As filed with the Securities and Exchange Commission on October 31, 1995
Registration No. 33-61477
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------------------
AMENDMENT NO. 3
FORM S-2
Registration Statement Under The Securities Act of 1933
- -------------------------------------------------------------------------------
ILX INCORPORATED
(formerly International Leisure Enterprises Incorporated)
(Exact name of registrant as specified in its charter)
ARIZONA 6531 86-0564171
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.
incorporation or Code Number)
organization
2777 East Camelback Road
Phoenix, Arizona 85016
(602) 957-2777
(Address, and telephone number, of registrant's principal executive offices)
JOSEPH P. MARTORI
Chief Executive Officer
ILX Incorporated
2777 East Camelback Road
Phoenix, Arizona 85016
(602) 957-2777
(Name, address, and telephone number, of agent for service)
Copies to:
Carol A. Colombo, Esq. Ronald Warner, Esq.
Colombo & Bonacci, P.C. Thelen, Marrin, Johnson & Bridges
2525 East Camelback Rd., Ste. 840 333 South Grand Avenue, 34th Fl.
Phoenix, Arizona 85016 Los Angeles, California 90071
(602) 956-5800 (213) 229-2066
Approximate date of commencement of proposed sale to public:
As soon as practicable after the Registration Statement becomes effective
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[] If the registrant elects to deliver its latest
annual report to its security holders, or a complete and legible facsimile
thereof, pursuant to Item 11(a)(1) of this form, check the following box. [ ] If
this Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering.___________ [ ] If delivery of the prospectus is
expected to be made pursuant to Rule 434, check the following box. [X]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Securities Amount to be Proposed Maximum Proposed Maximum Amount of
to be Registered Registered Offering Price Per Aggregate Offering Registration Fee
Unit(1) Price(1)
====================================================================================================================================
<S> <C> <C> <C> <C>
Convertible Adjustable Secured
Bonds due 2000 $3,450,000(2) 100% $3,450,000 $3,965.51
====================================================================================================================================
Common Stock, no par value,
issuable upon Conversion of
Convertible Adjustable
Secured Bonds(3) -- -- -- --
====================================================================================================================================
Representatives Warrants 100,000 $3.60 $360,000 $413.79
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Estimated solely for the purpose of computing the registration fee.
(2) Includes the Underwriters' over-allotment option to purchase $450,000
aggregate principal amount of CAS Bonds.
(3) Such indeterminate number of shares of ILX common stock as may be issuable
upon conversion of the CAS Bonds being registered hereunder. Such shares of
common stock will, if issued, be issued for no additional consideration and
therefor no registration fee is required.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<TABLE>
ILX INCORPORATED
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
Showing Location in the Prospectus
of Information Required by Items of Form S-2
<CAPTION>
Form S-2 Item Number and Caption Prospectus
-------------------------------- ----------
<S> <C>
1. Forepart of Registration Statement and Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus Outside Front Cover Page of the Prospectus
2. Inside Front and Outside Back Cover Pages Available Information; Incorporation of
of Prospectus Certain Documents by Reference; Table of
Contents
3. Summary Information, Risk Factors and Ratio Prospectus Summary; Risk Factors; Ratio of
of Earnings to Fixed Charges Earnings to Fixed Charges
4. Use of Proceeds Prospectus Summary; The Company -- The
Varsity Clubs Concept; Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Underwriting
9. Description of Securities to be Registered Description of ILX Securities and Pertinent
Arizona Statutes
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to the Registrant Available Information; Prospectus Summary;
Incorporation of Certain Documents by
Reference; Risk Factors
12. Incorporation of Certain Information by Available Information; Incorporation of
Reference Certain Documents by Reference
13. Disclosure of Commission Position on Disclosure of Commission Position
Indemnification for Securities Act Liabilities
</TABLE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED October 31, 1995
PROSPECTUS
ILX INCORPORATED
(formerly INTERNATIONAL LEISURE ENTERPRISES INCORPORATED)
$3,000,000
10% CONVERTIBLE ADJUSTABLE SECURED BONDS DUE 2000
(Denominated in $1,000 Increments)
ILX Incorporated, an Arizona corporation ("ILX"), is offering THREE
MILLION DOLLARS ($3,000,000) aggregate principal amount of Convertible
Adjustable Secured Bonds due _________, 2000 ("CAS Bonds") for sale at $1,000
per CAS Bond. See "Description of ILX Securities -- CAS Bonds." The CAS Bonds
will bear interest at the rate of 10% per annum. Interest on the CAS Bonds will
be payable on January 1 and July 1 in each year the CAS Bonds are outstanding.
The first interest payment on the CAS Bonds will be due and payable on January
1, 1996. Unless previously redeemed, the CAS Bonds will be convertible at the
following rates: (i) Commencing 30 calendar days after the closing of this
offering and continuing until the 29th calendar day after the second anniversary
of the closing of this offering, the CAS Bonds will be convertible into ILX
common stock at $2.50 per share; (ii) On the 30th calendar day after the second
anniversary of the closing of this offering, the conversion price will be
adjusted so that from that date until the 29th calendar day after the fourth
anniversary of the closing of this offering the CAS Bonds will be convertible
into ILX common stock at a price equal to: (a) 75% of the "Mark Price" of ILX's
common stock, where the "Mark Price" is defined as a price equal to the average
of the sale price (as defined in the Indenture) ("closing price") of ILX common
stock as of the close of business each day for the 30 calendar day period
beginning 30 calendar days before the second anniversary of the closing and
ending on and including the day before the second anniversary of the closing, or
(b) $2.50 per share, whichever is higher; (iii) The conversion price will again
be adjusted on the 30th calendar day after the fourth anniversary of the closing
of this offering so that from that date until maturity, the CAS Bonds will be
convertible into ILX common stock at a price equal to: (a) 75% of the "Mark
Price" of ILX common stock, where the "Mark Price" is defined as a price equal
to the average of the closing price of ILX common stock as of the close of
business each day for the 30 calendar day period beginning 30 calendar days
before the fourth anniversary of the closing and ending on and including the day
before the fourth anniversary of the closing, or (b) $2.50 per share, whichever
is higher.
The CAS Bonds are an outstanding debt obligation of ILX and, in terms
of preference, are junior to the Senior Indebtedness (as hereinafter defined).
Payment by the Company on the CAS Bonds is not permitted in the event of a
default on the Senior Indebtedness, regardless of the existence of the security
interest in the VCA Stock. In addition, the CAS Bonds are secured by all of the
issued and outstanding capital stock of Varsity Clubs of America Incorporated,
an Arizona corporation and a wholly owned subsidiary of ILX ("VCA"). ILX may
redeem the CAS Bonds, in whole or in part, at any time after ILX's common stock
has traded at a price in excess of $4.00 per share for a period of 20
consecutive trading days. The redemption price shall be 120% of the outstanding
principal amount of each CAS Bond.
As of June 30, 1995, the aggregate amount of outstanding Senior
Indebtedness was approximately $12.6 million. There is no limit on the amount of
Senior Indebtedness that ILX may incur. In addition, there is no restriction on
VCA's or its subsidiaries' ability to incur additional debt and to secure such
debt with a pledge or mortgage of all or a portion of VCA's or its subsidiaries'
assets. Incurrence of additional debts and/or encumbrance of the assets of VCA
or its subsidiaries may adversely affect the value of the VCA Stock offered as
security for the CAS Bonds. Further, any financial condition that might cause
ILX to default on the CAS Bonds might also result in a decrease in the value of
the VCA Stock securing the CAS Bonds thus reducing or eliminating any ability of
the VCA Stock to satisfy the obligations under the CAS Bonds. (See "Risk
Factors--Adequacy of Security for CAS Bonds May Not Be Adequate.") Recourse to
other assets of ILX is subject to the Senior Indebtedness and the terms of the
Indenture. (See "Description of ILX Securities and Pertinent Arizona Statutes --
Description of CAS Bonds -- Events of Default")
SEE "RISK FACTORS" FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT
IN ILX CAS BONDS INCLUDING UNLIMITED SENIOR INDEBTEDNESS, QUALIFIED SECURITY AND
DISCRETIONARY USE OF PROCEEDS. THESE ARE SPECULATIVE SECURITIES.
Until __, 199_, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE. THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED
ON OR ENDORSED THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
===============================================================================
Price to Underwriting Proceeds to Issuer or
Public Discounts(1) Other Persons(1)(2)
- --------------------------------------------------------------------------------
Per CAS Bond 100% 9% 91%
- --------------------------------------------------------------------------------
Total(3) $3,000,000 $270,000 $2,730,000
================================================================================
(1) Does not include additional compensation to Brookstreet Securities
Corporation in the form of a non- accountable expense allowance equal to 2% of
the gross proceeds of the offering. See "Underwriting."
(2) Before deduction of estimated expenses of approximately $251,634.50 payable
by ILX, including the 2% non-accountable expense allowance, of which $50,000 has
been paid to Brookstreet Securities Corporation. ILX has also agreed to grant to
Brookstreet Securities Corporation, for nominal consideration, warrants to
purchase 100,000 shares of ILX common stock at $3.60 per share. See
"Underwriting."
(3) ILX has granted the Underwriters an option, exercisable within 30 days of
the effective date hereof, to purchase up to an additional $450,000 principal
amount of CAS Bonds solely for the purpose of covering over-allotments, if any.
In the foregoing table, the amount shown assumes that the over-allotment option
will not be exercised. If the over-allotment option is exercised in full, the
price of the CAS Bonds to the public would be $3,450,000; the underwriting
discounts would be $310,500; and the proceeds to the Issuer or other persons
would be $3,139,500.
[BROOKSTREET LOGO]
AVAILABLE INFORMATION
ILX is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance with
the Exchange Act files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission by ILX can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at the regional
offices of the Commission located in Room 3190, Kluczynski Federal Building, 230
South Dearborn Street, Chicago, Illinois 60604, and at 7 World Trade Center, New
York, New York 10007. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
ILX's common stock is quoted on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") Small Cap Market System under the symbol
"ILEX." Reports, proxy statements and other information concerning ILX can be
inspected at the National Association of Securities Dealers, Report Section,
1735 "K" Street, N.W., Washington, D.C. 20006.
INCORPORATION BY REFERENCE
The following documents are hereby incorporated by reference: (i)
ILX's annual report on Form 10-K for the fiscal year ended December 31, 1994 as
amended on October 2, 1995, October 27, 1995 and October 31, 1995 ("ILX's
10-K"); (ii) ILX's first quarter Form 10-Q report (dated March 31, 1995) and
ILX's second quarter Form 10-Q report (dated June 30, 1995), which were filed
with the Commission on May 12, 1995, and July 28, 1995 as amended on October 2,
1995 ("ILX's 10-Qs"); (iii) ILX's Proxy Statement dated April 21, 1995, which
was filed with the Commission on April 28, 1995 as amended on October 2, 1995
("ILX's Proxy Statement"); and (iv) the Registration Statement on form S-2 filed
with the Commission on August 1, 1995 and all amendments and exhibits thereto of
which this Prospectus is a part ("ILX's S-2 Registration Statement"). Copies of
ILX's 10-K, ILX's most recent 10-Q and ILX's Proxy Statement accompany this
Prospectus.
This Prospectus incorporates documents by reference which are not
presented herein or delivered herewith. Documents relating to ILX (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents or into this Prospectus) are
available, and will be provided without charge, to each person, including any
beneficial owner, to whom this Prospectus is delivered upon a written or oral
request to ILX Incorporated, Attention: Nancy J. Stone, 2777 East Camelback
Road, Phoenix, Arizona 85016, telephone number (602) 957-2777.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
No person is authorized to give any information or to make any
representation not contained in this Prospectus and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Prospectus does not constitute an offer to exchange or sell, or
a solicitation of an offer to exchange or purchase, the securities offered by
this Prospectus in any jurisdiction to or from any person to whom it is unlawful
to make such offer or solicitation in such jurisdiction. Neither the delivery of
this Prospectus nor any distribution of the securities to which this Prospectus
relates shall, under any circumstances, create any implication that there has
been no change in the affairs of ILX since the date of this Prospectus.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CAS
BONDS OR THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and financial statements appearing elsewhere in this Prospectus.
The Company
ILX is an Arizona corporation formed (as International Leisure Enterprises
Incorporated) in October, 1986 for the purpose of developing, operating,
financing and marketing interval ownership ("timeshare") interests in resort
properties, and engaging in other leisure-oriented business activities. ILX's
timeshare portfolio consists of interests in resorts located in Arizona,
Colorado, Florida, Indiana and Mexico.
ILX's wholly owned subsidiary, Varsity Clubs of America Incorporated
("VCA"), is an Arizona corporation formed to capitalize on a perceived market
niche in the hospitality industry: the potential demand for high quality
accommodations near prominent colleges and universities with nationally
recognized athletic programs. The first Varsity Clubs facility was completed in
August, 1995 and is located approximately 2.8 miles from the University of Notre
Dame in Indiana. The site for the second Varsity Clubs facility was acquired on
July 13, 1995 and is located in Tucson, Arizona, approximately 2.3 miles from
the University of Arizona. VCA initially has targeted a total of 15 sites for
development of Varsity Clubs facilities in the next five years, including the
Arizona and Indiana sites. All Varsity Clubs facilities will be operated as
hotels to the extent of their unused or unsold timeshare inventory. As of the
date of this offering, VCA or its wholly owned subsidiaries have obtained
options to acquire properties located in Auburn, Alabama (Auburn University);
Iowa City, Iowa (University of Iowa); Norman, Oklahoma (Oklahoma University);
and State College, Pennsylvania (Penn State University). Due to the existence of
larger and better financed competitors in the lodging industry, ILX's management
believes that VCA's ability to capitalize on this perceived market niche
depends, at least in part, upon the successful implementation of a reasonably
aggressive development strategy. Accordingly, ILX intends to advance all of the
net proceeds of this offering to VCA to finance a portion of the costs
associated with the acquisition and development of Varsity Clubs facilities in
strategic locations throughout the United States. ILX will require VCA to
reimburse from the proceeds of this offering advanced to VCA a portion of the
development costs incurred by ILX on behalf of VCA, which costs, as of June 30,
1995, totalled $3.1 million. The portion of the development costs that VCA will
pay ILX will be an amount equal to all of the offering proceeds received by VCA
in excess of $1.5 million. See "Use of Proceeds," "The Company -- The Varsity
Clubs Concept" and "Risk Factors -- VCA Repayment for Development Costs."
ILX's principal executive office is located at 2777 East Camelback Road,
Phoenix, Arizona 85016, and its telephone number is (602) 957-2777.
The Offering
CAS Bonds $3,000,000 aggregate principal amount of Convertible
Adjustable Secured Bonds due 2000 (the "CAS Bonds"). In
addition, the Underwriters have been granted an over-allotment
option for an additional $450,000 aggregate principal amount
of CAS Bonds. See "Description of ILX Securities -- CAS
Bonds."
Interest Rate 10% per annum, payable on January 1 and July 1 in each year
the CAS Bonds are outstanding, commencing on January 1, 1996.
Conversion Unless previously redeemed, the CAS Bonds will be convertible
into ILX common stock at the following rates: (i) Commencing
30 calendar days after the closing of this offering until the
29th calendar day after the second anniversary of the closing
of this offering, at the rate of $2.50 per share; (ii) On the
30th calendar day after the second anniversary of the closing
of this offering the conversion price will be adjusted so that
from that date until the 29th calendar day after the fourth
anniversary of the closing of this offering, the CAS Bonds
will be convertible into ILX common stock at a price equal to
(a) 75% of the "Mark Price" of ILX's common stock, where "Mark
Price" is defined as a price equal to an average of the
closing price of ILX common stock as of the close of business
each day for the 30 calendar day period beginning 30 calendar
days before the second anniversary of the closing and ending
on and including the day before the second anniversary of the
closing, or (b) $2.50 per share, whichever is higher; and
(iii) The conversion price will again be adjusted on the 30th
calendar day after the fourth anniversary of the closing of
this offering, so that from that date until maturity, the CAS
Bonds will be convertible into ILX common stock at a price
equal to (a) 75% of the "Mark Price" of ILX's common stock,
where "Mark Price" is defined as a price equal to an average
of the closing price of ILX common stock as of the close of
business each day for the 30 calendar day period beginning 30
calendar days before the fourth anniversary of the closing and
ending on and including the day before the fourth anniversary
of the closing, or (b) $2.50 per share, whichever is higher.
See "Description of ILX Securities -- CAS Bonds --
Conversion."
Redemption ILX may redeem the CAS Bonds, in whole or in part, any time
after ILX's common stock trades at a price in excess of $4.00
per share for a period of 20 consecutive trading days. The
redemption price shall be 120% of the outstanding principal
amount of each CAS Bond, together with interest accrued to the
date fixed for redemption. ILX is not required to make any
sinking fund payments prior to maturity of the CAS Bonds. See
"Description of ILX Securities -- CAS Bonds -- Redemption" and
"Risk Factor -- Lack of Sinking Fund; Substantial Final
Payment for the CAS Bonds." However, if ILX receives proceeds
from the key person life insurance policy maintained under the
Indenture, such proceeds must be used by ILX for payment of
the principal on the CAS Bonds, or used to redeem or otherwise
acquire the CAS Bonds at the discretion of ILX's Board of
Directors.
Security The CAS Bonds are an outstanding debt obligation of ILX and,
in terms of preference, are junior to the Senior Indebtedness.
In addition, the CAS Bonds are secured by a pledge of all of
the issued and outstanding capital stock of Varsity Clubs of
America Incorporated (the "VCA Stock"). As of June 30, 1995,
the aggregate amount of outstanding Senior Indebtedness was
approximately $12.6 million. See "Description of ILX
Securities -- CAS Bonds -- Secured Interest," "Risk Factors --
Adequacy of Security for CAS Bonds" and "Risk Factors -- VCA
Repayment for Development Costs."
Subordination The CAS Bonds are subordinated in right of payment to all
present and future "Senior Indebtedness" (as defined in this
Prospectus) incurred by ILX. The Indenture does not restrict
ILX or its subsidiaries from incurring additional Senior
Indebtedness. Incurrence of additional debts and/or
encumbrance of the assets of VCA or its subsidiaries may
adversely affect the value of the VCA Stock offered as
security for the CAS Bonds. See "Description of ILX Securities
-- CAS Bonds -- Senior Indebtedness," "Risk Factors --
Subordination" and "Risk Factors --No Limitation on Additional
Debt of VCA."
Use of Proceeds ILX intends to advance all of the proceeds from the sale of
the CAS Bonds to VCA primarily to finance the acquisition and
development of Varsity Clubs facilities throughout the United
States in sites located near prominent universities with
nationally recognized athletic programs. ILX will require VCA
to reimburse, from the proceeds of this offering advanced to
VCA, a portion of the development costs incurred by ILX on
behalf of VCA, which costs, as of June 30, 1995, totalled $3.1
million. The portion of the development costs that VCA will
pay to ILX will be an amount equal to all of the offering
proceeds received by VCA in excess of $1.5 million. See "Use
of Proceeds," "The Company -- The Varsity Clubs Concept" and
"Risk Factors -- VCA Repayment for Development Costs."
Trustee U.S. Trust Company of California, N.A. is the Trustee for the
CAS Bonds under the Indenture.
NASDAQ
Stock Symbol ILEX
<TABLE>
SELECTED FINANCIAL DATA
The following table presents selected historical financial data for ILX
derived from ILX's consolidated financial statements. The historical financial
data are qualified in their entirety by reference to, and should be read in
conjunction with, the financial statements and notes thereto of ILX, which are
incorporated by reference into this Prospectus.
<CAPTION>
6 Month 6 Month
Period Period
Year Ended December 31 Ended June 30 Ended June 30
- -----------------------------------------------------------------------------------------------------------------------------------
1990(1) 1991(1) 1992 1993(2) 1994 1994 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $2,352,734 $6,095,859 $18,856,660 $20,459,379 $29,950,669 $14,360,980 $14,933,267
Net income (1,602,093) (307,051) 1,325,874 2,076,231 2,148,287 1,525,865 1,047,187
(loss)
Income (loss) (0.28) (.04) .12 .18 .17 .12 .08
per common
equivalent
share
Pro-forma .15 .11 .07
income per
common
equivalent
share
Total Assets 5,528,943 15,026,975 15,748,315 24,906,969 28,403,404 24,199,753 34,974,078
Notes 2,550,758 5,557,229 4,865,107 5,408,898 6,882,445 4,152,060 12,188,174
Payable
Total 1,562,096 5,095,895 6,477,383 10,541,495 12,957,129 12,280,434 14,127,742
shareholders'
equity
- -----------------------------------------------------------------------------------------------------------------------------------
<FN>
1. ILX ceased consolidating the accounts of BIS-ILE on January 8, 1990, the
date BIS-ILE filed a petition for reorganization under Chapter 1 of the U.S.
Bankruptcy Code. ILX commenced consolidating the accounts of LAP, the
successor in interest to BIS-ILE, on September 11, 1991.
2. 1993 data includes the effects of the acquisition of Genesis effective
November 1, 1993.
3. Supplemental pro-forma income per common equivalent share has been
presented for the year ended December 31, 1994 and for the six month
periods ended June 30, 1995 and June 30, 1994 to disclose the pro-forma per
share amounts as if the bonds offered herein had been outstanding and had
been converted to common stock at $2.50 per share on January 1, 1994.
Although ILX will use approximately $900,000 of the net proceeds of the
offering to retire certain high interest indebtedness (see "Use of
Proceeds"), interest expense has not been reduced in such pro-forma amounts
for the periods to reflect such debt retirement nor other retirements that
could be made with the proceeds because ILX has not taken formal corporate
action to dedicate such proceeds to the retirement of such outstanding
indebtedness. Pro-forma income per common equivalent share excludes the
effect of ILX's and VCA's investment of the net proceeds.
[/FN]
</TABLE>
CAPITALIZATION
The following table sets forth the capitalization of ILX at June 30, 1995, and
as adjusted to give effect to the sale of CAS Bonds in this offering and use of
the net proceeds from the sale of the CAS Bonds. This table is qualified in its
entirety by reference to, and should be read in conjunction with, the financial
statements and notes thereto of ILX, which are incorporated by reference into
this Prospectus.
June 30, As
1995 Adjusted
-------- --------
Genesis Funds Certificates $ 1,445,094 $ 1,445,094
Notes Payable 10,554,438 10,554,438
Notes Payable to Affiliates 1,633,736 1,633,736
CAS Bonds 3,000,000
----------- -----------
Total Debt 13,633,268 16,633,268
----------- -----------
Minority Interests 2,877,803 2,877,803
----------- -----------
Shareholders' Equity
Preferred Stock 1,525,152 1,525,152
Common Stock 9,222,394 9,222,394
Additional Paid-in Capital 30,000 30,000
Retained Earnings 3,350,196 3,350,196
----------- -----------
Total Shareholders' Equity 14,127,742 14,127,742
----------- -----------
TOTAL CAPITALIZATION $30,638,183 $33,638,813
----------- -----------
RISK FACTORS
An investment in Convertible Adjustable Secured Bonds involves certain
risks. In addition to other information contained in or incorporated by
reference into this Prospectus, prospective purchasers carefully should consider
the following risk factors before purchasing CAS Bonds.
Development of Varsity Clubs Concept. ILX's management is aware of no
other timeshare concepts that are targeted toward VCA's identified market niche,
which is the development of high quality accommodations near prominent colleges
and universities with nationally recognized athletic programs. The hotel
industry is, however, quick to recognize and copy profitable lodging concepts.
There can be no assurance that VCA will be able to capitalize on this perceived
market niche, if and to the extent it exists, before other larger and better
financed competitors become aware of and exploit this opportunity.
New Concept; Uncertainty of Market Acceptance. ILX's management
believes that the Varsity Clubs concept is new and, as is typical in the case of
a new concept, the ultimate level of demand for and market acceptance of the
Varsity Clubs concept is uncertain. There can be no assurance that VCA will be
able to implement its business strategy or, if the strategy is implemented, that
it will be profitable. Failure of the Varsity Clubs concept could adversely
affect ILX's business and the value of ILX's securities, including the CAS
Bonds, the common stock into which the CAS Bonds are convertible and the VCA
Stock that is pledged as security for the CAS Bonds.
Allocation of Proceeds and Potential Acquisitions; Broad Management
Discretion. $1.5 million of the offering proceeds will be allocated for the
acquisition, development and marketing of Varsity Clubs facilities. See "Use of
Proceeds." Investors in this offering will not be able to direct the use of
these funds (or any other offering proceeds) or have any opportunity to review
any acquisition. Investors must therefore rely on ILX's management for directing
the expenditure of the offering proceeds. Further, there can be no assurance
that any such acquisition, development or marketing will prove successful.
VCA Repayment for Development Costs. ILX intends to advance all of the
net proceeds of this offering to VCA in the form of a capital contribution to
finance a portion of the costs associated with the acquisition and development
of Varsity Clubs facilities in strategic locations throughout the United States.
As of June 30, 1995, ILX had advanced $3.1 million to VCA to pay for VCA's
development costs. Upon making its contribution of the net proceeds of the
offering to VCA, ILX will require VCA to repay ILX an amount equal to all of the
offering proceeds received by VCA in excess of $1.5 million. By making the
repayment, VCA will be reducing its assets and thereby reducing the immediate
value of the VCA Stock by a commensurate amount. See "Use of Proceeds."
Subordination. The CAS Bonds are junior in right of payment to the
Senior Indebtedness. See "Description of ILX Securities -- CAS Bonds -- Senior
Indebtedness." There is no limit on the amount of Senior Indebtedness that ILX
or its subsidiaries may incur in the future, nor any limit on ILX's or its
subsidiaries' ability to grant security interests in any of its property, except
VCA's capital stock. Between January 1, and June 30, 1995, VCA incurred debt
totalling approximately $6.2 million. Of that debt, VCA borrowed approximately
$1,310,000 from ILX in connection with VCA's development of the Notre Dame
facility. Approximately $4.4 million of that debt was incurred under a loan
taken to fund the construction of the Notre Dame facility and is secured by a
deed of trust on that facility. In addition to the above, VCA has, since June
30, 1995, received a commitment for a construction loan in the amount of $6.0
million to fund the construction of, and provide working capital for, VCA's
Tucson, Arizona facility, and received a commitment for $20 million in timeshare
receivables financing for VCA's Tucson facility, although to date, VCA has not
drawn any funds under those loan commitments. Since June 30, 1995, ILX has: (1)
borrowed an additional $900,000 secured by certain timeshare receivables; (2)
through its wholly owned subsidiary, Genesis Investment Group, Inc., received a
commitment for a construction loan in the amount of $5 million to fund the
construction of improvements to the Hotel Syracuse facility in New York, and
received a commitment for timeshare receivables financing for the Hotel Syracuse
facility in the amount of $20 million, although to date, Genesis Investment
Group, Inc. has not drawn any funds under those loan commitments; and (3)
obtained a commitment for $10 million in timeshare receivables financing for
Kohl's Ranch Lodge, although to date, ILX has not drawn any funds under this
loan commitment.
