related party transactions described elsewhere in the financial statements, the Company had the following related party transactions:
In December 1995, the Company sold the building that houses its Phoenix telemarketing operations, the Sedona Spa warehouse and administrative offices and certain other ILX administrative offices, to an affiliate for $500,000. The Company leases the building for $48,000 per year. At December 31, 2002, three one-year options to renew at the rate of $48,000 per year remain on the existing lease.
In March 2002, the Company completed a transaction with Edward John Martori (EJM). EJM had been a creditor of the company and was a direct and indirect major shareholder of the Company. EJM purchased the Sedona Station (the Sedona sales office) for $1,650,000 and the Company recorded a gain of $586,111 on the transaction. The loan to the Company secured by the property, which had a balance of $794,345, was assumed by EJM and a note payable from the Company to EJM of $700,000 was paid in full as a part of the transaction. The balance of the purchase price was paid to the Company in cash. The Company is leasing the space back from EJM under a nine-year lease agreement (at $165,000 per annum) and has paid $123,751 in rent expense for the twelve months ended December 31, 2002.
In August 2002, the Company invested $1,000,000 in cash for 8,000,000 shares or an approximately 36.4% ownership interest in GWWI. GWWI plans to develop 23-acres of the Company's 44-acre parcel in Las Vegas, Nevada. The facility will include a sports themed restaurant and bar, pro-shop, and six 18-hole natural grass putting courses. Four of the putting courses will be developed using 24 full-sized championship putting greens, each inspired by famous greens known around the world. The investment in GWWI is included in other assets and the Company is accounting for its interest in GWWI on the equity method. Total assets and liabilities at December 31, 2002 and net loss for the year ended December 31, 2002 for GWWI were $1,408,594, $99,600 and $344,859, respectively.
NOTE 17. CAPITAL LEASES
Leased assets included in resort property held for Vacation Ownership Interest sales and property and equipment totaled $693,015 and $693,015 (net of accumulated amortization of $468,017 and $636,408) at December 31, 2001 and
2002, respectively. The leases expire through 2004. Future minimum lease payments at December 31, 2002 are as follows:
2003 $ 40,539 2004 20,591 -------- Total 61,130 Less: Amounts representing interest (4,523) -------- Net minimum lease payments $ 56,607 ========
NOTE 18. CONCENTRATIONS OF RISK
CREDIT RISK
The Company is exposed to on-balance sheet credit risk related to its notes receivable. The Company is exposed to off-balance sheet credit risk related to loans sold under recourse provisions.
The Company offers financing to the buyers of Vacation Ownership Interests at the Company's resorts. These buyers make a down payment of at least 10% of the purchase price and deliver a promissory note to the Company for the balance; the promissory notes generally bear interest at a fixed rate, are payable over a seven-year period and are collateralized by a first mortgage on the Vacation Ownership Interest. The Company bears the risk of defaults on these promissory notes. The Company performs credit evaluations prior to Vacation Ownership Interest sales and the Vacation Ownership Interest deed of trust serves as collateral on the note receivable. If a buyer of a Vacation Ownership Interest defaults, the Company generally recovers the Vacation Ownership Interest by receiving a deed back from the owner or through foreclosure. The Company may resell the Vacation Ownership Interest; however, marketing, selling and administrative costs from the original sale are not recovered; and such costs must be incurred again to resell the Vacation Ownership Interest.
INTEREST RATE RISK
Because the Company's indebtedness bears interest at variable rates and the Company's customer receivables bear interest at fixed rates, increases in interest rates could cause the rate on the Company's borrowings to exceed the rate at which the Company provides financing to its customers. The Company does not engage in interest rate hedging transactions. Therefore, any increase in interest rates, particularly if sustained, could have a material adverse effect on the Company's results of operations, cash flows and financial position.
AVAILABILITY OF FUNDING SOURCES
The Company funds substantially all of the notes receivable, resort property held for Vacation Ownership Interest sales and land inventory which it originates or purchases with sales of consumer notes, borrowings through its financing facilities and internally generated funds. Borrowings are in turn repaid with the proceeds received by the Company from sales of notes receivable or from repayments by consumers of such notes receivable. To the extent that the Company is not successful in maintaining or replacing existing financings, it would have to curtail its operations or sell assets, thereby having a material adverse effect on the Company's results of operations, cash flows and financial condition.
GEOGRAPHIC CONCENTRATION
The Company's notes receivable have been primarily originated in Arizona. The risk inherent in such concentrations is dependent upon regional and general economic stability that affects property values and the financial stability of the borrowers. The Company's resort property held for Vacation Ownership Interest sales is also concentrated in Arizona. The risk inherent in such concentration is in the continued popularity of the resort destinations, which affects the marketability of the Company's products and the collection of notes receivable. The opening of a sales office in Las Vegas in 2002 reduces the amount of concentration of notes originated in Arizona.
NOTE 19. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value for financial instruments:
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash equivalents approximates their fair value because of the short maturity of these instruments.
NOTES RECEIVABLE
The carrying amount reported in the balance sheet for notes receivable approximates its fair value because the interest rates on the portfolio of notes receivable approximate current interest rates to be received on similar current notes receivable.
NOTES PAYABLE
The carrying amount reported in the balance sheet for notes payable approximates its fair value because the interest rates on these instruments approximate current interest rates charged on similar current borrowings.
NOTES PAYABLE TO AFFILIATES
The fair value of the notes payable to affiliates is not determinable since these financial instruments are not readily marketable and are payable to affiliates.
NOTE 20. SUBSEQUENT EVENT
On March 4, 2003, the Company filed a registration statement with the Securities and Exchange Commission to register 300,000 shares of common stock that may be issued under a dividend reinvestment plan adopted by the Company's Board of Directors.
NOTE 21. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is presented in the following summary.
NOTE 22. SIGNIFICANT FOURTH QUARTER ADJUSTMENT
There were no material fourth quarter adjustments or accounting changes.
EXHIBIT INDEX