SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended March 31, 1996 Commission File Number 33-16122
-------------- --------
ILX INCORPORATED
----------------
(Exact name of registrant as specified in its charter)
ARIZONA 86-0564171
- --------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2777 East Camelback Road, Phoenix, AZ 85016
-------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code 602-957-2777
---------------------------------------------
Former name, former address, and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at March 31, 1996
- ------------------------------- -----------------------------
Common Stock, without par value 12,758,021 shares
Preferred Stock, $10 par value 400,893 shares
1
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $3,463,828 $3,746,518
Notes receivable, net 9,491,021 8,785,487
Resort property held for timeshare sales 16,713,110 17,191,791
Resort property under development 1,129,645 1,119,080
Land held for sale 1,547,493 1,545,184
Deferred assets 365,997 451,496
Property and equipment, net 2,932,498 835,485
Deferred income taxes 1,713,710 1,887,021
Other assets 2,188,737 2,190,451
------------ ------------
$39,546,039 $37,752,513
=========== ===========
Liabilities and Shareholders' Equity
Accounts payable $2,111,547 $2,313,638
Accrued and other liabilities 1,448,042 1,793,160
Genesis funds certificates 1,348,793 1,366,843
Due to affiliates 226,005 440,629
Deferred income 3,298 2,869
Notes payable 16,159,897 13,189,945
Notes payable to affiliates 1,785,450 1,837,912
----------- -----------
23,083,032 20,944,996
---------- ----------
Minority Interests 2,492,293 3,032,415
--------- ---------
Shareholders' Equity
Preferred stock, $10 par value; 10,000,000 shares authorized;
400,893 and 411,483 shares issued and outstanding; liquidation
preference of $4,008,930 and $4,114,830, respectively 1,485,029 1,515,134
Common stock, no par value; 40,000,000 shares authorized;
12,758,021 and 12,625,757 shares issued and outstanding 9,449,670 9,322,375
Treasury stock, at cost, 20,000 shares (25,032) (25,032)
Additional paid in capital 37,720 35,190
Retained earnings 3,023,327 2,927,435
----------- -----------
13,970,714 13,775,102
---------- ----------
$39,546,039 $37,752,513
=========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------------
1996 1995
---- ----
<S> <C> <C>
Revenues
Sales of timeshare interests $4,897,089 $4,980,552
Resort operating revenue 2,317,743 1,704,543
Sales of land and other 53,261 58,695
---------- ----------
7,268,093 6,743,790
---------- ----------
Cost of sales and operating expenses
Cost of timeshare interests sold 1,708,109 1,622,516
Cost of resort operations 2,453,162 1,775,510
Cost of land sold and other 27,148 36,573
Advertising and promotion 1,530,394 1,480,979
General and administrative 675,285 739,526
Provision for doubtful accounts 290,180 269,063
---------- ----------
6,684,278 5,924,167
---------- ----------
Operating income 583,815 819,623
Other income (expense)
Interest expense (471,094) (209,570)
Interest income 204,493 114,049
---------- ----------
Income before minority interests and income taxes 317,214 724,102
Minority interests (145,170) (178,161)
Income taxes (74,496) (143,376)
----------- -----------
Net income $ 97,548 $ 402,565
========== ==========
Net income per common and equivalent share $ 0.01 $ 0.03
========= =========
Number of common and equivalent shares 12,787,700 12,516,219
========== ==========
Net income per share assuming full dilution $ 0.01 $ 0.03
========= =========
Number of fully diluted shares 13,263,200 13,011,924
========== ==========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $97,548 $402,565
Adjustments to reconcile net income to net cash used in operating
activities:
Increase (decrease) in undistributed minority interest (70,736) 178,161
Additions to notes receivable (2,770,736) (3,035,415)
Proceeds from sales of notes receivable 1,775,022 2,013,123
Provision for doubtful accounts 290,180 269,063
Depreciation and amortization 215,465 132,128
Deferred income taxes 173,311 104,466
Amortization of guarantee fees 18,500 27,200
Change in assets and liabilities:
Decrease in resort property held for timeshare sales 335,612 223,956
Additions to resort property under development (10,565) (1,990,734)
(Increase) decrease in land held for sale (2,309) 1,000
Increase in other assets (180,008) (172,488)
(Decrease) increase in accounts payable (224,952) 615,304
Decrease in accrued and other liabilities (396,583) (203,230)
Increase (decrease) in Genesis funds certificates (18,050) 2,862
Decrease in due to affiliates (114,624) (508,114)
Increase in deferred income 429 118,444
---------- ----------
Net cash used in operating activities (882,496) (1,821,709)
---------- ----------