No Limitation on Additional Debt of VCA. There is no restriction on
VCA's or its subsidiaries' ability to incur additional debt, and to secure such
debt or other obligation with a pledge, lien, mortgage or other encumbrance of
all or any portion of VCA's or its subsidiaries' assets. Incurrence of
additional debt and/or encumbrance of the assets of VCA or its subsidiaries may
adversely affect the value of the VCA Stock offered as security for the CAS
Bonds.
Security for CAS Bonds May Not be Adequate. The CAS Bonds are an
outstanding debt obligation of ILX and, in terms of preference, are junior to
the Senior Indebtedness. In addition, the CAS Bonds are secured by a first
priority lien against all of the issued and outstanding capital stock of VCA.
See "Description of ILX Securities and Pertinent Arizona Statutes -- Description
of CAS Bonds -- Secured Interest." If ILX fails to satisfy its obligations under
the CAS Bonds and it becomes necessary for the holders of the CAS Bonds ("CAS
Bondholders") to elect to foreclose their interest in the VCA Stock, there can
be no assurance that the proceeds received from such foreclosure will be
adequate to satisfy amounts due under CAS Bonds. If ILX encounters circumstances
that undermine its financial condition causing it to default on the CAS Bonds,
such a condition may likely be accompanied by circumstances that undermine VCA's
financial condition and, accordingly, the value of the VCA Stock. In addition,
the value of the VCA Stock may be reduced significantly if it is held other than
by ILX or if the then current value of the VCA Stock at the time of such
foreclosure has diminished.
Default on Senior Indebtedness Precludes Payment by the Company on CAS
Bonds. In the event of a default on any item of Senior Indebtedness, ILX is not
permitted to make payments on or in respect of the CAS Bonds. However, the
subordination (including upon the occurrence of an event of default on the
Senior Indebtedness) will not prevent the occurrence of an Event of Default
under the CAS Bonds. Further, such subordination will not interfere with the CAS
Bondholders' first priority lien against the VCA Stock or the rights of the CAS
Bondholders to receive payment as a result of the exercise of their rights as
to the VCA Stock.
Appraisal; Assumptions in Excess of Historic Performance; VCA Stock May
be Inadequate Security. Under the terms of the Trust Indenture Act, ILX sought
an appraisal of the VCA stock. Accordingly, for that purpose only, ILX engaged
The Mentor Group, an independent appraiser, unaffiliated with and previously
unknown to ILX, to prepare such an appraisal (the "Appraisal"). At The Mentor
Group's request, ILX management provided its internal financial projections of
income and cash flow and development objectives with respect to VCA facilities.
Based on ILX's internal financial projections for VCA, the appraiser then
prepared its own projections (attached to the Appraisal) of cash flows through
1999, including an estimated terminal value, all of which were discounted to
present value using a capitalization factor determined by the appraiser. The
appraiser projected growth of VCA's business based on ILX management's growth
projections to assume the addition of three VCA facilities each year, which is
substantially in excess of VCA's historic growth rate during its start-up phase.
Resulting cash flow projections also are substantially in excess of VCA's
historic performance. No assurance can be given that ILX or VCA will achieve the
results set forth in ILX's financial projections or in the Appraisal. If VCA
does not achieve the projected growth rates and resulting cash flows, VCA's
financial condition would be undermined, thereby undermining the value of the
VCA Stock securing the CAS Bonds. In addition, in preparing the financial
projections, ILX faced a potential conflict of interest: Over-statement of such
projections might benefit ILX in attracting investors, although only to the
extent investors would be convinced to rely on them, which ILX has not sought to
do. The appraised value of VCA Stock exceeds VCA's book value by more than $26
million. The description of the Appraisal is qualified in its entirety by
reference to the Appraisal and the exhibits attached thereto. See "Description
of ILX Securities and Pertinent Arizona Statutes -- Description of CAS Bonds --
Appraisal."
Lack of Sinking Fund; Substantial Final Payment for the CAS Bonds.
ILX's management anticipates that the holders of the CAS Bonds will elect to
convert their CAS Bonds into ILX common stock. Assuming, however, that the
holders of the CAS Bonds do not so elect, ILX is under no obligation to make any
sinking fund payments with respect to the CAS Bonds and the CAS Bonds are
redeemable only at ILX's option prior to their stated maturity. Thus, ILX will
be required to repay on maturity, up to $3,000,000 principal amount of the CAS
Bonds (or $3,450,000 if the Underwriters' over-allotment option is exercised in
full). If ILX does not have sufficient funds to pay such amount at maturity, it
will have to refinance the CAS Bonds at that time. There can be no assurance
that ILX will be able to obtain such refinancing. See "Description of ILX
Securities -- CAS Bonds."
No Public Market for the CAS Bonds. There is no existing market for the
CAS Bonds, nor will a public market exist upon completion of this offering. The
CAS Bonds will not qualify for listing on the NASDAQ system. ILX is under no
obligation to develop a public market for the CAS Bonds. Accordingly, purchasers
of the CAS Bonds must invest with the intent to hold the CAS Bonds for an
extended period of time. It is not expected that the CAS Bonds will be assigned
a rating by any of the nationally recognized statistical rating agencies. The
absence of such a rating may also limit any potential market for the CAS Bonds.
Uncertainty as to Trading Price. Even if a market for the CAS Bonds is
established, there can be no assurance as to the prices at which the CAS Bonds
will trade. To the extent there is any market for the CAS Bonds, whether the CAS
Bonds will be traded at prices that are higher or lower than their initial sale
price will depend on many factors including, among other things, prevailing
interest rates in the market for similar securities and the underlying value of
the ILX common stock. The holders of the CAS Bonds will bear the risk that an
increase in market interest rates or a decrease in the value of ILX common stock
may adversely affect the prices at which the CAS Bonds will trade, if they trade
at all.
Nature of Business; Business Plan. Resort development and sales to
owner-users, whether through condominium creation or interval ownership,
including timesharing or vacation club membership, present certain financial and
operational risks that should be considered by each prospective purchaser. These
risks include, but are not limited to, the following:
Unfavorable Publicity; Remarketing Difficulty. The timeshare
or interval ownership industry has been the subject of unfavorable
publicity, particularly with respect to difficulties faced by
purchasers in remarketing their timeshare interests. Negative publicity
might reduce sales and adversely affect the value of the CAS Bonds and
ILX's common stock into which the CAS Bonds are convertible.
Marketing Expenses High Compared to Sales Prices. The cost of
marketing timeshare interests is a high percentage of the selling price
of the timeshare interests. Although ILX has set the sales prices of
timeshare interests at levels that are believed to be sufficiently high
to cover such costs, there can be no assurance that the timeshare
interests of the projects currently involved or other timeshare
interests of any other given project will continue to be saleable at
such prices. Higher costs could reduce or eliminate profit margins.
Buyer Defaults. Generally, buyers of vacation ownership
interests present a greater risk of default than home mortgagors, even
if they meet credit qualification standards. Private mortgage insurance
or its equivalent is not readily available to cover defaults with
respect to buyers' purchases of vacation ownership interests. If a
buyer defaults, the costs ILX expended to make the associated sale are
not recoverable and such costs must be incurred again after the
timeshare interest has been returned to ILX's inventory for resale.
Unfavorable Publicity; Remarketing Difficulty. The timeshare
or interval ownership industry has been the subject of unfavorable
publicity, particularly with respect to difficulties faced by
purchasers in remarketing their timeshare interests. Negative publicity
might reduce sales and adversely affect the value of the CAS Bonds and
ILX's common stock into which the CAS Bonds are convertible.
Lack of Diverse Locations. The attractiveness of interval
ownership in resorts may be enhanced by the availability of exchange
networks allowing owners to "trade" the time they have purchased for
time at another resort. Several companies, including Resort
Condominiums International ("RCI") and Interval International ("II"),
provide broad-based exchange networks. ILX has qualified its Los
Abrigados Resort & Spa, Golden Eagle Resort, Kohl's Ranch Lodge and
Ventura Resort properties for participation in the RCI network, and has
qualified Varsity Clubs of America -- South Bend Chapter, Varsity Clubs
of America -- Tucson Chapter, and Costa Vida Vallarta Resort for
participation in the II network. Neither ILX's ability to qualify
additional properties nor the continued availability of such exchange
networks, however, can be assured. If ILX is unable to respond to
consumer demand for greater choices of locations, it may be at a
competitive disadvantage with companies that can offer such choices.
Potential Competition. Resort development and operation,
including condominiums and timesharing, is a highly competitive
industry. ILX anticipates that it will continue to face keen
competition in all aspects of its operations from organizations that
are larger, better financed and more experienced, such as the Walt
Disney Company, Hilton Hotels Corporation, Hyatt Hotels Corporation and
Marriott International Corporation. There can be no assurance that ILX
will be able to compete successfully with such companies.
Regulation. ILX's timeshare sales are subject to state
regulation by the states in which properties are located and states in which
timeshare interests are marketed or sold. ILX and its subsidiary companies
presently market and sell timeshare interests in Arizona, Colorado, Florida,
Illinois, Indiana, Iowa, Nevada and Pennsylvania. ILX anticipates that ILX and
its subsidiaries will apply for the right to conduct additional sales operations
in those states and in various other states throughout the United States. There
can be no assurance that each or any such state will grant, or continue to
grant, ILX the right to sell its timeshare interests in such states or that, if
such right to conduct sales operations is granted, it will be granted on terms
and conditions acceptable to ILX. Further, if agents or employees of ILX violate
such regulations or licensing requirements, such acts or ommissions might cause
the revocation or non-renewal of such licenses required for the sale by ILX and
its subsidiary companies of timeshare interests in such states. Under certain
conditions, timeshare interests may be considered "securities" under state or
federal law, with consequent time-consuming and expensive requirements for
registration of such interests, licensing of salespeople and compliance with
other regulations. There is no assurance that ILX's interval ownership plans can
be designed definitely to avoid regulation as "securities" under federal law or
the state law in the states where ILX desires to or does conduct sales or in
which its properties are located. If ILX's timeshare interests are deemed to be
securities, there can be no assurance that ILX will be able to comply with the
applicable state and federal securities requirements and if ILX's timeshare
interests are deemed to be securities, such a determination may create
liabilities or contigencies that may impact ILX's ability to perform its
obligations under the CAS Bonds.
Failure to Achieve Business Plan. Although ILX intends to
expand its marketing of timeshare interests and open additional sales
offices, no assurance can be given that ILX will be able to achieve
these objectives or that, if these objectives are achieved, ILX will be
profitable.
Potential Lack of Development Financing. ILX's ability to
expand its business to new resort projects, including the development
of additional Varsity Clubs facilities, will in large part depend upon
the availability of financing for the acquisition and development of
such projects. The proceeds of this offering will be sufficient to
cover only a small portion of the anticipated costs of VCA's facility
development plans. There can be no assurance that adequate additional
financing will continue to be available or that, if it is available, it
will be available on terms and conditions favorable to ILX.
Possibility of Downturn in General Economic Conditions. Any substantial
downturn in economic conditions or any significant increase in the cost of fuel
or transportation in general could significantly depress discretionary consumer
spending and, therefore, have a material adverse effect on ILX's sales of
vacation timeshare interests, including sales of timeshare interests in Varsity
Clubs facilities. In addition, the future unavailability of attractive financing
rates and favorable tax treatments (e.g. deductibility of interest payments for
"second homes," including interval ownership weeks) could adversely affect ILX's
business.
Potential Lack of Consumer Receivable Financing. A substantial majority
of ILX's timeshare sales are made on an installment basis. At such time as a
sale is made, ILX is required to pay commissions and other costs that exceed
ILX's cash-up-front receipts. Written arrangements presently exist for both the
sale and financing of consumer receivables created by such installment sales.
The financing is on a recourse basis and thus requires ILX to bear the risk of
consumer default. ILX's ability to sell interval ownership weeks will depend
upon the continued availability of consumer receivable financing. There can be
no assurance that such financing will continue to be available or that, if it is
available, it will be available on terms and conditions favorable to ILX. If
such financing becomes unavailable upon expiration of existing written
arrangements, ILX will have to rely upon other methods that could severely limit
ILX's ability to fund future operations.
Dividends. ILX has paid no cash dividends on its common or any series
of preferred stock and it does not contemplate paying cash dividends in the
foreseeable future. It is the present intention of ILX's management to retain
future earnings, if any, for use in ILX's business. Failure to pay dividends on
the Series C Stock will entitle the holders thereof to receive additional ILX
common stock upon conversion and the increased liquidation preference
attributable to the Cumulation Shares (see "Description of ILX Securities and
Pertinent Arizona Statutes -- Description of Series C Stock"); however,
dividends on the Series C Stock are not otherwise cumulative. Further, dividends
cannot be paid on Series C Stock unless mandatory sinking fund requirements are
met and dividends are paid with respect to ILX's Series A Stock. The Series B
Stock pays no dividends.
Arizona Anti-takeover Provisions. ILX does not have any provisions in
its Articles of Incorporation or Bylaws that directly prohibit the takeover or
change in control of ILX. However, Sections 10-1201 et seq. of the Arizona
Revised Statutes, as amended, restrict a security holder or acquiror from
affecting changes in control of corporations such as ILX or from exercising
voting rights without shareholder approval when shareholdings exceed certain
thresholds. See "Description of ILX Securities and Pertinent Arizona Statutes --
Anti-takeover Legislation and Anti-takeover Devices." Such statutory
restrictions may adversely hamper future transactions involving a change in
control or potential change in control of ILX or transactions with persons with
shareholdings over specified percentages, thereby depressing the price of ILX
common stock or the price of other ILX securities, including the CAS Bonds.
Further, such restrictions may adversely affect the ability of one or more
holders of ILX securities, including the CAS Bonds, to effect a change in
control of ILX.
Reliance on Key Personnel. ILX relies upon certain key management
employees, including its Chairman, Chief Executive Officer and President, Joseph
P. Martori, and the loss of any such individual could adversely affect ILX. ILX
believes that its future success will depend upon its ability to attract and
retain key personnel. There can be no assurance that ILX will be able to retain
key members of its current management team or that it will be able to attract
experienced personnel in the future. ILX currently does not have employment
agreements with such personnel. Pursuant to the Indenture and in order to reduce
the potential adverse affects on the value of the CAS Bonds in the event of the
death of Joseph P. Martori, ILX has purchased key man life insurance in the
amount of $5,000,000 on Joseph P. Martori for the benefit of the holders of the
CAS Bonds. See "Description of ILX Securities and Pertinent Arizona Statutes --
Description of CAS Bonds -- General."
Voting Control by Existing ILX Shareholders. ILX is required by Arizona
law to elect directors utilizing cumulative voting. By exercising his or her
right to vote cumulatively, a common shareholder would be able to elect a
percentage of directors corresponding to the percentage of the ILX common stock
held by such shareholder assuming the existence of a sufficient number of
directorships. ILX's Bylaws authorize a Board of no less than one nor more than
15 directors. ILX currently has eight directorships (seven of which are filled
and one of which is vacant). Consequently, a purchaser must hold 11.11% plus one
share of the ILX common stock to be able independently to elect a director.
Martori Enterprises Incorporated, an Arizona corporation ("MEI"), Joseph P.
Martori and Edward J. Martori, collectively, own or have the power to vote
approximately 49.3% of the outstanding ILX common stock, and thereby have the
power to elect at least 4 members of the 8 member Board of Directors and to
influence substantially ILX's business and affairs. If the interests of MEI,
Joseph P. Martori and Edward J. Martori, as shareholders, differ from the
interests of the holders of the CAS Bonds, the holders of the CAS Bonds may be
adversely affected by such control. Joseph P. Martori and Edward J. Martori also
are directors of ILX and Joseph P. Martori is Chairman of the Board, President
and Chief Executive Officer of ILX. Joseph P. Martori and Edward J. Martori also
are controlling shareholders of MEI. Accordingly, MEI, Joseph P. Martori and
Edward J. Martori are able to exert substantial influence over and in most cases
control essentially all of ILX's and VCA's business and affairs. In addition,
ILX's management believes that Alan R. Mishkin owns an amount of ILX's common
stock sufficient to elect at least one member of the Board of Directors.
Effect of Shares Eligible for Future Sale on Market Price of ILX
Securities. Certain ILX shareholders hold commercially significant amounts of
ILX common stock. Such stock is (i) freely tradeable, (ii) may become available
for resale in the open market pursuant to Rule 144 promulgated under the
Securities Act, or (iii) may become freely tradeable pursuant to a registration
of such shares. The sale of commercially significant amounts of ILX common stock
subsequent to this offering could adversely affect the prevailing market price
of the CAS Bonds, if any, and the ILX common stock into which the CAS Bonds are
convertible. Such sales also could impair ILX's ability to raise additional
capital through the sale of its securities. ILX filed a Form S-3 Registration
Statement on May 9, 1994 (supplemented on August 19, 1994), in order to register
on a "continuous basis" the stock of certain ILX shareholders. A total of
7,838,462 shares of ILX common stock were registered pursuant to the Form S-3
Registration Statement. Of these registered shares, ILX's management believes
that the selling shareholders are entitled, pursuant to the terms of the Form
S-3 Registration Statement, to sell publicly only 1,682,787 shares of ILX common
stock under the registration effected on that Form S-3 Registration Statement,
at least 700,000 shares of which have, to the best of ILX's management's
knowledge, already been sold by certain selling shareholders. In addition, three
of the selling shareholders, Joseph P. Martori, Edward J. Martori and Martori
Enterprises Incorporated, have entered into a contractual arrangement with
Brookstreet Securities Corporation that further restricts, for a period of two
years from the date of issuance of the CAS Bonds, their ability to sell ILX
common stock beneficially owned by them including stock registered pursuant to
the Form S-3 Registration Statement. See "Underwriting."
THE COMPANY
General.
ILX is an Arizona corporation formed in October, 1986 for the purpose
of developing, operating, financing and marketing interval ownership interests,
often referred to as "timeshare" interests, in resort properties and engaging in
other leisure-oriented business activities. ILX's principal executive offices
are located at 2777 East Camelback Road, Phoenix, Arizona 85016, telephone
number (602) 957-2777.
ILX sells timeshare interests in resorts located in Arizona, Colorado,
Florida, Indiana and Mexico. Generally, ILX either owns an 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. See "Risk Factors -- Nature of Business; Business Plan."
ILX owns an interest in the following resorts: Los Abrigados Resort &
Spa in Sedona, Arizona, Golden Eagle Resort in Estes Park, Colorado, Kohl's
Ranch Lodge in Gila County, Arizona, and Varsity Clubs of America -- South Bend
Chapter in Mishawaka, Indiana.
================================================================================
RESORT OWNERSHIP INTEREST
- --------------------------------------------------------------------------------
1. Los Abrigados Resort & Spa 78.5% Fee Simple
through Subsidiary*
- --------------------------------------------------------------------------------
2. Golden Eagle Resort 100% Fee Simple
- --------------------------------------------------------------------------------
3. Kohl's Ranch Lodge 100% Fee Simple
- --------------------------------------------------------------------------------
4. Varsity Clubs of America -- South 100% Fee Simple
Bend Chapter through Subsidiary
================================================================================
*The Los Abrigados Resort & Spa is owned by Los Abrigados
Limited Partnership ("LAP"). ILE Sedona Incorporated, a wholly
owned subsidiary of ILX, is the managing general partner of
LAP and owns 78.5% thereof.
The properties owned 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.
================================================================================
RESORT LOCATION
- --------------------------------------------------------------------------------
1. Ventura Resort Boca Raton, Florida
- --------------------------------------------------------------------------------
2. Costa Vida Vallarta Resort Puerto Vallarta,
Mexico
================================================================================
Except for the Costa Vida Vallarta Resort, described below, timeshare
purchasers acquire deed and title to an undivided fractional interest in a 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' defaults 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 purchasers 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.
With respect to those resort properties owned by ILX or its
subsidiaries (Los Abrigados Resort & Spa; Golden Eagle Resort; Kohl's Ranch
Lodge; and Varsity Clubs of America -- South Bend Chapter), 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
clear title to his or her timeshare interest.
ILX began marketing timeshare interests in the 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 June 30, 1995.
In 1986, ILX purchased, and in 1987 began operations at, the Golden
Eagle Resort, which is located in the town of Estes Park, Colorado, within three
miles of the Rocky Mountain National Park. The Golden Eagle Resort, including a
four-story wood-frame main lodge, is situated on approximately 4 acres of land
and is bounded generally by undeveloped forested mountainside land. The lodge
property contains 27 guest rooms, a restaurant, bar, library and outdoor
swimming pool, as well as two other free standing buildings containing 6 guest
rooms and support facilities. Space is available to construct additional suites
in the lodge and adjacent buildings. ILX also owns a residence in a duplex
adjacent to the property.
Marketing of timeshare interests in the Golden Eagle Resort began in
1987. ILX plans to offer a minimum of 1,785 timeshare weeks in the Golden Eagle
Resort. Arizona, Colorado and Indiana have authorized ILX to sell timeshare
interests in Golden Eagle Resort in those states. ILX had approximately 580
weeks available for sale in completed suites at June 30, 1995. The Golden Eagle
Resort is, as of June 30, 1995, encumbered by (i) a note and deed of trust in
the amount of $1,649,990, which is payable in monthly installments of interest
at the rate of 12% per annum and annual installments of principal in the amount
of $100,000, and matures in December, 1998, and (ii) a second deed of trust
securing repurchase obligations relating to borrowings against consumer notes
receivable in the principal amount of $525,000 and sales of consumer notes
receivable sold with recourse in the approximate amount of $1,023,000 at June
30, 1995.
In September, 1988 ILX acquired an ownership interest in the 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. See "The Company --
Other Wholly Owned Subsidiaries -- ILE Sedona Incorporated." The Los Abrigados
Resort & Spa is located on the northwest bank of Oak Creek in Sedona, Arizona,
approximately 110 miles northwest of Phoenix. The resort consists of a main
building, which houses the lobby and registration area, executive offices,
meeting space, a health spa and athletic club, food and beverage facilities and
support areas. The hotel contains 174 suites in 22 one and two story
free-standing structures. In addition, a two bedroom historic homesite that has
been renovated to include a spa and other luxury features is also on the
property and has been marketed by ILX. The resort has an outdoor swimming pool,
tennis courts and other recreational amenities and is situated on approximately
19 acres of land.
Marketing of timeshare interests in the Los Abrigados Resort & Spa
began in February, 1989. ILX, directly and through its wholly owned subsidiary,
ILE Sedona Incorporated, has served as managing general partner of BIS-ILE and
its successor, Los Abrigados Partners Limited Partnership, an Arizona limited
partnership ("LAP"), since inception. A total of 9,100 timeshare weeks may be
sold in Los Abrigados Resort & Spa. Arizona, Colorado, Indiana, Iowa and Nevada
have authorized ILX to sell timeshare interests in Los Abrigados Resort & Spa in
those states. At June 30, 1995, ILX had approximately 3,744 weeks available for
sale, and options to purchase 427 weeks had been extended to potential buyers.
Also, Genesis Investment Group, Inc., a wholly owned subsidiary of ILX, holds an
option to purchase 617 additional timeshare weeks in the Sedona Vacation Club at
Los Abrigados Resort & Spa, which timeshare weeks will be made available for
sale upon exercise of the option. See "The Company -- Other Wholly Owned
Subsidiaries -- Genesis Investment Group, Inc." The Los Abrigados Resort & Spa
is, as of June 30, 1995, encumbered by (i) a deed of trust, securing a note in
the amount of $1,125,000, which is payable in monthly installments of $80,000
principal and interest at the rate of prime plus 1.25% and matures in September,
1996, and (ii) two subordinate deeds of trust of equal priority securing
repurchase obligations relating to borrowings against consumer notes receivable
in the principal amount of approximately $326,000 and sales of consumer notes
receivable with recourse in the amount of approximately $16.2 million.
The Costa Vida Vallarta Resort is a beach front resort located in
Puerto Vallarta, Mexico. During 1993 and 1994, ILX 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 the Costa Vida Vallarta Resort in those states.
ILX had approximately 89 timeshare interests available for sale as of June 30,
1995.
On June 1, 1995, ILX acquired ownership of Kohl's Ranch Lodge ("Kohl's
Ranch"). Kohl's Ranch is a 10.5 acre property located 17 miles northeast of
Payson, Arizona. It is bordered on the eastern side by Tonto Creek and is
surrounded by Tonto National Forest. The main lodge of Kohl's Ranch contains 41
guest rooms and a variety of common area amenities. Kohl's Ranch also includes
eight 1- and 2-bedroom cabins along Tonto Creek, a triplex cabin with two
1-bedroom units and one efficiency unit, and a free standing building that
contains sales offices and food and beverage facilities.
On June 14, 1995, the Arizona Department of Real Estate approved ILX's
application to sell timeshare interests in Kohl's Ranch. Timeshare sales
commenced in July, 1995. As of June 30, 1995, ILX had 2,704 timeshare weeks
available for sale. In addition to the sale of timeshare interests, ILX intends
to continue operating Kohl's Ranch as a lodge-hotel. ILX has begun refurbishing
Kohl's Ranch and intends to maintain its authentic ranch atmosphere and decor.
ILX anticipates commencing construction of six new duplex cabins on the property
in the spring of 1996, thus adding twelve 2- bedroom cabins, for a total of 64
units and 3,328 timeshare weeks available for sale. Kohl's Ranch is, as of June
30, 1995, encumbered by (i) a first position note and deed of trust in the
amount of $929,250, which is payable in monthly installments of $3,000 principal
plus accrued interest through December 1995. On December 1, 1995, the then
remaining principal balance will be amortized over a thirty-six month period,
payable in equal installments of principal and interest through December 1998,
and (ii) a second position note and mortgage in the amount of $367,750, which is
payable, commencing June 1, 1996, in monthly installments of $7,500 principal
plus interest at the rate of 8% per annum, and matures on June 1, 2000.
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 timeshare weeks, the value received for the price and the
availability of a variety of destination locations. ILX employs approximately
450 people. ILX plans to continue exploring options for the development and
marketing of new resort facilities.
ILX will comply with the requirements of Rules 13e-4 and 14e-1 under
the Securities Exchange Act of 1934 and any other applicable securities laws in
connection with such provisions and any related offers by ILX.
The Varsity Clubs Concept
In 1988, ILX formed VCA to participate in a joint venture with a wholly
owned subsidiary of Coachman Incorporated, a publicly traded corporation. In
March, 1992 VCA acquired all of Coachman Incorporated's subsidiary's interest in
the Varsity Clubs joint venture, giving VCA 100% ownership of the venture.
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 ticketholders,
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. Each Varsity Clubs facility will operate as a hotel to the extent of
unsold or unused timeshare inventory. See "Risk Factors -- Development of
Varsity Clubs Concept" and "Risk Factors -- New Concept; Uncertainty of Market
Acceptance."
