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 September 30, 1997 Commission File Number 33-16122
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ILX INCORPORATED
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(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)
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
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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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at September 30, 1997
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Common Stock, without par value 13,431,662 shares
Preferred Stock, $10 par value 380,468 shares
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
------------ ------------
(Unaudited)
Assets
Cash and cash equivalents $ 2,218,261 $ 3,523,047
Notes receivable, net 16,058,418 11,745,720
Resort property held for timeshare sales 14,064,827 15,247,587
Resort property under development 1,727,833 1,209,706
Land held for sale 1,551,065 1,547,493
Deferred assets 313,813 313,346
Property and equipment, net 5,182,104 4,877,467
Deferred income taxes 438,449 1,178,653
Minority interests 318,711 --
Other assets 2,082,751 1,631,886
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$ 43,956,232 $ 41,274,905
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Liabilities and Shareholders' Equity
Accounts payable $ 1,919,757 $ 2,310,600
Accrued and other liabilities 1,727,533 3,476,135
Genesis funds certificates 1,164,913 1,182,087
Due to affiliates 41,336 139,715
Notes payable 19,250,677 14,867,096
Notes payable to affiliates 3,110,106 1,567,287
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27,214,322 23,542,920
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Minority Interests -- 2,556,865
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Shareholders' Equity
Preferred stock, $10 par value; 10,000,000 shares authorized;
380,468 and 392,109 shares issued and outstanding; liquidation
preference of $3,804,680 and $3,921,090, respectively 1,384,891 1,419,243
Common stock, no par value; 40,000,000 shares authorized;
13,462,162 and 13,024,290 shares issued and outstanding 10,275,111 9,788,738
Treasury stock, at cost, 30,500 and 30,000 shares, respectively (37,099) (36,536)
Additional paid in capital 79,450 78,300
Retained earnings 5,039,557 3,925,375
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16,741,910 15,175,120
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$ 43,956,232 $ 41,274,905
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See notes to consolidated financial statements
2
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
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1997 1996 1997 1996
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Revenues
Sales of timeshare interests $ 7,017,548 $ 5,480,153 $ 17,955,423 $ 15,270,596
Resort operating revenue 2,636,829 2,713,317 7,866,593 7,996,778
Sales of land and other 12,982 30,017 67,563 331,615
Interest income 414,482 248,532 973,236 712,628
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10,081,841 8,472,019 26,862,815 24,311,617
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Cost of sales and operating expenses
Cost of timeshare interests sold 2,538,146 1,566,106 6,286,509 4,960,098
Cost of resort operations 2,672,365 2,598,017 7,938,745 7,924,836
Cost of land sold and other 5,981 31,160 50,978 291,017
Advertising and promotion 2,629,237 1,980,278 6,539,853 5,168,565
General and administrative 692,225 723,990 2,199,251 2,157,287
Provision for doubtful accounts 208,759 36,410 526,352 459,143
------------ ------------ ------------ ------------
8,746,713 6,935,961 23,541,688 20,960,946
------------ ------------ ------------ ------------
Operating income 1,335,128 1,536,058 3,321,127 3,350,671
Interest expense 564,710 478,962 1,500,472 1,406,073
------------ ------------ ------------ ------------
Income before minority interests and income taxes 770,418 1,057,096 1,820,655 1,944,598
Minority interests 290,446 (204,303) 121,693 (486,469)
Income taxes (423,845) (354,006) (776,302) (607,371)
------------ ------------ ------------ ------------
Net income $ 637,019 $ 498,787 $ 1,166,046 $ 850,758
============ ============ ============ ============
Net income per common and equivalent
share $ 0.04 $ 0.03 $ 0.08 $ 0.06
============ ============ ============ ============
Number of common and equivalent
shares 13,413,664 13,013,372 13,257,677 12,890,033
============ ============ ============ ============
See notes to consolidated financial statements
3
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
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1997 1996