Cash flows from investing activities:
Decrease (increase) in deferred assets 66,999 (31,955)
Purchases of plant and equipment (46,422) (21,377)
----------- -----------
Net cash provided by (used in) investing activities 20,577 (53,332)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 2,565,095 2,457,014
Principal payments on notes payable (1,532,768) (1,361,526)
Principal payments on notes payable to affiliates (152,462) (119,426)
Distribution to minority partners (400,000) --
Proceeds from issuance of common stock 111,375 --
Redemption of preferred stock (12,000) (185)
Redemption of common stock -- (185)
Preferred stock dividend payments (11) (8)
------------ -----------
Net cash provided by financing activities 579,229 975,684
------------ -----------
Net decrease in cash and cash equivalents (282,690) (899,357)
Cash and cash equivalents at beginning of period 3,746,518 3,635,587
----------- -----------
Cash and cash equivalents at end of period $3,463,828 $2,736,230
=========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Business Activities
- ---------------------------------------------------
The Company's significant business activities include developing, operating,
marketing and financing ownership interests in resort properties located in
Arizona, Colorado, Florida, Indiana and Mexico. Effective in the third quarter
of 1994, the Company expanded its operations to include marketing of skin and
hair care products which are not considered significant to resort operations.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Registration S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the three month period ended March 31, 1996, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1996. The
accompanying financial statements should be read in conjunction with the
Company's most recent audited financial statements.
The consolidated financial statements include the accounts of 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.
Revenue Recognition
- -------------------
Revenue from sales of timeshare interests is recognized in accordance with
Statement of Financial Accounting Standard No. 66, Accounting for Sales of Real
Estate ("SFAS No. 66"). No sales are recognized until such time as a minimum of
10% of the purchase price has been received in cash, the buyer is committed to
continued payments of the remaining purchase price and the Company has been
released of all future obligations for the timeshare interest. Revenue from
sales of timeshare interests in Varsity Clubs of America - Notre Dame were
recognized by the percentage of completion method as development and
construction proceeded and as the costs of development and profit could be
reasonably estimated through August 15, 1995, when the property was complete.
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.
Statements of Cash Flows
- ------------------------
Cash equivalents are highly liquid investments with an original maturity of
three months or less. During the three month periods ended March 31, 1996 and
1995, the Company paid interest of approximately $400,000 and $279,000 and
income taxes of $0 and $8,000, respectively. Interest of $17,049 and $19,223 was
capitalized to resort property under development during the three month periods
ending March 31, 1996 and 1995, respectively.
Reclassifications
- -----------------
The financial statements for prior periods have been reclassified to be
consistent with the 1996 financial statement presentation.
Note 2 - Notes Payable
In February 1996, the Company borrowed an additional $1,760,000 from the first
mortgage holder on the Los Abrigados resort and extended the maturity date to
June 1998.
5
<PAGE>
The mortgage on the Red Rock Collection building was repaid in January 1996 by
the affiliate who purchased the building in 1995. In this non-cash transaction
to the Company, both the note payable and the related receivable were reduced by
$180,000.
Note 3 - Notes Payable to Affiliates
In January 1996, an affiliate of the Company agreed to accept as payment $60,000
cash and $100,000 in a promissory note as full satisfaction of a remaining
obligation of $173,225 in guarantee fees and $44,073 in holdbacks. The note
bears interest at 10%, with interest due quarterly and the principal due in full
in December 1999.
Note 4 - Shareholders' Equity
During the first quarter of 1996, holders of 5,172 shares of Series C Preferred
Stock exchanged their shares for 8,620 shares of common stock. The exchanges
were recorded as a reduction in preferred stock and an increase in common stock
of $14,275. Shares of stock valued at $1,645 and cash of $11 were issued in the
first quarter of 1996 for the Dividend Arrearage due to the holders of Series C
Preferred Stock who converted their shares in the first quarter of 1996.