The prototype Varsity Clubs facility is an all-suite, 62 unit lodging
facility that features amenities such as The Stadium (a sports-theme atrium
lounge), a private Member's Lounge, exercise facilities, a swimming pool and
whirlpool spa, complete business services and other facilities popular with the
target market of likely purchasers. The prototype Varsity Clubs facility is
expandable to approximately 90 units, without the need to acquire additional
real property, and can be built in smaller configurations if warranted by a
particular market.
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. The Indiana facility is owned, to the full extent of unsold
timeshare interests, by VCA South Bend Incorporated, a wholly owned subsidiary
of VCA. VCA South Bend Incorporated is affiliated with Varsity Clubs of America
- -- South Bend Chapter, a not-for-profit corporation whose members are the
purchasers of timeshare interests in the Indiana facility. Indiana, Arizona,
Illinois, Florida and Pennsylvania have authorized VCA South Bend Incorporated
to sell timeshare interests in the Indiana facility in those states. The Indiana
Varsity Clubs facility is, as of June 30, 1995, encumbered by a first position
mortgage and note in the amount of $3,977,000 the principal of which is payable
through release fees and interest is payable monthly at the rate of 13%. The
note matures 36 months from the date of the final construction draw. The
property is further encumbered by borrowings of $812,000 against consumer notes
receivable at June 30, 1995. This encumbrance was repaid in September 1995
through proceeds from the sale of consumer notes receivable, which also are
secured by the property.
The site for the second Varsity Clubs facility was acquired in July,
1995 and is located in Tucson, Arizona, approximately 2.3 miles from the
University of Arizona. The Arizona property is owned by VCA Tucson Incorporated,
a wholly owned subsidiary of VCA. Construction of the Arizona facility is
expected to commence in the fall of 1995. In July, 1995, VCA Tucson Incorporated
received a written commitment for construction financing for the Arizona
facility in the amount of $6 million, which is expected to be sufficient to
build and furnish the property. In addition, the commitment includes up to $20
million in financing for eligible notes received from the sale of timeshare
interests in the Arizona facility.
VCA initially has targeted a total of 15 sites for development of
Varsity Clubs facilities in the next five years, including the Varsity Clubs
facility in Indiana and the proposed facility in Tucson, Arizona. As of the date
of this offering, VCA or its wholly owned subsidiaries have obtained options to
acquire properties located in Auburn, Alabama (Auburn University); Iowa City,
Iowa (University of Iowa); Norman, Oklahoma (Oklahoma University); and State
College, Pennsylvania (Penn State University). Due to the existence of larger
and better financed competitors in the lodging industry, ILX's management
believes that VCA's ability to capitalize on this perceived market niche
depends, in part, on the successful implementation of a reasonably aggressive
development strategy. Accordingly, $1.5 million of the proceeds of this offering
will be used to finance a small portion of the expansion costs associated with
the acquisition and development of Varsity Clubs facilities in strategic
locations throughout the United States. See "Use of Proceeds."
As of June 30, 1995, VCA had incurred development expenses of
approximately $6.47 million, $3.1 million of which have been advanced by ILX.
Such expenses include costs associated with the research and development of the
Varsity Clubs concept, the design and creation of the prototype Varsity Clubs
facility, the development of advertising and marketing materials, the
acquisition of real property in Mishawaka, Indiana and Tucson, Arizona, the
construction of the Varsity Clubs facility in Indiana, and the acquisition of
options to acquire real property in Auburn, Alabama; Iowa City, Iowa; Norman,
Oklahoma; and State College, Pennsylvania. A substantial portion of the proceeds
of this offering will be used to reimburse all or a portion of the development
costs incurred by ILX on behalf of VCA. See "Use of Proceeds."
Other Wholly Owned Subsidiaries of ILX
ILE Sedona Incorporated. In September, 1988, ILX acquired, through its
wholly owned subsidiary, ILE Sedona Incorporated ("ILES"), a 40% interest in
BIS-ILE, the owner in fee simple of the Los Abrigados Resort & Spa. During 1989,
ILX acquired additional interests that increased its ownership in BIS-ILE. On
January 8, 1990, BIS-ILE filed a petition for relief with the United States
Bankruptcy Court for the District of Arizona, under Chapter 11 of the Bankruptcy
Code. At that time, ILX owned 55.875% of BIS-ILE. Sales of vacation ownership
interests in Los Abrigados Resort & Spa had ceased on January 8, 1990, pending
completion of the Chapter 11 filing. During 1990, while BIS-ILE prepared its
plan of reorganization, and in anticipation of that plan, ILX increased its
interest in BIS-ILE to 89.999%. On August 26, 1991, the Bankruptcy Court
approved BIS-ILE's amended plan of reorganization and sales of vacation
ownership interests in Los Abrigados Resort & Spa resumed on September 20, 1991,
following the successful reorganization. On September 10, 1991, Los Abrigados
Partners Limited Partnership, an Arizona limited partnership ("LAP") became the
successor in interest to BIS-ILE. ILX, directly and through ILES, owns a total
of 78.5% of LAP, which now owns the Los Abrigados Resort & Spa. LAP's other
partners are Alan Mishkin (11.5%) and MEI (10%). ILES serves as LAP's managing
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 the Sedona Vacation Club. The management contract
between ILX and LAP will terminate in September, 1996, unless otherwise renewed
pursuant to the terms of the contract or unless sooner terminated by 90% of the
owners of timeshare interests in the Sedona Vacation Club. It is the opinion of
ILX's management that the management contract will be renewed on equal or more
favorable terms to ILX.
Red Rock Collection Incorporated. Red Rock Collection Incorporated, an
Arizona corporation ("Red Rock Collection"), 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. The Red Rock Collection corporate headquarters are located at
3840 North 16th Street, Phoenix, Arizona. This 8400 square foot building is
owned by Red Rock Collection and houses the executive offices, customer service,
accounting, warehouse and shipping operations.
Currently, Red Rock Collection products primarily are 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. Based upon Red Rock Collection's initial
success with this method, it has begun promoting the sales program to other
hoteliers and resort properties. Red Rock Collection intends to distribute and
market its products through salons, retail stores and spas. This distribution
system will target well trafficked locations that have stylists, aestheticians
and salespeople capable of promoting the Red Rock Collection product line.
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.
On February 2, 1993, ILX acquired, through a stock subscription
offering, 71.4% of the issued and outstanding common stock of Red Rock
Collection. ILX agreed to contribute (at prices mutually acceptable to ILX and
Red Rock Collection) $700,000 in goods and services at Los Abrigados Resort &
Spa in exchange for its Red Rock Collection stock. Effective February 11, 1994,
ILX acquired the remaining 28.6% of Red Rock Collection's issued and outstanding
common stock from Alan R. & Carol Mishkin and from MEI. In exchange for the Red
Rock Collection stock, ILX issued to the Mishkins and MEI each 61,500 shares of
restricted ILX common stock and each a promissory note in the principal amount
of $150,000, requiring the payment of 10% interest annually and due and payable
in 36 equal monthly installments of $4,840.08 commencing March 11, 1994 and
ending with a final payment on February 11, 1997.
Genesis Investment Group, Inc. Genesis Investment Group, Inc. is an
Arizona corporation, ("Genesis") and, as of November 1, 1993, a wholly owned
subsidiary of ILX. Genesis' business is the holding and liquidating of ownership
interests in real estate (both fee and liens), most of which is unimproved, and
the developing and selling of timeshare interests. In August, 1995, Syracuse
Project Incorporated, a wholly owned subsidiary of Genesis, became the general
partner of Orangemen Club Limited Partnership, a New York limited partnership.
The partnership will acquire three floors of a hotel from Hotel Syracuse, Inc.
The hotel is located within 2 miles of Syracuse University. The purpose of the
partnership is to renovate and sell timeshare interests in the portion of the
hotel owned by the partnership. The Genesis subsidiary owns an 80% interest in
the partnership.
ILX acquired Genesis through the merger of Genesis into ILX's wholly
owned subsidiary, ILE Acquisition Corporation, an Arizona corporation ("ILEAC"),
that was effective on November 1, 1993 (the "Merger"). Pursuant to the Merger,
holders of Genesis common stock received the right to receive five shares of ILX
common stock and three shares of Series C Stock for every ten shares of Genesis
common stock. (At the time of the Merger, the Genesis shareholders were entitled
to receive a maximum of 305,964 shares of the Series C Stock and 509,940 shares
of ILX common stock.) Since the Merger, Genesis has continued to liquidate its
real estate holdings and has acquired an option to purchase 667 timeshare
intervals in the Sedona Vacation Club at Los Abrigados Resort & Spa. Pursuant to
such option, Genesis acquired for resale 50 timeshare weeks in the Sedona
Vacation Club at Los Abrigados Resort & Spa, and Genesis intends to engage LAP
to market these timeshare interests.
Prior shareholders of Genesis, who held Genesis stock immediately
preceding the Merger (the "Genesis Shareholders") also received certain rights
(the "Recovery Rights") in certain proceeds of certain lawsuits (the "Lawsuits")
that had been filed by Genesis and two Genesis affiliates, (collectively, the
"Plaintiffs") prior to the Merger. The Lawsuits were filed to recover real
estate from four partnerships that had claimed that their interests in the real
estate were superior to the Plaintiffs' various interests in that real estate.
Genesis agreed that, following the Merger, it would act as agent for the Genesis
Shareholders solely to (i) pursue the Lawsuits in its reasonable discretion, and
(ii) collect and distribute the proceeds of the Recovery Rights, if any, to the
Genesis Shareholders.
Golden Eagle Resort, Inc. Golden Eagle Resort, Inc. was formed in 1987
to serve as the management company for the Golden Eagle Resort in Estes Park,
Colorado. The management contract between ILX and Golden Eagle Resort, Inc.
could terminate on May 31, 1997, unless otherwise renewed pursuant to the terms
of the contract or unless sooner terminated by 90% of the owners of timeshare
interests in the Golden Eagle Resort. It is the opinion of ILX's management that
the management contract will be renewed.
ILE Florida, Inc. ILE Florida, Inc. was formed in 1987 for the purpose
of holding 100% of the issued and outstanding stock of Southern Vacations, Inc.
Southern Vacations, Inc. owns timeshare interests in the Ventura Resort in Boca
Raton, Florida. At the present time, all timeshare interests in the Ventura
Resort are being marketed and sold by ILX in Arizona.
In addition to the above mentioned wholly owned subsidiaries, ILX also
owns three corporations, SHI Health Institute Incorporated, Golden Eagle Realty,
Inc., and Red Rock Worldwide Incorporated, none of which has any assets or
liabilities or is conducting any business at the present time.
Consulting Arrangements
Effective June, 1995, ILX entered into Consulting Agreements with
Investor Resource Services, Inc., a Florida corporation ("IRC"), and Universal
Solutions, Inc., a Colorado corporation ("Universal"), pursuant to which IRC and
Universal agreed to provide certain investor relations, broker relations and
public relations services. Concurrently, IRC and Universal entered into
Consulting Agreements with Martori Enterprises Incorporated ("MEI") under which
MEI, as the largest shareholder of ILX, agreed to make certain payments to IRC
and Universal for their services. Under the terms of the Agreements, each of IRC
and Universal receive from ILX a total of 50,000 shares of ILX common stock,
plus options to purchase an additional 200,000 shares of ILX common stock at
$1.25 per share and 50,000 shares at $1.625 per share. ILX has agreed that the
common stock received from ILX (including pursuant to the exercise of an option)
may be registered pursuant to the terms of the Consulting Agreements.
Additionally, MEI agreed to transfer to each of IRC and Universal 50,000 shares
of ILX common stock together with options to purchase 50,000 shares each at
$1.625 per share.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for ILX were as follows for the
respective periods indicated:
<TABLE>
<CAPTION>
======================================================================================================
Year Ended December 31 Six Months
Ended
- ------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1994(1) 1995 1995(1)
Pro Forma Pro Forma
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges 2.40 3.48 3.08 2.34 3.50 2.80
- ------------------------------------------------------------------------------------------------------
Coverage Deficiency
(in thousands) ($1,602) ($307)
======================================================================================================
(1) The pro forma ratios assume the CAS Bonds are outstanding during
the applicable periods and that the proceeds from issuance of the CAS
Bonds are not invested and do not earn a return.
</TABLE>
For the purpose of these ratios, earnings consist of income before
losses from joint ventures accounted for under the equity method. Fixed charges
consist of interest, the amortization of debt issuance costs and an estimated
interest factor in rentals. Earnings in the years ended December 31, 1994,
December 31, 1993 and December 31, 1992 were sufficient to cover the combined
fixed charges. Earnings for the years ended December 31, 1990 and December 31,
1991 were not sufficient to do so. The coverage deficiency for the years ended
December 31, 1990 and December 31, 1991 represents the excess of fixed charges
over earnings.
USE OF PROCEEDS
The net proceeds from the sale of the Convertible Adjustable Secured
Bonds offered hereby are estimated to be approximately $2,478,365.00
($2,878,865.00 if the Underwriters' over-allotment option is exercised) after
deduction of all estimated offering expenses.
ILX intends to advance all of the net proceeds of this offering to VCA
in the form of a capital contribution to finance a portion of the costs
associated with the acquisition and development of Varsity Clubs facilities in
strategic locations throughout the United States. See "The Company -- The
Varsity Clubs Concept." See "Risk Factors -- Allocation of Proceeds and
Potential Acquisitions; Broad Management Discretion."
ILX will require VCA immediately to reimburse, from the offering
proceeds contributed to VCA, a portion of the development costs incurred by ILX
on behalf of VCA, which costs, as of June 30, 1995, totalled $3.1 million. The
development costs include, but are not limited to, costs associated with the
research and development of the Varsity Clubs concept, the design and creation
of the prototype Varsity Clubs facility, the development of advertising and
marketing materials, the acquisition of real property in Mishawaka, Indiana and
Tucson, Arizona, the construction of the Varsity Clubs facility in Indiana, and
the acquisition of options to acquire real property in Auburn, Alabama (Auburn
University); Iowa City, Iowa (University of Iowa); Norman, Oklahoma (Oklahoma
University); and State College, Pennsylvania (Penn State University). The
portion of the development costs that VCA will pay to ILX will be an amount
equal to all of the offering proceeds received by VCA in excess of $1.5 million.
See "Risk Factors -- VCA Repayment for Development Costs."
ILX intends to utilize the reimbursement payment to repay existing,
high interest bearing indebtedness that bears interest at a rate of 13.5% per
annum and has a stated maturity date of July 31, 1998 (approximately $900,000).
The indebtedness was used to partially finance improvements to the Los Abrigados
Resort & Spa and the lending group includes certain affiliates of ILX (see
"Information About the Registrant"). Any remaining proceeds (approximately
$78,000 or, if the overallotment option is exercised, approximately $478,000)
will be used to provide working capital to ILX. See "Risk Factors -- VCA
Repayment for Development Costs."
VCA initially has targeted a total of 15 sites for development in the
next five years, including the six locations discussed above. VCA's management
estimates that the total development cost in present dollars for each Varsity
Clubs facility is approximately $6 million, including land acquisition, land
improvements, construction, and furniture, fixtures and equipment costs. VCA
also will incur additional costs associated with staffing each facility,
marketing the facilities to, and financing the purchase of timeshare interests
by, interested customers. The proceeds of this offering will be sufficient to
cover only a small portion of the anticipated costs of VCA's facility
development plans. Accordingly, significant amounts of additional capital will
be required to achieve VCA's facility development goal within the proposed
5-year period. Although VCA's management intends to seek traditional bank loans
and other financing to finance a majority of the above referenced costs, there
can be no assurance that such credit facilities will be available, or if
available, that VCA will qualify for such financing or that such financing will
be on terms acceptable to VCA. See "Risk Factors --Potential Lack of Development
Financing."
UNDERWRITING
The following is a summary of the principal terms of the Underwriting
Agreement among ILX and the underwriters named below (the "Underwriters"). The
form of the Underwriting Agreement is filed as an exhibit to the Registration
Statement, of which this Prospectus forms a part. This summary does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the Underwriting Agreement, including the definitions
therein of certain terms, which provisions and definitions are incorporated
herein by reference. Subject to the terms and conditions of the Underwriting
Agreement, ILX has agreed to sell to the Underwriters, for whom Brookstreet
Securities Corporation is acting as representative (in such capacity, the
"Representative"), and the Underwriters have agreed to purchase, on a firm
commitment basis, the principal amount of CAS Bonds set forth opposite their
names below:
Underwriters Amount of CAS Bonds
- --------------------------------------------------------------------------------
Brookstreet Securities Corporation....................................$1,000,000
Khadim Ali Shah Bukhari..................................................450,000
Maruso Securities Company Ltd. ..........................................450,000
Nuntius Hellenic Securities..............................................450,000
Joseph Charles & Associates, Inc. .......................................250,000
National Securities Corporation..........................................200,000
M.S. Farrell & Company, Inc. ............................................100,000
Capital West Securities, Inc. ...........................................100,000
Total........................................................$3,000,000
Under the terms of the Underwriting Agreement, ILX has agreed to sell
the CAS Bonds to the Underwriters for ninety-one percent (91%) of the principal
amount of the CAS Bonds.
ILX has granted to the Underwriters an option, exercisable during the
30 day period commencing on the date of this Prospectus, to purchase an
aggregate of up to an additional $450,000 principal amount of CAS Bonds, at a
price equal to ninety-one percent (91%) of the principal amount of the CAS
Bonds, for the sole purpose of covering over-allotments, if any. The
Underwriters may exercise such over-allotment option in whole or in part.
The Underwriters are responsible for paying all fees and expenses
incurred by them. ILX, however, has agreed to pay the Underwriters a
non-accountable expense allowance equal to two percent (2%) of the gross
proceeds received by ILX from the sale of the CAS Bonds (including from the sale
of any CAS Bonds sold as a result of the Underwriters' exercise of the
over-allotment option). ILX has advanced to the Representative, on a
non-refundable basis, $50,000 to be applied against the non-accountable expense
allowance.
ILX has agreed to indemnify the Underwriters, any controlling person of
an Underwriter, and other persons related to the Underwriters and identified in
the Underwriting Agreement, against certain liabilities, including liabilities
arising (i) under the Securities Act, (ii) out of any untrue statement of a
material fact contained in the Registration Statement, this Prospectus, any
amendments thereto, and certain other documents, or (iii) out of any omission of
a material fact required to be stated therein or necessary to make the
statements therein not misleading, unless the statement or omission is made in
reliance upon and in conformity with written information furnished to ILX by or
on behalf of the Underwriters for use in the document in which it was used.
In connection with this offering and as additional, nominal
consideration for the Underwriter's efforts in connection with the offering, ILX
has agreed to sell to the Representative (in its individual capacity and not as
representative of the Underwriters), for nominal consideration, warrants
("Representative Warrants") to purchase 100,000 shares of ILX common stock at
$3.60 per share, subject to adjustment upon the occurrence of certain events,
including stock splits and combinations, reclassifications, exchanges and
substitutions relating to ILX common stock. The Representative Warrants are
exercisable for a period of four years commencing one year from the date of the
closing of the offering. The Representative Warrants grant to the holders
thereof certain rights with respect to the registration under the Securities Act
of the securities issuable upon exercise of the Representative's Warrants.
By contractual arrangement with the Representative, Martori Enterprises
Incorporated, Edward J. Martori and Joseph P. Martori have agreed that, for a
period of two (2) years from the date of issuance of the CAS Bonds, they will
not sell more than twenty percent (20%) of the ILX common stock beneficially
owned by them without the consent of the Representative, which consent shall not
be unreasonably withheld. Such restriction shall not apply, however, to the sale
of ILX common stock pursuant to any options, contracts or other agreements or
understandings existing as of the date of the issuance of the CAS Bonds. See
"Risk Factors -- Effect of Shares Eligible for Future Sale on Market Price of
ILX Securities."
Application has been made for the approval of the CAS Bonds for listing
on NASDAQ under the symbol "ILEX.G." See "Risk Factors -- No Public Market for
the CAS Bonds," and "Risk Factors -- Uncertainty as to Trading Price."
DESCRIPTION OF ILX SECURITIES AND PERTINENT ARIZONA STATUTES
Description of CAS Bonds
General. The Convertible Adjustable Secured Bonds are to be issued
under an Indenture (the "Indenture"), dated as of ______________, 1995, between
ILX and U.S. Trust Company of California, N.A., as trustee (the "Trustee"). The
form of the Indenture and form of the CAS Bonds are filed as exhibits to the
Registration Statement of which this Prospectus is a part. The following
statements summarize certain provisions of the CAS Bonds and the Indenture. The
summary statements do not purport to be complete, and are subject and qualified
in their entirety by reference to all of the provisions of the Indenture and the
CAS Bonds, including the definitions therein of certain terms (generally
capitalized when used herein), which provisions and definitions are incorporated
herein by reference.
The CAS Bonds to be issued under the Indenture will be limited to
$3,450,000.00 aggregate principal amount (which amount includes the
Underwriters' over-allotment option to purchase $450,000.00 principal amount of
CAS Bonds). The CAS Bonds are an outstanding debt obligation of ILX and, in
terms of preference, are junior to the Senior Indebtedness. In addition, the CAS
Bonds are secured by a first priority lien against all the issued and
outstanding VCA Stock. See "The Company -- The Varsity Clubs Concept." ILX is
not required to establish a sinking fund for the retirement of principal (see
"Risk Factors -- Lack of Sinking Fund; Substantial Final Payment for the CAS
Bonds"); however, if ILX receives proceeds from the "key person" life insurance
policy maintained under the Indenture, such proceeds must be held by ILX in
trust, to the full extent of the principal amount of the CAS Bonds outstanding
plus any accrued and unpaid interest, for the payment of the principal on the
CAS Bonds or used to redeem or otherwise acquire the CAS Bonds at the discretion
of the Board of Directors. ILX may incur Senior Indebtedness (as defined in the
Indenture and described below) to which the CAS Bonds will be subordinated.
There is no limit on the amount of Senior Indebtedness that ILX or its
subsidiaries may incur. See "Risk Factors -- Subordination" and "Risk Factors --
No Limit on Additional Debt of VCA." The CAS Bonds will mature on
_______________, 2000. Each CAS Bond will bear interest from the closing date of
this offering (or the option closing date, with respect to the overallotment
option) at a rate of 10% per annum payable on January 1 and July 1 in each year
("Interest Payment Dates") commencing January 1, 1996. Such interest
installments will be paid to the person in whose name the CAS Bond is registered
on the Bond Register maintained under the Indenture at the close of business on
the Regular Record Date for such interest, which shall be December 15 and June
15 (whether or not a Business Day), as the case may be, next preceding such
Interest Payment Date. Principal and interest will be payable at the office or
agency to be maintained by the Trustee.
ILX will issue the CAS Bonds only in fully registered form, without
coupons, in denominations of $1,000. ILX will not assess a service charge for
any transfer or exchange of the CAS Bonds, but it may require payment of a sum
sufficient to cover the tax or governmental charge payable in connection
therewith. Holders may transfer the CAS Bonds by surrendering them for transfer
at the office of the Registrar, together with such written instrument of
transfer and evidence of compliance with applicable laws as ILX and the
Registrar may require. ILX has appointed the Trustee as the Registrar.
Conversion. Unless previously redeemed, each CAS Bond will be
convertible at any time after thirty (30) calendar days from the close of this
offering, at the option of the CAS Bondholder, into shares of ILX common stock
at the following conversion prices:
(i) Commencing 30 calendar days after the close of this offering and
continuing until the 29th calendar day after the second anniversary of
the closing of this offering, the CAS Bonds will be convertible into
ILX common stock at the price of $2.50 per share;
(ii) On the 30th calendar day after the second anniversary of the
closing of this offering, the conversion price shall be adjusted so
that from that date until the 29th calendar day after the fourth
anniversary of the closing of this offering, the CAS Bonds will be
convertible into ILX common stock at a price equal to: (a) seventy-five
percent (75%) of the "Mark Price" of ILX common stock, where the "Mark
Price" is defined as a price equal to an average of the closing price
of ILX common stock as of the close of business each day for the 30
calendar day period beginning 30 calendar days before the second
anniversary of the closing and ending on and including the day before
the second anniversary of the closing, (b) $2.50 per share, whichever
is higher;
(iii) On the 30th calendar day after the fourth anniversary of the
closing of this offering, the conversion price shall be adjusted so
that from that date until maturity, the CAS Bonds will be convertible
into ILX common stock at a price equal to: (a) seventy-five percent
(75%) of the "Mark Price" of ILX common stock, where the "Mark Price"
is defined as a price equal to an average of the closing price of ILX
common stock as of the close of business each day for the 30 calendar
day period beginning 30 calendar days before the fourth anniversary of
the closing and ending on and including the day before the fourth
anniversary of the closing, or (b) $2.50 per share, whichever is
higher.
On conversion, no adjustment for interest accrued on the CAS Bonds or
distributions on the ILX common stock will be made. ILX currently has reserved
1,380,000 shares of common stock for issuance upon conversion of CAS Bonds. The
number of shares of ILX common stock reserved for issuance may be adjusted upon
any adjustment in the conversion price.
The conversion price is further subject to adjustment in certain events
including: (i) the payment of dividends on common stock in shares of common
stock; and (ii) the subdivision or combination of common stock. With respect to
CAS Bonds called for redemption, conversion rights expire at the close of
business on the last business day prior to the Redemption Date. No fractional
shares will be issued upon conversion, but ILX will pay cash in lieu thereof at
the fraction of the conversion price that corresponds to the fractional share.
Redemption. The CAS Bonds will be subject to redemption at the option
of ILX, in whole or in part, from time to time, at any time after ILX's common
stock has traded at a price in excess of $4.00 per share (subject to adjustment
for subdivision, combination and other events) for a period of 20 consecutive
trading days, upon not less than 30 nor more than 60 days' notice mailed to the
holders thereof, at the Redemption Price of 120% of the outstanding principal
amount of each CAS Bond, together, in each case, with interest accrued to the
date fixed for redemption (subject to the right of a holder on the Regular
Record Date for an interest payment to receive such interest).
ILX may elect to redeem less than all of the CAS Bonds. If ILX elects
to redeem less than all of the CAS Bonds, the Trustee will select which CAS
Bonds to redeem, using such method as it shall deem fair and appropriate. Such
method may include the selection for redemption of portions (equal to $1,000 or
any multiple thereof) of the principal amount of any CAS Bond of a denomination
larger than $1,000.
Senior Indebtedness. The CAS Bonds are subordinated and junior in right
of payment to the Senior Indebtedness of ILX to the full extent set forth in the
Indenture. As of June 30, 1995, the aggregate amount of outstanding Senior
Indebtedness was approximately $12.6 million. There is no limit on the amount of
Senior Indebtedness that ILX may incur. See "Risk Factors -- Subordination."