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Cash flows from operating activities:
Net income $ 1,166,046 $ 850,758
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed minority interest (121,968) 239,258
Provision for doubtful accounts 526,352 459,143
Depreciation and amortization 345,145 543,643
Deferred income taxes 740,204 735,150
Amortization of guarantee fees 67,150 56,300
Gain on settlement of liability (98,705) --
Change in assets and liabilities:
Decrease in resort property held for timeshare sales 1,182,760 485,381
Additions to resort property under development (518,127) (65,269)
Increase in land held for sale (3,572) (2,309)
Increase in other assets (174,637) (198,852)
Decrease in accounts payable (390,843) (141,757)
Increase (decrease) in accrued and other liabilities 487,323 (15,841)
Decrease in Genesis funds certificates (17,174) (175,171)
Decrease in due to affiliates (98,379) (240,863)
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Net cash provided by operating activities 3,091,575 2,529,571
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Cash flows from investing activities:
(Increase) decrease in deferred assets (67,617) 66,050
Purchases of plant and equipment (492,988) (242,465)
Notes receivable, net (4,554,967) (3,123,123)
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Net cash used in investing activities (5,115,572) (3,299,538)
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Cash flows from financing activities:
Proceeds from notes payable 6,208,386 4,181,139
Principal payments on notes payable (4,374,662) (3,826,898)
Principal payments on notes payable to affiliates (202,181) (339,350)
Distributions to minority partners (960,000) (720,000)
Proceeds from issuance of common stock 96,125 423,875
Acquisition of treasury stock (563) --
Redemption of preferred stock -- (12,000)
Preferred stock dividend payments (47,894) (47,971)
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Net cash provided by (used in) financing activities 719,211 (341,205)
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Net decrease in cash and cash equivalents (1,304,786) (1,111,172)
Cash and cash equivalents at beginning of period 3,523,047 3,746,518
----------- -----------
Cash and cash equivalents at end of period $ 2,218,261 $ 2,635,346
=========== ===========
See notes to consolidated financial statements
4
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 nine month periods ended September 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 nine month periods ended September
30, 1997 and 1996, the Company paid interest and income taxes and capitalized
interest to resort property under development as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
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1997 1996 1997 1996
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Interest $ 627,079 $ 497,975 $1,546,751 $1,376,891
Income Taxes $ -- $ 2,000 $ -- $ 2,000
Interest Capitalized $ 54,020 $ 19,859 $ 140,006 $ 53,958
5
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
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$ 0
===========
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 bear interest at prime plus 3.25% and are secured
by the consumer notes.
In July 1997, the Company borrowed $598,500 from one of its timeshare lenders to
purchase 285 timeshare interests in Los Abrigados Resort & Spa. The interests
were acquired for approximately $567,000, including closing costs, 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 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 September 2000.
6
In September 1997, the Company borrowed an additional $800,000 from the first
mortgage holder on the Los Abrigados Resort & Spa and extended the maturity date
of the borrowing to April 1999.
During the third quarter of 1997, the Company borrowed $1,309,269 on its
$6,550,000 construction financing commitment for the Varsity Clubs of America -
Tucson facility, bringing the balance outstanding on the loan to $1,609,269 at
September 30, 1997.
During the first nine months of 1997, the Company borrowed $1,651,427 against
consumer notes receivable and also borrowed on its lines of credit, of which
$200,000 was outstanding at September 30, 1997.
During the second quarter of 1997, property and equipment of $97,181 was leased
and a vehicle was financed for $29,450.
Note 3 - Notes Payable to Affiliates
In July 1997, the Company issued 184,000 shares of its restricted common stock,
which were subsequently registered with the Securities and Exchange Commission,
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.