During the first quarter of 1996, holders of 383 shares of Series A Preferred
Stock exchanged their shares for lodging certificates at the Los Abrigados
resort. Preferred stock was reduced by $3,830, which is the liquidation and par
value of the shares surrendered and additional paid in capital was increased by
$2,530, which is the difference between the par value of the preferred stock and
the liability recorded related to the lodging certificates.
In January 1996, 5,035 shares of Series A Preferred Stock were redeemed for
$12,000.
During the first quarter of 1996, the Company issued 72,500 shares of restricted
common stock, valued at $52,000, to employees in exchange for services provided.
In accordance with consulting agreements entered into in 1995, 50,000 shares of
restricted common stock, valued at $1.1875 per share, were issued in the first
quarter of 1996.
Note 5 - Lomacasi Cottages
In March 1996, the Company, through a subsidiary, became the managing general
partner of the limited partnership which owns Lomacasi Cottages in Sedona,
Arizona, a 5.27 acre property approximately one mile from the Los Abrigados
resort. The Company acquired its partnership interest for a $25,000 capital
contribution and the assumption of existing non-recourse deeds of trust on the
property and accrued liabilities. The balance sheet of the partnership at March
1, 1996, was as follows:
Assets
Cash $20,000
Property and equipment 2,116,337
Other assets 9,928
------------
$ 2,146,265
============
Liabilities and Partners' Equity
Accounts payable $22,862
Accrued and other liabilities 50,164
Notes payable 2,117,625
------------
2,190,651
------------
Partners' capital (44,386)
------------
$ 2,146,265
============
6
<PAGE>
The assumed first mortgage of $549,625 bears interest at 12.5% with principal
and interest payable in monthly installments of $6,779 through November 2000.
The $1,500,000 note payable, secured by a second deed of trust, bears interest
at 8% through December 1996 and increases .5% annually through December 1999
when it becomes fixed at 9.5%. Interest is accrued through December 1996 and,
thereafter, is payable monthly with principal due November 2010. A note payable
of $68,000, secured by a deed of trust, bears interest at 8% with principal and
interest payments of $4,779 due monthly through May 1997 (interest payments are
to be deducted from the capital account of a limited partner). The Company
intends to initially use the resort to provide lodging accommodations to
prospective timeshare purchasers at the Company's Sedona Sales Office. The
Company may offer timeshare interests in the resort in the future.
7
<PAGE>
ILX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Sales of timeshare interests of $4,980,552 in the first quarter of 1995 are
comparable to sales of $4,897,089 in the first quarter of 1996. 1995 sales
reflect sales from the Phoenix Sales Office and sales of upgraded intervals to
existing timeshare owners of Los Abrigados resort. 1996 sales include increased
sales of Varsity Clubs of America-Notre Dame interests and sales of Kohl's Ranch
interests.
On April 1, 1995, the Company closed the Phoenix Sales Office, which had sold
primarily interests in Los Abrigados, and began directing the customers who
would otherwise have attended a Phoenix Sales Office presentation to the Sedona
Sales Office, where closing rates had consistently exceeded those of the Phoenix
Sales Office. The Phoenix Sales Office generated approximately $771,000 in the
first quarter of 1995.
During the first quarter of 1995, the Company converted eight of its one-bedroom
business suites at Los Abrigados resort to two-bedroom suites with kitchens, and
invited its existing timeshare owners to exchange their one and two-bedroom
suites without kitchens to these upgraded units. Owners of approximately 115
intervals accepted this special offer, generating revenue of approximately
$471,000 during the first quarter of 1995.
Sales of interests in Varsity Clubs of America-Notre Dame increased from
$868,000 in the first quarter of 1995 to $1,259,000 in the first quarter of
1996. Revenue and directly related expenses were recognized as a percentage of
completion in 1995 (approximately 56% through March 31, 1995) until August 15,
1995 when construction was complete. Sales in Kohl's Ranch, which commenced in
the third quarter of 1995, were approximately $738,000 for the first quarter of
1996.
