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, 1997 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)
2111 East Highland Avenue, Suite 210, Phoenix, Arizona 85016
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(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 June 30, 1997
- ------------------------------- ----------------------------
Common Stock, without par value 13,078,669 shares
Preferred Stock, $10 par value 385,145 shares
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,677,805 $ 3,523,047
Notes receivable, net 14,372,337 11,745,720
Resort property held for timeshare sales 14,456,753 15,247,587
Resort property under development 1,347,245 1,209,706
Land held for sale 1,551,065 1,547,493
Deferred assets 321,930 313,346
Property and equipment, net 4,811,690 4,877,467
Deferred income taxes 862,294 1,178,653
Other assets 1,791,747 1,631,886
---------------- ----------------
$ 41,192,866 $ 41,274,905
================ ================
Liabilities and Shareholders' Equity
Accounts payable $ 1,779,134 $ 2,310,600
Accrued and other liabilities 1,615,122 3,476,135
Genesis funds certificates 1,171,009 1,182,087
Due to affiliates 91,480 139,715
Notes payable 16,638,835 14,867,096
Notes payable to affiliates 1,429,854 1,567,287
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22,725,434 23,542,920
---------------- ----------------
Minority Interests 2,725,343 2,556,865
---------------- ----------------
Shareholders' Equity
Preferred stock, $10 par value; 10,000,000 shares authorized;
385,145 and 392,109 shares issued and outstanding; liquidation
preference of $3,851,450 and 3,921,090, respectively 1,397,799 1,419,243
Common stock, no par value; 40,000,000 shares authorized;
13,108,669 and 13,024,290 shares issued and outstanding 9,849,263 9,788,738
Treasury stock, at cost, 30,000 shares (36,536) (36,536)
Additional paid in capital 79,450 78,300
Retained earnings 4,452,113 3,925,375
---------------- ----------------
15,742,089 15,175,120
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$ 41,192,866 $ 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 Six months ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Sales of timeshare interests $ 5,846,579 $ 4,893,354 $ 10,937,875 $ 9,790,443
Resort operating revenue 2,801,978 2,965,718 5,229,764 5,283,461
Sales of land and other 22,996 248,337 54,581 301,598
Interest income 294,031 259,603 558,754 464,096
------------ ------------ ------------ ------------
8,965,584 8,367,012 16,780,974 15,839,598
------------ ------------ ------------ ------------
Cost of sales and operating expenses
Cost of timeshare interests sold 2,045,433 1,685,883 3,748,363 3,393,992
Cost of resort operations 2,662,267 2,873,657 5,266,380 5,326,819
Cost of land sold and other 17,944 232,709 44,997 259,857
Advertising and promotion 2,137,939 1,657,893 3,910,616 3,188,287
General and administrative 659,826 758,012 1,507,026 1,433,297
Provision for doubtful accounts 170,823 132,553 317,593 422,733
------------ ------------ ------------ ------------
7,694,232 7,340,707 14,794,975 14,024,985
------------ ------------ ------------ ------------
Operating income 1,271,352 1,026,305 1,985,999 1,814,613
Interest expense 472,177 456,017 935,762 927,111
------------ ------------ ------------ ------------
Income before minority interests
and income taxes 799,175 570,288 1,050,237 887,502
Minority interests (94,468) (136,996) (168,753) (282,166)
Income taxes (281,884) (178,869) (352,457) (253,365)
------------ ------------ ============ ------------
Net income $ 422,823 $ 254,423 $ 529,027 $ 351,971
============ ============ ============ ============
Net income per common and equivalent share
$ 0.03 $ 0.02 $ 0.04 $ 0.03
============ ============ ============ ============
Number of common and equivalent shares 13,181,978 12,873,021 13,158,683 12,827,837
============ ============ ============ ============
</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,
--------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 529,027 $ 351,971
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in undistributed minority interest 168,478 57,541
Provision for doubtful accounts 317,593 422,733
Depreciation and amortization 208,278 473,678
Deferred income taxes 316,359 397,393
Amortization of guarantee fees 45,850 38,350
Gain on settlement of liability (98,705) --
Change in assets and liabilities:
Decrease in resort property held for timeshare sales 790,834 1,134,199
Additions to resort property under development (137,539) (40,431)
Increase in land held for sale (3,572) (2,309)
Increase in other assets (173,161) (263,112)
Decrease in accounts payable (531,466) (132,460)
Increase in accrued and other liabilities 374,909 155,998
Decrease in Genesis funds certificates (11,078) (13,372)