In August 1997, the Company acquired the Class B Limited Partnership Interest in
LAP, effective as of January 1, 1997, for a purchase price of $2,920,000,
consisting of cash payments of $820,000, the issuance of 100,000 shares of the
Company's common stock valued at $1.25 per share and the issuance of promissory
notes in the amount of $1,300,000 and $675,000. The $1,300,000 note payable,
secured by the Company's 10% Class B Limited Partnership Interest in Los
Abrigados, bears interest at 8%, with principal of $100,000 payable on or before
January 1, 1998 and principal and interest payable in annual installments of
$200,000 commencing July 31, 1998, with any unpaid principal and interest due
July 31, 2002. Interest from August 8, 1997 through January 1, 1998 will be
added to principal on December 31, 1997. The $675,000 note payable, secured by
the Company's 11.5% Class B Limited Partnership Interest in Los Abrigados, bears
interest at 8%, with principal and interest payable in annual installments of
$100,000 commencing July 31, 1998, with any unpaid principal and interest due
July 31, 2002. The purchase was recorded as follows:
Increase in notes payable to affiliates $ 1,975,000
Issuance of common stock 125,000
Increase in other assets (306,392)
Decrease in minority interest (2,613,608)
-----------
Issuance of cash payments $ (820,000)
===========
Note 4 - Shareholders' Equity
During the first nine months of 1997, holders of 11,334 shares of Series C
Preferred Stock exchanged their shares for 18,890 shares of common stock. The
exchanges were recorded as a reduction in preferred stock and an increase in
common stock of $31,282. Shares of stock valued at $3,966 and cash of $16 were
issued in the first nine months of 1997 for the Dividend Arrearage due to the
holders of Series C Preferred Stock who converted their shares in the first nine
months of 1997.
7
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.
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 issued 60,000 shares of ILX common stock on August 1, 1997 and will issue an
additional 60,000 shares on February 1, 1998. The shares issued and to be issued
have been valued at $112,500, and are being amortized over a twelve-month
period. $28,125 has been expensed through September 30, 1997. In accordance with
the terms of the agreement, ILX has registered with the Securities and Exchange
Commission the shares issued in August and will likewise cause the shares to be
issued in February to be so registered. The parties intend for the agreement to
remain in effect for a minimum of one year.
Note 5 - Subsequent Events
In October 1997, the Company made a bid to acquire an approximate 5/8 undivided
interest in the common areas of and all of the undeveloped and unsold portions
of the Roundhouse Resort, an existing 59-unit resort with five acres of
developable land located in Pinetop/Lakeside, Arizona. The Company's bid has
been approved by the United States Bankruptcy Court for the District of Arizona,
with the closing expected in mid-November. The bid price is $700,000, to consist
of $525,000 in cash and $175,000 in stock valued at the market price on the
closing date.
8
ILX INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Sales of timeshare interests were 28.1% and 17.6% greater for the three and nine
months ended September 30, 1997, respectively, than for the same periods in
1996. The increases reflect greater sales from the Sedona and South Bend Sales
Offices, sales to customers already owning interests in ILX resorts, and the
opening of sales offices in Tucson and the Phoenix metropolitan area, net of
reduced sales from the Kohl's Ranch Sales Office for the first six months of
1997.
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
$528,000 in 1997 from $202,000 in 1996 for the third quarter, and to $2,232,000
from $703,000 for the nine months ended September 30, 1997 and 1996,
respectively.
Sales of timeshare interests from the Sedona Sales Office increased
approximately $395,000 and $659,000 for the three and nine months ended
September 30, 1997 from the same periods in 1996 due to increases in prices and
a greater number of timeshare tours, and in the first and third quarters of
1997, increased closing rates (number of timeshare sales divided by number of
timeshare tours).
Sales of timeshare interests in Varsity Clubs of America - Notre Dame were
$2,507,980 and $1,823,887 and $5,726,925 and $3,879,491 for the three and nine
months ended September 30, 1997 and 1996, respectively. In 1997, approximately
$3,904,000 in Varsity Clubs of America - Notre Dame sales were generated from
the South Bend Sales Office, $1,779,000 from the Sedona Sales Office, which
commenced offering interests in Varsity Clubs of America - Notre Dame in June
1996 and $44,000 from the Tucson Sales Office, which opened in August 1997.
Sales of Varsity Clubs of America - Notre Dame in the first six months of 1996
were primarily from the South Bend Sales Office. The increase in 1997 sales from
the South Bend Sales Office reflects higher closing rates and increased prices.
Sales of timeshare interests in Kohl's Ranch increased approximately $112,000 in
the third quarter of 1997 from the third quarter of 1996, reflecting increased
prices, net of a reduced closing rate. Sales decreased approximately $306,000
for the nine months ended September 30, 1997 from the same period in 1996 as a
result of lower closing rates and a lower number of timeshare tours, which in
part were offset by increased prices. Second and third quarter 1997 sales
include $109,395 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.