The increase between 1995 and 1996 in cost of timeshare interests sold as a
percentage of sales reflects increased sales of interests in Varsity Clubs of
America-Note Dame, which have a higher product cost as a percentage of revenue
than interests in both Los Abrigados and Kohl's Ranch.
The increase in resort operating revenue from $1,704,543 for the first quarter
of 1995 to $2,317,743 for the first quarter of 1996 reflects revenue from
Varsity Clubs of America-Notre Dame which opened in mid August 1995, revenue
from Kohl's Ranch which was acquired on June 1, 1995 and an increase in revenue
from Los Abrigados resort as a result of an increase in occupancy and in average
daily rate.
Cost of resort operations as a percentage of resort operating revenue is
comparable between periods. 1996 costs include Varsity Clubs of America-Notre
Dame and Kohl's Ranch which have higher costs of operation as a percentage of
revenue than Los Abrigados. 1996 Los Abrigados costs as a percentage of revenue
are lower than 1995 due to increased occupancy and average daily rate and
reduced operating costs in 1996.
Sales of land and other and the associated cost of land sold and other in both
1995 and 1996 reflect sales of Red Rock Collection products and in 1996 revenue
and related costs from the Kohl's Ranch Water Company for services provided. The
decrease in cost of sales as a percentage of sales reflects variances in Red
Rock Collection product mix and commission structure.
Advertising and promotion as a percentage of revenue is comparable between
periods.
The decrease in general and administrative expenses from $739,526 in the first
quarter of 1995 to $675,285 in the first quarter of 1996 includes $57,298 in
gains from the discounting and prepayment of accrued obligations in 1996.
The increase in interest expense from $209,570 for the first quarter of 1995 to
$471,094 for the first quarter of 1996 reflects an increase in notes payable,
including the note payable for the construction of Varsity Clubs of
America-Notre Dame, the Kohl's Ranch and Lomacasi Cottages acquisition notes and
increased borrowings
8
<PAGE>
against consumer notes receivable. The increase in interest income from 1995 to
1996 is a result of the increased consumer paper retained by the Company.
The decrease in minority interests from 1995 to 1996 reflects lower LAP net
income in 1996 because the first quarter of 1995 included sales from the Phoenix
Sales Office and sales of upgraded intervals to existing timeshare owners.
Income tax expense as a percentage of income increased from 1995 to 1996 because
1995 expense is net of a $75,000 reduction in the valuation allowance reflecting
management's estimate of the future benefit to be derived from the utilization
of Genesis net operating loss carryovers and 1996 includes gross receipts tax on
revenue generated in Indiana.
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity needs principally arise from the necessity of financing
notes received from sales of timeshare interests. In that regard, the Company
has $13 million in lines of credit issued by financing companies under which
conforming notes from sales of interval interests in Los Abrigados and the
Golden Eagle Resort can be sold on a recourse basis through September 1996. In
addition, the Company has an open ended arrangement with a finance company which
is expected to provide financing of at least $5 million through 1996. At March
31, 1996, approximately $7.1 million is available under the fixed commitment
lines and approximately $3 million is expected to be available on the open ended
line. The Company also has a financing commitment whereby the Company may borrow
up to $2.5 million against non-conforming notes from sales of interval interests
in Los Abrigados and the Golden Eagle Resort through September 1998.
Approximately $500,000 was available under this commitment at March 31, 1996.
The Company also has a $10 million financing commitment whereby the Company may
sell eligible notes received from sales of timeshare interests in Varsity Clubs
of America-Notre Dame on a recourse basis through September 1, 1997.
Approximately $7.1 million was available under this commitment at March 31,
1996.
The Company has a financing commitment whereby it may borrow up to $10 million
against conforming notes received from sales of timeshare interests in Kohl's
Ranch through August 1997. Approximately $9.5 million was available on this
commitment at March 31, 1996.
The Company will continue to retain certain non-conforming notes which have one
to two year terms or which do not otherwise meet existing financing criteria,
and finance these notes either through internal funds or through borrowings from
affiliates secured by the non-conforming notes. The Company will pursue
additional credit facilities to finance conforming and non-conforming notes as
the need for such financing arises.