Decrease in due to affiliates (48,235) (206,867)
----------- -----------
Net cash provided by operating activities 1,747,572 2,373,312
----------- -----------
Cash flows from investing activities:
(Increase) decrease in deferred assets (54,434) 66,050
Purchases of plant and equipment (2,570) (294,207)
Notes receivable, net (2,660,127) (2,334,865)
----------- -----------
Net cash used in investing activities (2,717,131) (2,563,022)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 1,238,048 3,151,070
Principal payments on notes payable (2,016,166) (2,313,145)
Principal payments on notes payable to affiliates (137,433) (250,652)
Distribution to minority partners -- (600,000)
Proceeds from issuance of common stock 39,875 236,375
Redemption of preferred stock -- (12,000)
Redemption of common stock -- --
Preferred stock dividend payments (7) (11)
----------- -----------
Net cash (used in) provided by financing activities (875,683) 211,637
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,845,242) 21,927
Cash and cash equivalents at beginning of period 3,523,047 3,746,518
----------- -----------
Cash and cash equivalents at end of period $ 1,677,805 $ 3,768,445
=========== ===========
</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
Regulation 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, 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 and six month periods ended June 30, 1997
and 1996, the Company paid no income taxes and paid interest and capitalized
interest to resort property under development as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
Interest $402,607 $478,516 $939,388 $878,916
Interest Capitalized $ 40,402 $ 17,050 $ 85,986 $ 34,099
5
<PAGE>
Reclassifications
- -----------------
The financial statements for prior periods have been reclassified to be
consistent with the 1997 financial statement presentation.
Note 2 - Notes Payable
In June 1997, the Company negotiated a settlement agreement for the 1996 breach
by a timeshare lender of a 1995 management agreement between the lender and the
Company. Under the management agreement, the lender committed to advance $3.5
million, but failed to fund $1.1 million of this amount. The settlement
agreement provides for repayment of the outstanding advances through a note
payable in the amount of $2.4 million. The note bears interest commencing July
1, 1997, at 12% per annum, payable monthly. Commencing July 1, 1998, principal
is payable through release payments upon the sale of certain timeshare
intervals. Any outstanding principal and interest is due in full on December 31,
2002. The note is secured by one million shares of ILX stock pledged by an
affiliate of the Company, for which the affiliate will receive a guarantee fee.
The settlement agreement also includes the termination of the management
agreement (which included a profit sharing arrangement), the commitment by the
lender to advance an additional $550,000, bringing the total commitment to
$6,550,000, for the construction of Varsity Clubs of America - Tucson, as well
as a reduction in interest rate to 12% (from 13%) on the Varsity Clubs of
America - Tucson construction note, and the addition of a fee of $100 per annual
Varsity Clubs of America - Tucson timeshare interest sold. The settlement was
recorded as follows:
Increase in notes payable $2,400,000
Decrease in accrued liabilities (2,214,622)
Increase in notes receivable (284,083)
Gain on settlement 98,705
-----------
$ 0
===========
During the first six months of 1997, the Company borrowed $938,048 against
consumer notes receivable and also borrowed on its lines of credit, of which
$300,000 was outstanding at June 30, 1997.
Property and equipment of $97,181 was leased and a vehicle was financed for
$29,450 in the second quarter of 1997.
Note 3 - Shareholders' Equity
During the second quarter of 1997, holders of 6,657 shares of Series C Preferred
Stock exchanged their shares for 11,095 shares of common stock. The exchanges
were recorded as a reduction in preferred stock and an increase in common stock
of $18,373. Shares of stock valued at $2,277 and cash of $7 were issued in the
second quarter of 1997 for the Dividend Arrearage due to the holders of Series C
Preferred Stock who converted their shares in the second quarter of 1997.
During the second quarter of 1997, holders of 307 shares of Series A Preferred
Stock exchanged their shares for lodging certificates at Kohl's Ranch. Preferred
stock was reduced by $3,070, which is the liquidation and par value of the
shares surrendered and additional paid in capital was increased by $1,150, which
is the difference between the par value of the preferred stock and the liability
recorded related to the lodging certificates.
