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, 1997 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)
2111 East Highland Avenue, Suite 210, Phoenix, Arizona 85016
(Address of principal executive offices)
Registrant's telephone number, including area code 602-957-2777
------------
--------------------------------------
Former name, former address, and former fiscal year, if changed since last
report.
Former address: 2777 East Camelback Road, Phoenix, Arizona 85016
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, 1997
- ------------------------------- -----------------------------
Common Stock, without par value 13,064,290 shares
Preferred Stock, $10 par value 392,109 shares
1
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,039,366 $ 3,523,047
Notes receivable, net 13,001,900 11,745,720
Resort property held for timeshare sales 14,993,944 15,247,587
Resort property under development 1,231,284 1,209,706
Land held for sale 1,551,065 1,547,493
Deferred assets 311,462 313,346
Property and equipment, net 4,758,726 4,877,467
Deferred income taxes 1,144,178 1,178,653
Other assets 1,877,167 1,631,886
---------------- ----------------
$ 40,909,092 $ 41,274,905
================ ================
Liabilities and Shareholders' Equity
Accounts payable $ 1,969,721 $ 2,310,600
Accrued and other liabilities 3,689,928 3,476,135
Genesis funds certificates 1,178,423 1,182,087
Due to affiliates 74,799 139,715
Notes payable 14,594,726 14,867,096
Notes payable to affiliates 1,449,921 1,567,287
---------------- ----------------
22,957,518 23,542,920
---------------- ----------------
Minority Interests 2,630,875 2,556,865
---------------- ----------------
Shareholders' Equity
Preferred stock, $10 par value; 10,000,000 shares authorized;
392,109 shares issued and outstanding; liquidation preference of
$3,921,090 1,419,243 1,419,243
Common stock, no par value; 40,000,000 shares authorized;
13,094,290 and 13,024,290 shares issued and outstanding 9,828,113 9,788,738
Treasury stock, at cost, 30,000 shares (36,536) (36,536)
Additional paid in capital 78,300 78,300
Retained earnings 4,031,579 3,925,375
---------------- ----------------
15,320,699 15,175,120
---------------- ----------------
$ 40,909,092 $ 41,274,905
================ ================
</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,
-------------------------------------
1997 1996
---- ----
<S> <C> <C>
Revenues
Sales of timeshare interests $ 5,091,296 $ 4,897,089
Resort operating revenue 2,427,786 2,317,743
Sales of land and other 31,585 53,261
Interest income 264,723 204,493
--------------- ----------------
7,815,390 7,472,586
--------------- ----------------
Cost of sales and operating expenses
Cost of timeshare interests sold 1,702,930 1,708,109
Cost of resort operations 2,604,113 2,453,162
Cost of land sold and other 27,053 27,148
Advertising and promotion 1,772,677 1,530,394
General and administrative 847,200 675,285
Provision for doubtful accounts 146,770 290,180
--------------- ----------------
7,100,743 6,684,278
--------------- ----------------
Operating income 714,647 788,308
Interest expense (463,585) (471,094)
---------------- -----------------
Income before minority interests and income taxes 251,062 317,214
Minority interests (74,285) (145,170)
Income taxes (70,573) (74,496)
---------------- -----------------
Net income $ 106,204 $ 97,548
=============== ================
Net income per common and equivalent share $ 0.01 $ 0.01
=============== ================
Number of common and equivalent shares 13,139,290 12,787,700
=============== ================
</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,
---------------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 106,204 $ 97,548
Adjustments to reconcile net income to net cash used in operating
activities:
Increase (decrease) in undistributed minority interest 74,010 (70,736)
Additions to notes receivable (2,881,898) (2,770,736)
Proceeds from sales of notes receivable 1,478,948 1,775,022
Provision for doubtful accounts 146,770 290,180
Depreciation and amortization 112,669 215,465
Deferred income taxes 34,475 173,311
Amortization of guarantee fees 25,350 18,500
Change in assets and liabilities:
Decrease in resort property held for timeshare sales 253,643 345,395
Additions to resort property under development (21,578) (10,565)
Increase in land held for sale (3,572) (2,309)
Increase in other assets (251,931) (180,008)
Decrease in accounts payable (340,879) (224,952)
Increase in accrued and other liabilities 213,793 289,365
Decrease in Genesis funds certificates (3,664) (18,050)
Decrease in due to affiliates (64,916) (114,624)
----------------- -----------------
Net cash used in operating activities (1,122,576) (187,194)
----------------- -----------------
Cash flows from investing activities:
(Increase) decrease in deferred assets (23,466) 66,999
Deletions (purchases) of plant and equipment 12,722 (56,205)
---------------- -----------------
Net cash (used in) provided by investing activities (10,744) 10,794
----------------- ----------------
Cash flows from financing activities:
Proceeds from notes payable 725,800 1,865,095
Principal payments on notes payable (998,170) (1,518,287)
Principal payments on notes payable to affiliates (117,366) (152,462)
Distribution to minority partners - (400,000)
Proceeds from issuance of common stock 39,375 111,375
Redemption of preferred stock - (12,000)
Preferred stock dividend payments - (11)
---------------- -----------------
Net cash used in financing activities (350,361) (106,290)
----------------- -----------------
Net decrease in cash and cash equivalents (1,483,681) (282,690)
Cash and cash equivalents at beginning of period 3,523,047 3,746,518
---------------- ----------------
Cash and cash equivalents at end of period $ 2,039,366 $ 3,463,828
================ ================
</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, 1997, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997. 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. 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, 1997 and
1996, the Company paid interest of approximately $497,000 and $400,000,
respectively, and no income taxes. Interest of $45,583 and $17,049 was
capitalized to resort property under development during the three month periods
ending March 31, 1997 and 1996, respectively.