During the continuance of any default in payment of Senior Indebtedness, no
payment may be made by ILX on or in respect of the CAS Bonds. In the event of
any dissolution, winding-up, liquidation, or reorganization of ILX (whether in
bankruptcy, insolvency, or receivership proceedings or upon an assignment for
the benefit of creditors or otherwise), and except to the extent of the rights
of the CAS Bondholders to exercise their rights in respect of the VCA Stock, the
holders of Senior Indebtedness then outstanding will be entitled to receive
payment in full of all such Senior Indebtedness before the holders of CAS Bonds
are entitled to receive any payment on account of the principal of, premium, if
any, or interest on the CAS Bonds. Such subordination will not prevent the
occurrence of an Event of Default under the Indenture or the CAS Bonds, and will
not, of itself, affect the rights of the CAS Bondholders to enforce their rights
with respect to the VCA Stock.
In the event of a default on the Senior Indebtedness, no payment may be
made by ILX on or in respect of the CAS Bonds. However, the existence of a
default in payment of Senior Indebtedness shall not prevent the existence of an
Event of Default on or in respect of the CAS Bonds. In addition, the
subordination of the CAS Bonds does not affect the rights of the CAS Bondholders
(including upon the occurrence of an event of default on the Senior
Indebtedness) to enforce their first priority rights with respect to the VCA
Stock, including the rights to foreclose or take other action against the VCA
Stock upon the occurrence of an Event of Default. If the CAS Bondholders
successfully foreclose upon and aquire the VCA Stock, then the CAS Bondholders
as a group would have the rights of shareholders of VCA to control VCA's assets,
subject to VCA's organizational documents and the rights of VCA's creditors. See
"Risk Factors -- Effect of Default on Payments."
"Senior Indebtedness" is defined in the Indenture as "the principal of,
premium (if any) and interest on any and all Indebtedness of the Company (other
than the [CAS] Bonds) incurred in connection with (i) the borrowing of money
from or guaranteed to banks, trust companies, leasing companies, insurance
companies and other financial institutions, including all Indebtedness to such
institutions and other specialized industry lenders to the extent it is secured
by real estate and/or assets of the Company, evidenced by bonds, debentures,
mortgages, notes or other securities or other instruments, (ii) purchase money
Indebtedness incurred to or assumed from or on behalf of a seller in connection
with the acquisition of assets by the Company, (iii) the borrowing of money from
any source (including from Affiliates of the Company) for the purpose of
financing timeshare arrangements and secured by receivables or timeshare
interests generated from the sales of interval ownership interests by the
Company or any Subsidiary, or (iv) notes payable arising from the acquisition of
stock in [Red Rock Collection] and the acquisition of partnership interests in
[LAP], in each instance under (i), (ii) and (iii), to the extent such
Indebtedness is incurred, assumed or guaranteed by the Company before, at or
after the date of execution of this Indenture, and all renewals, extensions and
refundings thereof, unless in the instrument creating or evidencing any such
Indebtedness or pursuant to which such Indebtedness is outstanding, it is
provided that such Indebtedness, or such renewal, extension or refunding
thereof, is junior or is not superior in right of payment to the [CAS] Bonds."
Events of Default. The Indenture defines the following as "Events of
Default": (1) default in the payment of interest and the continuance of such
default for 30 days after becoming due; (2) failure to pay principal (or
premium, if any) when due at Maturity or upon redemption; (3) failure to
perform any other covenants for 60 days after written notice specifying the
default and allowing ILX to remedy such default; or (4) certain events of
bankruptcy, insolvency, or reorganization.
The Indenture provides that the Trustee shall, within 90 days after the
occurrence of an Event of Default, give the CAS Bondholders written notice of
all uncured defaults known to it. The term "default" means the above specified
events without grace periods; provided that, except in the case of default in
the payment of principal of (or premium, if any) or interest on any of the CAS
Bonds, the Trustee shall be protected in withholding such notice if and so long
as it in good faith, determines that the withholding of such notice is in the
interest of the CAS Bondholders. In the case of a default based on a breach of a
material covenant or warranty, notice shall not be given until 30 days after the
occurrence of such event of default.
If an Event of Default shall occur, and be continuing, either the
Trustee or the holders of at least a majority in aggregate principal amount of
outstanding CAS Bonds may accelerate the maturity of all such outstanding CAS
Bonds. Prior to acceleration of maturity of such CAS Bonds, the CAS Bondholders
of at least a majority in principal amount of outstanding CAS Bonds may waive
any past defaults under the Indenture, except for default in certain covenants
as provided in the Indenture, which require unanimous consent. The CAS
Bondholders of at least a majority in principal amount of outstanding CAS Bonds
may waive an Event of Default resulting in acceleration, and annul the
acceleration, of such CAS Bonds, but only if all the Events of Default have been
remedied and all payments (other than those due as a result of acceleration)
have been made.
Upon an Event of Default, and following the passage of any applicable
grace periods, the Trustee under the Indenture or the holders of a majority in
principal amount of the CAS Bonds outstanding, on behalf of all the holders of
the CAS Bonds, may institute proceedings and collect monies adjudged payable out
of the property of ILX, subject to the rights of holders of Senior Indebtedness.
Such proceedings may include (1) enforcing the rights of the CAS Bondholders as
against the VCA Stock (by the Trustee acting at the direction of a majority in
principal amount of the CAS Bonds), or (2) an action against other assets of
ILX, provided that the ability of the CAS Bondholders to recover directly from
ILX (including in the event the value of the security is insufficient to satisfy
the CAS Bonds) is subject to the rights of the holders of Senior Indebtedness.
Absent a security interest or interests granted by VCA as to specific assets of
VCA, holders of Senior Indebtedness of ILX may not reach the assets of VCA.
However, there is no limitation on VCA's ability to incur debt or encumber its
assets, including encumbrances of VCA's assets to secure Senior Indebtedness.
There does not currently exist any encumbrance on the VCA Stock that is
senior to the security interest of the CAS Bondholders. Without the consent of
the CAS Bondholders, ILX may not grant any security interest in the VCA Stock
senior to the security interest of the CAS Bondholders.
Upon an application by ILX to the Trustee to take any action under the
Indenture, ILX must deliver an officer's certificate and an opinion of counsel
regarding ILX's compliance with conditions precedent to the taking of the
requested action. In addition, annually ILX must deliver a certificate of
certain officers of ILX concerning their knowledge, if any, of any default, and
of ILX's compliance with the Indenture.
Modification, Waiver of Certain Covenants and Satisfaction of
Indenture. With certain exceptions that permit modifications of the Indenture by
ILX and the Trustee only, the Indenture, the rights and obligations of ILX and
the rights of CAS Bondholders may be modified by ILX with the consent of holders
of not less than a majority in aggregate principal amount of outstanding CAS
Bonds affected thereby; provided that ILX may make no such modification without
the consent of the holder of each CAS Bond affected thereby if such modification
would (1) impair or affect the rights of the CAS Bondholders to receive
principal (or premium, if any) and interest at the Stated Maturity, (2) impair
or affect the right to institute suit for the enforcement of any such payment on
or with respect to any such CAS Bond (except as to postponement of an interest
payment as provided below), or (3) modify the foregoing requirements. The
holders of not less than seventy-five percent (75%) in aggregate principal
amount of outstanding CAS Bonds may consent to a postponement of any interest
payment for a period not exceeding three years from its due date. No
supplemental indenture shall affect adversely the rights of the holders of
Senior Indebtedness without the consent of such holders.
The holders of a majority in aggregate principal amount of outstanding
CAS Bonds may waive ILX's compliance with certain restrictive provisions of the
Indenture.
The Indenture shall be satisfied and discharged when (i) either (a) all
authenticated and delivered CAS Bonds have been delivered to the Trustee for
cancellation; or (b) all CAS Bonds not delivered for cancellation are or will be
due and payable, or are to be called for redemption, within one year, and ILX
has deposited sufficient amounts with Trustee to pay the amounts due on the CAS
Bonds; (ii) ILX has paid all other sums payable by ILX under the Indenture; and
(iii) ILX has delivered a certificate of an officer of ILX and a opinion of
counsel stating that all conditions precedent to discharge have been completed.
Secured Interest. The CAS Bonds are an outstanding debt obligation of
ILX and, in terms of preference, are junior to the Senior Indebtedness. In
addition, the VCA Stock has been pledged to secure the obligations evidenced by
the CAS Bonds. The stock pledge represents a first priority lien against the VCA
Stock. If ILX fails to satisfy its obligations under the CAS Bonds and it
becomes necessary for the CAS Bondholders to elect to foreclose their interest
in the VCA Stock, there can be no assurance that the proceeds received from such
foreclosure will be adequate to satisfy amounts due under CAS Bonds. In
addition, the value of the VCA Stock may be reduced significantly if it is held
other than by ILX or if the then current value of the VCA Stock at the time of
such foreclosure has diminished. See "Risk Factors -- Security for CAS Bonds May
Not Be Adequate."
Appraisal. An appraisal concerning the value of the VCA Stock was
prepared by The Mentor Group, Inc., an independent appraisal and valuation firm
that is not affiliated with and was previously unknown to ILX. The Mentor Group
established a valuation for VCA of $26,300,000 (the "Appraisal"), an amount that
is substantially in excess of VCA's current book value as of June 30, 1995
totaling $44,425. The Appraisal was prepared to comply with the terms of the
Trust Indenture Act of 1939, which may require the Company to provide the
Trustee under the CAS Bonds with an appraisal setting forth the value of VCA to
ILX. The appraiser requested and was provided with ILX's internal financial
projections prepared for VCA for use in raising funds from third party
investors. The financial projections prepared by ILX's management were based on
assumptions regarding VCA that are believed by ILX's management to be
reasonable. Those assumptions were made based on management's combined
experience in the timeshare and hotel industries and assume availability of
financing necessary for growth. The assumptions include assessments of VCA's
future success rates in marketing timeshare interests in its facilities
(including that VCA would achieve sales of approximately 70% of the combined
timeshare inventory by the end of 1997 from the first three facilities
constructed on a timely basis), the likely prices at which such intervals would
be sold, room night rental prices (assuming occupancy rates of 73% to 78%)
averaging $78.00 to $80.00 per night, maintenance subsidies for timeshare
intervals of approximately $18.00 per day, cash flows from timeshare sales
payments based on downpayments of 30% and notes receivable of 70% of sales
prices, that the notes receivable may be financed to generate immediate cash
equal to 85% of their face values with receipt of the balance upon customers'
payment of their notes, and construction costs for the standard facility
averaging $6.0 million (with approximate amounts of $700,000 paid for land,
$300,000 for land improvements, $3.9 million for direct construction costs and
$1.1 million for furniture, fixtures and equipment). Based on ILX's internal
financial projections for VCA, the appraiser then prepared its own projections
(attached to the Appraisal) of cash flows through 1999, including an estimated
terminal value, all of which were discounted to present value using a
capitalization factor determined by the appraiser. The appraiser projected
growth of VCA's business based on ILX management's growth projections to assume
the addition of three VCA facilities each year, which is substantially in excess
of VCA's historic growth rate during its start-up phase. Resulting cash flow
projections also are substantially in excess of VCA's historic performance.
ILX's management believes such growth is reasonable assuming sale of the CAS
Bonds and ILX's continuing ability to secure construction and timeshare
financing for new facilities commensurate with its recent acquisition of
financing for VCA's Notre Dame facility and Tucson facility. See "Risk Factors
- -- Appraisal;" Assumptions in Excess of Historic Performance; VCA Stock May be
Inadequate Security." However, no assurance can be given that ILX or VCA will
achieve such projections or that ILX or VCA will achieve the projected results
even if such projections are met. If VCA does not achieve the projected growth
or cash flows, VCA's financial condition would be undermined, thereby underming
the value of the VCA Stock securing the CAS Bonds. The description of the
Appraisal is qualified in its entirety by reference to the Appraisal and the
exhibits attached thereto. A Statement of the Assumptions and Limiting
Conditions is set forth in the Appraisal. In particular, the Statement discloses
that, in preparing its analysis, The Mentor Group relied on certain of ILX's
financial statements, projections for VCA and related assumptions, and other
pertinent data. The Mentor Group accepted the information it received from ILX
without further verification (except as otherwise noted in the Appraisal) as a
reflection of ILX's and VCA's overall business operations and conditions. A
potential investor in the CAS Bonds should refer to the Statement attached to
the Appraisal, which is incorporated herein by reference.
The Trustee. U.S. Trust Company of California, N.A. will be the Trustee
under the Indenture. The Trustee need not take any action in the enforcement of
any remedy available to the Trustee if the Trustee does not have sufficient
indemnification against loss or expense.
Certain Covenants
Restrictions on Dividends. For such time as at least 50% of the
principal amount of the CAS Bonds remain outstanding ILX will not declare or pay
any cash dividends or dividends in kind on its shares of common stock other than
dividends payable solely in shares of ILX common stock.
Limitation on Liquidation. Neither the board of directors nor the
holders of common stock of ILX shall adopt a plan of liquidation that provides
for (i) the sale, lease, conveyance or other disposition of all of the assets of
ILX, other than substantially as an entirety, and (ii) the distribution of all
or substantially all of the proceeds of such transaction, and of the remaining
assets of ILX, to the holders of common stock or preferred stock unless ILX,
prior to making any liquidating distribution pursuant to such plan, makes
provision for the satisfaction of its obligations as to the payment of principal
and interest on the CAS Bonds.
Overhead Allocation Limitation. ILX shall maintain its annual
expenditures for general and administrative costs at an amount not to exceed 16%
of ILX's gross revenue.
Limitation on Change of Control. ILX shall not experience a change in
control, where "change in control" means (a) when any person, or any persons
acting together that would constitute a "group" for purposes of Section 13(d) of
the Securities Exchange Act of 1934 (other than a person or group including or
comprised of ILX, an entity in which Joseph P. Martori, Edward J. Martori or
Martori Enterprises Incorporated owns an interest (or any of them individually),
any subsidiary, any employee stock purchase plan, stock option plan or other
incentive plan or program, retirement plan or automatic dividend reinvestment
plan or any substantially similar plan of ILX or any subsidiary or any person
holding securities of ILX for or pursuant to the terms of any such plan,
together with any affiliates thereof), acquires beneficial ownership (as defined
in Rule 13d-3 under the Exchange Act) of at least a majority of all classes of
capital stock of ILX, or (b) all or substantially all of ILX's assets (defined
as greater than 75% of the fair market value of ILX's assets) are sold as an
entirety to any person or related group of persons in any one transaction or
series of related transactions.
A "change in control" does not violate the covenant if (i) the market
price of the common stock on the date of the change in control occurred is at
least 105% of the conversion price of the CAS Bonds in effect immediately
preceding the time of the change in control, or (ii) all of the consideration
(excluding cash payments for fractional shares) in the transaction giving rise
to the change in control to the holders of common stock consists of securities
that are, or are immediately upon issuance will be, listed on a national
exchange or quoted on a quotation system, and as a result of such transaction
the CAS Bonds become convertible into such security, or (iii) the consideration
in the transaction giving rise to the change in control to the holders of the
common stock consists of cash, securities that are, or immediately upon issuance
will be, listed on a national securities exchange or quoted on a quotation
system, or a combination of cash and such securities and the aggregate fair
value of such consideration is at least 105% of the conversion price of the CAS
Bonds in effect on the date immediately preceding such transaction, or (iv) the
CAS Bonds or the shares of common stock into which the CAS Bonds are convertible
are freely tradeable without restriction in time or quantity with respect to
sales of CAS Bonds or shares of common stock.
The Indenture offers limited or no protection to the CAS Bondholders in
the event of a leveraged buyout initiated by ILX, certain management of ILX, or
any of their affiliates, or by an entity in which they have an interest.
Limitation on Merger. ILX may not merge into or consolidate with any
other corporation in a transaction in which ILX is not the surviving corporation
unless: (i) the successor is a corporation organized under the laws of any
domestic jurisdiction; (ii) the successor corporation assumes ILX's obligations
on the CAS Bonds and under the Indenture; (iii) after giving effect to the
transaction, no default, and no event that, after notice of lapse of time, would
become a default, shall have occurred and be continuing; (iv) the successor
corporation must have a class of equity securities listed on a national exchange
or quotation system, and the CAS Bonds must be convertible into such securities;
and (v) ILX delivers to the Trustee appropriate opinions and certifications as
to compliance with conditions precedent under the Indenture.
Description of ILX Common Stock
Each share of ILX common stock entitles the holder thereof to one vote
in all matters submitted to a vote of ILX's shareholders, except that election
of directors shall be by cumulative voting to the extent and in the manner
provided by Arizona law. Cumulative voting requires that in any election for
board members, each share of stock is entitled to a total number of votes equal
to the total number of board members to be elected. Such votes may be cast for
one or more directors as the shareholder desires. No holder of ILX common stock
has any preemptive right to subscribe for or purchase additional shares of ILX's
stock. Holders of ILX common stock are entitled to share ratably in all
dividends not attributable to the Series A or Series C Stock that are declared
by the Board of Directors and in all assets available for distribution upon
liquidation after giving effect to the liquidation preferences of the Series A,
Series B and Series C Stock.
Description of Series A Stock
Pursuant to the plan of reorganization of BIS-ILE Associates dated
September 10, 1991 (see "The Company--Other Wholly Owned Subsidiaries--ILE
Sedona Incorporated), the unsecured trade creditors of BIS-ILE Associates agreed
to accept 82,540 shares of ILX's non-voting Series A Preferred Stock, $10.00 par
value ("Series A Stock"), in full satisfaction of a debt to such trade creditors
in the amount of $825,400. Accordingly, ILX authorized 110,000 shares of Series
A Stock, 66,795 shares of which remain issued and outstanding at June 30, 1995.
Beginning July 1, 1996, the Series A Stock is entitled to an annual dividend of
$.80 per share when and as declared by ILX's Board of Directors out of funds
legally available therefor. Dividends may not be paid on ILX common, Series B or
Series C Stock until the Series A Stock sinking fund requirements and dividends
payments are satisfied.
The Series A Stock has a liquidation preference of $10.00 per share
that is superior to the liquidation preferences of the Series B Stock and Series
C Stock and the liquidation rights on the ILX common stock. Prior to June 30,
1996, ILX may redeem the Series A Stock at a price of $10.00 per share.
Beginning January 1, 1993, ILX, through one of its affiliates, is required
quarterly to make provision for a dividend sinking fund in an amount equal to
$100 for each unrescinded timeshare sale in the Sedona Vacation Club at Los
Abrigados Resort & Spa made during the preceding calendar quarter, adjusted for
certain conversions of Series A Stock into Lodging Certificates, as described
below.
Before June 30, 1996, each holder of Series A Stock may exchange up to
$35,000 par value of Series A Stock for "Lodging Certificates" at the rate of
one Lodging Certificate for every fifteen shares of Series A Stock so exchanged.
Subject to certain conditions, a Lodging Certificate may be exchanged for one
night's stay at Los Abrigados Resort & Spa. Additionally, a holder of more than
one thousand shares of Series A Stock may exchange one thousand shares of Series
A Stock plus $2,100 for a timeshare membership in the Sedona Vacation Club at
Los Abrigados Resort & Spa in Sedona, Arizona. The foregoing discussion of the
Series A Stock is qualified in its entirety by reference to the Certificate of
Designation of the Series A Stock, a copy of which may be obtained from ILX.
Description of Series B Stock
Pursuant to the plan of reorganization of BIS-ILE Associates, ILX
authorized and issued 275,000 shares of non-voting Series B Convertible
Preferred Stock, $10.00 par value ("Series B Stock"), in full satisfaction of a
debt to B.I. Sedona, Inc., in the amount of $2,750,000, 55,000 shares of which
remain issued and outstanding at June 30, 1995.
The Series B Stock has a liquidation preference of $10.00 per share
that is junior to the liquidation preference of the Series A Stock but senior to
the liquidation preference of the Series C Stock and the liquidation rights on
the ILX common stock. Prior to June 30, 1996, ILX may redeem the Series B Stock
at a price of $10.00 per share. From and after July 1, 1996, each share of
Series B Stock may be converted into two shares of ILX common stock. The
conversion rate shall be adjusted for dividends paid in ILX common stock, stock
splits, reverse stock splits and stock reclassifications.
Prior to June 30, 1996, a holder of Series B Stock may exchange up to
$100,000 par value of Series B Stock for Lodging Certificates at the rate of one
Lodging Certificate for every fifteen shares of Series B Stock so exchanged.
Additionally, a holder of more than one thousand shares of Series B Stock may
exchange one thousand shares of Series B Stock plus $2,100 for a timeshare
membership in the Sedona Vacation Club at Los Abrigados Resort & Spa in Sedona,
Arizona. The foregoing discussion of the Series B Stock is qualified in its
entirety by reference to the Certificate of Designation for the Series B Stock,
a copy of which may be obtained from ILX.
Description of Series C Stock
In connection with the Merger of Genesis into ILX's wholly-owned
subsidiary, ILX authorized 309,000 shares of non-voting Series C Convertible
Preferred Stock, $10.00 par value ("Series C Stock"). ILX issued 305,652 shares
of Series C Stock, of which 291,261 shares remain issued and outstanding at June
30, 1995. The Series C Stock has been issued, along with certain shares of ILX
common stock, to former Genesis Shareholders in exchange for their Genesis
common stock.
The Series C Stock is entitled to receive dividends, when and as
declared by ILX's Board of Directors, out of any funds legally available
therefore at the rate of $.60 per share per annum (the "Dividend Preference"),
payable in preference and priority to any payment of any dividend on ILX common
stock but subordinate and subject to the dividend rights of the Series A Stock.
Except for Cumulation Shares (as hereafter defined) issuable on conversion or
liquidation of the Series C Stock, the right to Dividend Preference is not
cumulative. If, during any year prior to the fifth anniversary (November 1,
1998) of the effective date of the Merger between ILX's wholly owned subsidiary,
ILEAC, and Genesis (see "The Company - Other Wholly Owned Subsidiaries --
Genesis"), the Dividend Preference is not paid in full, the unpaid portion
thereof will accumulate through November 1, 1998 (the total amount of such
cumulation expressed in dollars is referred to herein as the "Dividend
Arrearage"). ILX is not required to pay the Dividend Preference in cash except
upon liquidation. "Cumulation Shares" means the total Dividend Arrearage (as of
the date of calculation thereof) owed to any holder of Series C Stock with
respect to all shares of Series C Stock owned of record by such holder divided
by $6.00. Partial fiscal years are to be equitably prorated. The Series C Stock
has a liquidation preference of $10.00 per share plus any Dividend Arrearage
allocable to such shares. Such liquidation preference is subordinate to the
liquidation preferences of ILX's Series A Stock and Series B Stock. The Series C
Stock may be redeemed by ILX at any time on or after November 1, 1996 at a price
of $10.00 per share plus payment of all declared but unpaid dividends. At the
option of the holder, shares of Series C Stock may be converted into shares of
ILX common stock after November 1, 1994 but prior to November 1, 2003 at a rate
of five shares of ILX common stock for every three shares of Series C Stock. A
holder of Series C Stock also shall convert the applicable Dividend Arrearage
with respect to such shares into ILX common stock at the rate of one share of
ILX common stock for every $6.00 of Dividend Arrearage. This summary of the
terms of the Series C Stock is qualified in its entirety by the Certificate of
Designation of the Series C Stock, a copy of which may be obtained from ILX.
Arizona Anti-takeover Legislation and Anti-takeover Devices
Arizona Revised Statutes Sections 10-1201 et seq. were adopted by the
Arizona legislature in an attempt to prevent corporate "greenmail" and to
restrict the ability to acquire domestic corporations. These statutes generally
apply to business combinations or control share acquisitions of "issuing public
corporations," which are defined as corporations having a class of equity
securities registered pursuant to Section 12 of the Exchange Act or subject to
Section 15(d) of the Exchange Act and either (i) incorporated under the laws of
Arizona or (ii) having a principal place of business or principal executive
office in Arizona, owning or controlling assets in Arizona that have a fair
market value of at least $1,000,000 and having more than 500 employees residing
in Arizona. ILX has securities registered pursuant to Section 12 of the Exchange
Act and is subject to Section 15(d) of the Exchange Act, and therefore is
subject to these statutes. These statutes could impede an acquisition of ILX and
its affiliates.
Arizona Revised Statutes Section 10-1204 limits the ability of a
corporation to repurchase stock from a beneficial owner of more than 5% of the
voting power of an issuing public corporation unless certain conditions are
satisfied. ARS Section 10-1205 limits the ability of the issuing public
corporation to enter into or amend any agreements containing provisions that
increase the current or future compensation of any officer or director of the
issuing public corporation during any tender offer or request or invitation for
tenders of any class or series of shares of the issuing public corporation
(other than an offer, request or invitation by the issuing public corporation).
ARS Section 10-1211 regulates control share acquisitions, defined as a direct or
indirect acquisition of beneficial ownership of shares of an issuing public
corporation that would, when added to all other shares of the issuing public
corporation beneficially owned by the acquiring person, entitle the acquiring
person immediately after the acquisition to exercise either (a) more than 20%
but less than 33-1/3% or (b) at least 33- 1/3% but less than 50% or (c) more
than 50% of the voting power. Among other things, control share acquisitions
exclude statutory mergers and acquisitions, and acquisitions pursuant to
security agreements. Within ten days after engaging in a control share
acquisition, the acquiring person must deliver to the issuing public corporation
an information statement setting forth the identity of the acquiring person and
all of its affiliates, the number and class of securities of the issuing public
corporation beneficially owned before, and to be acquired in, the control share
acquisition, and the terms of the control share acquisition. The shares acquired
in a control share acquisition have all the same voting rights as other shares
in elections for directors, but do not have the right to vote on other matters
unless approved by a resolution of shareholders of the issuing public
corporation other than the acquiring person and any officer or director. If the
shareholders vote not to accord voting rights to the shares acquired by the
acquiring person, the issuing public corporation may redeem the control shares
at their then current market price. Finally, in certain circumstances, ARS
Section 10-1221 prohibits an issuing public corporation or a subsidiary thereof
from engaging in a business combination with any interested shareholder of the
issuing public corporation or any affiliate or associate of the interested
shareholder for three years after the interested shareholder's share acquisition
date.
The constitutionality of these provisions of Arizona law has not been
tested under Arizona or federal law. No assurance can be given that such
statutes would withstand any such constitutional challenge. The existence of
these statutes may make ILX a less attractive merger or acquisition candidate.
Except as described above with respect to the statutory provisions of
the Arizona anti-takeover laws, ILX has not adopted any anti-takeover devices
with respect to its equity or debt securities, including the CAS Bonds. See
"Risk Factors -- Arizona Anti-takeover Provisions."
INFORMATION ABOUT THE REGISTRANT
Information regarding ILX is incorporated by reference from ILX's 10-K,
ILX's 10-Qs, ILX's Proxy Statement and ILX's S-2 Registration Statement. Copies
of ILX's 10-K, ILX's most recent 10-Q and ILX's Proxy Statement accompany this
Prospectus.
