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, 1995 Commission File Number 33-16122
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ILX INCORPORATED
(Exact name of registrant as specified in its charter)
ARIZONA 86-0564171
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2777 East Camelback Road, Phoenix, AZ 85016
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(Address of principal executive offices)
Registrant's telephone number, including area code 602-957-2777
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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
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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, 1995
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Common Stock, without par value 12,535,698 shares
Preferred Stock, $10 par value 413,056 shares
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1995 1994
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(Unaudited)
Assets
Cash and cash equivalents $ 1,833,461 $ 3,635,587
Restricted cash 782,907 --
Notes receivable, net 8,695,068 6,750,896
Resort property held for
timeshare sales 10,846,263 9,407,733
Resort property under development 5,993,060 1,735,592
Land held for sale 1,672,168 1,673,168
Deferred assets 1,156,228 1,114,137
Property and equipment, net 1,369,259 1,437,227
Deferred income taxes 850,315 1,137,524
Other assets 1,950,172 1,730,023
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$35,148,901 $28,621,887
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Liabilities and Shareholders' Equity
Accounts payable $ 1,648,127 $ 1,581,659
Accrued and other liabilities 2,140,267 1,488,816
Genesis funds certificates 1,445,094 1,612,457
Due to affiliates 442,676 984,534
Deferred income 104,195 365,195
Notes payable 10,554,438 4,881,861
Notes payable to affiliates 1,633,736 2,000,584
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17,968,533 12,915,106
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Minority interests 2,877,803 2,531,169
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Shareholders' Equity
Preferred stock, $10 par value;
10,000,000 shares authorized;
413,056 and 430,313 shares issued
and outstanding; liquidation
preference of $4,130,560
and $4,303,130, respectively 1,525,152 1,648,755
Common stock, no par value;
40,000,000 shares authorized;
12,535,698 and 12,405,325 shares
issued and outstanding 9,222,394 8,972,969
Additional paid in capital 30,000 30,000
Retained earnings 3,525,019 2,523,888
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14,302,565 13,175,612
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$35,148,901 $28,621,887
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See notes to consolidated financial statements
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1995 1994 1995 1994
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Revenues
Sales of timeshare interests $ 5,636,952 $ 3,901,160 $ 10,617,504 $ 8,265,572
Resort operating revenue 2,332,582 2,197,394 4,037,125 4,036,730
Sales of land -- 1,927,428 -- 2,058,678
Sales of consumer products 126,936 -- 278,638 --
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8,096,470 8,025,982 14,933,267 14,360,980
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Cost of sales and operating expenses
Cost of timeshare interests sold 2,179,843 1,349,605 3,802,359 2,785,762
Cost of resort operations 2,132,389 1,911,850 3,840,150 3,641,826
Cost of land sold -- 1,519,212 -- 1,634,957
Cost of consumer products 64,600 -- 172,370 --
Advertising and promotion 1,444,889 1,301,058 3,015,426 2,370,866
General and administrative 783,266 364,473 1,559,173 938,952
Provision for doubtful accounts 334,256 231,915 603,319 466,801
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6,939,243 6,678,113 12,992,797 11,839,164
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Operating income 1,157,227 1,347,869 1,940,470 2,521,816
Other income (expense)
Interest expense (246,669) (129,350) (456,239) (299,811)
Interest income 170,900 71,713 284,949 142,071
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Income before minority interests 1,081,458 1,290,232 1,769,180 2,364,076
and income taxes
Minority interests (168,473) (485,550) (346,634) (838,211)
Income taxes (290,196) -- (419,019) -- .