Reclassifications
- -----------------
The financial statements for prior periods have been reclassified to be
consistent with the 1997 financial statement presentation.
5
<PAGE>
Note 2 - Notes Payable
During the first quarter of 1997, the Company borrowed $425,800 against consumer
notes receivable and $300,000 on a line of credit that remains outstanding at
March 31, 1997.
Note 3 - Shareholders' Equity
During the first quarter of 1997, the Company issued 70,000 shares of restricted
common stock, valued at $39,375, to employees in exchange for services provided.
Effective January 1, 1997, the Company entered into a one year consulting
agreement for financial and business advisory services, subject to extension on
a month-to-month basis at the option of the Company. In exchange for the
services to be provided, the Company granted options for up to 500,000 shares of
common stock exercisable over a one year period. Also effective January 1, 1997,
the Company entered into a separate consulting agreement through June 1997. In
exchange for the services to be provided under this agreement, the Company
granted options for 500,000 shares of common stock at $1.25 per share
exercisable through June 1997. The obligations to fulfill such options under
both agreements were assumed by an affiliate of the Company effective January 1,
1997.
6
<PAGE>
ILX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Sales of timeshare interests of $5,091,296 in the first quarter of 1997 were 4%
greater than sales of $4,897,089 in the first quarter of 1996. The increase
reflects greater sales to customers already owning interests in ILX resorts, and
greater sales from the Sedona Sales Office net of reduced sales from the Kohl's
Ranch and South Bend Sales Offices.
The increase in sales to existing ILX owners in 1997 reflects an expanded
marketing program whereby owners are offered the opportunity to upgrade their
ownership to a larger size unit, to exchange their ownership to a different
resort, and/or to purchase additional time. As a result of the increased
marketing efforts to existing customers, revenue increased to approximately
$776,000 in 1997, from $244,000 in 1996.
Sales of timeshare interests from the Sedona Sales Office in 1997 increased
approximately $185,000 from the first quarter of 1996 due to increases in prices
and closing rates (number of timeshare sales divided by number of timeshare
tours).
Sales of timeshare interests in Kohl's Ranch decreased from $738,000 in the
first quarter of 1996 to $478,000 in the first quarter of 1997 as a result of a
lower closing rate, which was partially offset by increased prices.
Sales of timeshare interests in Varsity Clubs of America - Notre Dame were
$1,404,045 and $1,259,310 for the three months ended March 31, 1997 and 1996,
respectively. In 1997, approximately $885,000 in Varsity Clubs of America -
Notre Dame sales were generated from the South Bend Sales Office and $519,000
from the Sedona Sales Office, which commenced offering interests in Varsity
Clubs of America - Notre Dame in June 1996. All 1996 sales of Varsity Clubs of
America - Notre Dame were made from the South Bend Sales Office. The decrease in
sales from the South Bend Sales Office reflects a greater percentage of sales of
alternate year usage in 1997 and higher average prices in 1996 as a result of a
discontinued promotional program which was in operation through November 1996
that offered certain purchasers a vacation experience (including airfare and car
rental) in addition to their timeshare interval. The cost of the vacation
experience was added to the buyer's purchase price.
Cost of timeshare interests sold as a percentage of sales is comparable between
years.
The increase in resort operating revenue for the three months ended March 31,
1997 from the same period in 1996 reflects increases in occupancy and in average
daily rates for Varsity Clubs of America - Notre Dame and Kohl's Ranch and
revenue from Lomacasi Cottages, which was acquired on March 1, 1996.
Cost of resort operations as a percentage of resort operating revenue is
comparable between periods. First quarter cost of resort operations is typically
higher as a percentage of resort operating revenue than annual results due to
the season.