In late August 1997, the Tucson Sales Office opened and began selling timeshare
interests in Los Abrigados Resort & Spa, Varsity Clubs of America - Notre Dame
and Kohl's Ranch Lodge. Sales from this office were $240,730 for the third
quarter of 1997.
The increase in cost of timeshare interests sold as a percentage of sales
between years reflects an adjustment to the estimated cost of Los Abrigados
interests in 1996.
9
The decreases in resort operating revenue for both the third quarter and the
nine months ended September 30, 1997 from the same periods in 1996 reflect: at
Los Abrigados Resort & Spa, increased occupancy by timeshare owners and exchange
guests, who pay substantially lower rates than resort guests, reduced food and
beverage revenue from these guests, net of increased average daily rates;
increased occupancy and average daily rates for both 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 in
timing of usage as well as the increasing number of timeshare owners. 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 for the nine months ended September 30, 1997. The
increase in cost of resort operations as a percentage of resort operating
revenue for the third quarter of 1997 from the same period in 1996 reflects a
change in estimated depreciation expense in 1996. 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 decrease in sales of land and other and the related cost of sales for the
nine months ended September 30, 1997 reflects the sale of a parcel of land held
by Genesis in the second quarter of 1996. Sales are comparable for the three
months ended September 30, 1997 and 1996.
The increase in interest income from 1996 to 1997 is a result of the increased
consumer paper retained by the Company and an increase in interest rates charged
by the Company effective July 1997. The Company hypothecates (borrows against)
the majority of its retained paper.
Advertising and promotion as a percentage of sales has increased for both the
third quarter and nine months ended September 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, the opening of the
Tucson Sales Office in 1997, 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 nine
months ended September 30, 1997 and 1996. General and administrative expenses
are lower as a percentage of revenue in the third quarter of 1997 than for the
same period in 1996 due to the recognition in 1997 of a $114,929 gain resulting
from the settlement of accrued liabilities and the purchase of assets from an
affiliate at less than the recorded amount.
The increase in the provision for doubtful accounts for the third quarter of
1997 from same period in 1996 reflects an adjustment to the provision in 1996
based on the expected performance of the portfolio of consumer paper, both sold
and unsold. The provision for doubtful accounts is comparable as a percentage of
sales of timeshare interests for the nine months ended September 30, 1997 and
1996.
Interest expense is comparable between periods and reflects increased borrowings
against consumer paper retained by the Company, borrowings against resort
property held for sale and debt issued in exchange for the purchase of LAP
minority interest, net of payments.
10
The decrease in minority interests from 1996 to 1997 reflects the purchase by
the Company of the minority interest in LAP effective January 1, 1997. 1997
minority interest consists of operating losses of Lomacasi Cottages, which was
acquired March 1, 1996 and the minority interest in operating losses of Sedona
Worldwide Incorporated commencing January 1, 1997.
ILX Incorporated intends from time to time to utilize the trade names and/or
marks "ILX Resorts" and "ILX Resorts Incorporated."
Liquidity and Capital Resources
- -------------------------------
The Company's liquidity needs principally arise because it finances consumer
purchases of timeshare interests. The Company addresses such liquidity needs
through the sale and/or hypothecation of the consumer notes it generates. 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 September 30, 1997,
approximately $2.2 million is available under the fixed commitment line and a
minimum of $2.4 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
$900,000 was available under these commitments at September 30, 1997.
The Company has a $10 million open ended financing arrangement whereby the
Company may sell eligible notes received from sales of timeshare interests in
Varsity Clubs of America - Notre Dame on a recourse basis. Approximately $3.5
million was available under this commitment at September 30, 1997.
The Company has financing commitments whereby it may borrow up to $5 million
against conforming notes received from sales of timeshare interests in Kohl's
Ranch through March 1998 and $5 million through June 2000. Approximately $2.2
million was available on the first commitment and $5 million on the second
commitment at September 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 through internal funds. 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 September 30, 1997, $800,000 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.