In late July, 1995, after ILX's second quarter Form 10-Q was filed
with the Securities and Exchange Commission, ILX borrowed $900,000 from Edward
J. Martori and the Cynthia J. Polich Irrevocable Trust, of which Joseph P.
Martori is trustee. The note bears interest at 13.5% and is secured by 320
timeshare weeks in the Sedona Vacation Club at Los Abrigados Resort & Spa. This
debt will be repaid from the proceeds of this offering. See "Use of Proceeds."
The Compamy received notice that a claim (No. 35095275) was filed
with the Equal Employment Opportunity Commission alleging discrimination based
on sex. The notice indicates that no action is required by the Company at the
present time.
SEC POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Articles 13 and 14 of ILX's Articles of Incorporation, under certain
circumstances, provide for the indemnification of ILX's officers and directors
against liabilities they may incur in such capacities. A summary of the
circumstances in which such indemnification is provided is contained herein, but
that description is qualified in its entirety by reference to Articles 13 and 14
of ILX's Articles of Incorporation.
In general, any director or officer of ILX is eligible to be
indemnified against all expenses, including attorneys' fees, judgments, fines,
punitive damages and amounts paid in settlement, that were incurred in
connection with a proceeding to which the director or officer was a party as a
result of his or her relationship with ILX, unless (1) the individual breached
his or her duty of loyalty to ILX, (2) the individual's acts or omissions are
not in good faith, (3) the individual engaged in intentional misconduct or
knowing violation of law, or (4) indemnification is expressly prohibited by
applicable law. In addition, ILX will not indemnify a director or officer for
any liability incurred in a proceeding initiated (or participated in as an
intervenor or amicus curiae) by the officer or director seeking indemnification
unless such initiation or participation is authorized by the affirmative vote of
a majority of the directors in office.
ILX shall advance funds to pay the expenses of any officer or director
involved in a proceeding provided ILX receives an undertaking that the
individual will repay the funds if it is ultimately determined that he or she is
not entitled to indemnification. The indemnification rights granted to ILX's
officers and directors are deemed to be a legally binding contract between ILX
and each such officer and director. Any repeal, amendment or modification of
Articles 13 or 14 of ILX's Articles of Incorporation shall be effective
prospectively and shall not affect any prior rights or obligations concerning
the indemnification of ILX's officers and directors.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
LEGAL MATTERS
Certain legal matters in connection with the authorization and issuance
of the CAS Bonds and the shares of ILX common stock issuable upon conversion
thereof will be passed upon for ILX by Colombo & Bonacci, P.C., Phoenix,
Arizona. Thelen, Marrin, Johnson & Bridges, Los Angeles, California, is acting
as counsel to the Underwriters in connection with certain legal matters relating
to the CAS Bonds offered hereby.
UNDERTAKINGS
Beginning after the closing of the offering, all investors will be
provided annually with financial statements of the issuing entity and its
subsidiaries, including a balance sheet and the related statements of income and
retained earnings and changes in financial position, accompanied by a report of
an independent public accountant stating that an audit of such financial
statements has been made in accordance with generally accepted accounting
principles, stating the opinion of the accountant with respect to the financial
statements and the accounting principles and practices reflected therein and
with respect to the consistency of the application of the accounting principles,
and identifying any matters to which the accountant takes exception and stating,
to the extent practicable, the effect of each such exception on such financial
statements.
ILX does not currently make loans to its affiliates. Further, all
future material affiliated transactions and loans with affiliates of ILX will be
made or entered into on terms that are no less favorable to ILX than those that
can be obtained from an unaffiliated third party, and any such transaction,
including any forgiveness of loans, shall be approved by a majority of the
directors who do not have an interest in the transaction.
EXHIBIT INDEX
The VCA Financial Statements are attached to this Prospectus as an
exhibit and made a part hereof.
VARSITY CLUBS OF AMERICA
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report........................................F-1
Consolidated Balance Sheets as of June 30, 1995 and December 31,
1994 and 1993.......................................................F-2
Consolidated Statements of Operations for the six months ended
June 30, 1995 and for the year ended December 31, 1994..............F-3
Consolidated Statements of Shareholder Equity for the years
ended December 31, 1991, 1992, 1993 and 1994........................F-4
Consolidated Statements of Cash Flows for the six months ended
June 30, 1995 and for the year ended December 31, 1994..............F-5
Notes to Consolidated Financial Statements..........................F-6
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Varsity Clubs of America Incorporated
Phoenix, Arizona
We have audited the accompanying balance sheets of Varsity Clubs of America
Incorporated (the "Company") as of December 31, 1994 and 1993, the statements of
operations and of cash flows for the year ended December 31, 1994, and the
statements of shareholders' equity for each of the three years in the period
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1994 and
1993, and the results of their operations and their cash flows for the year
ended December 31, 1994 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
July 26, 1995
<TABLE>
VARSITY CLUBS OF AMERICA INCORPORATED
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31, December 31,
1995 1994 1993
------ ------- --------
(Unaudited)
<S> <C> <C> <C>
Assets
Cash and cash equivalents (Note 6) $ -- $ 97,502 $ 15
Restricted cash (Note 1) 782,907 -- --
Notes receivable, net (Note 2) 1,734,106 251,679 26
Resort property under development
(Note 3) 5,993,060 1,735,592 --
Deferred assets (Note 4) 371,582 204,383 221,336
Property and equipment, net (Note 5) 92,106 60,266 --
Other assets 23,419 7,670 --
--------- ---------- ---------
$8,997,180 $2,357,092 $221,377
========= ========= ========
Liabilities and Shareholder Equity
Accounts payable $ 264,512 $ 67,817 $3,623
Accrued and other liabilities 696,599 92,161 --
Due to affiliates (Note 6) 3,098,995 1,788,294 203,866
Deferred income (Note 3) 103,973 365,195 --
Notes payable (Note 7) 4,788,676 400,784 --
--------- ---------- --------
8,952,755 2,714,251 207,489
--------- ---------- --------
Shareholder Equity
Common stock, no par value; 1,000,000
shares authorized; 1,000 issued
and outstanding 126,095 126,095 126,095
Deficit (81,670) (483,254) (112,207)
---------- ----------- ---------
44,425 (357,159) 13,888
---------- ----------- ---------
$8,997,180 $2,357,092 $221,377
========== =========== =========
See notes to consolidated financial statements
</TABLE>
<TABLE>
VARSITY CLUBS OF AMERICA INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Six months Year
ended June 30, ended December 31,
1995 1994
---- ----
(unaudited)
<S> <C> <C>
Revenues
Sales of timeshare interests $2,941,347 $ --
Commissions on timeshare interests sold 80,733 149,446
---------- -------
3,022,080 149,446
---------- -------
Cost of sales and operating expenses
Cost of timeshare interests sold 1,254,347 98,022
Advertising and promotion 718,929 525,184
General and administrative 25,773 29,205
Provision for doubtful accounts 176,452 --
--------- --------
2,175,501 652,411
--------- --------
Operating income (loss) 846,579 (502,965)
Other income (expense)
Interest expense (201,372) (115,447)
Interest income 24,100 --.
Income (loss) before income taxes 669,307 (618,412)
Income taxes (267,723) 247,365
---------- --------
Net income (loss) $ 401,584 $(371,047)
========== =========
See notes to consolidated financial statements
</TABLE>
<TABLE>
VARSITY CLUBS OF AMERICA INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDER EQUITY
<CAPTION>
Common Stock
--------------------
Shares Amount Deficit Total
------- ------- ------------ -------
<S> <C> <C> <C> <C>
Balances, December 31, 1991 1,000 $ 98,866 $(112,207) $(13,341)
Additional capital contribution --- 27,229 --- 27,229
-------- -------- ----------- ---------
Balances, December 31, 1992 and 1993 1,000 126,095 (112,207) 13,888
Net loss --- --- (371,047) (371,047)
--------- -------- --------- ---------
Balances, December 31, 1994 1,000 126,095 (483,254) (357,159)
Net income (unaudited) --- --- 401,584 401,584
--------- -------- ---------- -------
Balances, June 30, 1995 (unaudited) 1,000 $126,095 $ (81,670) $ 44,425
========= ======== ========== ========
See notes to consolidated financial statements
</TABLE>
<TABLE>
VARSITY CLUBS OF AMERICA INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
Six months ended Year ended
June 30, December 31,
1995 1994
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 401,584 $ (371,047)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Additions to notes receivable (1,658,879) (251,653)
Provision for doubtful accounts 176,452 --
Depreciation and amortization 6,918 1,035
Cost of timeshare interests sold 547,860 --
Change in assets and liabilities:
Additions to resort property under development (4,805,328) (1,735,592)
Increase in other assets (15,749) (7,670)
Increase in accounts payable 196,695 64,194
Increase in accrued and other liabilities 604,438 92,161
Increase (decrease) in deferred income (261,222) 365,195
----------- ---------
Net cash provided (used) by operating activities (4,807,231) (1,843,377)
--------- ---------
Cash flows from investing activities:
Additions to restricted cash (782,907) --
(Increase) decrease in deferred assets (167,199) 16,953
Purchases of plant and equipment (38,758) (61,301)
----------- -----------
Net cash used in investing activities (988,864) (44,348)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 4,387,892 400,784
Increase in due to affiliates 1,310,701 1,584,428
---------- ----------
Net cash provided by financing activities 5,698,593 1,985,212
---------- ---------
Net increase (decrease) in cash and cash equivalents (97,502) 97,487
Cash and cash equivalents at beginning of period 97,502 15
------ ----------
Cash and cash equivalents at end of period $ -- $ 97,502
========== =======
See notes to consolidated financial statements
</TABLE>
VARSITY CLUBS OF AMERICA INCORPORATED
Notes to Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Business Activities
The consolidated financial statements include the accounts of Varsity Clubs of
America Incorporated and its wholly-owned subsidiaries ("VCA" or the "Company").
All significant intercompany transactions and balances have been eliminated in
consolidation. VCA is a wholly owned subsidiary of ILX Incorporated ("ILX").
The Company's significant business activities include developing, operating,
marketing and financing ownership interests in quality lodging accommodations
near prominent colleges and universities.
There was no income statement activity in 1992 and 1993.
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
either released of, or has provided for, the delivery of all future obligations
for the timeshare interest. Revenue will be recognized by the percentage of
completion method as development and construction proceeds and as the costs of
development and profit can be reasonably estimated.
Income Taxes
VCA has an informal tax sharing agreement with ILX under which it receives a tax
benefit from ILX for tax losses included in the ILX tax return if such losses
can be utilized by ILX. Amounts will be payable by VCA to ILX when VCA taxable
income is included in the ILX tax return. This payable will be calculated based
upon taxes that VCA would owe on a stand alone basis. Deferred tax assets and
liabilities are recorded when there is a difference between the tax basis of
such accounts in the ILX consolidated tax returns and the financial statement
basis. At December 31, 1994, due to affiliates included a current tax receivable
of $165,969 and a deferred tax asset of $90,290.
Statements of Cash Flows
Cash equivalents are highly liquid investments with an original maturity of
three months or less. During the year ended December 31, 1994, the Company paid
interest of approximately $30,748, which was capitalized to resort property
under development.
Restricted Cash
Amounts of cash in escrow 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.
Note 2 - Notes Receivable
Notes receivable consist of the following:
December 31,
1994
----
Timeshare receivables $282,483
Allowance for possible credit losses (30,804)
--------
$251,679
========
Notes generated from the sale of timeshare interests bear interest at annual
rates ranging from 9% to 13.5% and have terms of five to seven years. In
addition, the Company offers 0% interest and below market interest, and one and
two year financing, to certain timeshare purchasers. These notes are discounted
to yield a consumer market rate. The notes are collateralized by deeds of trust
on the timeshare interests sold.
The Company has a $10 million financing commitment whereby the Company may sell
eligible notes received from sales of timeshare interests 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. This commitment was unused at December 31, 1994.
Note 3 - Resort Property Under Development
The Company intends to develop lodging accommodations in areas located near
major university campuses, and to market those lodging accommodations, including
interval ownership interests, to alumni and other sports enthusiasts. During
1994, the Company acquired its first site near the University of Notre Dame for
$690,655 and commenced construction. Acquisition and construction costs totaling
$1,735,592 are included in resort property under development at December 31,
1994. Revenues of $513,400, net of related selling costs of $148,205, have been
deferred at December 31, 1994, until construction is substantially complete.
The Company has a construction financing commitment for $5 million to complete
the Notre Dame facility, of which $400,784 has been drawn at December 31, 1994.
(Note 7)
Note 4 - Deferred Assets
Deferred assets consist of loan fees and land deposits on potential future
sites.
Note 5 - Property and Equipment
Property and equipment consists of the following:
December 31,
1994
----
Office equipment $15,564
Computer equipment 45,737
-------
61,301
Accumulated depreciation (1,035)
------
$60,266
=======
Note 6 - Due to Affiliates
The balances in due to affiliates represent advances from ILX and cash
overdrafts that will be covered by ILX. The advances bear interest at 13.5% and
are payable on demand, although no demand is anticipated until VCA has
sufficient working capital to commence repayment.
Note 7 - Notes Payable
Notes payable consists of a construction note payable, collateralized by a deed
of trust on the Varsity Clubs of America - Notre Dame facility in Mishawaka,
Indiana. The note bears interest at 13%, with interest payable monthly, release
fees of $2,180 per interval applied to the principal balance of the note, with
the balance due in full 36 months from the date of the final loan draw. This
note was issued pursuant to a commitment for $5 million. Under certain
circumstances the lender has the option to convert the repayment terms to a 60
month amortization.
Note 8 - Commitments
Future minimum lease payments on noncancelable operating leases are as follows:
Year ending
December 31,
------------
1995 $51,000
1996 26,000
1997 13,000
--------
$90,000
========
Total rent expense for the year ended December 31, 1994, was approximately
$63,000.
Note 9 - Subsequent Events
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. 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.
Note 10 - Unaudited Interim Period
Summary of Significant Accounting Policies
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 10Q 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 six month period 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.
Notes Payable
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 $812,097 against
consumer notes receivable. This amount was borrowed under the $10 million
committment and such notes will be sold to the lender when deeds are issued.
<PAGE>
================================================================================
No dealer, salesperson or any other $3,000,000
person has been authorized to give any
information or to make any
representation not contained in this
Prospectus in connection with the offer -----------
made hereby. If given or made, such
information or representation must not
be relied upon as having been authorized ILX INCORPORATED
by the Company. This Prospectus does not
constitute an offer to sell or
solicitation of an offer to purchase by 10% Convertible
any person in any jurisdiction in which Adjustable
such offer would be unlawful. Neither Secured Bonds
the delivery of this Prospectus nor any
sale made hereunder shall under any
circumstances create any implication Due 2000
that the information contained herein is
correct as of any time subsequent to the
date hereof. However, in the event of
any material change during the period
when this Prospectus must be delivered,
this Prospectus will be amended or
supplemented accordingly.
----------------------------------
TABLE OF CONTENTS
AVAILABLE INFORMATION...................1
CORPORATION BY REFERENCE................1
PROSPECTUS SUMMARY......................2
---------------
RISK FACTORS............................6
PROSPECTUS
THE COMPANY............... ............11
---------------
RATIO OF EARNINGS TO FIXED CHARGES ....18
USE OF PROCEEDS....................... 18
UNDERWRITING...........................19
DESCRIPTION OF ILX SECURITIES AND
PERTINENT ARIZONA STATUTES........... 21
BROOKSTREET SECURITIES
INFORMATION ABOUT THE REGISTRANT..... 29 2361 Campus Drive
Suite 210
SEC POSITION ON INDEMNIFICATION Irvine, California 92715
FOR SECURITIES ACT LIABILITIES....... 30 (714) 852-7905
LEGAL MATTERS........................ 30
UNDERTAKINGS......................... 30
EXHIBIT INDEX........................ 31
--------------------------------
================================================================================
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
SEC Registration Fee.............................................$4,379.30
NASD Fees........................................................$2,770.00
Representative Non-Accountable Expense Allowance................$60,000.00
Accounting Fees and Expenses....................................$50,000.00
Legal Fees and Expenses.........................................$50,000.00
Printing Expenses...............................................$20,000.00
Blue Sky Fees and Expenses......................................$35,985.00
Appraiser Fees...................................................$8,000.00
Trustee Fees....................................................$10,500.00
Miscellaneous...................................................$10,000.00
----------
Total..................................................$251,634.30
Item 15. Indemnity of the Officers and Directors and Commission Position on Such
Indemnity.
Articles 13 and 14 of ILX's Articles of Incorporation, under certain
circumstances, provide for the indemnification of ILX's officers and directors
against liabilities they may incur in such capacities. A summary of the
circumstances in which such indemnification is provided for is contained herein,
but that description is qualified in its entirety by reference to Articles 13
and 14 of ILX's Articles of Incorporation.
In general, any director or officer of ILX is eligible to be
indemnified against all expenses, including attorneys' fees, judgments, fines,
punitive damages and amounts paid in settlement, that were incurred in
connection with a proceeding to which the director or officer was a party as a
result of his or her relationship with ILX, unless (1) the individual breached
his or her duty of loyalty to ILX, (2) the individual's acts or omissions are
not in good faith, (3) the individual engaged in intentional misconduct or
knowing violation of law, or (4) indemnification is expressly prohibited by
applicable law. In addition, ILX will not indemnify a director or officer for
any liability incurred in a proceeding initiated (or participated in as an
intervenor or amicus curiae) by the officer or director seeking indemnification
unless such initiation or participation is authorized by the affirmative vote of
a majority of the directors in office.
ILX shall advance funds to pay the expenses of any officer or director
involved in a proceeding provided ILX receives an undertaking that the
individual will repay the funds if it is ultimately determined that he or she is
not entitled to indemnification. The indemnification rights granted to ILX's
officers and directors are deemed to be a legally binding contract between ILX
and each such officer and director. Any repeal, amendment or modification of
Articles 13 or 14 of ILX's Articles of Incorporation shall be effective
prospectively and shall not affect any prior rights or obligations concerning
the indemnification of ILX's officers and directors.
Item 16. Exhibits.
The Exhibits required by Item 601 of Regulation S-K have been supplied
as follows:
Exhibit Page
------- ----
(1) Form of Underwriting Agreement, Agreement
Among Underwriters, and Master Dealer Agreement *
(4) Form of Indenture between ILX and
U.S. Trust Company of California, N.A., as
Trustee (including the Form of CAS Bonds) *
(5) Opinion of Colombo & Bonacci, P.C. *
(10) Material Contracts *
(a) Consulting Agreement between ILX Incorporated
and Investor Resources Services, Inc. *
(b) Consulting Agreement between ILX Incorporated
and Universal Solutions, Inc. *
(11) Statement re Computation of Per Share Earnings *
(12) Statement re Computation of Ratios *
(13) Annual Report to Security-Holders on Form 10-K/A-3
and Form 10-Q/A **
(23) Consents of Experts and Counsel
(a) Consent of Colombo & Bonacci, P.C. *
(b) Consent of Deloitte & Touche LLP
(c) Consent of The Mentor Group, Incorporated *
(25) Statement of Eligibility of Trustee *
(99) Additional Exhibits
(a) Appraisal prepared by The Mentor Group, Inc.
concerning Valuation of VCA Stock *
* Previously Filed
**Form 10-Q/A Previously Filed
UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) deliver or cause to be delivered with the Prospectus, to each
person to whom the Prospectus is sent or given, the latest annual
report to security holders that is incorporated by reference in the
Prospectus and furnished pursuant to and meeting the requirements of
Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934;
and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the Prospectus, to
deliver, or cause to be delivered to each person to whom the Prospectus
is sent or given, the latest quarterly report that is specifically
incorporated by reference in the Prospectus to provide such interim
financial information.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or
persons controlling the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted form the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Phoenix,
State of Arizona, on October 31, 1995.
ILX INCORPORATED
By /s/ Joseph P. Martori
--------------------------------
Joseph P. Martori, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Joseph P. Martori President/Director 10-31-1995
- -------------------------
Joseph P. Martori
/s/ Nancy J. Stone Chief Financial Officer/ 10-31-1995
- -------------------------
Nancy J. Stone Director
/s/ Denise Janda Controller 10-31-1995
- -------------------------
Denise Janda
/s/ Ronald D. Nitzberg Director 10-31-1995
- -------------------------
Ronald D. Nitzberg
/s/ Edward J. Martori Director 10-31-1995
- -------------------------
Edward J. Martori
/s/ James W. Myers Director 10-31-1995
- -------------------------
James W. Myers
/s/ Steven R. Chanen Director 10-31-1995
- -------------------------
Steven R. Chanen
/s/ Luis C. Acosta Director 10-31-1995
- -------------------------
Luis C. Acosta
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-3
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934
(Fee Required)
For the fiscal year ended December 31, 1994
[ ] Transition Report Pursuant to Section 13 of 15(d) of the Securities Act of
1934 (No Fee Required)
For the transition period from to
---------------- -------------------
Commission File Number 33-16122
--------
ILX INCORPORATED
ARIZONA 86-0564171
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2777 East Camelback Road, Phoenix, AZ 85016
----------------------------------------------------------------
Registrant's telephone number, including area code (602)957-2777
-------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of Class on which registered
- -------------------------------- ----------------------
Common Stock, without par value Over the Counter
Preferred Stock, $10 par value
Securities registered pursuant to Section 12 (g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
stock, as of the latest practicable date.
Class Outstanding at February 28, 1995
- -------------------------------- --------------------------------
Common Stock, without par value 12,406,215 shares
Preferred Stock, $10 par value 420,728 shares
At February 28, 1995, the aggregate market value of Registrant's common shares
held by non-affiliates, based upon the closing bid price at which such stock was
sold as reported by the National Association of Securities Dealers, was
approximately $4.8 million.
Portions of Registrant's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on June 26, 1995 are incorporated in Parts II and III as
set forth in said Parts.
<PAGE>
ILX INCORPORATED
1994 Form 10-K/A-3 Annual Report
Table of Contents
Part I
Page
----
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for the Registrant's Common Equity and 9
Related Stockholder Matters
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on 14
Accounting and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial 21
Owners and Management
Item 13. Certain Relationships and Related Transactions 22
Part IV
Item 14. Exhibits, Financial Statement Schedules and 25
Reports on Form 8-K
PART I
Item 1. Business
ILX Incorporated ("ILX" or the "Company") is an Arizona corporation formed in
October, 1986 for the purpose of developing, operating, financing and marketing
interval ownership interests in resort properties and engaging in other
leisure-oriented business activities. In November 1993, the Company acquired
interests in unimproved real estate through its acquisition of Genesis
Investment Group, Inc. and during 1994, ILX expanded its operations to include
marketing of skin and hair care products.
Resorts. ILX sells timeshare interests in resorts located in Arizona,
Colorado, Florida, Indiana and Mexico. Generally, ILX either owns an 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 an interest in the following resorts: Los Abrigados in Sedona,
Arizona, Golden Eagle Resort in Estes Park, Colorado, and Varsity Clubs of
America -- South Bend Chapter in Mishawaka, Indiana. The properties owned 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.
Except for the Costa Vida Vallarta Resort, described below, timeshare
purchasers acquire deed and title to an undivided fractional interest in a 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.
Each of the above referenced resorts is affiliated with a
not-for-profit organization, the members of which are the purchasers 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.
With respect to those 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 clear title to his or her timeshare interest.
ILX began marketing timeshare interests in the 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 22 weeks available for sale at December 31, 1994.
In 1986, ILX purchased, and in 1987 began operations at, the 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 the Golden Eagle Resort. Arizona, Colorado and Indiana have
authorized ILX to sell timeshare interests in Golden Eagle Resort in those
states. ILX had approximately 702 weeks available for sale in completed suites
at December 31, 1994.
In September, 1988, ILX acquired an ownership interest in the Los
Abrigados resort 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. See ILE Sedona Incorporated below.
Marketing of timeshare interests in the Los Abrigados resort began in
February, 1989. ILX, directly and through its wholly owned subsidiary, ILE
Sedona Incorporated, has served as managing general partner of BIS-ILE and its
successor, Los Abrigados Partners Limited Partnership, an Arizona limited
partnership ("LAP"), since inception. A total of 9,100 timeshare weeks may be
sold in Los Abrigados. Arizona, Colorado, Indiana, Iowa and Nevada have
authorized ILX to sell timeshare interests in Los Abrigados in those states. At
December 31, 1994, ILX had approximately 4,158 weeks available for sale, and
options to purchase 344 weeks had been extended to potential buyers. Also,
Genesis Investment Group, Inc., a wholly owned subsidiary of ILX, holds an
option to purchase 667 additional timeshare weeks for $2,100 each in Los
Abrigados, which timeshare weeks will be made available for sale upon exercise
of the option.
The Costa Vida Vallarta Resort is a beach front resort located in
Puerto Vallarta, Mexico. During 1993 and 1994, ILX 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 the Costa Vida Vallarta Resort in those states.
ILX had approximately 85 timeshare interests available for sale as of December
31, 1994.
The Company markets timeshare interests in Los Abrigados, the Golden
Eagle Resort and the Costa Vida Vallarta Resort from its Sedona Sales Office
located at Los Abrigados and its Phoenix Sales Office located at the Company's
headquarters. There are several other timeshare resorts in Sedona and elsewhere
in Arizona which draw upon the same metropolitan Phoenix customers the Company
does for both its Sedona and Phoenix 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
("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 Varisty Clubs concept is a lodging alternative targeted to
appeal to university alumni, baseketball 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. Each Varsity Clubs facility will operate as a hotel to the extent of
unsold unused timeshare inventory.
During late 1994, ILX, through VCA, commenced construction of its first
Varsity Clubs of America in Mishawaka, Indiana, near the University of Notre
Dame. ILX is pre-selling ownership interests in the property, which is expected
to be complete in June 1995. 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. The Company intends to operate the resort as a commercial lodging
facility to the extent of unsold intervals. At December 31, 1994, contracts to
purchase approximately 274 nights had been accepted by VCA. To the Company's
knowledge, no other timeshare properties exist proximate to the University of
Notre Dame. In addition, the Company believes the hotel will compete favorably
for commercial guests because of its superior facilities and amenities relative
to other lodging accommodations in the area.
VCA intends to develop additional lodging accommodations near other
university campuses and to market the facilities, including interval ownership
interests, to alumni, sports enthusiasts, sponsors of major universities and
parents of students. VCA's current plans anticipate acquisition of two or three
additional sites and commencement of construction on each during 1995 and early
1996, with a target of 15 sites over the next 5 years. Due to the existence of
larger and better financed competitors in the lodging industry, ILX's management
believes that VCA's ability to capitalize on this perceived market niche
depends, in part, on the successful implementation of a reasonably aggressive
development strategy.
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
surrounding 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 development and marketing of new resort facilities.