The increase in interest income from 1996 to 1997 is a result of the increased
consumer paper retained by the Company. The Company hypothecates (borrows
against) the majority of its retained paper.
7
<PAGE>
Advertising and promotion as a percentage of sales has increased from 1996 to
1997 due to a lower closing rate at the Kohl's Ranch Sales Office in 1997, due
to the increased costs of generating tours to the Sedona and South Bend Sales
Offices in 1997, and due to the recognition in 1996 of benefits from premiums
issued to potential customers in prior periods which expired without redemption.
The increase in general and administrative expenses from $675,285 in the first
quarter of 1996 to $847,200 in the first quarter of 1997 reflects the write-off
of leasehold improvements associated with the relocation of the Company's
corporate headquarters in 1997, stock bonuses issued to employees in 1997, and
in 1996, gains from the discounting and prepayment of accrued obligations.
The provision for doubtful accounts relates primarily to sales of timeshare
interests. The decrease in the provision for doubtful accounts for the first
quarter of 1997 from the same period in 1996 reflects the expected performance
of the portfolio of consumer paper based on prior years' collection experience,
both sold and unsold.
Interest expense is comparable between periods and reflects increased borrowings
against consumer paper retained by the Company, net of reductions in borrowings
against resort property held for sale.
The decrease in minority interests from 1996 to 1997 reflects the minority
interest in operating losses of Lomacasi Cottages, which was acquired March 1,
1996, the minority interest in operating losses of Sedona Worldwide Incorporated
commencing January 1, 1997, and a decrease in LAP net income in 1997 as a result
of stock bonuses granted in 1997 and reductions in 1996 of estimated
liabilities.
The decrease in income tax expense as a percentage of income from 1996 to 1997
reflects the change in a state tax rate.
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 $5 million of credit issued by a financing company under which conforming
notes from sales of interval interests in Los Abrigados Resort & Spa can be sold
on a recourse basis through March 1998. 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 1997. At March 31, 1997, approximately $3.6
million is available under the fixed commitment line and a minimum of $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 against
non-conforming notes from sales of interval interests in Los Abrigados Resort &
Spa, Golden Eagle Resort, Kohl's Ranch and Varsity Clubs of America - Notre
Dame, and $2.2 million against conforming notes from sales of interval interests
in Golden Eagle Resort through March 1998. Approximately $2.1 million was
available under these commitments at March 31, 1997.
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 $5 million was available under this commitment at March 31, 1997.
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 $7.7 million was available on this
commitment at March 31, 1997.
8
<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 each from two financial institutions.
At March 31, 1997, $700,000 was available for working capital.
In November 1995, the Company entered into a management agreement with one of
its timeshare lenders whereby the lender committed to advance $3.5 million,
provide strategic planning and consultation with respect to timeshare sales of
3,500 Los Abrigados intervals, and reduce holdback requirements on timeshare
paper purchased by the lender. Although at March 31, 1997, approximately $1.1
million remains available under this agreement, an affiliate of the lender filed
for bankruptcy protection in 1996, and 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. The
Company is presently negotiating a settlement with the lender.
Cash used in operating activities increased from $187,194 in 1996 to $1,122,576
in 1997 due to an increase in consumer notes retained by the Company, an
increase in other assets and a decrease in other liabilities.
The change from cash provided by investing activities in 1996 of $10,794 to cash
used in investing activities in 1997 of $10,744 reflects the cancellation of the
Company's options on its Varsity Clubs of America sites near Penn State and
Auburn University in 1996.
Cash used in financing activities increased from $106,290 in 1996 to $350,361 in
1997 due to greater borrowings in 1996.
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.
9
<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 13, 1997
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE REGISTRANTS FIRST
QUARTER 1997 CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,039,366
<SECURITIES> 0
<RECEIVABLES> 15,713,294
<ALLOWANCES> 2,711,394
<INVENTORY> 17,776,293
<CURRENT-ASSETS> 32,817,559
<PP&E> 5,949,540
<DEPRECIATION> 1,190,814
<TOTAL-ASSETS> 40,909,092
<CURRENT-LIABILITIES> 5,659,649
<BONDS> 16,044,647
0
1,419,243
<COMMON> 9,791,577
<OTHER-SE> 78,300
<TOTAL-LIABILITY-AND-EQUITY> 40,909,092
<SALES> 5,122,881
<TOTAL-REVENUES> 7,815,390
<CGS> 1,729,983
<TOTAL-COSTS> 6,106,773
<OTHER-EXPENSES> 847,200
<LOSS-PROVISION> 146,770
<INTEREST-EXPENSE> 463,585
<INCOME-PRETAX> 251,062
<INCOME-TAX> 70,573
<INCOME-CONTINUING> 106,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 106,204
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