11
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 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.
In August and September 1997, the Company acquired the Class B Limited
Partnership Interests in Los Abrigados for $820,000 cash, 100,000 shares of the
Company's common stock valued at $1.25 per share and notes payable totaling
$1,975,000 secured by the Company's interest in LAP. The Company borrowed an
additional $800,000 from the first mortgage holder on Los Abrigados to finance
the acquisition.
During the third quarter of 1997, the Company borrowed $1,309,268 on its
construction financing commitment for the Varsity Clubs of America - Tucson
facility.
Cash provided by operating activities increased from $2,529,571 in 1996 to
$3,091,575 in 1997 due to greater net income and an increase in accrued
liabilities, offset by additions to resort property under development in 1997
and greater additions to resort property held for timeshare sales in 1996.
The increase in cash used in investing activities from $3,299,538 in 1996 to
$5,115,572 in 1997 reflects primarily an increase in consumer notes retained by
the Company and an increase in purchases of plant and equipment.
The change from cash used in financing activities in 1996 of $341,205 to cash
provided by financing activities in 1997 of $719,211 reflects greater borrowings
in 1997.
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
Exhibits
- --------
(a) The Exhibit Index attached to this report is hereby incorporated by
reference.
Reports on Form 8-K
- -------------------
(b)
(i) The Company filed with the Securities and Exchange Commission a report
on Form 8-K dated August 22, 1997, which disclosed the following:
Item 5. Other Events.
On August 29, 1997, ILX Incorporated ("ILX") and Alan R. Mishkin
("Mishkin") entered into an Agreement for Transfer of Limited Partnership
Interest (the "Mishkin Agreement").
12
Under the terms of the Mishkin Agreement, ILX is to purchase from
Mishkin all of Mishkin's Class B Limited Partnership Interest (the "Mishkin
LAP Interest") in Los Abrigados Limited Partners Partnership, an Arizona
limited partnership ("LAP"). For accounting certainty, the parties have
agreed that the transfer of the Mishkin LAP Interest shall have an
effective date of January 1, 1997. In consideration for the transfer of the
Mishkin LAP Interest, ILX shall pay to Mishkin $720,000 upon closing, and
shall deliver a promissory note in the amount of $675,000 (the "Mishkin
Note"). In addition, ILX shall issue to Mishkin 100,000 shares of common
stock of ILX. Closing under the Mishkin Agreement is scheduled to occur on
or before September 28, 1997.
When issued, the Mishkin Note will be payable in annual installments of
$100,000 (inclusive of principal and interest), payable on July 31 of each
year beginning July 31, 1998. The entire unpaid principal balance of the
Mishkin Note and accrued and unpaid interest, if any, is payable on July
31, 2002. ILX's obligations under the Mishkin Note are secured by a
Security Agreement covering the Mishkin LAP Interest (the "Mishkin Security
Agreement").
The above descriptions are qualified in their entirety by reference to
the Mishkin Agreement, Mishkin Note and Mishkin Security Agreement attached
as Exhibits 10A, 10B and 10C, respectively, of this Form 8-K.
On August 22, 1997, ILX purchased from Martori Enterprises Incorporated
("MEI"), all of MEI's Class B Limited Partnership Interest in LAP (the "MEI
LAP Interest"). The purchase was consummated pursuant to an Agreement for
Transfer of Limited Partnership Interest (the "MEI Agreement"). In
consideration for transfer of the MEI LAP Interest, ILX paid to MEI
$100,000, and issued a promissory note in the amount of $1,300,000 (the
"MEI Note"). The MEI Note is payable by an installment of $100,000
(inclusive of principal and interest) on January 1, 1998, and by equal
annual installments of $200,000 (inclusive of principal and interest)
payable on July 31 of each year, beginning July 31, 1998. The entire unpaid
principal balance of the MEI Note and accrued and unpaid interest, if any,
is payable on July 31, 2002. ILX's obligations under the MEI Note are
secured by a Security Agreement covering the MEI LAP Interest (the "MEI
Security Agreement").
The MEI Agreement and the transactions contemplated thereby are subject
to rescission by ILX at any time prior to the close of business on October
15, 1997, if ILX has not acquired the Mishkin LAP Interest by that date.
