SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended June 30, 1996 Commission File Number 33-16122
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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)
602-957-2777
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Registrant's telephone number, including area code
Former name, former address, and former fiscal year, if changed since last
report:
N/A
---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at June 30, 1996
- ------------------------------- ----------------------------
Common Stock, without par value 12,838,021 shares
Preferred Stock, $10 par value 400,577 shares
1
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 3,768,445 $ 3,746,518
Notes receivable, net 10,697,619 8,785,487
Resort property held for timeshare sales 16,296,863 17,191,791
Resort property under development 1,159,511 1,119,080
Land held for sale 1,547,493 1,545,184
Deferred assets 347,096 451,496
Property and equipment, net 2,886,304 835,485
Deferred income taxes 1,489,628 1,887,021
Other assets 2,265,191 2,190,451
---------------- ---------------
$ 40,458,150 $ 37,752,513
================ ===============
Liabilities and Shareholders' Equity
Accounts payable $ 2,181,178 $ 2,313,638
Accrued and other liabilities 3,490,657 3,293,160
Genesis funds certificates 1,353,471 1,366,843
Due to affiliates 133,762 440,629
Deferred income 2,296 2,869
Notes payable 14,840,269 11,689,945
Notes payable to affiliates 1,687,260 1,837,912
---------------- ---------------
23,688,893 20,944,996
---------------- ---------------
Minority Interests 2,420,570 3,032,415
---------------- ---------------
Shareholders' Equity
Preferred stock, $10 par value; 10,000,000 shares authorized; 400,577 and
411,483 shares issued and outstanding; liquidation preference of $4,005,770
and $4,114,830, respectively 1,481,869 1,515,134
Common stock, no par value: 40,000,000 shares authorized; 12,858,021 and
12,625,757 shares issued and outstanding 9,574,670 9,322,375
Treasury stock, at cost, 20,000 shares (25,032) (25,032)
Additional paid in capital 39,430 35,190
Retained earnings 3,277,750 2,927,435
---------------- ---------------
14,348,687 13,775,102
---------------- ---------------
$ 40,458,150 $ 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 Six months ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Sales of timeshare interests $ 4,893,354 $ 5,636,952 $ 9,790,443 $ 10,617,504
Resort operating revenue 2,965,718 2,332,582 5,283,461 4,037,125
Sales of land and other 248,337 45,304 301,598 103,999
---------------- ---------------- ---------------- ----------------
8,107,409 8,014,838 15,375,502 14,758,628
---------------- ---------------- ---------------- ----------------
Cost of sales and operating expenses
Cost of timeshare interests sold 1,685,883 2,179,843 3,393,992 3,802,359
Cost of resort operations 2,873,657 2,132,389 5,326,819 3,840,150
Cost of land sold and other 232,709 10,060 259,857 46,633
Advertising and promotion 1,657,893 1,417,797 3,188,287 2,966,524
General and administrative 758,012 746,880 1,433,297 1,486,406
Provision for doubtful accounts 132,553 334,256 422,733 603,319
---------------- ---------------- ---------------- ----------------
7,340,707 6,821,225 14,024,985 12,745,391
---------------- ---------------- ---------------- ----------------
Operating income 766,702 1,193,613 1,350,517 2,013,237
Other income (expense)
Interest expense (456,017) (246,669) (927,111) (456,239)
Interest income 259,603 170,900 464,096 284,949
---------------- ---------------- ---------------- ----------------
Income before minority interests and income taxes 570,288 1,117,844 887,502 1,841,947
Minority interests (136,996) (168,473) (282,166) (346,634)
Income taxes (178,869) (304,750) (253,365) (448,126)
---------------- ---------------- ---------------- ----------------
Net income $ 254,423 $ 644,621 $ 351,971 $ 1,047,187
================ ================ ================ ================
Net income per common and equivalent share $ 0.02 $ 0.05 $ 0.03 $ 0.08
================ ================ ================ ================
Number of common and equivalent shares 12,873,021 12,571,562 12,827,837 12,546,142
================ ================ ================ ================
