Item 1. Business
ILX Incorporated ("ILX" or the "Company") is an Arizona corporation formed in
October 1986. The Company is engaged primarily in the business of developing,
marketing and financing interval ownership interests, often referred to as
"timeshare" interests, in resort properties and operating resort properties as
hotels.
Resorts
ILX sells timeshare interests in resorts located in Arizona, Colorado, Florida,
Hawaii, Indiana and Mexico. Generally, ILX either owns all or a controlling
interest in the resort itself, or it owns a designated number of timeshare
interests in a resort and has a corresponding right to sell those timeshare
interests to third parties.
ILX owns all or a controlling interest in the following resorts: Los Abrigados
Resort & Spa in Sedona, Arizona, Kohl's Ranch Lodge in Gila County, Arizona,
Golden Eagle Resort in Estes Park, Colorado, Varsity Clubs of America near the
University of Notre Dame in Mishawaka, Indiana and Lomacasi Cottages in Sedona,
Arizona. The properties owned or controlled by ILX or its subsidiaries are
operated as hotels to the extent of unused or unsold timeshare inventory.
In addition, ILX owns a designated number of timeshare interests in the
following resorts and has a right to sell those timeshare interests to third
party purchasers: Ventura Resort in Boca Raton, Florida and Costa Vida Vallarta
Resort in Puerto Vallarta, Mexico.
ILX also has a marketing agreement with Pahio Vacation Ownership, Inc., which
owns and operates, on the island of Kauai, Hawaii, Pahio at Kauai Beach Villas,
Pahio at Bali Hai Villas, Pahio at The Shearwater and Pahio at Ka'Eo Kai. Under
the marketing agreement, ILX may market and sell, subject to regulatory
approval, timeshare interests in Pahio's four Hawaii resorts. ILX intends to
market the timeshare interests for Pahio at Kauai Beach Villas in Arizona.
Thereafter, ILX may then expand its marketing effort to include timeshare
interests in other Pahio resorts and expand such marketing to other states.
Except for Costa Vida Vallarta Resort, described below, purchasers of timeshare
interests from ILX acquire deed and title to an undivided fractional interest in
the entire resort or to a particular unit or type of unit, which entitles the
purchaser to use a unit at the selected resort and to use the resort's common
areas during a designated time period. On occasion, ILX reacquires a timeshare
interest through a variety of circumstances including, but not limited to,
customers defaulting on their obligation to pay for their timeshare interests.
In those instances, the reacquired timeshare interests are restored to ILX's
inventory for resale.
Each of the above referenced resorts is affiliated with a not-for-profit
organization, the members of which are the owners (including ILX and its
subsidiaries) of timeshare interests in each such resort. These not-for-profit
organizations have certain recorded governing documents that contain
restrictions concerning the use of the resort property and that retain certain
benefits for ILX and its subsidiaries.
With respect to certain of the resort properties owned by ILX or its
subsidiaries, a portion of the price paid to ILX by a purchaser of a timeshare
interest in those resorts must be paid by ILX to the holder(s) of the underlying
mortgage(s) on the property in order to release such timeshare interest from the
lender's underlying encumbrance. This "release fee" ensures that the timeshare
purchaser can acquire title to his or her timeshare interest free from monetary
encumbrances.
ILX began marketing timeshare interests in Ventura Resort in Boca Raton, Florida
in 1987. The Ventura Resort is located across from Boca Beach in Boca Raton,
Florida. ILX is authorized by the states of Arizona and Florida to sell
timeshare interests in Ventura Resort in those states. ILX had approximately 20
weeks available for sale at December 31, 1996.
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In 1986, ILX purchased, and in 1987 began operations at, Golden Eagle Resort,
which is located in the town of Estes Park, Colorado, within three miles of the
Rocky Mountain National Park. ILX plans to offer a minimum of 1,785 timeshare
weeks in Golden Eagle Resort. Arizona, Colorado and Indiana have authorized ILX
to sell timeshare interests in Golden Eagle Resort in those states. ILX had
approximately 575 weeks available for sale in completed suites at December 31,
1996.
In September 1988, ILX acquired an ownership interest in Los Abrigados Resort &
Spa in Sedona, Arizona through BIS-ILE Associates ("BIS-ILE"), a partnership
that was formed to acquire and market the property and in which ILX held an
interest as a general partner. In September 1991, Los Abrigados Partners Limited
Partnership, an Arizona limited partnership ("LAP"), became the successor in
interest to BIS-ILE. ILX, directly and through its wholly-owned subsidiary, ILE
Sedona Incorporated ("ILES"), owns a total of 78.5% of LAP, which now owns Los
Abrigados Resort & Spa. ILES serves as LAP's general partner. LAP has contracted
with ILX to manage the resort and to market fee simple interval ownership
interests in the resort through the sale of membership interests in Sedona
Vacation Club.