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Net income $ 622,789 $ 804,682 $ 1,003,527 $ 1,525,865
============= ============= ============= ==============
Net income per common and
equivalent share $ 0.05 $ 0.06 $ 0.08 $ 0.12
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Number of common and equivalent
shares 12,571,562 12,487,742 12,546,142 12,441,320
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Net income per share assuming
full dilution $ 0.05 $ 0.06 $ 0.08 $ 0.12
============= ============= ============= ==============
Number of fully diluted shares 13,056,997 12,996,782 13,036,712 12,950,490
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See notes to consolidated financial statements
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
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1995 1994
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Cash flows from operating activities:
Net income $ 1,003,527 $ 1,525,865
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed minority interest 346,634 201,080
Increase in restricted cash (782,907) --
(Additions to) reduction of notes
receivable-net (1,480,394) 1,176,817
Provision for doubtful accounts 603,319 466,801
Depreciation and amortization 380,248 206,801
Deferred income taxes 287,209 (306,050)
Cost of timeshare interests sold 1,587,257 931,773
Cost of land sold 1,000 1,332,852
Amortization of guarantee fees 49,400 59,850
Change in assets and liabilities:
Increase in other assets (222,449) (238,340)
Increase (decrease) in accounts payable 66,468 (353,688)
Increase in accrued and other liabilities 546,621 153,720
Decrease in Genesis funds certificates (167,363) (429,847)
Decrease in due to affiliates (541,858) (81,633)
Decrease in deferred income (261,000) (456,899)
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Net cash provided by operating activities 1,415,712 4,189,102
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Cash flows from investing activities:
Increase in deferred assets (164,258) (1,159,589)
Purchases of plant and equipment (55,675) (418,347)
Additions to resort property
held for timeshare sales (1,122,465) (823,168)
Additions to resort property
under development (4,805,328) (55,825)
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Net cash used in investing activities (6,147,726) (2,456,929)
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Cash flows from financing activities:
Proceeds from notes payable 4,935,869 329,141
Principal payments on notes payable (1,627,389) (2,350,163)
Principal payments on notes payable
to affiliates (366,848) (420,646)
Proceeds from issuance of common stock 13,672 93,535
Acquisition of treasury stock (25,032) --
Redemption of preferred stock (185) (2,320)
Redemption of common stock (185) (1,141)
Preferred stock dividend payments (14) --
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Net cash provided by (used in)
financing activities 2,929,888 (2,351,594)
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Net decrease in cash and
cash equivalents (1,802,126) (619,421)
Cash and cash equivalents
at beginning of period 3,635,587 2,060,107
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Cash and cash equivalents
at end of period $ 1,833,461 $ 1,440,686
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See notes to consolidated financial statements
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 and, effective
in the third quarter of 1994, marketing of skin and hair care products.
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, 1995, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1995. 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, except for sales of
timeshare interests in Varsity Clubs of America-Notre Dame, 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 is being
recognized by the percentage of completion method as development and
construction proceeds and as the costs of development and profit can be
reasonably estimated. 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, 1995
and 1994, the Company paid interest and income taxes as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
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Interest $303,732 $101,949 $582,658 $237,456
Income taxes $125,500 $306,050 $133,500 $306,050
Restricted Cash
Cash from customer payments towards purchases of timeshare interests in Varsity
Clubs of America-Notre Dame have been classified as restricted cash because the
Company does not have access to the cash until the facility is complete and
deeds are issued.
Reclassifications
The financial statements for prior periods have been reclassified to be
consistent with the 1995 financial statement presentation.
Note 2 - Income Taxes
Income taxes have been provided based on the estimated effective annual tax
rate, including an estimated reduction in the valuation allowance.
Note 3 - Notes Payable
In March 1995, the first deed of trust holder on the Golden Eagle Resort loaned
an additional $1,010,075 against its interest in the property and its assignment
of the Company's general partnership interest in LAP and extended the maturity
date through 1998.
During the first six months of 1995, the Company borrowed $3,575,795 on its $5
million construction financing commitment for the Varsity Clubs of America -
Notre Dame facility, bringing the balance outstanding on the loan to $3,976,579
at June 30, 1995.
During the second quarter of 1995, the Company borrowed $1,067,079 against
consumer notes receivable.
Note 4 - Shareholders' Equity
During the first six months of 1995, holders of 6,735 shares of Series C
Preferred Stock exchanged their shares for 11,225 shares of common stock. The
exchanges were recorded as a reduction in preferred stock and an increase in
common stock of $18,588. Shares of stock valued at $2,382 and cash of $14 were
issued in the first six months of 1995 for the Dividend Arrearage due to the
holders of Series C Preferred Stock who converted their shares in the last
quarter of 1994 and first six months of 1995.
During the second quarter of 1995, the Company acquired 20,000 shares of its
common stock for $25,032. The acquired shares have been recorded as treasury
stock.
During the second quarter of 1995, the Company granted 17,500 shares of
restricted common stock, valued at $13,672, to employees in exchange for
services provided.
Note 5 - Kohl's Ranch Lodge
In June 1995, the Company acquired the Kohl's Ranch Lodge, a 10 acre rustic
resort near Payson, Arizona for a purchase price of $1,590,000, consisting of a
$50,000 cash down payment, assumption of an existing deed of trust of
approximately $932,250, issuance of a $367,750 second deed of trust to the
seller and the issuance of 120,000 shares of ILX restricted common stock valued
at $2 per share. The Company intends to offer timeshare intervals in the
property, commencing in the third quarter 1995. The assumed first mortgage bears
interest at prime plus 1 1/4%, with $3,000 principal plus accrued interest
payable monthly through December 1, when the remaining balance will begin being
amortized over 36 equal monthly installments of principal and interest through
December 1998. Release fees of $750 per interval sold are applied to principal.
The note payable to the seller bears interest at 8%, with the first year's
interest to be added to principal on June 1, 1996. Principal of $7,500 plus
accrued interest is payable monthly thereafter through June 2000. Release fees
of $300 per interval sold are applied to principal.