6
<PAGE>
During the first six months of 1997, the Company issued to employees in exchange
for services provided 71,000 shares of restricted common stock, valued at
$39,875.
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, provided that certain options
were exercised prior to June 30, 1997. 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. All such options expired without exercise on June 30, 1997.
In June 1997, the Company entered into an agreement with EVEREN Securities, Inc.
("ESI") for ESI to act as ILX's exclusive financial advisor, investment banker
and agent with respect to evaluation of alternatives to position ILX for
long-term growth and to enhance shareholder value. In exchange for the services,
ILX will issue 60,000 shares of ILX common stock on each of August 1, 1997 and
February 1, 1998, and cause those shares to be registered with the Securities
and Exchange Commission. The parties intend for the agreement to remain in
effect for a minimum of one year.
Note 4 - Subsequent Events
In June 1997, the Company entered into an agreement with one of its timeshare
lenders whereby the Company may borrow up to $5 million against consumer notes
from sales of timeshare interests in Kohl's Ranch Lodge and, in addition,
whereby the Company in July 1997 borrowed $1.5 million, secured by a first
position deed of trust on Kohl's Ranch Lodge. The existing first deed of trust
on Kohl's Ranch Lodge of $444,500 was repaid in full in conjunction with the new
financing. The $1.5 million borrowing bears interest at prime plus 4%, interest
payable monthly and principal payable through release payments as timeshare
interests are sold, with a minimum principal payment of $80,000 due per quarter,
and the balance due in full June 27, 2000. Borrowings against the $5 million
commitment for timeshare paper will bear interest at prime plus 3.25% and will
be secured by both the consumer notes and be cross collateralized with the first
deed of trust.
In July 1997, the Company acquired 285 timeshare interests in Los Abrigados
Resort & Spa for approximately $567,000, including closing costs. The interests
were acquired under an option agreement whereby the Company had both the option
and under certain circumstances the obligation to purchase up to 667 intervals
at a cost of $2,100 per interval. The July purchase was made at a negotiated
rate that was less than the amount specified in the option agreement. Following
this transaction, 107 intervals remain subject to the option. The purchase of
the intervals was financed by a $598,500 borrowing from one of the Company's
timeshare lenders. The borrowing is secured by the 285 intervals and bears
interest at prime plus 4%, with a 13% maximum rate. Interest is payable monthly
and principal is payable in quarterly installments of $25,000 through June 2000.
In July 1997, the Company issued 184,000 shares of its restricted common stock,
which were subsequently registered, in exchange for a $230,000 note payable to
an affiliate. In conjunction with the exchange, 100 timeshare intervals in Los
Abrigados Resort & Spa, which secured the note, were released.
7
<PAGE>
ILX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Sales of timeshare interests were 19.5% and 11.7% greater for the three and six
months ended June 30, 1997, respectively, than for the same periods in 1996. The
increases reflect greater sales to customers already owning interests in ILX
resorts, greater sales from the Sedona and South Bend Sales Offices and the
opening of a sales office in the Phoenix metropolitan area, net of reduced sales
from the Kohl's Ranch Sales Office.
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
$810,000 in 1997 from $315,000 in 1996 for the second quarter, and to $1,705,000
from $611,000 for the six months ended June 30, 1997 and 1996, respectively.
Sales of timeshare interests from the Sedona Sales Office increased
approximately $79,000 and $264,000 for the three and six months ended June 30,
1997 from the same periods in 1996 due to increases in prices for both quarters
and increased closing rates (number of timeshare sales divided by number of
timeshare tours) in the first quarter and a greater number of timeshare tours in
the second quarter.
Sales of timeshare interests in Varsity Clubs of America - Notre Dame were
$1,814,900 and $796,294 and $3,218,945 and $2,055,604 for the three and six
months ended June 30, 1997 and 1996, respectively. In 1997, approximately
$2,062,000 in Varsity Clubs of America - Notre Dame sales were generated from
the South Bend Sales Office and $1,157,000 from the Sedona Sales Office, which
commenced offering interests in Varsity Clubs of America - Notre Dame in June
1996. Sales of Varsity Clubs of America - Notre Dame in the first six months of
1996 were primarily from the South Bend Sales Office, with approximately
$105,000 generated by the Sedona Sales Office. The increase in sales from the
South Bend Sales Office reflects higher closing rates and increased prices for
the second quarter of 1997.