Net income per share assuming full dilution $ 0.02 $ 0.05 $ 0.03 $ 0.08
================ ================ ================ ================
Number of fully diluted shares 13,348,521 13,056,997 13,303,337 13,036,712
================ ================ ================ ================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 351,971 $ 1,047,187
Adjustments to reconcile net income to net cash used in operating activities:
Undistributed minority interest 57,541 346,634
Increase in restricted cash -- (782,907)
Additions to notes receivable (5,568,585) (6,095,913)
Proceeds from sales of notes receivable 3,233,720 3,548,422
Provision for doubtful accounts 422,733 603,319
Depreciation and amortization 473,678 307,482
Deferred income taxes 397,393 316,315
Amortization of guarantee fees 38,350 49,400
Change in assets and liabilities:
Decrease (increase) in resort property held for timeshare sales 909,838 (83,068)
Additions to resort property under development (40,431) (4,257,468)
(Increase) decrease in land held for sale (2,309) 1,000
Increase in other assets (263,112) (222,449)
(Decrease) increase in accounts payable (132,460) 66,468
Increase in accrued and other liabilities 156,571 610,592
Decrease in Genesis funds certificates (13,372) (167,363)
Decrease in due to affiliates (206,867) (541,858)
Decrease in deferred income (573) (261,000)
--------------- ---------------
Net cash used in operating activities (185,914) (5,515,207)
--------------- ---------------
Cash flows from investing activities:
Decrease (increase) in deferred assets 66,050 (164,258)
Purchases of plant and equipment (69,846) (55,675)
--------------- ---------------
Net cash used in investing activities (3,796) (219,933)
--------------- ---------------
Cash flows from financing activities:
Proceeds from notes payable 3,496,070 6,002,966
Principal payments on notes payable (2,658,145) (1,691,360)
Principal payments on notes payable to affiliates (250,652) (366,848)
Distributions to minority partners (600,000) --
Proceeds from issuance of common stock 236,375 13,672
Acquisition of treasury stock -- (25,032)
Redemption of preferred stock (12,000) (185)
Redemption of common stock -- (185)
Preferred stock dividend payments (11) (14)
--------------- ---------------
Net cash provided by financing activities 211,637 3,933,014
--------------- --------------
Net increase (decrease) in cash and cash equivalents 21,927 (1,802,126)
Cash and cash equivalents at beginning of period 3,746,518 3,635,587
--------------- --------------
Cash and cash equivalents at end of period $ 3,768,445 $ 1,833,461
=============== ==============
</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 and six month periods ended June 30, 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 was
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 completed.
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.
Cash equivalents are highly liquid investments with an original maturity of
three months or less. During the three and six month periods ended June 30, 1996
and 1995, the Company paid interest and income taxes and capitalized interest to
resort property under development as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest $ 478,516 $ 303,732 $ 878,916 $ 582,658
Income Taxes -- $ 125,500 -- $ 133,500
Interest Capitalized $ 17,050 $ 107,580 $ 34,099 $ 126,803
</TABLE>
Reclassifications
- -----------------
The financial statements for prior periods have been reclassified to be
consistent with the 1996 financial statement presentation.
5
<PAGE>
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.
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.
During the second quarter of 1996, the Company made its first borrowing of
$300,000 on its $6 million, 13% interest rate, construction financing commitment
for the Varsity Clubs of America - Tucson facility.
During the first six months of 1996, the Company borrowed $1,050,960 against
consumer notes receivable.
Property and equipment of $339,924 was leased in the second quarter of 1996.
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 six months 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 six months of 1996 for the Dividend Arrearage due to the
holders of Series C Preferred Stock who converted their shares in the first six
months of 1996.