ILE Sedona Incorporated. In September, 1988, ILX acquired, through its wholly
owned subsidiary, ILE Sedona Incorporated ("ILES"), a 40% interest in BIS-ILE,
the owner in fee simple Los Abrigados resort. During 1989, ILX acquired
additional interests that increased its ownership in BIS-ILE. On January 8,
1990, BIS-ILE filed a petition for relief with the United States Bankruptcy
Court for the District of Arizona, under Chapter 11 of the Bankruptcy Code. At
that time, ILX owned 55.875% of BIS-ILE. Sales of vacation ownership interests
in Los Abrigados had ceased on January 8, 1990, pending completion of the
Chapter 11 filing. During 1990, while BIS-ILE prepared its plan of
reorganization, and in anticipation of that plan, ILX increased its interest in
BIS-ILE to 89.999%. On August 26, 1991, the Bankruptcy Court approved BIS-ILE's
amended plan of reorganization and sales of vacation ownership interests in Los
Abrigados resumed on September 20, 1991, following the successful
reorganization. On September 10, 1991, Los Abrigados Partners Limited
Partnership, an Arizona limited partnership ("LAP") became the successor in
interest to BIS-ILE. ILX, directly and through ILES, owns a total of 78.5% of
LAP, which now owns Los Abrigados. ILES serves as LAP's managing 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 the Sedona Vacation Club.
Red Rock Collection. In July 1994, ILX, through its wholly owned
subsidiary, Red Rock Collection Incorporated ("RRC"), commenced sales of a
complete line of spa and salon formulated products for face, body, bath and hair
care. The products are produced by outside laboratories according to RRC's
specifications and raw materials are readily available. RRC is marketing its
products through network and direct marketing to consumers. RRC products are
used as in-room amenities in ILX's resort hotels and, commencing in 1995, are
being offered as marketing premiums to generate potential interval ownership
customers. In addition, RRC intends to enter the salon market in the second
quarter of 1995. RRC is also exploring opportunities to offer RRC formulated
amenities to outside resorts and hotels.
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. Pursuant to the terms of the merger, holders of Genesis
common stock received the right to receive five shares of ILX common stock and
three shares of ILX Series C Convertible Preferred stock for every ten shares of
Genesis common stock. (At the time of the merger, the Genesis shareholders were
entitled to receive a maximum of 305,964 shares of the ILX Series C Convertible
Preferred stock and 509,940 shares of ILX common stock.) Since the merger,
Genesis has continued to liquidate its real estate holdings and has acquired an
option to purchase 667 timeshare intervals in the Los Abrigados resort.
Other. ILX employs approximately 450 people.
Item 2. Properties
Los Abrigados Resort
Los Abrigados resort is located in Sedona, Arizona, approximately 110 miles
northwest of Phoenix. The resort consists of a main building which houses the
lobby and registration area, executive offices, meeting space, a health spa and
athletic club, food and beverage facilities and support areas. The hotel
contains 174 suites in 22 one and two story free-standing structures. In
addition, a two bedroom historic homesite which has been renovated to include a
spa and other luxury features is also located on the property and has been
marketed by the Company. The resort has an outdoor swimming pool, tennis courts
and other recreational amenities and is situated on approximately 19 acres of
land.
The Company offers membership interests to customers in the form of deed and
title which provide the right to occupy the resort for a designated amount of
time each year in perpetuity. A total of 9,100 interval ownership memberships
may be sold, of which approximately 4,158 were available for sale at December
31, 1994. One to two year options to purchase approximately 344 of these
available memberships have been extended to potential buyers on terms
substantially the same as those offered to current purchasers.
The Company holds fee simple title to the property, which is encumbered by a
first deed of trust securing loans in the principal amount of $1,660,000, and by
two subordinate deeds of trust of equal priority securing repurchase obligations
relating to borrowings against consumer notes receivable of approximately
$424,000 and sales of consumer notes receivable with recourse in the amount of
approximately $14.3 million at December 31, 1994.
Golden Eagle Resort
The Golden Eagle Resort, located within the corporate limits of the Town of
Estes Park, Colorado and within three miles of the Rocky Mountain National Park,
contains a resort lodge which overlooks the Estes Valley and is bounded
generally by undeveloped forested mountainside land. Approximately four acres of
land are owned along with a four-story wood-frame main lodge that was
constructed in 1914. The lodge property contains 27 guest rooms, a restaurant,
bar, library and outdoor swimming pool, as well as two other free standing
buildings containing six guest rooms and support facilities. Space is available
to construct eleven to fifteen additional suites in the lodge and adjacent
buildings and the Company also owns a residence in a duplex adjacent to the
property which may be marketed.
The Company offers deed and title interests which provide the right to occupy a
specific unit for a specific week each year in perpetuity and plans to offer a
minimum of approximately 1,785 such interval ownership weeks, exclusive of the
adjacent condominium. Approximately 702 interests in completed suites are
available for sale at December 31, 1994. The Company offers certain purchasers
of Golden Eagle interests the option to convert their ownership to other ILX
owned properties at a designated time for a pre-determined amount. Golden Eagle
interests received from converting owners are offered for resale.
The Company holds fee simple title to the property which is encumbered by a
first deed of trust securing a loan in the principal amount of $639,916 and by a
second deed of trust securing repurchase obligations relating to borrowings
against consumer notes receivable in the principal amount of $626,265 and sales
of consumer notes receivable sold with recourse in the approximate amount of
$943,000 at December 31, 1994.
Kohl's Ranch Lodge
On June 1, 1995, ILX acquired ownership of Kohl's Ranch Lodge ("Kohl's Ranch").
Kohl's Ranch is a 10.5 acre property located 17 miles northeast of Payson,
Arizona. It is bordered on the eastern side by Tonto Creek and is surrounded by
Tonto National Forest. The main lodge of Kohl's Ranch contains 41 guest rooms
and a variety of common area amentities. Kohl's Ranch also includes eight (8) 1-
and 2-bedroom cabins along Tonto Creek, a triplex cabin with two 1-bedroom
units and one efficiency unit, and a free standing building that contains sales
offices and food and beverage facilities.
On June 14, 1995, the Arizona Department of Real Estate approved ILX's
application to sell timeshare interests in Kohl's Ranch. Timeshare sales
commenced in July, 1995. As of June 30, 1995, ILX had 2,704 timeshare weeks
available for sale. In addition to the sale of timeshare interests, ILX intends
to continue operating Kohl's Ranch as a lodge-hotel. ILX has begun refurbishing
Kohl's Ranch and intends to maintain its authentic ranch atmosphere and decor.
ILX anticipates commencing construction of six new duplex cabins on the property
in the spring of 1996, thus adding twelve 2-bedroom cabins, for a total of 64
units and 3,328 timeshare weeks available for sale. The Company holds fee simple
title to the property which at June 30, 1995, is encumbered by a first position
note and deed of trust in the amount of $929,250 and a second position note and
mortgage in the amount of $367,750.
Interval Ownership Interests in Costa Vida and Ventura Resorts
At December 31, 1994, the Company owned and held for sale 22 interval ownership
interests in the Ventura Resort in Boca Raton, Florida, 115 interval ownership
interests in the Costa Vida Resort in Puerto Vallarta, Mexico, and 85 interval
ownership interests in other resort properties worldwide. These intervals are
owned free and clear by the Company at December 31, 1994.
Varsity Clubs of America - Notre Dame
Varsity Clubs of America - Notre Dame is under construction in Mishawaka,
Indiana at December 31, 1994. The resort is situated on approximately four acres
of land and will consist of a three story main building which houses 60 one and
two-bedroom suites, the lobby, gift shop, meeting space, member lounge, health
club, and food and beverage facilities and a separate one story building which
contains a three bedroom suite and a one bedroom suite.
The Company offers membership interests to customers in the form of deed and
title which provide the right to occupy the resort for a designated amount of
time each year in perpetuity. Memberships are offered in one day intervals.
Approximately 22,568 one day intervals will be offered for sale. Sales contracts
have been accepted in advance of completion for approximately 274 one day
intervals at December 31, 1994.
The Company holds the fee simple title to the property, which is encumbered by a
first mortgage securing construction financing in the amount of $400,784 at
December 31, 1994.
Varsity Clubs of America - Arizona
The site for the 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 the
fall of 1995. In July, 1995, the Company received a written commitment for
construction financing for the Arizona facility in the amount of $6 million,
which is expected to be sufficient to build and furnish the property. In
addition, the commitment includes up to $20 million in financing for eligible
notes received from the sale of timeshare interests in the Arizona facility. The
property is held in fee simple title and is encumbered by a first deed of trust
in the amount of $701,400 at July 31, 1995.
Red Rock Collection Building
The Company holds in fee simple title an 8400 square foot building in Phoenix,
Arizona which houses the Red Rock Collection office and warehouse facilities.
The building is encumbered by a deed of trust in the amount of $225,000 at
December 31, 1994.
Land
The Company owns various parcels of unimproved real estate in Arizona through
its wholly owned subsidiary Genesis and is presently marketing these properties.
At December 31, 1994, the real estate held for sale less encumbrances was
recorded at $1,673,168. It is the Company's intention to liquidate this land in
the next twelve to twenty four months.
Company Headquarters
The Company leases its corporate headquarters in Phoenix, Arizona under a five
year lease through April 30, 1998. The terms of the lease provide the Company
with the option to extend the lease for three additional one year periods and
with a right of first refusal to purchase the building. The landlord has the
right to cancel the lease upon one year notice and payment of a $20,000
cancellation fee in the event the building is sold. Such cancellation may not
occur prior to May 1, 1997.
Other
In the opinion of management, the Company's properties are adequately covered by
insurance.
Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is traded over-the-counter under the National
Association of Securities Dealers (NASD) trading symbol ILEX. The following
table sets forth the high and low bid and ask prices for the stock for each full
quarterly period during 1994 and 1993. The following over-the-counter market
quotations reflect inter-dealer prices, without retail markup, markdown or
commission and may not necessarily represent actual transactions.
Bid Ask
---------------- ---------------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
December 31, 1994 .................. 1.63 1.13 1.75 1.31
September 30, 1994 ................. 1.75 1.50 1.94 1.56
June 30, 1994 ...................... 2.00 1.13 2.13 1.31
March 31, 1994 ..................... 1.75 1.19 2.00 1.25
December 31, 1993 .................. 2.00 1.50 2.13 1.56
September 30, 1993 ................. 1.88 1.06 2.13 1.25
June 30, 1993 ...................... 1.50 .63 1.63 .81
March 31, 1993 ..................... 1.25 .50 1.38 .66
On February 28, 1995, the number of holders of the Company's common stock was
approximately 1300. No dividends have been declared by the Company since
inception and dividends are not anticipated in the foreseeable future.
<TABLE>
Item 6. Selected Financial Data
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------
1994 1993 (1) 1992 1991 1990
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenue ................................ $ 29,950,669 $ 20,459,379 $ 18,856,660 $ 6,095,859 $ 2,352,734
Net income (loss) ...................... 2,148,287 2,076,231 1,325,874 (307,051) (1,602,093)
Net income (loss) per
common and equivalent share ............ .17 .18 .12 (.04) (.28)
Total assets ........................... 28,403,404 24,906,969 15,748,315 15,026,975 5,528,943
Notes payable .......................... 6,882,445 5,408,898 4,865,107 5,577,229 2,550,758
Total shareholders'
equity ............................... 12,957,129 10,541,495 6,477,838 5,095,895 1,562,096
(1) The 1993 data includes the effects of the acquisition of Genesis effective November 1, 1993.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Fiscal Year 1992 to 1993
- ------------------------
Sales of timeshare interests of $12,263,619 in 1993 were 10.1% greater than
sales of $11,136,950 in 1992. The increase in sales from 1992 to 1993 reflects
an increased sales volume at both the Sedona Sales Office and the Phoenix Sales
Office. While sales prices for annual ownership interests increased slightly,
the average sales price declined in 1993 from 1992 due to the introduction in
1993 of a bi-annual ownership program which provides alternate year usage at Los
Abrigados and which sells for a lower price than annual usage. The ability to
offer the annual product as well as the lower priced bi-annual product has
increased closing rates (which are the number of sales divided by number of
tours) and therefore sales revenue in 1993.
Included in 1992 sales of timeshare interests is $971,900 from a bulk sale of
667 weekly intervals in Los Abrigados resort which occurred in 1992. Additional
revenue from this bulk sale was deferred until 1994, as further discussed in the
comparison of Fiscal Year 1993 to 1994.
1993 sales of land of $123,500 and the associated cost of land sold of $113,613
reflect sales of unimproved real property acquired in the November 1993 Genesis
acquisition.
Costs of timeshare interests sold of $4,911,976 in 1992 and $5,007,131 in 1993
have decreased as a percentage of sales of timeshare interests from 1992 to 1993
because of the introduction of bi-annual ownership interests. Bi-annual
interests sell for more than half of the price of annual interests and therefore
have a lower product cost as a percentage of selling price than annual
interests. Advertising and promotion expenses in 1993 of $3,168,562 and in 1992
of $2,900,258 were comparable as a percentage of revenue with 15.5% in 1993 and
15.4% in 1992.
The increase in resort operating revenue from $7,179,710 in 1992 to $8,072,260
in 1993 reflects largely an increase in average daily rate for resort guests at
Los Abrigados and increased usage of resort services. Traditional resort guest
occupancy levels were consistent between 1993 and 1992 in spite of increasing
usage of the property by tour guests and owners. Cost of resort operations as a
percentage of resort operating revenue decreased from 87.9% in 1992 to 86.2% in
1993 as fixed costs were spread over greater revenues.
General and administrative expenses of $1,339,962 in 1992 and $1,510,448 in 1993
are comparable as a percentage of total revenue, with 7.1% in 1992 and 7.4% in
1993.
The provision for doubtful accounts is provided primarily for sales of timeshare
interests. The provisions of $629,510 in 1992 and $666,690 in 1993 as a
percentage of sales are comparable, with 5.7% in 1992 and 5.4% in 1993.
The increase in interest income from $169,600 in 1992 to $359,908 in 1993
reflects increased consumer paper retained by the Company.
The decrease in interest expense from $643,023 in 1992 to $599,238 in 1993
reflects fluctuations in principal balances outstanding on notes payable and
differences in interest rates and terms among notes.
In 1993 and 1992 the income tax benefit of $100,000 each year resulted from
decreases in the valuation allowance as a result of the ability to utilize loss
carryforwards and built in losses arising principally from the Los Abrigados
resort, based on accelerated profitability of the property. The valuation
allowance had been established to reflect the uncertainty of the utilization of
deferred tax assets. In 1993, an additional deferred tax asset was recorded to
reflect the future tax benefit of the Genesis net operating loss carryforwards
and a valuation allowance was recorded to offset the full amount of the asset.
The increase in minority interests from $587,826 in 1992 to $814,520 in 1993
reflects the increased profitability of Los Abrigados Limited Partnership
("LAP"), the partnership which owns the Los Abrigados resort.
Fiscal Year 1993 to 1994
- ------------------------
Sales of timeshare interest of $18,713,970 in 1994 were 52.6% higher than sales
of $12,263,619 in 1993. The increase in sales from 1993 to 1994 reflects
improved closing rates in the Sedona Sales Office and, in the 3rd quarter of
1994, the expansion of the Sedona Sales Office to accommodate a greater number
of tours. In addition, sales from the Phoenix Sales Office increased following
the Company's assumption of this operation, as discussed below.
Included in 1994 sales of timeshare interests is $428,100 in revenue from a bulk
sale of 667 weekly intervals in Los Abrigados resort which occurred in 1992. The
1994 revenue had been deferred pending collection of the $900,000 note
receivable arising from the sale which was collected in March 1994.
Advertising and promotion as a percentage of sales increased from 15.5% in 1993
to 19.8% in 1994 due to the acquisition of the Phoenix Sales Office, net of
increased closing rates at the Sedona Sales Office. Effective January 31, 1994,
the Company acquired the assets of the organization which had performed the
sales and marketing for the Phoenix Sales Office and the Company assumed those
sales and marketing operations. Prior to that date, the Company paid a flat
percentage of sales to the outside organization which operated in facilities it
leased from the Company and that percentage of sales was included in cost of
timeshare interests sold. After the acquisition, the Company began recording the
costs of generating tours to and operations of the Phoenix Sales Office as
advertising and promotion expenses. Commissions and other compensation paid to
sales staff are recorded as costs of timeshare interests sold. The effect has
been an increase in advertising and promotion expense and a corresponding
decrease in cost of timeshare interests sold as a percentage of sales of
timeshare interests in 1994. Costs of timeshare interests sold as a percentage
of sales of timeshare interests have decreased from 40.8% in 1993 to 35.2% in
1994.
The increase in resort operating revenue from $8,072,260 in 1993 to $8,764,558
in 1994 reflects increased total resort occupancy and average daily rate from
resort guests, and increased utilization of food and beverage outlets. The
improvements in resort occupancy are a result of the increasing usage of the
resort by prospective timeshare purchasers and timeshare owners, net of the
decreasing availability of rooms for resort guests. The cost of resort
operations as a percentage of resort operating revenue has increased to 89.1% in
1994 from 86.3% in 1993 because prospective purchasers and timeshare owners (an
increasing portion of occupancy) pay substantially reduced rates for their room
usage and because the variable cost of providing food and beverage is greater as
a percentage of corresponding revenue than the variable cost as a percentage of
revenue of providing rooms to resort guests. Total occupancy is expected to
continue to increase consistent with sales to timeshare purchasers. Demand for
food, beverage, spa and other services is anticipated to increase
correspondingly. The Company has been modifying and expanding its food and
beverage outlets and further changes will be complete in the second quarter of
1995 to capitalize on the revenue opportunities available from owners, tours and
resort guests.
Sales of land and the associated cost of land sold reflect sales of unimproved
real property acquired in the November 1993 Genesis acquisition. 1993 sales of
$123,500 and the associated cost of sales of $113,618 reflect sales of
subdivided lots. 1994 sales of $2,237,166 and the associated cost of sales of
$1,796,974 represent sales of the remainder of the subdivided lots and the sale
of a large, unimproved parcel.
Sales of consumers products and the related cost of consumer products reflect
the commencement of Red Rock Collection sales in the third quarter of 1994.
Amortization of approximately $929,000 in deferred Red Rock Collection costs is
included in general and administrative expense in 1994.
General and administrative expenses increased as a percentage of revenue from
7.4% in 1993 to 10.7% in 1994 because of the amortization of deferred Red Rock
Collection costs described above and because of the recognition of other Red
Rock general and administrative costs. Excluding both Red Rock Collection
revenues and expenses, general and administrative expenses as a percentage of
revenue declined to 5.8% in 1994 from 7.4% in 1993.
The decrease in the 1994 doubtful accounts provision to 4.1% as compared to 5.4%
in 1993 as a percentage of sales of timeshare interests reflects collection
experience more favorable than expectations.
The increase in interest income from $359,908 in 1993 to $402,596 in 1994
reflects increased consumer paper retained by the Company.
The increase in interest expense fron $599,238 in 1993 to $661,141 in 1994
reflects greater balances outstanding on notes payable and differences in
interest rates and terms among notes.
Income tax benefits increased from $100,000 in 1993 to $161,799 in 1994. In both
1993 and 1994 tax benefits resulted from decreases in the valuation allowance as
a result of the ability to utilize loss carryforwards and built in losses
arising principally from the Los Abrigados resort. The valuation allowance had
been established to reflect the uncertainty of the utilization of the deferred
tax assets.
As previously discussed, in 1993 an additional tax asset was recorded to reflect
the future tax benefit ot the Genesis net operating loss carryforwards and a
valuation allowance was recorded to offset the full amount of the asset. This
valuation allowance was reduced in 1994 due to improvements in the Arizona real
estate market and the development of tax strategies from which management
concluded that a portion of the net operating loss carryforwards will more
likely than not be utilized.
The increase in minority interests from $814,520 in 1993 to $1,440,034 in 1994
reflects continued increased profitability of LAP net of a decrease in the
minority interest ownership of LAP effective July 1, 1994, of 7.5%. In addition,
1994 minority interests include approximately $236,000 in partnerships in which
the Company's Genesis subsidiary is a partner.
During the third quarter of 1994, the Company opened a sales office adjacent to
the site of its first Varsity Clubs of America near the University of Notre Dame
in Indiana. Construction commenced in the fourth quarter of 1994 and completion
is expected in June 1995. Sales and marketing expenses of approximately $283,000
for promoting sales of Varsity Clubs of America-Notre Dame have been expended
during 1994 and are included in advertising and promotion. Revenue generated by
these marketing effects, however, has been deferred pending substantial
completion of the facility. Deferred revenue of $513,000, net of associated
costs of sales of $148,000, is included in deferred revenue at December 31,
1994. The Notre Dame Sales Office also offers timeshare interests in the
Company's other resorts. Sales of intervals in other resorts of approximately
$319,000 are included in 1994 sales of timeshare interests.
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 $18 million in lines of credit issued by financing companies under which
conforming notes (notes that meet the credit criteria, term and interest rate
specified by the lender) from sales of interval interests in Los Abrigados and
the Golden Eagle Resort can be sold to lenders on a recourse basis. At December
31, 1994, approximately $12 million is available under the lines. 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 December 31, 1994.
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.
This commitment was unused at December 31, 1994.
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, both available for working capital. At
December 31, 1994, $150,000 was available on the lines.
In October 1994, the Company entered into financing arrangements to borrow $2
million from the first deed of trust holder on the Los Abrigados resort and
simultaneously repay the then outstanding $1,079,000 principal on the first deed
of trust. The net additional financing of $921,000 was utilized for expansion of
food and beverage facilities at Los Abrigados and to purchase the Class A
partners' minority interest in LAP held by non-affiliates. In conjunction with
the refinancing, the deed of trust holder had an appraisal performed by a Member
of the Appraisal Institute (MAI) of the property which valued the resort at
$18,800,000 at July 31, 1994. From the appraisal date through December 31, 1994,
664 timeshare intervals were sold.
During 1994, the Company acquired the land for Varsity Clubs of America - Notre
Dame for approximately $691,000 cash and secured $5 million in construction
financing to build and furnish the facility. Approximately $401,000 has been
drawn on the construction commitment at December 31, 1994. The Company believes
the $5 million in construction financing will be sufficient to complete the
facility.
The Company optioned additional Varsity Clubs of America sites during 1994 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.
In July 1994, the Company acquired for $10,000 an option through October 1, 1994
to purchase 15.37 acres of undeveloped property in Sedona, Arizona for $4.5
million. The option may be extended through July 1, 1995, for monthly payments
totaling $260,000, all of which may be applied to the purchase price. In
September 1994, the Company entered into a 50/50 joint venture agreement for the
project with a development company and assigned the option agreement to the
joint venture. During the option period, the joint venture intends to
investigate the feasibility of developing a resort and retail complex on the
site. The joint venture is currently negotiating a reduction in the monthly
option payment. The Company's investment in the joint venture at December 31,
1994, is approximately $40,000.
In March 1995, the Company borrowed an additional $1,010,000 from The Steele
Foundation, Inc., the first mortgage holder on the Golden Eagle Resort. The
Company intends to use 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 March 1995, the Company entered into an agreement, subject to a sixty day
right of cancellation, to acquire the Kohl's Ranch, a ten acre rustic resort
near Payson, Arizona for $1,650,000. The purchase price will consist of a
$50,000 cash down payment, assumption of the existing deed of trust of
approximately $950,000, seller financing of approximately $350,000, and the
issuance of 150,000 shares of ILX restricted common stock valued at $2 per
share. The Company intends to secure additional financing from the first deed of
trust holder for a portion of the cost of improvements and renovation and
intends to finance the balance of approximately $400,000 either through other
financing sources or from working capital. The Company plans to offer interval
ownership interests in the property.
Cash provided by operating activities increased from $1,723,454 in 1992 to
$2,307,986 in 1993 due to increased net income in 1993, because of greater
additions to resort property held for timeshare sales in 1993, because of
greater proceeds from sales of notes receivable in 1993 and because both the
income portion of a bulk sale and the deferred income portion were included in
net cash provided by operating activities in 1992. Cash provided by operating
activities increased from $2,307,986 in 1993 to $3,169,370 in 1994 due to
greater proceeds from sales of notes receivable, net of increased additions to
resort property under development for Varsity Clubs of America-Notre Dame.
Cash flows from investing activities changed from cash provided by investing
activities of $79,045 in 1992 to cash used in investing activities of $1,301,986
in 1993 due to greater investment in plant and equipment for the leasehold
improvements to the corporate headquarters in 1993 and due to the investment in
deferred Red Rock Collection costs in 1993. Cash used in investing activities of
$1,301,986 and $1,305,936 in 1994 are comparable but reflect the acquisition of
the minority interest in LAP in 1994 and greater increases in Red Rock
Collection deferred assets in 1993 than 1994.
The change from cash used in financing activities of $1,449,458 in 1992 to cash
provided by financing activities of $338,185 in 1993 is due to greater proceeds
from notes payable in 1993 and the issuance of minority interests in Red Rock
Collection in 1993. The change from cash provided by financing activities of
$338,185 in 1993 to cash used in financing activities of $287,954 in 1994
reflects greater principal payments on notes payable, net of increased
borrowings.
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 cashflow 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 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data required by Item 8
are set forth in Part IV, Item 14.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Certain information concerning the Directors as of February
28, 1995, is set forth below. Except as set forth herein, none of them are
officers or directors of any other publicly-owned corporation or entity.
Director Number Percentage
Name Age Since of Shares of Total
- ---- --- ---- --------- --------
Edward J. Martori 42 1993 6,006,632 (1) 48.42%
Joseph P. Martori 53 1986 6,054,292 (1) 48.80%
Ronald D. Nitzberg 63 1986 213,031 (2) 1.71%(2)(5)
Nancy J. Stone 37 1989 289,586 (3)(4) 2.30%(3)(4)(5)
Alan J. Tucker 48 1992 197,000 (3) 1.58%(3)(5)
(1) See notes to principal shareholders listing.
(2) Including options to purchase 20,000 shares from the Company
at $1.625 per share.
(3) Including options to purchase 25,000 shares from the Company
and 50,000 shares from Martori Enterprises Incorporated at
$1.625 per share.
(4) Including options of Michael W. Stone, her husband, to
purchase 87,500 shares from the Company at $1.625 per share.
(5) The person's options to purchase shares are treated as
exercised with respect to that person and are included in
both the numerator and denominator.
Edward J. Martori has been a director of the Company since
December 1993. He has been employed as President of Martori Enterprises
Incorporated, a principal shareholder of the Company, since 1987. He is a cousin
of Joseph P. Martori.
Joseph P. Martori is a founder of the Company and has been a
director since its inception. He has been Chairman of the Board of Directors
since September 1991, and President since January 1, 1994. From 1985 until
January 1994, he was a member of the Phoenix, Arizona law firm of Brown & Bain,
P.A., where he was the Chairman of the Corporate, Real Estate and Banking
Department. Brown & Bain, P.A. currently serves as legal counsel for the
Company. He is a cousin of Edward J. Martori.