ILX anticipates that it will not exercise this rescission right.
The above descriptions are qualified in their entirety by reference to
the MEI Agreement, the MEI Note and the MEI Security Agreement attached as
Exhibits 10D, 10E and 10F, respectively, of this Form 8-K.
(ii)The Company filed with the Securities and Exchange Commission a report
on Form 8-K dated September 22, 1997, which disclosed the following:
Item 5. Other Events.
On September 22, 1997, ILX Incorporated ("ILX") filed a No Action
Letter Request (the "Request") with the Securities and Exchange Commission
(the "SEC"). ILX seeks an opinion from the SEC regarding ILX's proposal to
transfer common stock of its subsidiary, Sedona Worldwide incorporated,
formerly Red Rock Collection Incorporated, ("Sedona") to the holders of
ILX's common stock on a prorata basis. ILX seeks to conduct the transfer as
a taxable dividend without registration of the Sedona common stock under
the Securities Act of 1933.
13
Prior to conducting the payment of the stock dividend to ILX's
shareholders, ILX would cause Sedona to undertake a stock split so that
Sedona would have 4,000,000 issued and outstanding shares of common stock.
Thereafter, ILX would transfer a total of twenty percent of the Sedona
common stock to Todd Fisher and to a trust held by celebrity Debbie
Reynolds in connection with Personal Services Agreements that Mr. Fisher
and Ms. Reynolds entered with ILX and Sedona. Under those Agreements, Mr.
Fisher and Ms. Reynolds have agreed, among other things, that Ms. Reynolds
will endorse the Red Rock Collection line of face, body, bath and hair care
products. (ILX contemplated merging Red Rock Collection with another wholly
owned subsidiary, which then was named Sedona Worldwide Incorporated, with
the intention that the resulting corporation would fulfill the obligations
under the Personal Service Agreements. Instead, on September 19, 1997, ILX
elected to and did change Red Rock Collection's name to Sedona Worldwide
Incorporated and changed the name of the original Sedona Worldwide
Incorporated to SW Resorts Incorporated. Accordingly, Sedona will continue
to benefit from and be subject to the obligations contained in the Personal
Service Agreements and Sedona holds all the assets and liabilities of Red
Rock Collection. ILX will continue to hold SW Resorts Incorporated as a
wholly owned subsidiary.)
In connection with the dividend payment of Sedona common stock to ILX's
common shareholders, ILX's board of directors will establish a record date
when and as the board deems appropriate. The record date will determine the
identity of the ILX common shareholders who will be entitled to receive the
dividend of Sedona's common stock when the subject shares are transferred.
In connection with the stock transfer, ILX proposes to place the Sedona
common stock in escrow until the stock may be transferred to the identified
ILX shareholders pursuant to the state laws of the states in which the such
ILX shareholders reside. The determination of when such transfers may be
undertaken in compliance with any applicable state law will be made by
ILX's board of directors on advice of ILX's counsel. The transfers are
proposed to take place on a state-by-state basis when and as ILX's board on
advice of counsel determines that an exemption from registration is
available under such state laws or ILX otherwise qualifies the shares for
transfer to the appropriate ILX shareholders.
The above description of the Request and the proposed transfer of
Sedona common stock is qualified in its entirety by reference to the
Request, which is attached as Exhibit 10A.
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.
----------------------------------------------------------------------------------------------------------------------------
10A Mishkin Agreement 4
10B Form of Mishkin Note 14
10C Form of Mishkin Security Agreement 16
10D MEI Agreement 21
10E MEI Note 29
10F MEI Security Agreement 31
10A No Action Letter Request 4
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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 October 31, 1997
15
EXHIBIT INDEX
No. Description
- --- -----------
10-1 Third Amendment to Loan and Security Agreement between Tammac Financial
Corp. and ILX Incorporated dated as of August 25, 1997 (Kohl's Ranch).
10-2 Fourth Modification Agreement ($5,000,000) between Bank One, Arizona,
NA and Los Abrigados Partners Limited Partnership dated September 3,
1997 (additional advance).
16