Sales of timeshare interests in Kohl's Ranch decreased approximately $157,000 in
the second quarter of 1997 and $418,000 for the six months ended June 30, 1997
from the same periods in 1996 as a result of lower closing rates, which in part
were offset by increased prices. Second quarter 1997 sales include $95,545 in
sales of Kohl's Ranch interests from a sales office opened on a trial basis in
the Phoenix metropolitan area in late April 1997. The office was not retained
beyond the trial period (April - July 1997) due to high marketing costs and low
closing rates.
Cost of timeshare interests sold as a percentage of sales is comparable between
years.
The decreases in resort operating revenue for both the second quarter and the
six months ended June 30, 1997 from the same periods in 1996 reflect a decrease
in food and beverage revenue and increased occupancy by timeshare owners and
exchange guests who pay substantially lower rates than resort guests at Los
Abrigados Resort & Spa, net of increased occupancy and 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. The increased usage of Los
Abrigados Resort & Spa by timeshare owners and exchange guests in 1997 reflects
in part differences during the year by such users in timing of usage as well as
the increasing number of timeshare owners.
8
<PAGE>
The increased occupancy at Varsity Clubs of America - Notre Dame and Kohl's
Ranch reflects the maturing of operations at these properties, both of which
opened during 1995.
Cost of resort operations as a percentage of resort operating revenue is
comparable between periods. 1997 costs for Varsity Clubs of America - Notre Dame
and Kohl's Ranch as a percentage of revenue are lower than 1996 due to increased
occupancy and average daily rate. 1997 Los Abrigados costs as a percentage of
revenue are higher than 1996 due to increased occupancy by timeshare owners, who
pay a lower rate for their usage.
The decreases in sales of land and other and the related cost of sales for both
the second quarter and six months ended June 30, 1997 reflect the sale of a
parcel of land held by Genesis in the second quarter of 1996.
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.
Advertising and promotion as a percentage of sales has increased for both the
second quarter and six months ended June 30, 1997 from the same periods in 1996
due to increased costs of generating tours to the Arizona sales offices in 1997,
a low closing rate in the trial Phoenix office in 1997, a lower closing rate at
the Kohl's Ranch Sales Office in 1997 than 1996, and due to the recognition in
1996 of benefits from premiums issued to potential customers in prior periods
which expired without redemption. Increases in costs of generating tours in 1997
is due in part to the trial of several new marketing strategies which were
determined not to be cost effective and therefore terminated in July and August
1997.
General and administrative expenses are comparable between years for the six
months ended June 30, 1997 and 1996. General and administrative expenses are
lower as a percentage of revenue in the second quarter of 1997 than for the same
period in 1996 due to the recognition in 1997 of a $98,705 gain resulting from
the settlement of an accrued liability at less than the recorded amount. First
quarter 1996 expenses reflect gains from the discounting and prepayment of
accrued obligations.
The provision for doubtful accounts relates primarily to sales of timeshare
interests and is comparable as a percentage of sales of timeshare interests
between periods.
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 reduced resort operating revenue and stock bonuses granted in 1997, and
reductions in 1996 of estimated liabilities.
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 notes from sales of interests in Los Abrigados Resort & Spa of at least $5
million through 1997. At June 30, 1997, approximately $2.7 million is available
under the fixed commitment
9
<PAGE>
line and a minimum of $2.6 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 $1.7 million was available under these commitments at June 30,
1997.
The Company 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 $4.5 million was available under this commitment at June 30, 1997.
The Company has financing commitments whereby it may borrow up to $10 million
against conforming notes received from sales of timeshare interests in Kohl's
Ranch through August 1997 and $5 million through June 2000. Approximately $7.5
million was available on the first commitment and $5 million on the second
commitment at June 30, 1997.
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 June 30, 1997, $700,000 was available for working capital.
In June 1997, the Company negotiated a settlement agreement for the 1996 breach
by a timeshare lender of a 1995 management agreement between the lender and the
Company. Under the management agreement, the lender committed to advance $3.5
million, but failed to fund $1.1 million of this amount. The settlement
agreement provides for repayment of the outstanding advances through a note
payable in the amount of $2.4 million.
In July 1997, the Company borrowed $1.5 million, secured by a first position
deed of trust on Kohl's Ranch Lodge. The funds were used to repay the prior
first deed of trust of $444,500, and the balance will be used for working
capital.