Marketing of timeshare interests in Los Abrigados Resort & Spa began in February
1989. A total of 9,100 timeshare weeks in constructed units may be sold, of
which approximately 2,790 were available for sale at December 31, 1996. The
Company intends to construct an additional 20 units, thereby adding 1,040
timeshare weeks. At December 31, 1996, Genesis Investment Group, Inc., a
wholly-owned subsidiary of ILX, holds an option to purchase, and is subject to a
put and call option requiring and allowing it to purchase, 392 additional
timeshare weeks for $2,100 each in Los Abrigados Resort & Spa, which timeshare
weeks will be made available for sale upon exercise of the option. At December
31, 1996, options to purchase 641 weeks had been extended to owners of timeshare
interests in Golden Eagle Resort, Kohl's Ranch Lodge and Varsity Clubs of
America - Notre Dame on substantially the same terms offered to current
purchasers. In addition, one to two year options have been extended to certain
owners of alternate year usage at Los Abrigados Resort & Spa that allow the
owners to increase their ownership to every year usage. Such options are at
prices in excess of the current prices. Arizona, Colorado, Indiana, Iowa and
Nevada have authorized ILX to sell timeshare interests in Los Abrigados Resort &
Spa in those states.
The Costa Vida Vallarta Resort is a beach front resort located in Puerto
Vallarta, Mexico. ILX has acquired timeshare weeks in the resort that provide a
right to occupy a specific week and unit in the resort and to use the common
areas of the resort (during the week of occupancy) through and including the
year 2009. Arizona, Colorado and Indiana have authorized ILX to sell timeshare
interests in Costa Vida Vallarta Resort in those states. ILX had 49 timeshare
interests available for sale as of December 31, 1996.
In June 1995, ILX acquired ownership of Kohl's Ranch Lodge ("Kohl's Ranch"), a
10.5 acre property located 17 miles northeast of Payson, Arizona. Kohl's Ranch
timeshare interests have been approved for sale in Arizona, and timeshare sales
began in July 1995. The Company is refurbishing Kohl's Ranch, maintaining its
authentic ranch atmosphere and decor. ILX anticipates constructing six
additional duplex cabins as needed to accommodate timeshare sales, thus adding
twelve 2-bedroom cabins, for a total of 64 units and 3,328 timeshare intervals.
The Company also owns and operates the water company which provides water to
Kohl's Ranch and surrounding area residences. As of December 31, 1996,
approximately 2,175 timeshare weeks were available for sale in completed units.
On March 1, 1996, ILX indirectly became the 75% general partner of The Sedona
Real Estate Limited Partnership #1, an Arizona limited partnership, ("SRELP")
that owns Lomacasi Cottages in Sedona, Arizona, a 19 unit, 5.27 acre property
approximately one mile from Los Abrigados Resort & Spa. ILX intends initially to
use the resort to provide lodging accommodations to prospective timeshare
purchasers attending a presentation at ILX's Sedona Sales Office. ILX may offer
timeshare interests in the property in the future.
In September 1996, ILX acquired approximately one-half acre of improved property
adjacent to Los Abrigados Resort & Spa. ILX intends to make improvements to the
property, to be known as the Inn at Los Abrigados, in the amount of
approximately $300,000 and to offer approximately 468 timeshare interests in the
property commencing in 1997.
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The Company markets timeshare interests in Los Abrigados Resort & Spa, Kohl's
Ranch, Golden Eagle Resort, Varsity Clubs of America - Notre Dame, Pahio at
Kauai Beach Villas and Costa Vida Vallarta Resort from its Sales Offices located
at Los Abrigados Resort & Spa and Kohl's Ranch. There are several other
timeshare resorts in Sedona and elsewhere in Arizona that draw upon the same
metropolitan Phoenix customers the Company does for both its Los Abrigados
Resort & Spa and Kohl's Ranch Sales Offices. To date the Company has been able
to successfully compete to attract such customers to attend its timeshare
presentations. The Company markets its Golden Eagle interests exclusively from
its Arizona and Indiana sales offices and does not, therefore, compete directly
with Colorado timeshare resorts.
The Company's wholly-owned subsidiary, Varsity Clubs of America Incorporated
("VCA"), was formed to capitalize on a perceived niche market: the potential
demand for high quality accommodations near prominent colleges and universities
with nationally recognized athletic programs. Large universities host a variety
of sporting, recreational, academic and cultural events that create a
substantial and relatively constant influx of participants, attendees and
spectators. The Varsity Clubs concept is a lodging alternative targeted to
appeal to university alumni, basketball or football season ticket holders,
parents of university students and corporate sponsors of university functions,
among others. The Varsity Clubs concept is designed to address the specific
needs of these individuals and entities by creating specialty timeshare hotels
that have a flexible ownership structure, enabling the purchase of anything from
a single day (such as the first home football game) to an entire football
season. In addition, the Varsity Clubs concept serves the needs of local
residents by offering a variety of on-site club privileges to purchasers, as
well as the ability to exchange their usage at other resorts worldwide. Each
Varsity Clubs facility will operate as a hotel to the extent of unsold or unused
timeshare inventory.