During the first six months of 1996, holders of 699 shares of Series A Preferred
Stock exchanged their shares for lodging certificates at Los Abrigados and
Kohl's Ranch. Preferred stock was reduced by $6,990, which is the liquidation
and par value of the shares surrendered and additional paid in capital was
increased by $4,240, 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. In the second quarter of 1996, options for 100,000 of the total
500,000 option shares of restricted common stock granted under the consulting
agreements were exercised at $1.25 per share.
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 taking the property subject to 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 15,315
Notes payable 2,152,474
------------
2,190,651
------------
Partners' capital (44,386)
------------
$ 2,146,265
============
The 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
$1,534,849 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 and added to principal 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 deducted from the capital account of a limited partner).
The Company is using 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. Until such time, the resort is
classified as property and equipment.
Note 6 - Other
During the first quarter of 1996, the Company received an additional $700,000
pursuant to a management agreement with one of its timeshare lenders. At June
30, 1996, approximately $1.2 million remains available under this agreement;
however, an affiliate of the lender recently filed for bankruptcy protection.
While the Company has been informed that said proceedings do not involve the
lender with which the Company conducts business, the lender has failed to fund
advances requested by the Company. It is the Company's position that the
management agreement, as previously amended, has been anticipatorily 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 and other loan
transactions between the Company, its subsidiaries and affiliates, and the
lender and its affiliates. The balance outstanding under the agreement of
$2,185,519 at June 30, 1996 and $1,500,000 at December 31, 1995, is included in
accrued and other liabilities.
7
<PAGE>
ILX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
1995 first and second quarter sales of timeshare interests were greater than the
same periods in 1996 due to the inclusion of 1994 sales of timeshare interests
in Varsity Clubs of America - Notre Dame in both the first and second quarters
of 1995, due to the operation of the Phoenix Sales Office in the first quarter
of 1995, and due to a program to sell upgraded intervals to existing timeshare
owners of Los Abrigados resort in 1995. 1996 first and second quarter sales
include sales of timeshare interests in Kohl's Ranch, and second quarter 1996
sales reflect reduced sales at the Sedona Sales Office.
1995 Varsity Clubs of America - Notre Dame sales of timeshare interests include
1994 sales of timeshare interests of approximately $203,000 for the second
quarter and $490,000 for the six months ended June 30, 1995. Recognition had
been deferred in 1994 and recognized on the percentage of completion in 1995
when the property was substantially complete. 1995 sales of timeshare interests
in Varsity Clubs of America - Notre Dame excluding these 1994 sales exceeded
1996 sales by approximately $600,000 due to a greater number of tours and higher
closing rates in 1995 and because 1995 sales included several multiple-week
football season sales to alumni and university supporters. The Company intends
to promote football season sales in the late third quarter and early fourth
quarter of 1996.
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. Revenue from these sales of
approximately $471,000 and $54,000 is included in the first and second quarter
of 1995, respectively.
Sales of timeshare interests from the Kohl's Ranch Sales Office commenced in the
third quarter of 1995 and the Company began directing its Phoenix-based
customers to the Kohl's Ranch Sales Office as well as its Sedona Sales Office.
While the number of customers generated to both offices increased in total,
customers directed to the Sedona Sales Office declined and, accordingly, Sedona
Sales Office sales of timeshare interests also declined. Kohl's Ranch Sales
Office sales of timeshare interests were approximately $870,000 and $1,608,000
for the second quarter and six months ended June 30, 1996, respectively.
The decrease in cost of timeshare interests sold as a percentage of sales
between years reflects the higher percentage of sales of interests in Varsity
Clubs of America - Notre Dame in 1995. Varsity Clubs of America - Notre Dame
interests have higher product costs as a percentage of revenue than interests in
Los Abrigados and Kohl's Ranch.
The increases in resort operating revenue for both the second quarter and six
months ended June 30, 1996, from the same periods in 1995 reflect 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.