In July 1997, the Company acquired 285 timeshare interests in Los Abrigados
Resort & Spa for approximately $567,000. The purchase of the intervals was
financed by a $598,500 borrowing from one of the Company's timeshare lenders,
and is secured by the intervals acquired.
Cash provided by operating activities decreased from $2,373,312 in 1996 to
$1,747,572 in 1997 due to greater 1997 additions to resort property held for
timeshare sales and a decrease in 1997 in accounts payable.
The increase in cash used in investing activities from $2,563,022 in 1996 to
$2,717,131 in 1997 reflects an increase in consumer notes retained by the
Company, an increase in deferred assets relating to Sedona Worldwide
Incorporated, net of a reduction in purchases of plant and equipment in 1997.
The change from cash provided by financing activities in 1996 of $211,637 to
cash used in financing activities in 1997 of $875,683 is due to greater
borrowings in 1996.
10
<PAGE>
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.
Item 6. Exhibits and Reports on Form 8-K
(b)
(i) The Company filed with the Securities and Exchange Commission a report
on Form 8-K dated May 2, 1997, which disclosed the following:
Item 5. Other Events.
Effective January 7, 1997, ILX Incorporated ("ILX") and Texas Capital
Securities ("TCS") entered into a Letter Agreement regarding financial
advisory services (the "TCS Letter Agreement") and an Option Agreement
regarding options on up to 500,000 shares of ILX common stock (the "TCS
Option Agreement"). The TCS Letter Agreement and the TCS Option Agreement
are dated as of January 7, 1997 and were executed January 27, 1997. Under
the TCS Letter Agreement, ILX granted TCS options to acquire 500,000 shares
of ILX's common stock pursuant to the TCS Option Agreement. The TCS Option
Agreement provides that TCS receives options for up to 250,000 shares of
ILX's common stock exercisable at a price of $1.25 per share on or before
June 30, 1997 (the "First Option"). If TCS exercises the First Option in
full prior to its expiration date, TCS may exercise options for up to
125,000 shares of ILX's common stock exercisable at a price of $1.75 per
share on or before September 30, 1997 (the "Second Option"). If TCS then
exercises the Second Option in full prior to its expiration date, TCS may
exercise options for up to 125,000 shares of ILX's common stock exercisable
at a price of $2.00 per share on or before December 15, 1997 (the "Third
Option"). At ILX's election, the term of the Third Option will be extended
to the extent that ILX extends the term of the TCS Letter Agreement.
Effective January 1, 1997, ILX and Investor Resource Services, Inc.
("IRS") entered into a Consulting Agreement pursuant to which IRS agreed to
provide certain investor relations, broker relations and public relations
services to ILX (the "IRS Consulting Agreement"). Under the terms of the
IRS Consulting Agreement, IRS received new and extended options to purchase
500,000 shares of ILX common stock at $1.25 per share (the "IRS Option
Shares"). The options granted in the IRS Consulting Agreement with respect
to the IRS Option Shares expire on June 30, 1997.
On May 2, 1997, ILX and TCS and IRS executed Assumption Agreements with
Martori Enterprises Incorporated ("MEI"), an affiliate and shareholder of
ILX, under which MEI agreed to assume all of ILX's obligations to issue
shares of its common stock on the exercise of the options held by TCS and
IRS under the TCS Option Agreement and the IRS Consulting Agreement (the
"Assumption Agreements"). Copies of the Assumption Agreements are attached
as Exhibit 10 hereto and the above description of the Assumption Agreements
is qualified in its entirety by reference to those Assumption Agreements.
The descriptions of the TCS Letter Agreement, the TCS Option Agreement and
the IRS Consulting Agreement are qualified in their entirety by reference
to those Agreements, copies of which are attached to ILX's Form 8-K Reports
dated February 10, 1997 and January 13, 1997, respectively.
(ii)The Company filed with the Securities and Exchange Commission a report
on Form 8-K dated May 15, 1997, which disclosed the following:
11
<PAGE>
Item 5. Other Events.