Note 6 - Other
In July 1995, the Company acquired a two acre site in Tucson, Arizona, near the
University of Arizona, to be the site of its second Varsity Clubs of America.
The land was acquired for $1,002,000, consisting of a $300,600 down payment and
a note payable to the seller of $701,400.
In June 1995, the Company signed a letter of intent to offer to the public
$10,000,000 in convertible secured bonds through Brookstreet Securities
Corporation ("Brookstreet"). The bonds have a five year maturity, bear interest
at 10%, and are convertible to common stock at prices tied to market rates, with
a minimum price of $3.00 per share for the first two years following the
offering and $2.50 per share thereafter. The letter of intent is a firm
commitment by Brookstreet to sell a minimum of $10,000,000 face value of the
bonds and gives Brookstreet the option to sell an additional $1,500,000 face
value. The offering is scheduled for September 1995. The Company intends to use
the proceeds from the bond offering to finance land and/or construction costs of
additional Varsity Clubs of America sites and for working capital.
ILX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The increases in sales of timeshare interests for both the second quarter and
six months ended June 30, 1995, from the same periods in 1994, reflect the
recognition, based on percentage of completion, of sales in Varsity Clubs of
America Notre Dame, increased sales from the Sedona Sales Office, net of a
decrease in sales from the Phoenix Sales Office. In addition, sales of timeshare
interests for the first six months of 1994 include the recognition of $428,100
in deferred revenue from a 1992 bulk sale. Sales of timeshare interests for the
first six months of 1995 include revenue of approximately $525,000 from sales of
upgraded units at Los Abrigados to existing owners who were invited to exchange
their ownership interests for interests in the newly renovated units, for an
additional payment.
In the first half of 1995, the Company recognized approximately $2,941,000 in
Varsity Clubs of America-Notre Dame sales, which represents 95.5% of the sales
through June 30, 1995. Second quarter 1995 sales of $2,073,000 reflect 95.5% of
second quarter sales plus the additional 39.5% of sales through March 31, 1995.
(First quarter sales were recorded at 56%, which represents the percentage of
completion of the facility at March 31, 1995).
The increased sales generated by the Sedona Sales Office in the second quarter
of 1995 and the six month period ended June 30, 1995, reflect higher closing
rates and higher average prices.
On April 1, 1995, the Company closed the Phoenix Sales Office, which had sold
primarily interests in the Los Abrigados resort, in favor of directing all
Phoenix area potential customers to the Sedona Sales Office. The Sedona Sales
Office has had consistently higher closing rates than the Phoenix Sales Office.
The Phoenix Sales Office generated approximately $2.49 million in timeshare
sales in the first six months of 1994, and approximately $771,000 during the
first half of 1995, prior to closure of the office.
The increase in cost of timeshare interests sold between years reflects
improvements to Los Abrigados and sales of interests in Varsity Clubs of
America-Notre Dame which have a higher product cost as a percentage of revenue
than interests in Los Abrigados.
The increase in cost of resort operations as a percentage of resort operating
revenue reflects the increasing usage of the Los Abrigados resort by timeshare
owners and tour guests and the decreasing availability of rooms for traditional
resort guests. Owners and tour guests pay substantially less for their usage
than traditional resort guests.
The 1994 sales of land reflect sales of parcels held by Genesis.
The 1995 sales of consumer products and the related cost of sales reflect sales
of Red Rock Collection products.
Advertising and promotion expenses relate primarily to sales of timeshare
interests. Advertising and promotion as a percentage of sales of timeshare
interests is comparable between years for the six month periods ending June 30,
1995 and 1994. Advertising and promotion is smaller as a percentage of timeshare
sales in the second quarter of 1995 than for the same period in 1994 because
advertising and promotion expenses related to Varsity Clubs of America-Notre
Dame are expensed in their entirety as they are incurred, while revenue
recognition is deferred and recognized based on percentage of completion.
Accordingly, during the fourth quarter of 1994 and first quarter of 1995 a
disproportionate amount of advertising and promotion expense was recognized
relative to sales recognition.
The increases in general and administrative expenses from 1994 to 1995 reflect
the expansion of timeshare operations in 1995 and the amortization of Red Rock
Collection start up costs and recognition of its operating expenses. Red Rock
Collection expenses were deferred during the first six months of 1994, pending
commencement of operations in the third quarter of 1994.
The increases in interest expense between years reflect increased borrowings
against consumer paper, interest on notes payable arising from the acquisition
of the Los Abrigados Partners Limited Partnership ("LAP") Class A limited
partnership interests in the third quarter of 1994, and borrowings for
improvements to resort property held for sale. The increases in interest income
from 1994 to 1995 are a result of the increased consumer paper retained by the
Company.