The increase in cost of resort operations as a percentage of resort operating
revenue between years reflects the operation of Varsity Clubs of America - Notre
Dame and Kohl's Ranch, each of which is in its first year of operation and
accordingly has lower occupancy than a mature resort. In addition, the smaller,
current size and reduced amenities offered at these properties is likely to
yield a higher cost of resort operations as a percentage of resort operating
revenue than that of the Los Abrigados resort. 1996 Los Abrigados costs as a
percentage of revenue are lower than 1995 due to increased occupancy and average
daily rate in 1996.
8
<PAGE>
The increase in sales of land and other and the related cost of sales for both
the second quarter and six months ended June 30, 1996, reflects the sale of a
parcel of land held by Genesis. Sales of land and other and the associated cost
of land sold and other also include in 1995 and 1996 sales of Red Rock
Collection products and in 1996 revenue and related costs from the Kohl's Ranch
Water Company for services provided.
Advertising and promotion as a percentage of sales is comparable between years
for the six month periods ending June 30, 1996 and 1995. Advertising and
promotion is larger as a percentage of sales in the second quarter of 1996 than
for the same period in 1995 because advertising and promotion expenses related
to sales of interests in Varsity Clubs of America - Notre Dame were expensed in
their entirety as they were incurred, while revenue recognition was deferred and
recognized based on percentage of completion through August 15, 1995.
Advertising and promotion was larger as a percentage of sales in the first
quarter of 1995 than the same period in 1996 because 1995 included the
generation of customers to the Phoenix Sales Office. The Phoenix Sales Office
experienced a lower closing rate (number of timeshare sales divided by timeshare
tours) than the Company's other sales offices, thereby incurring a higher
advertising and promotion expense as a percentage of revenue.
General and administrative expenses are comparable between years for both the
second quarter and six months ended June 30, 1996 and 1995.
The decreases in the provision for doubtful accounts for the second quarter and
six months ended June 30, 1996 from the same periods in 1995 reflect the
expected performance of the portfolio of consumer paper, both sold and unsold.
The increase in interest expense for both the second quarter and six months
ended June 30, 1996 from the same periods in 1995 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 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 as well as increased balances of invested cash.
The decreases in minority interests from 1995 to 1996 reflect the minority
interest in operating losses of Lomacasi resort commencing March 1, 1996, and
decreases in Los Abrigados resort net income between years due to closure of the
Phoenix Sales Office, the 1995 upgrade program, net of increased hotel operating
income in 1996.
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 each
quarter, reflecting management's estimate of the future benefit to be derived
from the utilization of Genesis net operating loss carryovers and because 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 June
30, 1996, approximately $6.4 million is available under the fixed commitment
lines and approximately $2.7 million is expected to be available on the open
ended line. The Company also has financing commitments whereby the Company may
borrow up to $2 million through March 1998 and $2.5 million through September
1998 against non-conforming notes from sales of interval interests in Los
Abrigados and the Golden Eagle Resort. Approximately $2.1 million was available
under these commitments at June 30, 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 $6.8 million was available under this commitment at June 30, 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 $8.9 million was available on this
commitment at June 30, 1996.
9
<PAGE>
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
June 30, 1996.
In February 1996, the Company borrowed an additional $1,760,000 from the first
mortgage holder on the Los Abrigados resort. The Company used 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 is using 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. At June
30, 1996, approximately $1.2 million remains available under this agreement;
however an affiliate of the lender recently filed for bankruptcy protection.
While the Company has been informed that said proceedings do not involve the
lender with which the Company conducts business, the lender has failed to fund
advances requested by the Company. It is the Company's position that the
management agreement, as previously amended, has been anticipatorily 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 and other loan
transactions between the Company, its subsidiaries and affiliates, and the
lender and its affiliates.
During the second quarter of 1996, the Company made its first borrowing of
$300,000 on its $6 million, 13% interest rate, construction financing commitment
for the Varsity Clubs of America - Tucson facility.
Cash used in operating activities decreased from $5,515,207 in 1995 to $185,914
in 1996 because 1995 included additions to resort property under development for
Varsity Clubs of America - Notre Dame and improvements to Los Abrigados, and
because of restricted cash from customer deposits in 1995 pending completion of
construction of Varsity Clubs of America - Notre Dame.