The first Varsity Clubs facility was completed in August 1995 and is located in
Mishawaka, Indiana, approximately 2.8 miles from the University of Notre Dame
("Varsity Clubs of America - Notre Dame"). The Indiana facility is owned, to the
full extent of unsold timeshare interests, by VCASB Partners General Partnership
("VCASB"), which is owned 50% each by ILX and VCA South Bend Incorporated, a
wholly-owned subsidiary of VCA. Arizona, Florida, Illinois, Indiana and
Pennsylvania have authorized VCASB to sell timeshare interests in the Indiana
facility in those states. Customers purchase deed and title to a floating number
of night's use of a unit and unlimited use of the common areas of the resort.
Purchasers may also receive the right to utilize the facility on specified
dates, such as dates of home football games, for which they pay a premium. A
total of 22,568 one night intervals have been constructed and, at December 31,
1996, approximately 16,147 one night intervals were available for sale. The
Company anticipates expanding the facility by constructing an additional 30
suites, thus adding 10,920 one night intervals. To the Company's knowledge, no
other timeshare properties exist proximate to the University of Notre Dame. To
date, Varsity Clubs of America - Notre Dame has been able to compete favorably
for commercial guests because of its superior facilities and amenities relative
to other lodging accommodations in the area.
The site for a second Varsity Clubs facility was acquired in July 1995 and is
located in Tucson, Arizona, approximately 2.3 miles from the University of
Arizona. Construction of the Arizona facility is expected to commence in 1998.
ILX extends financing, not to exceed 90% of the purchase price of the ownership
interval, to qualified purchasers of timeshare interests in the Company's
various resorts. ILX sells with recourse a portion of the consumer obligations,
borrows against a portion, and carries the balance. On occasion, ILX reacquires
an interval from a customer who defaults on his obligation. Intervals are not
reacquired unless ILX has exhausted its collection attempts (which include a
series of telephone calls and letters and reporting to national credit bureaus)
and has determined the obligation to be uncollectible. Such reacquired ownership
interests are held for resale.
ILX's interval ownership plans compete both with other interval ownership plans
as well as hotels, motels, condominium developments and second homes. ILX
considers its competitive environment to include not only the areas near its
properties but also other vacation destination alternatives. ILX's competitive
posture is based on the distinction of its products, the desirability of the
locations of its properties, the quality of the amenities ancillary to the
interval ownership weeks, the value received for the price and the availability
of a variety of destination locations. ILX plans to continue exploring options
for the acquisition or development and marketing of new resort facilities.
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Sedona Worldwide Incorporated and Red Rock Collection Incorporated
Red Rock Collection Incorporated, an Arizona corporation ("Red Rock
Collection"), was a wholly and directly owned subsidiary of ILX. It has, since
July 1994, been engaged in the manufacture and distribution of personal care
products. The complete product line consists of spa and salon formulated
products for face, body, bath and hair care.
Effective January 1, 1997, ILX and Red Rock Collection entered into personal
service agreements (the "Personal Service Agreements") with celebrity Debbie
Reynolds and her son, Todd Fisher. The Personal Service Agreements provide,
among other things, that Ms. Reynolds will endorse the Red Rock Collection line
of face, body, bath and hair care products. Pursuant to the Personal Service
Agreements and related documents, each of Ms. Reynolds and Mr. Fisher are to
receive from ILX 70,000 shares of the 700,000 issued and outstanding shares of
Red Rock Collection common stock.
Also under the Personal Service Agreements, ILX agreed that, within sixty (60)
days from the issuance of such stock to Ms. Reynolds and Mr. Fisher, which
issuance has not yet occurred, ILX would distribute to the existing ILX
shareholders the common stock of Red Rock Collection equal to at least thirty
percent (30%) of the then issued and outstanding Red Rock Collection common
stock. The Personal Service Agreements further provide that (i) ILX shall
undertake promptly to register the common stock of Red Rock Collection with the
Securities and Exchange Commission with a view to listing the stock on the
National Association of Securities Dealers Automatic Quotation System (NASDAQ)
and (ii) either concurrently with such registration or by separate registration,
and upon the advice of its underwriters, Red Rock Collection would undertake a
public offering of between $2 million and $5 million.