Ronald D. Nitzberg is a founder of the Company and has been a
director since its inception. He was the Company's President and chief executive
officer from inception until May 1988. He was Chairman of the Board of Directors
of the Company from June 1988 through March 1989. Since May 1988, Mr. Nitzberg
has been a consultant to the timeshare industry and was Executive Vice President
of Debbie Reynolds Resort, Inc., a Nevada corporation, from 1993 until March
1995.
Nancy J. Stone has been a director of the Company since April
1989, Executive Vice President since July 1993, and was President of the Company
from January 1990 until April 1992. From 1992 until June 1993 she was on the
faculty of North Central College in Naperville, Illinois. From April 1987 until
December 1989, she served as the Company's Vice President of Finance and
Secretary. She is certified as a public accountant in the States of Arizona and
Illinois.
Alan J. Tucker has been a director of the Company since
February 1992, and Executive Vice President since September 1991. He was Vice
President from January 1990 until August 1991, and has been Project Director of
Sedona Vacation Club timeshare sales since March 1989.
EXECUTIVE MANAGEMENT
The following table sets forth certain information concerning the
Company's executive officers. None of the executive officers are directors or
officers of any other publicly owned corporation or entity.
Name Age Postion/Term
- ---- --- ------------
Joseph P. Martori 53 President November 1993 to Present
Nancy J. Stone 37 Executive Vice President July 1993 to
Present
Alan J. Tucker 48 Executive Vice President September 1991
to Present, Vice President January 1990
to August 1991
Luis C. Acosta 43 President of Varsity Clubs of America
Incorporated November 1993 to Present
Michael W. Stone 40 President of Red Rock Collection
Incorporated July 1993 to Present
George C. Wallach 58 Executive Vice President February 1995
to Present
Edward S. Zielinski 43 Senior Vice President Janauary 1994 to
Present, Vice President December 1992 to
December 1993
Joseph P. Martori is a founder of the Company and has been a
director since its inception. He has been Chairman of the Board of Directors
since September 1991, and President since January 1, 1994. From 1985 until
January 1994, he was a member of the Phoenix, Arizona law firm of Brown & Bain,
P.A., where he was the Chairman of the Corporate, Real Estate and Banking
Department. Brown & Bain, P.A. currently serves as legal counsel for the
Company.
Nancy J. Stone has been a director of the Company since April
1989, Executive Vice President and Chief Financial Officer since July 1993, and
was President of the Company from January 1990 until April 1992. From 1992 until
June 1993, she was on the faculty of North Central College in Naperville,
Illinois. From April 1987 until December 1989, she served as the Company's Vice
President of Finance and Secretary. She is certified as a public accountant in
the States of Arizona and Illinois. Ms. Stone is the wife of Michael W. Stone,
President of Red Rock Collection Incorporated.
Alan J. Tucker has been a director of the Company since
February 1992, and Executive Vice President since September 1991. He was Vice
President from January 1990 until August 1991, and has been Project Director of
Sedona Vacation Club timeshare sales since March 1989.
Luis C. Acosta has been President and Chief Operating Officer
of Varsity Clubs of America Incorporated since November 1993. From January 1993
until November 1993, he was President of Destination Guild, a Nebraska
corporation, which develops and manages resort hotels. From 1990 to 1993, he was
Vice President of Development for Hilton Hotels Corporation, which develops,
owns and operates hotels, resorts and casinos. From 1985 to 1990, he was Vice
President of Development and Senior Vice President of Development for Ramada,
Inc., a Delaware corporation engaged in the development and management of
hotels, resorts and casinos.
Michael W. Stone has been President of Red Rock Collection
Incorporated since July 1993. From 1992 to 1993, he was Vice President of S.L.
Cooper and Associates, a Virginia based company, engaged in distribution of
filing and material handling equipment, and was responsible for new product
development and introduction, distribution and sales. From 1987 to 1992, he was
National Sales Manager of Richards-Wilcox, an Aurora, Illinois division of White
Consolidated Industries, engaged in manufacturing and sales of office and
material handling equipment. Mr. Stone is the husband of Nancy J. Stone,
Executive Vice President and Chief Financial Officer of ILX Incorporated.
George C. Wallach has been Executive Vice President since
February 1995. From February 1986 until January 1995, he was a member and
director of the Phoenix, Arizona law firm of Brown and Bain, P.A., specializing
in real estate and business transactions.
Edward S. Zielinski has been Senior Vice President since
January 1994, Vice President and General Manager of Los Abrigados resort since
December 1992, and Executive Assistant Manager of Los Abrigados resort since
November 1988.
Item 11. Executive Compensation
The following table sets forth compensation paid by the
Company for the years 1992-1994 to the principal executive officer and executive
officers that received compensation in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation Compensation(2)
Annual Compensation Awards All Other
-------------------------------- ---------------------- ---------------
Securities Underlying
Year Salary Bonus Stock Options (#)
---- ------ ----- ----------------------
<S> <C> <C> <C> <C> <C>
Joseph P. Martori
President and Principal 1994 $200,875 - - -
Executive Officer 1993 $ 30,709 - - -
1992 - - - -
Alan J. Tucker
Executive Vice President 1994 $148,667 $ 30,000 25,000 (1) -
1993 $ 75,000 $105,737 - -
1992 $ 75,000 $100,468 - -
Luis C. Acosta
President of Varsity 1994 $114,231 - - -
Clubs of America 1993 $ 9,615 - -
Incorporated 1992 - - -
(1) Excludes options to purchase 50,000 shares from Martori
Enterprises Incorporated for $1.625 per share.
(2) Excludes Profit Sharing Plan contributions on behalf of the
executive officer. During 1994 the Company adopted a Profit
Sharing Plan and declared a 1994 contribution which will be
funded in 1995. The allocation of the 1994 contribution among
participants has not yet been made. No executive officer is
expected to be allocated more than $2,500 for the 1994 plan
year.
</TABLE>
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth information on stock option
grants to executive officers of the Company during 1994 under the Company's 1992
Incentive Stock Option Plan. No stock appreciation rights were granted in 1994.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock Price
Appreciation for
Individual Grants Option Term
- --------------------------------------------------------------------------------------------- ----------------------
Number of
Securities % of Total
Underlying Options Market Price
Options Granted to Exercise on Date of
Granted Employees Price Grant Expiration 5% 10%
Name (#) in FiscalYear ($/Share) ($/Share) Date ($) ($)
- -------------- --- -------------- --------- --------- ---- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Alan J.
Tucker 25,000 8.12% $1.625 $1.375 3/28/2004 $15,368 $48,535
</TABLE>
<TABLE>
OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END
OPTION VALUES
The following table sets forth information regarding option exercises by
executive officers during 1994 and unexercised options held by executive
officers at December 31, 1994.
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Fiscal
Year-End (#) Year-End ($)
----------------- -----------------
Shares
Acquired on Value Exercisable (E) Exercisable (E)
Name Exercise (#) Realized ($) Unexercisable (U) Unexercisable (U)
---- ------------ ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Alan J. Tucker 0 $0 0(E) $0
25,000(U) $0
</TABLE>
OTHER COMPENSATION
The Company's policy is to pay a fee per Board of Directors
meeting attended by directors who are not employees of the Company, and
reimburse all directors for actual expenses incurred in connection with
attending meetings of the Board of Directors. The 1994 directors' fees were $250
per meeting. The Directors agreed to waive all meeting fees earned in 1994.
Commencing in 1995, the fee per Board of Directors meeting attended by a
non-employee director will be $1,000.
During 1994, non-employee director Ronald Nitzberg was granted
an option to purchase 20,000 shares of common stock at the price of $1.625 per
share. The market price on the date of grant was $1.375 and the options will
expire in 2004 or six months from the date Mr. Nitzberg ceases to be a director,
whichever is earlier. The options were granted as compensation for consulting
services provided in 1993 and 1994.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee and the Stock Option Committee of the Board
of Directors has furnished the following report on executive compensation:
It is the Company's policy to compensate its executives in a
manner which aligns their interests with the long-term interests of the
Company's shareholders. Through its compensation policies the Company
also seeks to attract and retain senior executives and reward
executives for their collective and individual contribution to the
leadership and short-term and long-term growth and profitability of the
Company. The Company compensates its executives through a mixture of
base salary, discretionary bonuses, and discretionary stock option
grants. The principal component of executive compensation to date has
been base salary.
Base Salary. Each Company executive receives a base salary which is
intended to be competitive with similarly situated executives in
companies of a similar size and nature. In setting base salaries for
1994, the Compensation Committee considered the executive's position
relative to other executives, overall responsibility, the achievement
of past performance objectives, and compensation information gleaned
informally with respect to similar companies.
The salary of the Company's Chief Executive Officer was set
through negotiations with the Board of Directors at an annual rate of
$200,000 plus annual cost of living increases. Accordingly, in November
1994, Mr. Martori's salary was increased to $205,000. Mr. Martori's
future salary will be subject to review by and negotiation with the
Company's Board of Directors based upon achievement of subjective and
objective performance factors, with the final salary determination to
reflect a subjective judgement of the Board of Directors.
Discretionary Options. From time to time, the Company has granted stock
options to executives to recognize significant performance and to
encourage them to take an equity stake in the Company. In making past
option awards, the Compensation Committee has reviewed the overall
performance of the executives and the Company has awarded options on a
discretionary basis, based upon a largely subjective determination.
During 1994, 167,500 stock options were granted to Executive Officers.
Bonuses. From time to time, the Company has granted bonuses to
executive officers who, in the discretion of the Company's Compensation
Committee, have performed in a manner meriting recognition above and
beyond their base salary. In addition, during 1993, the Company
instituted a performance bonus for one of its principal executives with
responsibility for the Company's Varsity Clubs Program, which
performance bonus will be tied to the achievement of certain defined
key objectives. Specifically, a bonus of between $30,000 and $50,000
will be granted upon the opening of each Varsity Clubs site and, in
addition, on an annual basis, a bonus of ten percent of the net income
of Varsity Clubs of America Incorporated will be granted and payable in
cash or, at the employee's option, in common stock at a price tied to
the price of the stock on the first business day of the preceding
calendar year. No such bonus has been earned or paid to date. The
Compensation committee may, in the future, consider the use of similar
performance-based bonuses for other executives.
Profit Sharing Plan. In 1994 the Company adopted a Profit Sharing Plan
for the benefit of all employees, including executive officers. A
contribution of $75,000 was declared for the 1994 fiscal year and will
be funded in 1995. Allocation among the participants of the amount to
be contributed has not yet occurred. The allocation is not expected to
exceed $2,500 for any executive officer.
Compliance with Section 162(m) of Internal Revenue Code. Section 162(m)
of the Internal Revenue Code limits the corporate deduction for
compensation paid to the Named Officers identified in the Company's
proxy statement to $1,000,000 per year, unless certain requirements are
met. The Compensation Committee has reviewed the impact of this new Tax
Code provision on the current compensation package for executives. No
executives will exceed the applicable limit. The Compensation Committee
will continue to review the impact of this Tax Code Section and make
appropriate recommendations to shareholders in the future.
Compensation Committee Interlocks and Insider Participation
Mr. Joseph P. Martori is a member of the Compensation Committee and
Stock Option Committee and Ms. Nancy J. Stone is a member of the Stock
Option Committee. Mr. Martori and Ms. Stone are officers of the
Company.
This report is made by Edward J. Martori, Joseph P. Martori, Ronald D. Nitzberg,
and Nancy J. Stone.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG THE COMPANY,
NASDAQ MARKET INDEX AND SIC CODE INDEX
The data below compares the cumulative total return of the Company's
common stock with the NASDAQ market index and the SIC code 701 index (hotels and
motels) from January 1, 1990 to December 31, 1994. The Company has selected SIC
code 701 based on its belief that it is the most applicable comparison, based
upon the absence of data regarding publicly owned timeshare companies which
derive substantial revenues from hotel/motel operations.
Comparison of Five Year Cumulative Total Return
of Company, Industry Index and Broad Market
Company 1989 1990 1991 1992 1993 1994
------- ---- ---- ---- ---- ---- ----
ILX Incorporated 100 11.76 117.64 129.40 288.22 211.74
Industry Index 100 51.25 59.50 84.85 165.78 145.48
Broad Market 100 81.12 104.14 105.16 126.14 132.44
Item 12. Security Ownership of Certain Beneficial Owners and Management
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following persons own more than five percent of the
outstanding voting securities of the Company as of February 28, 1995:
Amount and
Nature of
Title Name and Address of Beneficial Percentage
of Class Beneficial Owner(1) Ownership of Class
- ------- ------------------- --------- --------
Common Edward J. Martori 6,006,632 (4) 48.42%
Common Joseph P. Martori 6,054,292 (2) (3) 48.80%
Common Martori Enterprises 6,056,474 (5) 48.82%
Incorporated
Common Alan R. Mishkin 2,551,845 20.57%
Common All Officers/Directors 6,697,101 (6) 53.18%(6)(7)
(1) Unless otherwise indicated, the business address for all listed
shareholders is c/o the Company, 2777 East Camelback Road, Phoenix, Arizona
85016.
(2) Including 5,010 shares owned by Christina Ann Martori, daughter of
Joseph P. Martori, under trust dated February 20, 1978, and 4,000 shares held by
Joseph P. Martori as custodian for his daughter, Arianne Terres Martori.
(3) Including 40,832 shares of Common Stock owned by Wedbush Securities
Inc., Custodian of IRA Contributory Plan for Joseph P. Martori, and 6,004,450
shares owned by Martori Enterprises Incorporated. Joseph P. Martori is a
shareholder in Martori Enterprises Incorporated and a cousin of Edward J.
Martori.
(4) Including 6,004,450 shares owned by Martori Enterprises
Incorporated. Edward J. Martori is a shareholder in Martori Enterprises
Incorporated and a cousin of Joseph P. Martori.
(5) Including 2,182 shares of Common Stock owned by Edward J. Martori,
49,842 shares owned by Joseph P. Martori (notes (2) and (3)) and 6,004,450 owned
by Martori Enterprises Incorporated.
(6) Shares deemed to be beneficially owned by more than one officer
and/or director were only counted once.
(7) Options for 187,500 shares held by directors and officers are
treated as exercised and are included in both the numerator and the denominator.
Effective December 31, 1994, Martori Enterprises Incorporated
acquired 1,144,546 shares held by Wm. Robert Burns and Paige Burns. The
management of the Company is not aware of any other change in control of the
Company which has taken place since the beginning of the last fiscal year, nor
of any contractual arrangements or pledges of securities the operation of the
terms of which may at a subsequent date result in a change in control of the
Company. Except as set forth above, management is not aware of any other person
or group of persons that owns in excess of 5% of the Company's outstanding
common stock.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as to the
securities of the Company beneficially owned by (i) each director and nominee,
(ii) each named executive officer and (iii) all directors and officers as a
group.
<TABLE>
<CAPTION>
Amount and Nature
Title of Name of Beneficial of Beneficial Ownership Percentage
Class Owner of Common Shares of Class
- -------- ------------------ ----------------------- ----------
<S> <C> <C> <C>
Common Edward J. Martori 6,006,631(1) 48.42%
Common Joseph P. Martori 6,054,292(1)(2)(3) 48.80%
Common Ronald J. Nitzberg 213,031(4) 1.71%(9)
Common Nancy J. Stone 289,586(5)(6) 2.30%(9)
Common Alan J. Tucker 197,000(5) 1.58%(9)
Common Luis C. Acosta 9,900 .08%
Common Michael W. Stone 289,586(7) 2.30%(9)
Common George C. Wallach 1,000 .01%
Common Edward S. Zielinski 20,110(8) .16%(9)
Common Directors and Officers as a group 6,697,101(11) 53.18%(10)(11)
(1) Including 6,004,450 shares owned by Martori Enterprises Incorporated.
Edward J. Martori is a shareholder in Martori Enterprises Incorporated
and a cousin of Joseph P. Martori.
(2) Including 5,010 shares owned by Christina Ann Martori, daughter of
Joseph P. Martori, under trust dated February 20, 1978, and 4,000
shares held by Joseph P. Martori custodian for his daughter, Arianne
Terres Martori.
(3) Including 40,832 shares of common stock owned by Wedbush Morgan
Securities Inc., Custodian of IRA Contributory Plan for Joseph P.
Martori, and 6,004,450 shares owned by Martori Enterprises
Incorporated and a cousin of Edward J. Martori.
(4) Including options to purchase 20,000 shares from the Company at $1.625
per share.
(5) Including options to purchase 25,000 shares from the Company and
50,000 shares from Martori Enterprises Incorporated at $1.625 per
share.
(6) Including options of Michael W. Stone, her husband, to purchase 87,500
shares from the Company at $1.625 per share.
(7) Including options to purchase 87,500 shares from the Company at $1.625
per share and shares held beneficially by his wife, Nancy J. Stone.
(8) Including options to purchase 30,000 shares from the Company at $1.625
per share.
(9) The officers' and directors' options to purchase shares from the
Company are treated as exercised with respect to that officer or
director and are included in both the numerator and the denominator.
(10) Options to purchase from the Company 187,500 shares by directors and
officers are treated as exercised and are included in both the
numerator and the denominator.
(11) Shares deemed to be beneficially owned by more than one officer and/or
director were only counted once.
</TABLE>
Item 13. Certain Relationships and Related Transactions
The following is a summary of transactions entered into on
behalf of the Company or its subsidiaries since January 1, 1994, in which the
amount involved exceeded $60,000 and in which officers, directors, nominees
and/or greater than 5% beneficial owners of the Company's common stock had, or
will have, a direct or indirect material interest.
On September 9, 1991, the Company entered into a guarantee fee
agreement with Arthur J. Martori, then an affiliate, and Alan R. Mishkin, who
guaranteed a loan to Los Abrigados Limited Partnership ("LAP") in the amount of
$5,000,000 from The Valley National Bank of Arizona. The affiliates earned a
guarantee fee of $780,000, payable quarterly at the rate of $100 for each Los
Abrigados timeshare interest sold. During 1994, LAP paid $93,564 related to this
fee. Also, in conjunction with the September 9, 1991 transaction, the affiliates
were assigned $185,000 of amounts held back by financial institutions as
collateral on the sale of consumer notes receivable. During 1994, the Company
paid $48,760 related to these holdbacks. Effective November 11, 1993, Martori
Enterprises Incorporated acquired all of Arthur J. Martori's interest in ILX and
its subsidiaries, including his interests in guarantee fees and holdbacks, and
his interests in notes receivable, described below. Joseph P. Martori and Edward
J. Martori are shareholders of Martori Enterprises Incorporated.
Certain affiliates of the Company held a 6% interest in LAP as
Class A limited partners (Edward J. Martori 5%, Martori Enterprises Incorporated
.5%, Wedbush Morgan Securities IRA for Joseph P. Martori .25% and Joseph P.
Martori, Trustee .25%). Class A partners Edward J. Martori and Martori
Enterprises Incorporated were entitled to receive a 13.5% preferred return and
Class A partners Joseph P. Martori as Trustee and Wedbush Morgan Securities for
the benefit of Joseph P. Martori were entitled to receive a 22% preferred
return. During fiscal 1994, payments of $103,000 were made to the above
described Class A partners.
In October 1994, the Company acquired all of the Class A
partnership interests in LAP for $1,587,000, effective July 1, 1994. The
interests held by Martori Enterprises Incorporated, Edward J. Martori, Joseph P.
Martori as Trustee and Wedbush Morgan Securities for the benefit of Joseph P.
Martori were acquired in exchange for notes totaling $1,215,750 and cash of
$6,000. During fiscal year 1994, no principal or interest payments were made on
the notes to the affiliated Class A partners.
Martori Enterprises Incorporated and Alan R. Mishkin hold a
21.5% interest in LAP as Class B limited partners. The Class B Partners are
entitled to 13.5% interest on their original Class B LAP capital contributions
of $250,000 each. During fiscal year 1994, payments of $36,259 were made to the
Class B partners.
The Company leases from affiliates 41 timeshare interests in
the Stonehouse at the Los Abrigados resort under a September 1, 1991, license
agreement which provides for a payment of $250 per calendar quarter per
Stonehouse interval for the five year period commencing October 1, 1991. During
1994, lease payments totaling $41,000 were made to Martori Enterprises
Incorporated, Alan R. Mishkin, Wm. Robert Burns and certain affiliates of Wm.
Robert Burns.
On September 10, 1991, the Company entered into a management
agreement with LAP whereby the Company was appointed the exclusive managing and
operating agent for the resort and for the timeshare sales office located at the
resort. The Company was also appointed as the exclusive agent for the marketing
of timeshare interests of LAP. The agreement provides for fees of $25,000 per
month for a term of five years with automatically renewable five-year terms.
Management fees in the amount of $300,000 were earned by the Company during the
1994 fiscal year.
In August 1992, the Company issued to Martori Enterprises
Incorporated, as agent for Edward J. Martori, Martori Enterprises Incorporated,
Arthur J. Martori and Alan R. Mishkin, a $770,000 promissory note bearing
interest at 14%, collateralized by $810,630 in notes receivable. The promissory
note was issued to reduce Class A limited partners' capital contributions by
$500,000, Class A priority returns by $149,954, Class B accrued interest by
$73,772 and loan guarantee fees by $46,274. Principal payments of $188,381 and
interest payments of $61,046 were made during the 1994 fiscal year.
In May 1993, the Company borrowed $150,000 from Martori
Enterprises Incorporated. The note bears interest at 16%, has a term of four
years and was collateralized by approximately $199,000 in notes receivable.
During fiscal 1994, principal payments of $30,512 and interest payments of
$18,439 were paid on the note.
In June 1993, the Company borrowed $100,000 form Martori
Enterprises Incorporated. The note bears interest at 16%, has a term of three
years and was collateralized by furniture and equipment. Principal payments of
$50,008 and interest payments of $8,749 were made on the note during fiscal year
1994.
In July 1993, the Company issued 102,000 shares of restricted
common stock, valued at $1 per share, to Alan R. Mishkin in consideration for
accrued and future guarantee fees and Class B interest. The $102,000 was
initially reflected as payment of accrued Class B interest ($11,016) and accrued
and future guarantee fees ($90,984). During 1994, $36,259 originally applied to
future guarantee fees was reclassified as payment of Class B interest.
During fiscal 1994, the Company leased a condominium adjacent
to the Golden Eagle Resort from Martori Enterprises Incorporated, Edward J.
Martori and Joseph P. Martori. The Company paid the debt service, property taxes
and operating expenses in exchange for use of the unit. The debt service paid by
the Company in 1994 was $11,126. On December 31, 1994, the Company purchased the
condominium for $104,915, the approximate assessed value as determined by the
county assessor's most recent assessment. The Company paid cash of $32,643 and
assumed the existing mortgage.
In February 1994, the Company acquired the minority interests
in Red Rock Collection Incorporated, an Arizona corporation ("RRC"), held by
Alan R. Mishkin and Martori Enterprises Incorporated for consideration of
123,000 shares of restricted ILX common stock and $300,000 in promissory notes
which bear interest at 10% and are payable over a thirty six month period.
During fiscal year 1994, principal payments of $74,574 and interest payments of
$22,228 were made on the notes.
In September 1994, the Company, through Genesis Investment
Group, Inc., assumed from Martori Enterprises Incorporated an existing option
agreement between Martori Enterprises Incorporated and a non-affiliated company
which owns 667 weeks at Los Abrigados resort. The option agreement provides that
the Company must, if requested, purchase at $2,100 per interval, 25 intervals
per month commencing July 1994, and one-half of the intervals remaining on an
annual basis. The agreement also provides the Company the right to acquire the
intervals for $2100 each, commencing July 1995. No intervals have been acquired
by the Company to date.
The law firm of Brown & Bain, P.A. has served as legal counsel to the
Company since the Company's inception. Joseph P. Martori, Chairman of the
Company's Board of Directors since September 1991, President since November 1,
1993, and director since inception, was the Chairman of the Corporate, Real
Estate and Banking Department of Brown & Bain, P.A. until January 1994. George
C. Wallach, Executive Vice President of the Company since February 1995, was a
partner in Brown & Bain, P.A. until he joined the Company. The Company paid
Brown & Bain, P.A. $159,305 during 1994 for legal services provided in 1994 and
prior years. The Company anticipates that it will retain Brown & Bain, P.A. to
provide legal services during the 1995 fiscal year.
The above-described transactions are believed to be on terms no less
favorable to the Company than those available in arms' length transactions with
unaffiliated third parties. Each transaction has been approved by independent
directors of the Company who are not parties to the transaction.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Consolidated Financial Statements Page or Method of Filing
--------------------------------- ------------------------
(i) Consolidated Financial Statements and Pages 27 through 46
Notes to Consolidated Statements of
the Registrant, including Consolidated
Balance Sheets as of December 31,
1994 and 1993 and Consolidated
Statements of Operations, Shareholders'
Equity and Cash Flows for each of the
three years ended December 31,
1994, 1993 and 1992.
(ii) Report of Deloitte & Touche LLP Page 26
(a) (2) Consolidated Financial Statement
--------------------------------
Schedules
---------
Reserve for possible credit losses Page 48
Schedules other than those mentioned above are omitted because
the conditions requiring their filing do not exist or because
the required information is given in the financial statements,
including the notes thereto.
(a) (3) Exhibits
The Exhibit Index attached to this report is hereby
incorporated by reference.