The decreases in minority interests from 1994 to 1995 reflect the acquisition of
the LAP Class A limited partnership interests, the decrease in LAP net income in
1995 and the minority interests in the income generated from second quarter 1994
Genesis land sales. The decrease in LAP net income between years is a result of
closure of the Phoenix Sales Office and reduced tours and closing rates prior to
the closure, and reduced profitability from Los Abrigados hotel operations due
to decreased availability of rooms for resort guests.
Income tax expense increased between 1994 and 1995 because in 1994 a reduction
in the valuation allowance (which had been established to reflect the
uncertainty of the utilization of the deferred tax assets) offset the tax
provision in full. In the first and second quarters of 1995, income tax expense
has been recorded based on the estimated effective annual tax rate for fiscal
1995, including an estimated reduction in the Genesis deferred tax benefit
valuation allowance.
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 a financing company 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, 1995, approximately $9 million is available under the fixed committment
lines and approximately $4 million is expected to be available on the open ended
line. In addition, the Company has a financing commitment whereby the Company
may borrow up to $2.5 million against non-conforming notes through September
1998. Approximately $1.3 million was available under this commitment at June 30,
1995.
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 February 1996. The
commitment may be extended for an additional eighteen month period and an
additional $10 million at the option of the financing company. Approximately $9
million was available under this commitment at June 30, 1995.
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. $550,000 was available on the lines for
working capital at June 30, 1995.
The Company has a $5 million construction loan for the construction and
furnishing of Varsity Clubs of America-Notre Dame. The loan provides for
principal repayment via release payments as timeshare interests are sold.
Approximately $1 million is available at June 30, 1995, which is expected to be
sufficient to complete the facility.
In July 1995, the Company acquired land near the University of Arizona to be the
site of its second Varsity Clubs of America. The Company made a down payment of
$300,600 and the seller is carrying the balance of $701,400. The Company has a
commitment for construction financing for the facility in the amount of $6
million, which is expected to be sufficient to build and furnish the property.
In addition, the Company has received a verbal commitment for up to $20 million
in financing for eligible notes received from sales of timeshare interests in
Varsity Clubs of America-Arizona. The company is presently completing the
documentation of the written commitments for both the construction and notes
receivable financing.
The Company has optioned property near various college campuses for possible
future Varsity Clubs of America sites and expects to finance such land
acquisitions through seller financing or through financial institutions, secured
by the land acquired. The Company may seek equity and/or debt financing for the
construction of facilities and future sites.
Cash provided by operating activities decreased from 1994 to 1995 because 1994
included the collection of $750,000 on a note receivable which arose from a 1992
bulk sale and the collection of $1,000,000 on a Genesis mortgage receivable. In
addition, 1994 cash flows from operating activities included Genesis land sales
of $2,048,678.
Cash used in investing activities increased from 1994 to 1995 due to the
construction in 1995 of Varsity Clubs of America-Notre Dame, improvements to Los
Abrigados in 1995, net of increases in Red Rock Collection deferred assets in
1994.
The change from cash used in financing activities in 1994 to cash provided by
financing activities in 1995 reflects increased borrowings in 1995 for
construction of Varsity Clubs of America-Notre Dame and for improvements to the
Los Abrigados resort.
In March 1995, the Company borrowed an additional $1,010,000 from the first
mortgage holder on the Golden Eagle Resort. The Company has used these funds for
further expansion of food and beverage facilities, refurbishment of suites and
the construction of additional administrative facilities at Los Abrigados
resort.
In June 1995, the Company acquired the Kohl's Ranch Lodge, a ten acre rustic
resort near Payson, Arizona for $1,590,000, consisting of a $50,000 cash down
payment, assumption of the existing deed of trust of $932,250, seller financing
of $367,750, and the issuance of 120,000 shares of ILX restricted common stock
valued at $2 per share. The Company intends to finance the cost of the initial
improvements and renovations to the resort from working capital. Construction of
additional units and future improvements may be financed through the existing
deed of trust holder, other financing sources, or from working capital.
In June 1995, the Company signed a letter of intent to offer to the public
$10,000,000 in convertible secured bonds through Brookstreet Securities
Corporation ("Brookstreet"). The bonds have a five year maturity, bear interest
at 10%, and are convertible to common stock at prices tied to market rates, with
a minimum price of $3.00 per share for the first two years following the
offering and $2.50 per share thereafter. The letter of intent is a firm
commitment by Brookstreet to sell a minimum of $10,000,000 face value of the
bonds and gives Brookstreet the option to sell an additional $1,500,000 face
value. The offering is scheduled for September 1995. The Company intends to use
the proceeds from the bond offering to finance land and/or construction costs of
additional Varsity Clubs of America sites and for working capital.
The Company believes that its capital resources are adequate to meet current and
foreseeable future needs.
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
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Nancy J. Stone
Executive Vice President/
Chief Financial Officer
/s/ Denise L. Janda
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Denise L. Janda
Vice President/Controller
Date: July 21, 1995