On October 30, 1996, ILX Incorporated ("ILX") entered into an Agreement
for Purchase and Sale (the "Agreement") with Debbie Reynolds Hotel &
Casino, Inc., a Nevada corporation, ("DRHC") (OTC: DEBI) and Debbie
Reynolds Resorts, Inc., a Nevada corporation, ("DRC") whereby ILX could
acquire, among other assets, the physical assets constituting the Debbie
Reynolds Hotel & Casino in Las Vegas, Nevada. The purchase price for the
assets was $16,800,000 and was payable by issuance to DRHC of $7,500,000
worth of federally registered ILX common stock valued for purposes of the
transaction at $2.00 per share (totaling 3,750,000 shares), as well as
payment of $4,200,000 in cash and ILX's assumption of $5,100,000 in
mortgage indebtedness.
Consummation of the transaction was contingent on, among other things,
satisfaction of various conditions by the sellers and the completion of
ILX's due diligence investigation. On May 15, 1997, ILX transmitted the
required formal written notice of its election to cancel and terminate the
Agreement (the "Election Notice") effective immediately, although ILX's
management remains hopeful that the parties may yet structure some other
type of strategic relationship involving the Debbie Reynolds Hotel &
Casino.
(iii) The Company filed with the Securities and Exchange Commission a
report on Form 8-K dated June 23, 1997, which disclosed the following:
Item 5. Other Events.
Effective June 23, 1997, ILX Incorporated ("ILX") and EVEREN
Securities, Inc. ("ESI") entered into a Letter Agreement regarding
financial advisory services (the "Letter Agreement"). The Letter Agreement,
which was accepted and agreed to by ILX on June 23, 1997, will take effect
commencing July 1, 1997. The Letter Agreement is attached to this Form 8-K
as Exhibit 10.
Under the terms of the Letter Agreement, ESI is to act as ILX's
exclusive financial advisor, investment banker and agent with respect to
the evaluation of various alternatives to position ILX for long-term growth
and evaluation of various strategic alternatives that may enhance
shareholder value. The services, which are more fully described in the
Letter Agreement, may include: evaluating third party entities that ILX may
seek to acquire or with which ILX may seek to merge; evaluating capital
raising strategies and providing access to the capital markets; and other
investment banking and related services on which ESI and ILX may agree. The
Letter Agreement has no fixed term, although the parties have expressed
their intentions that the Letter Agreement remain in effect for at least
one year. However, 30 days after ILX executes the Letter Agreement it may
be terminated by either party on 10-days' written notice to the other
party, although ILX would have certain ongoing obligations to ESI including
to compensate ESI for previously earned fees, to reimburse ESI for accrued
expenses, to honor a right of first refusal held by ESI, and to indemnify
ESI for certain matters.
In exchange for the above services under the Letter Agreement, in
addition to other compensation that may be payable to ESI as "success
fees," ILX agreed to transfer to ESI 60,000 shares of ILX's common stock
(the "Common Stock") on each of August 1, 1997 and February 1, 1998 and to
cause those shares to be registered under an appropriate registration
statement.
The above descriptions of the Letter Agreement is qualified in its
entirety by reference to that Agreement, attached hereto as Exhibit 10.
12
<PAGE>
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 Assumption Agreements 4
10 Election Notice 4
10 Letter Agreement 4
13
<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 and Controller
Date: As of August 11, 1997
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE REGISTRANTS SECOND
QUARTER 1997 CONSOLIDATED BALANCE SHEET AND
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,677,805
<SECURITIES> 0
<RECEIVABLES> 17,195,141
<ALLOWANCES> 2,822,804
<INVENTORY> 17,355,063
<CURRENT-ASSETS> 33,405,205
<PP&E> 6,098,113
<DEPRECIATION> 1,286,423
<TOTAL-ASSETS> 41,192,866
<CURRENT-LIABILITIES> 3,394,256
<BONDS> 18,068,689
0
1,397,799
<COMMON> 9,812,727
<OTHER-SE> 79,450
<TOTAL-LIABILITY-AND-EQUITY> 41,192,866
<SALES> 10,992,456
<TOTAL-REVENUES> 16,780,974
<CGS> 3,793,360
<TOTAL-COSTS> 12,970,356
<OTHER-EXPENSES> 1,507,026
<LOSS-PROVISION> 317,593
<INTEREST-EXPENSE> 935,762
<INCOME-PRETAX> 1,050,237
<INCOME-TAX> 352,457
<INCOME-CONTINUING> 529,027
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 529,027
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