In November 1996, ILX activated a wholly-owned subsidiary, Sedona Worldwide
Incorporated ("SWW") (formerly "Red Rock Worldwide Incorporated"). Pursuant to a
Contribution Agreement to be effective as of January 1, 1997, all of the issued
and outstanding shares of Red Rock Collection are to be exchanged for shares of
SWW, at a rate of four shares of SWW for each share of Red Rock Collection. As a
part of that agreement, SWW is to assume Red Rock Collection's obligations under
the Personal Service Agreements and ILX is to undertake the various Red Rock
Collection stock transfers and registrations using SWW stock rather than Red
Rock Collection stock.
Red Rock Collection products primarily have been marketed through resort
properties owned and operated by ILX. This resort-based sales program includes
an upscale amenities line, an in-room gift basket promotion and retail product
sales at ILX resort venues. Red Rock Collection products are also used by ILX
and its subsidiaries as tour promotion incentives. The products are given as
gifts to individuals who attend timeshare tours and presentations. Red Rock
Collection then markets by direct mail to the resort and tour customers who have
received and/or used the Red Rock Collection products. Red Rock Collection is
considering other marketing opportunities, including promotional activities
utilizing Ms. Reynolds.
ILX and SWW intend to offer additional product lines through SWW, including
jewelry, artwork and apparel.
Debbie Reynolds Hotel & Casino
On October 30, 1996, ILX entered into a definitive agreement with Debbie
Reynolds Hotel & Casino, Inc., a Nevada corporation ("DRHC") and Debbie Reynolds
Resorts, Inc., a Nevada corporation ("DRC") whereby ILX can acquire, among other
assets, the physical assets constituting the Debbie Reynolds Hotel & Casino in
Las Vegas, Nevada (the "Hotel"). The purchase price for the assets is
$16,800,000 and is payable by issuance to DRHC of $7,500,000 worth of federally
registered shares of ILX's 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, which ILX intends to borrow from third-party lenders to whom ILX
believes it will be required to provide recourse mortgages against ILX's assets,
and ILX's assumption of $5,100,000 in mortgage indebtedness, which ILX believes
likely would be recourse to ILX's assets. The Hotel consists of 193 rooms in a
twelve-story structure situated on over six acres. Hotel amenities include the
Debbie Reynolds Hollywood Movie Museum, Debbie's Star Theater, food and beverage
facilities, a pool and a
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spa, and space for a full-service casino. Forty-three of the hotel rooms have
recently been renovated and established as timeshare units, providing the
opportunity to market up to 2,193 timeshare interests in the Hotel, of which
approximately one-half have been sold by the current owners. As part of the
agreement, Debbie Reynolds would continue to perform and make regularly
scheduled appearances at the Hotel. If the transaction is consummated, ILX would
offer timeshare interests, would conduct hotel operations, and would lease to
Debbie Reynolds or her nominee for 99 years facilities that include the
showroom, casino space, museum, gift shop, back bar and certain joint use areas
for an approximate lease fee of $150,000 per month, which is at a rate that DRHC
has indicated would not likely be profitable for DRHC to undertake.
Consummation of the contemplated transaction was and remains contingent upon
approval by the shareholders of DRHC, satisfaction of various conditions by the
sellers, and a due diligence investigation by ILX. To date, DRHC has not sought
the approval of the shareholders, only a small portion of the conditions have
been satisfied by the sellers, and ILX has not completed its due diligence
investigation as a result of the lack of information made available by the
sellers, all of which places an additional degree of substantial uncertainty
upon the likelihood of closing the transaction as originally anticipated. One
condition recently satisfied is that DRHC provided ILX with DRHC's delinquently
filed financial statements for the year ended December 31, 1995 and the first
three quarters of 1996. ILX's preliminary review of these financial statements
revealed lower performance levels than had previously been anticipated for DRHC,
and greater debt owed by DRHC, raising additional issues that ILX must now
explore. Accordingly, ILX's management has determined that, until further due
diligence is performed and the other seller contingencies are satisfied, ILX
will not be able to determine whether or not it will proceed to consummate the
transaction.
Genesis
ILX, through its wholly-owned subsidiary Genesis Investment Group, Inc.
("Genesis"), holds for the purpose of liquidation ownership interests in real
estate (both fee and lien), most of which is unimproved. ILX acquired Genesis in
November 1993 through the merger of ILX's wholly-owned subsidiary and Genesis.
Since the merger, Genesis has continued to liquidate its real estate holdings
and is subject to a put and call option allowing and requiring Genesis to
purchase 667 timeshare intervals in Los Abrigados Resort & Spa. Pursuant to such
option, Genesis has acquired 275 timeshare intervals as of December 31, 1996 and
has engaged LAP to market these timeshare interests for resale.
Other
ILX employs approximately 700 people.
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