The Company has a $500,000 line of credit from one financial institution and a
$400,000 line of credit from another. Both were available for working capital at
March 31, 1996.
In February 1996, the Company borrowed an additional $1,760,000 from the first
mortgage holder on the Los Abrigados resort. The Company intends to use these
funds for improvements to the Los Abrigados resort and Kohl's Ranch and for
working capital.
Effective March 1, 1996, the Company, through a subsidiary, became the managing
general partner of the limited partnership which owns Lomacasi Cottages in
Sedona, Arizona, a 5.27 acre property approximately one mile from the Los
Abrigados resort. The Company acquired its partnership interest for a $25,000
capital contribution. The resort is encumbered by non-recourse deeds of trust on
the property totaling approximately $2.2 million. The Company intends to
initially use the resort to provide lodging accommodations to prospective
timeshare purchasers at the Company's Sedona Sales Office, thereby creating more
availability of rooms for resort guests at the Los Abrigados resort. The Company
may offer timeshare interests in the resort in the future.
During the first quarter of 1996, the Company received an additional $700,000
pursuant to a management agreement with one of its timeshare lenders. Although
at March 31, 1996, approximately $1.2 million remains available under this
agreement, an affiliate of the lender recently filed for bankruptcy protection.
The Company has been informed that said proceedings do not involve the lender
with which the Company conducts business. It is the Company's position that the
management agreement, as previously amended, has been anticipatorily
9
<PAGE>
breached by the lender and its affiliates. The Company is of the opinion that
while further advances under the management agreement may not occur, the
bankruptcy will have no additional material impact on the Company's ability to
obtain timeshare financing from the lender or alternate sources. Any future
payments under the management agreement received by the Company will be applied
to mitigate present and future damages sustained by the Company by virtue of the
breach by the lender and its affiliates of the management agreement.
Cash used in operating activities decreased from $1,821,709 in 1995 to $882,496
in 1996 because 1995 included additions to resort property under development for
Varsity Clubs of America-Notre Dame.
The change from cash used in investing activities for 1995 of $53,332 to cash
provided by investing activities in 1996 of $20,577 reflects the cancellation of
the Company's options on its Varsity Clubs of America sites near Penn State and
Auburn University.
Cash provided by financing activities decreased from $975,684 in 1995 to
$579,229 in 1996 due to cash distributions to LAP minority partners.
Although no assurances can be made, based on the prior success of the Company in
obtaining necessary financings for operations and for expansion, the Company
believes that with its existing financing commitments, its cash flow from
operations and the contemplated financings discussed above the Company will have
adequate capital resources for at least the next twelve to twenty-four months.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ILX INCORPORATED
(Registrant)
/s/ Joseph P. Martori
----------------------
Joseph P. Martori
Chief Executive Officer
/s/ Nancy J. Stone
-------------------
Nancy J. Stone
President/
Chief Financial Officer
/s/ Denise L. Janda
---------------------
Denise L. Janda
Vice President Controller
Date: As of May 8, 1996
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE REGISTRANTS FIRST
QUARTER 1996 CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERNECE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 3,463,828
<SECURITIES> 0
<RECEIVABLES> 12,172,003
<ALLOWANCES> 2,680,982
<INVENTORY> 19,390,248
<CURRENT-ASSETS> 32,345,097
<PP&E> 2,055,705
<DEPRECIATION> 695,232
<TOTAL-ASSETS> 39,546,039
<CURRENT-LIABILITIES> 3,559,589
<BONDS> 17,945,347
0
1,485,029
<COMMON> 9,424,638
<OTHER-SE> 37,720
<TOTAL-LIABILITY-AND-EQUITY> 39,546,039
<SALES> 4,950,350
<TOTAL-REVENUES> 7,268,093
<CGS> 1,735,257
<TOTAL-COSTS> 5,718,813
<OTHER-EXPENSES> 675,285
<LOSS-PROVISION> 290,180
<INTEREST-EXPENSE> 471,094
<INCOME-PRETAX> 317,214
<INCOME-TAX> 74,496
<INCOME-CONTINUING> 97,548
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97,548
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