Cash used in investing activities decreased from $219,933 in 1995 to $3,796 in
1996 because 1995 includes investments in Varsity Clubs of America deferred
assets and 1996 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 $3,933,014 in 1995 to
$211,637 in 1996 because 1995 reflects increased borrowings for construction of
Varsity Clubs of America - Notre Dame, and 1996 reflects cash distributions to
LAP minority partners and increased payments on notes payable.
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>
Item 6. Exhibits and Reports on Form 8-K
(b) On June 14, 1996, a report on Form 8-K was filed with the Securities
and Exchange Commission, which disclosed the following:
Item 5. Other Events.
Effective June 2, 1995, ILX Incorporated ("ILX") entered into
Consulting Agreements with Investor Resource Services, Inc., a Florida
corporation, ("IRC") and Universal Solutions, Inc., a Colorado
Corporation, ("Universal") pursuant to which IRC and Universal agreed
to provide certain investor relations, broker relations and public
relations services to ILX. The Consulting agreements are Exhibits to
ILX's Form S-2 Registration Statement No. 33-61477. Under the terms of
the Consulting agreements, as amended in the related Option Agreements
(which are attached as Exhibits to ILX's Form S-3 Registration
Statement No. 333-03151), each of IRC and Universal received from ILX a
total of 50,000 shares of ILX Common Stock (the "Shares") plus options
to purchase an additional 250,000 shares of ILX Common Stock at $1.25
per share (the "Option Shares"). ILX agreed that the Shares and the
Option Shares may be registered pursuant to the terms of the Consulting
Agreements.
The term of the Option Agreements originally was to terminate 30
days after the effective date of any registration described under
Section 7(b) of the Consulting Agreements (a "Registration") or June 1,
1997, whichever occurred first. Pursuant to a letter agreement dated
June 10, 1996 (the "Letter Agreement"), a copy of which is attached as
Exhibit A, ILX agreed to extend the term of the Option Agreements so
that those Option Agreements would terminate 90 days after the
effective date (May 17, 1996) of any such Registration or June 1, 1997,
whichever occurs earlier. In consideration for the extension, IRC and
Universal agreed to exercise, collectively and on or before June 14,
1996, options for 100,000 of the Option Shares at a price of $1.25 per
Option Share.
The above descriptions of the Consulting Agreements, the Option
Agreements and the Letter Agreement are qualified in their entirety by
reference to the Consulting Agreements, the Option Agreements and the
Letter Agreement.
Item 7. Financial Statements and Exhibits.
The Exhibits required by Item 601 of Regulation S-K have been
supplied as follows:
Exhibit Numbers Description of Exhibit Page No.
-------------------------------------------------------------------
10 Letter Agreement 4
11
<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 August 12, 1996
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE REGISTRANTS SECOND
QUARTER 1996 CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 3,768,445
<SECURITIES> 0
<RECEIVABLES> 13,462,624
<ALLOWANCES> 2,765,005
<INVENTORY> 19,003,867
<CURRENT-ASSETS> 33,469,931
<PP&E> 3,658,516
<DEPRECIATION> 772,212
<TOTAL-ASSETS> 40,458,150
<CURRENT-LIABILITIES> 5,671,835
<BONDS> 16,527,529
0
1,481,869
<COMMON> 9,549,638
<OTHER-SE> 39,430
<TOTAL-LIABILITY-AND-EQUITY> 40,458,150
<SALES> 10,092,041
<TOTAL-REVENUES> 15,375,502
<CGS> 3,653,849
<TOTAL-COSTS> 12,168,955
<OTHER-EXPENSES> 1,433,297
<LOSS-PROVISION> 422,733
<INTEREST-EXPENSE> 927,111
<INCOME-PRETAX> 887,502
<INCOME-TAX> 253,365
<INCOME-CONTINUING> 351,971
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 351,971
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