(b) Reports on Form 8-K
None
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
ILX Incorporated:
We have audited the accompanying consolidated balance sheets of ILX Incorporated
and subsidiaries (the "Company") as of December 31, 1994 and 1993, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1994. Our
audits also included the financial statement schedule listed in the Index at
Item 14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1994
and 1993, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Phoenix, Arizona
March 10, 1995
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------
1994 1993
----------- -----------
Assets
Cash and cash equivalents ..................... $ 3,635,587 $ 2,060,107
Notes receivable, net (Notes 2, 10, 11 and 14). 6,750,896 6,671,626
Resort property held for timeshare sales
(Notes 3 and 10) ......................... 9,407,733 9,749,018
Resort property under development (Note 6)..... 1,735,592 --
Land held for sale (Note 4) ................... 1,673,168 3,113,933
Deferred assets (Notes 5, 6 and 7) ........... 749,999 1,465,769
Property and equipment , net (Note 8) ......... 1,437,227 692,387
Deferred income taxes (Note 9) ................ 1,283,179 397,771
Other assets .................................. 1,730,023 756,358
----------- -----------
$28,403,404 $24,906,969
Liabilities and Shareholders' Equity =========== ===========
Accounts payable .............................. $ 1,581,659 $ 1,800,194
Accrued and other liabilities ................. 1,488,816 944,779
Genesis funds certificates (Note 4) ........... 1,612,457 2,181,016
Due to affiliates (Notes 7, 12, and 16) ....... 984,534 728,876
Deferred income (Notes 2 and 6) ............... 365,195 456,899
Notes payable (Note 10) ....................... 4,881,861 4,356,990
Notes payable to affiliates (Note 11) ......... 2,000,584 1,051,908
----------- -----------
12,915,106 11,520,662
----------- -----------
Minority Interests (Note 12) ................... 2,531,169 2,844,812
----------- -----------
Commitments (Note 13)
Shareholders' Equity (Notes 14 and 15)
Preferred stock, $10 par value;
10,000,000 shares authorized;
430,313 and 438,175 shares issued and
outstanding; liquidation preference of
$4,303,130 and $4,381,750, respectively ..... 1,648,755 1,673,028
Common stock, no par value;
40,000,000 shares authorized; 12,405,325
and 12,083,618 shares issued and outstanding. 8,972,969 8,681,349
Additional paid in capital .................... 30,000 30,000
Retained earnings ............................. 2,305,405 157,118
----------- -----------
12,957,129 10,541,495
----------- -----------
$28,403,404 $24,906,969
=========== ===========
See notes to consolidated financial statements
<PAGE>
<TABLE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<CAPTION>
1994 1993 1992
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales of timeshare interests ................................ $ 18,713,970 $ 12,263,619 $ 11,136,950
Resort operating revenue .................................... 8,764,558 8,072,260 7,719,710
Sales of land ............................................... 2,237,166 123,500 --
Sales of consumer products .................................. 234,975 -- --
----------- ------------ ------------
29,950,669 20,459,379 18,856,660
----------- ------------ ------------
Cost of sales and operating expenses:
Cost of timeshare interests sold............................. 6,592,684 5,007,131 4,911,976
Cost of resort opertions .................................... 7,807,857 6,962,849 6,787,831
Cost of land sold ........................................... 1,796,974 113,618 --
Cost of consumer products .................................. 158,657 -- --
Advertising and promotion ................................... 5,941,761 3,168,562 2,900,258
General and administrative .................................. 3,198,604 1,510,448 1,339,962
Provision for doubtful accounts ............................. 764,065 666,690 629,510
----------- ------------ ------------
26,260,602 17,429,298 16,569,537
----------- ------------ ------------
Operating income ................................................. 3,690,067 3,030,081 2,287,123
Other income (expense):
Interest expense (Note 11) .................................. (666,141) (599,238) (643,023)
Interest income ............................................. 402,596 359,908 169,600
----------- ------------ ------------
(263,545) (239,330) (473,423)
----------- ------------ ------------
Income before income taxes ....................................... 3,426,522 2,790,751 1,813,700
Income tax benefit ............................................... 161,799 100,000 100,000
----------- ------------ ------------
Income before minority interests ................................. 3,588,321 2,890,751 1,913,700
Minority interests ............................................... (1,440,034) (814,520) (587,826)
----------- ------------ ------------
Net income ....................................................... $ 2,148,287 $ 2,076,231 $ 1,325,874
============ ============ ============
Net income per common and
equivalent share ............................................... $ 0.17 $ 0.18 $ 0.12
============ ============ ============
Number of common and equivalent shares ........................... 12,463,246 11,791,786 11,229,991
============ ============ ============
Net income per share assuming
full dilution .................................................. $ 0.17 $ 0.17 $ 0.12
============ ============ ============
Number of fully diluted shares ................................... 12,971,235 12,301,206 11,229,991
============ ============ ============
See notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Retained
Common Stock Additional Preferred Stock Earnings/
------------------------- Paid In ---------------------- Accumulated
Shares Amount Capital Shares Amount Deficit Total
---------- --------- ------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1991 10,973,414 $7,240,482 - 357,540 $1,100,400 ($3,244,987) $5,095,895
Net income - - - - - 1,325,874 1,325,874
Issuance of common stock
for acquisition 150,000 84,375 84,375
Other issuance of common
stock 144,684 57,664 - - - - 57,664
Purchase of Series B
preferred stock - - 30,000 (220,000) (220,000) - (190,000)
Exchange of preferred stock
for lodging certificates - - - (4,597) (45,970) - (45,970)
Collection of note receivable
for exercise of warrants - 150,000 - - - - 150,000
---------- --------- ------ -------- ---------- ---------- ----------
Balances, December 31, 1992 11,268,098 7,532,521 30,000 132,943 834,430 (1,919,113) 6,477,838
Net income - - - - - 2,076,231 2,076,231
Issuance of common stock
for acquisition 509,420 842,798 842,798
Other issuance of common
stock 306,100 306,030 - - - - 306,030
Issuance of preferred stock
for acquisition - - - 305,652 842,798 - 842,798
Exchange of preferred stock
for lodging certificates - - - (420) (4,200) - (4,200)
---------- --------- ------ -------- ---------- ---------- ----------
Balances, December 31, 1993 12,083,618 8,681,349 30,000 438,175 1,673,028 157,118 10,541,495
Net Income - - - - - 2,148,287 2,148,287
Issuance of common stock
for acquisition 123,000 123,000 123,000
Other issuance of common
stock 24,616 29,232 - - - - 29,232
Exchange of preferred stock
for common stock 12,100 20,038 - (7,260) (20,038) - -
Exercise of options 162,586 121,135 - - - - 121,135
Exchange of preferred stock
for lodging certificates - - - (245) (2,450) - (2,450)
Exercise of cash options (595) (1,785) - (357) (1,785) - (3,570)
---------- --------- ------ -------- ---------- ---------- ----------
Balances, December 31, 1994 12,405,325 $8,972,969 $30,000 430,313 $1,648,755 $2,305,405 $12,957,129
========== ========== ======== ======== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS DECEMBER 31, 1994, 1993, 1992
<CAPTION>
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 2,148,287 $ 2,076,231 $ 1,325,874
Adjustments to reconcile net income to
net cash provided by operating activities:
Undistributed minority interest ....................................... 760,306 651,205 310,736
Deferred income taxes ................................................. (885,408) (297,771) (100,000)
Additions to notes receivable ......................................... (10,333,377) (8,182,286) (7,028,138)
Proceeds from sale of notes receivable ................................ 9,490,042 6,406,437 4,533,918
Provision for doubtful accounts ....................................... 764,065 666,690 629,510
Depreciation and amortization ......................................... 1,425,792 352,877 271,327
Amortization of guarantee fees ........................................ 140,550 132,054 47,496
Change in assets and liabilities, net of the
effects from purchase of subsidiary:
(Increase)decrease in resort property held for
timeshare sales .................................................. 870,858 (221,501) 1,110,165
Increase in resort property under development ..................... (1,735,592) -- --
Decrease in land held for sale .................................... 1,440,765 -- --
(Increase) decrease in other assets ............................... (862,965) 226,307 189,500
Increase (decrease) in accounts payable ........................... (218,535) 241,931 (119,253)
Decrease in Genesis funds certificates ............................ (568,559) -- --
Increase in accrued and other liabilities ......................... 569,187 187,762 82,064
Increase in due to affiliates ..................................... 255,658 39,251 42,155
Increase (decrease) in deferred income ............................ (91,704) 28,799 428,100
----------- ----------- ----------
Net cash provided by operating activities .............................. 3,169,370 2,307,986 1,723,454
----------- ----------- ----------
Cash flows from investing activities:
(Increase) decrease in deferred assets ................................ (353,251) (904,173) 106,439
Purchases of plant and equipment ...................................... (581,435) (741,323) (28,529)
Net cash acquired from purchase of subsidiary ......................... -- 343,510 1,135
Net cash paid for Class A minority interest ........................... (371,250) -- --
----------- ----------- ----------
Net cash provided by (used in) investing activities .................... (1,305,936) (1,301,986) 79,045
----------- ----------- ----------
Cash flows from financing activities:
Proceeds from notes payable ........................................... 6,165,996 1,579,056 --
Proceeds from notes payable to affiliates ............................. -- 850,000 --
Principal payments on notes payable ................................... (6,006,073) (1,567,486) (1,127,717)
Principal payments on notes payable to affiliates ..................... (567,074) (820,265) (529,405)
Payments in lieu of issuance of common stock .......................... -- (1,560) --
Payments in lieu of issuance of preferred stock ....................... -- (1,560) --
Proceeds from issuance of common stock ................................ 122,767 -- 207,664
Proceeds from issuance of minority interest in subsidiary ............. -- 300,000 --
Redemption of preferred stock ......................................... (1,785) -- --
Redemption of common stock ............................................ (1,785) -- --
----------- ----------- ----------
Net cash provided by (used in) financing activites ..................... (287,954) 338,185 (1,449,458)
----------- ----------- ----------
Net increase in cash and cash equivalents .............................. 1,575,480 1,344,185 353,041
Cash and cash equivalents at beginning of year ......................... 2,060,107 715,922 362,881
----------- ----------- ----------
Cash and cash equivalents at end of year ............................... $ 3,635,587 $ 2,060,107 $ 715,922
=========== =========== ===========
See notes to consolidated financial statements and supplemental schedules of noncash investing and financing activities
</TABLE>
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of noncash investing and financing activities for the year
ended December 31, 1994:
Acquisition of Class A interest:
Increase in notes payable to affiliates ................. $ 1,215,750
Reduction in minority interest .......................... (773,949)
Increase in resort property held for timeshare sales .... (813,051)
-----------
Net cash paid for Class A minority interest ............. $ 371,250
===========
Purchases of plant and equipment
Increase in notes payable ............................... $ 364,948
Increase in plant and equipment ......................... (364,948)
-----------
$ 0
===========
Purchase of minority interest in subsidiary
Increase in other assets ................................ ($ 123,000)
Increase in notes payable to affiliates.................. 300,000
Issuance of common stock ................................ 123,000
Reduction in minority interest .......................... (300,000)
-----------
$ 0
===========
Exchange of Series C Preferred Stock for common stock:
Issuance of common stock ................................ $ 20,038
Reduction in Series C Preferred Stock ................... (20,038)
-----------
$ 0
===========
Redemption of Series A Preferred Stock:
Issuance of certificates for room nights ................ $ 2,450
Reduction in series A Preferred Stock ................... (2,450)
-----------
$ 0
===========
Tax benefit on exercise of stock options
Increase in common stock ................................ $ 27,600
Reduction in taxes payable .............................. (27,600)
-----------
$ 0
===========
See notes to consolidated financial statements
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of noncash investing and financing activities for the year
ended December 31, 1993:
Purchase of subsidiary:
Acquisition of notes receivable ....................... ($2,644,310)
Acquisition of land held for sale ..................... (2,345,902)
Acquisition of other assets ........................... (261,568)
Assumption of accounts payable ........................ 838,354
Assumption of Genesis funds certificates .............. 2,162,943
Assumption of notes payable ........................... 502,486
Assumption of minority interest ....................... 402,791
Issuance of preferred stock ........................... 844,358
Issuance of common stock .............................. 844,358
-----------
Net cash acquired from
purchase of subsidiary ......................... $ 343,510
===========
Exchange of note for land:
Increase in land held for sale ........................ ($ 768,031)
Decrease in notes receivable .......................... 768,031
-----------
$ 0
===========
Issuance of common stock for reduction of
Class A Priority return:
Issuance of common stock .............................. $ 204,000
Reduction in minority interest ........................ (204,000)
-----------
$ 0
===========
Redemption of common stock to reduce
amounts due to affiliates:
Issuance of common stock .............................. $ 102,000
Reduction in due to affiliates ........................ (102,000)
-----------
$ 0
===========
Redemption of Series A Preferred Stock:
Issuance of certificates for room nights .............. $ 4,200
Reduction in series A Preferred Stock ................. (4,200)
-----------
$ 0
===========
See notes to consolidated financial statements
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental schedule of noncash investing and financing activities for the year
ended December 31, 1992:
Purchase of subsidiary:
Acquisition of other assets ........................... $ (141,706)
Assumption of accounts payable ........................ 16,746
Issuance of common stock .............................. 84,375
Issuance of timeshare interests ....................... 6,720
Reduction in investment in joint venture .............. 35,000
-----------
Net cash acquired from purchase of subsidiary ......... $ 1,135
===========
Repurchase of Series B Preferred Stock:
Issuance of certificates for room nights .............. $ 15,000
Increase in notes payable to affiliate ................ 175,000
Reduction in Series B Preferred Stock ................. (220,000)
Increase in paid in capital ........................... 30,000
-----------
$ -
===========
Issuance of note payable to reduce amounts due to affiliate
minority interest:
Increase in notes payable to affiliate ................ $ 770,000
Reduction in due to affiliates ........................ (270,000)
Reduction in minority interests ....................... (500,000)
-----------
$ -
===========
Redemption of Series A Preferred Stock:
Issuance of certificates for room nights .............. $ 45,970
Reduction in Series A Preferred Stock ................. (45,970)
-----------
$ -
===========
See notes to consolidated financial statements
<PAGE>
ILX INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Principles of Consolidation and Business Activities
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.
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.
Net Income per Share
Net income per common share and common equivalent share is based on the weighted
average number of common shares outstanding, including common stock equivalents
which have a dilutive effect. Common stock equivalents consist of Series B
Convertible Preferred Stock, warrants and shares issuable under the stock option
plan (Notes 14 and 15). Net income per common share and common equivalent share
is based on net income adjusted for undeclared dividends on Series C Preferred
Stock. Net income per share assuming full dilution is based on the weighted
average number of common shares outstanding, including common stock equivalents,
and after giving effect to the conversion of Series C Preferred Stock.
Resort Property Held for Timeshare Sales
Resort property held for timeshare sales is recorded at the lower of historical
cost less amounts charged to cost of sales for timeshare sales and depreciation
provided for on the basis of daily rental occupancy, or market. As timeshare
interests are sold, the Company amortizes to cost of sales the average carrying
value of the property plus estimated future additional costs related to
remodeling and construction.
Land Held for Sale
Land held for sale is recorded at the lower of cost or estimated realizable
value, consistent with the Company's intention to liquidate these properties
(Note 4).
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.
Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes ("SFAS No.
109"), which requires an asset and liability approach for financial accounting
and reporting for income taxes. In the first quarter of 1992, the Company
adopted SFAS No. 109, which had no material effect on the consolidated financial
statements.
Statements of Cash Flows
Cash equivalents are highly liquid investments with an original maturity of
three months or less. During the years ended December 31, 1994, 1993 and 1992,
the Company paid interest of approximately $716,000, $503,000, and $517,000 and
income taxes of approximately $723,000, $193,000 and $6,000 respectively.
Interest of $30,749 was capitalized during 1994 to resort property under
development.
Reclassifications
The financial statements for prior periods have been reclassified to be
consistent with the 1994 financial statement presentation.
Note 2 - Notes Receivable
Notes receivable consist of the following:
December 31,
------------------------------
1994 1993
------------ ------------
Timeshare receivables ...................... $ 5,243,443 $ 4,954,678
Holdbacks by financial institutions ........ 1,993,965 1,106,716
Genesis mortgage receivables (Note 4) ...... 776,776 1,426,058
Allowance for possible credit losses ....... (1,263,288) (815,826)
------------ ------------
$ 6,750,896 $ 6,671,626
============ ============
Notes generated from the sale of timeshare interests bear interest at annual
rates ranging from 9% to 16% and have terms of five to ten years. In addition,
the Company offers 0% interest and below market interest, and one and two year
financing, to purchasers who pay 50% of the purchase price at the time of sale.
These notes are discounted to yield a consumer market rate. The notes are
collateralized by deeds of trust on the timeshare interests sold. Included in
notes receivable at December 31, 1993, was a note for $900,000 from a California
limited partnership which acquired in December 1992, 667 timeshare interests at
Los Abrigados resort for $500,000 cash and a $900,000 promissory note. Annual
principal payments were not required under the terms of the note receivable and,
therefore, the gross profit of $428,100 on the $900,000 was deferred until
collection in 1994 (Note 14).
The Company has agreements with financial institutions under which the Company
may sell certain of its notes receivable. These agreements provide for sales on
a recourse basis with a percentage of the amount sold held back by the financial
institution as additional collateral. At December 31, 1994 and 1993, the Company
had approximately $15 million and $11 million in outstanding notes receivable
sold on a recourse basis. Portions of the notes receivable are secured by second
deeds of trust on the Los Abrigados resort and the Golden Eagle Resort. Notes
may be sold at discounts to yield the consumer market rate as defined by the
financial institution.
At December 31, 1994, the Company had $13,000,000 in financing commitments
through September 1996, and an additional $5,000,000 through March 1995, to sell
consumer notes receivable generated from sales of timeshare interests at the Los
Abrigados resort and the Golden Eagle Resort. At December 31, 1994,
approximately $ 11 million remained available on the commitments expiring in
September 1996, and approximately $771,000 on the commitment expiring in March
1995. Subsequent to December 31, 1994, an additional $5 million was committed
through September 1996, to replace the $5 million commitment expiring in March
1995. The Company also has financing commitments whereby it may borrow up to
$2.5 million against notes receivable generated from sales of timeshare
interests at the Golden Eagle Resort through September 1998. Approximately $1.3
million remained available on this commitment at December 31, 1994.
In January 1992, the Company sold consumer notes receivable to affiliates of the
Company for proceeds of $368,000, consisting of $156,000 cash and the assignment
of Los Abrigados Limited Partners ("LAP") Class A priority returns, LAP Class B
limited partners interest payments and loan guarantee fees totaling $212,000.
The notes were sold with recourse and the Company recognized a loss of
approximately $60,000 on the sale. At December 31, 1994 and 1993, the Company
had approximately $304,000 and $357,000, respectively, in outstanding notes
receivable sold on a recourse basis related to this sale.
During 1993, the Company borrowed $550,000 from affiliates of the Company,
collateralized by notes receivable with principal balances of approximately
$760,000 at the date of the borrowings. Balances outstanding on the borrowings
totaled $332,724 and $521,105 at December 31, 1994 and 1993, respectively (Note
11).
In May 1994, the Company sold its interest in certain land held for sale for
$825,000 cash and a $950,000 note receivable. The Company then sold the note,
with recourse, at face value. Principal of $750,000 on the note remains
outstanding at December 31, 1994, and is secured by the underlying real estate.
At December 31, 1994, notes receivable in the amount of approximately $240,000
have been contributed to the Company's Series A Preferred Stock sinking fund and
therefore their use is restricted (Note 14).
The reserve for possible credit losses of approximately $1,263,000 and $816,000
at December 31, 1994 and 1993, reflect reserves for both notes sold with
recourse and notes retained.
Note 3 - Resort Property Held for Timeshare Sales
Resort property held for timeshare sales consists of the following projects:
December 31,
-----------------------------
1994 1993
---------- ----------
Los Abrigados Resort ................... $6,846,715 $6,773,148
Golden Eagle Resort .................... 2,443,818 2,829,670
Costa Vida Resort ...................... 68,200 88,200
Ventura Resort ......................... 49,000 58,000
---------- ----------
$9,407,733 $9,749,018
========== ==========
Resort properties are stated net of accumulated depreciation of $878,000 and
$599,000 at December 31, 1994 and 1993, respectively.
In September 1994, the Company acquired for $15,000 an option to purchase 667
previously sold timeshare interests in the Los Abrigados resort. The terms of
the option agreement provide that the seller may sell to the Company up to 25
intervals per month and, in addition, up to one half of the remainder of the 667
intervals per year, for $2100 per interval. The seller must provide the Company
with written notice of its intent to sell 30 days in advance of a monthly sale
and 180 days in advance of an annual sale. The seller has neither provided
notice of its intent to sell nor sold any intervals to the Company through
December 31, 1994. Commencing July 1, 1995, the Company has the option to
purchase from the seller from time to time for a price of $2100 per interval,
groups of 25 or more intervals. The option was acquired from an affiliate.
Note 4 - Genesis Investment Group, Inc.
In March 1993, the Company reached agreement to acquire Genesis Investment
Group, Inc. ("Genesis"), a reorganized company resulting from the restructuring
of the investments originally made by hundreds of individuals and pension plans
and secured by interests in real property located principally in Arizona. As a
result of the reorganization, Genesis became a public company in 1988 holding
ownership interests in real estate (both fee and liens), most of which are
unimproved. On November 1, 1993, a wholly owned subsidiary of ILX consummated
its merger with and into Genesis and, as a result, Genesis, the surviving
corporation, became a wholly owned subsidiary of ILX. Under the terms of the
merger agreement, the Company issued a unit consisting of five shares of ILX
common stock and three shares of Series C Convertible Preferred Stock, with a
par value of $10 per share, for each ten shares of Genesis common stock. Each
three shares of Series C Preferred Stock are convertible after one year, at the
option of the holder, into five shares of ILX common stock. The merger agreement
also provides that Genesis shareholders who would otherwise receive fractional
units in exchange for all or a portion of their Genesis shares shall receive $3
per Genesis share for the fractional portion. Genesis shareholders who hold
fewer than 100 Genesis shares have the option under the merger agreement to
select cash of $3 per Genesis share in lieu of ILX units.
On November 1, 1993, the date of the merger, ILX issued 101,988 units, the
maximum number of whole units that Genesis shareholders are entitled to under
the terms of the merger agreement, consisting of 305,964 shares of Series C
Preferred Stock recorded at $844,358 and 509,940 shares of ILX common stock
recorded at $844,358, and recorded a liability in the amount of $17,262 for
fractional units. As Genesis shareholders who own fewer than 100 shares elect
cash in lieu of units, the ILX Series C Preferred Stock and common stock are
reduced. During 1994, Genesis shareholders elected to receive $3,570 in cash,
and, accordingly, Series C Preferred Stock and common stock were each reduced by
$1,785 (Note 14).
The acquisition has been accounted for as a purchase with the cost allocated to
preferred and common shares based on the assumption that all preferred shares
are converted to common shares.
The balance sheet of Genesis at November 1, 1993, was as follows:
(Unaudited)
----------
Assets
Cash and cash equivalents .............................. $ 343,510
Notes receivable, net .................................. 2,644,310
Land held for sale ..................................... 2,345,902
Other assets ........................................... 261,568
----------
$5,595,290
==========
Liabilities and Shareholder Equity
Accounts payable ....................................... $ 838,354
Genesis funds certificates ............................. 2,162,943
Notes payable .......................................... 502,486
Minority interests ..................................... 402,791
----------
3,906,574
----------
Stockholder equity ..................................... 1,688,716
----------
$5,595,290
==========
The Genesis funds certificates arise from the reorganization of Genesis and
represent non-recourse liabilities. The holders are entitled to receive 50% of
the net proceeds from the sale of certain Genesis properties. Such amounts have
been recorded based upon the estimated realizable values of the related
properties and are increased for sales of property at prices higher than their
carrying values and for collection of mortgage interest and decreased for
payments to the certificate holders and for property expenses paid by Genesis
which reduce the amount payable to the certificate holders.
If the Company and Genesis had been combined as of January 1, 1992, the proforma
results of the combined entity would be as follows:
December 31,
----------------------------
1993 1992
(Unaudited) (Unaudited)
------------ -----------
Total revenues ............................... $ 21,137,079 $19,125,010
------------ -----------
Net income ................................... $ 1,898,500 $1,982,904
------------ -----------
Net income per common and
equivalent share .......................... $ 0.16 $ 0.17
------------ -----------
Net income per share assuming full dilution .. $ 0.15 $ 0.16
------------ -----------
Note 5 - Red Rock Collection
In February 1993, the Company acquired, through a stock subscription offering,
71.4% of the issued and outstanding stock of Red Rock Collection Incorporated,
an Arizona Corporation ("RRC" or "Red Rock Collection"), in exchange for
$700,000 in goods and services to be provided to RRC at Los Abrigados resort. In
February 1994, the Company acquired the $300,000 minority interest in RRC, which
was held by affiliates, in exchange for 123,000 shares of restricted ILX common
stock valued at $1 per share and $300,000 in promissory notes (Notes 11 and 14).
Goodwill of $123,000 was recorded and is included, net of amortization of
$12,300, in other assets at December 31, 1994.
RRC was formed to market an exclusive line of skin and hair care products. Costs
were deferred until July 1994, the date at which sales commenced. Deferred costs
of approximately $929,000 were expensed in 1994.
Note 6 - Resort Property Under Development
Varsity Clubs of America Incorporated ("VCA") a wholly owned subsidiary of ILX,
intends to develop lodging accomodations in areas located near major university
campuses, and to market those lodging accommodations, including interval
ownership interests, to alumni and other sport enthusiasts. During 1994 VCA
acquired its first site near the University of Notre Dame for $690,655 and
commenced construction. Acquisition and construction costs totalling $1,735,592
are included in resort property under development at December 31, 1994. Revenues
of $513,400, net of related selling costs of $148,205, have been deferred at
December 31, 1994, until construction is substantially complete.
The Company has a construction financing commitment for $5 million to complete
the Notre Dame facility, of which $400,784 has been drawn at December 31, 1994
(Note 10).
<TABLE>
Note 7 - Deferred Assets
<CAPTION>
December 31,
1994 1993
------------ -----------
<S> <C> <C>
Deferred assets consist of the following:
Red Rock Collection development costs (Note 5) $ -- $567,589
Varsity Clubs of America loan fees and land deposits 204,383 221,336
Guarantee fees 459,900 600,450
California Department of Real Estate registration costs 85,716 76,394
------------ -----------
$ 749,999 $1,465,769
============ ===========
</TABLE>
As part of the acquisition of Los Abrigados resort, certain affiliates of the
Company guaranteed the underlying mortgage on the resort. As partial
consideration for their guarantee, the affiliates earned a $780,000 fee. The fee
is amortized to expense and is payable to the affiliates at the rate of $100 per
Los Abrigados timeshare interest sold. The unpaid balance of the fee is due on
December 31, 1996. The amount payable on the guarantee fee included in due to
affiliates at December 31, 1994 and 1993, was $536,501 and $604,771.
As additional consideration for the guarantee, the affiliates are entitled to
receive a percentage of certain amounts held back on the sale of notes
receivable by a financial institution as collateral. The amount is to be paid as
the amounts held back are collected from the financial institution. At December
31, 1994 and 1993, notes receivable are shown net of $122,000 and $138,000,
respectively, related to this amount.
The Company has incurred costs to register the Los Abrigados resort for
timeshare sales in the state of California. The costs will be amortized over
their estimated useful life.
Note 8 - Property and Equipment
Property and equipment consists of the following:
December 31,
1994 1993
----------- -----------
Buildings and improvements ............. $ 640,933 $ 19,280
Leasehold improvements ................. 464,141 443,729
Furniture and fixtures ................. 317,573 206,967
Office equipment ....................... 243,960 190,436
Computer equipment ..................... 140,188 --
----------- -----------
1,806,795 860,412
Accumulated depreciation ............... (369,568) (168,025)
----------- -----------
$ 1,437,227 $ 692,387
=========== ===========
Note 9 - Income Taxes
<TABLE>
Deferred income tax assets (liabilities) included in the consolidated balance
sheet consist of the following:
<CAPTION>
December 31,
-----------------------------
1994 1993
----------- ----------
<S> <C> <C>
Deferred Tax Assets:
Nondeductible accruals for uncollectible receivables $588,000 $ 278,000
Inventory costs capitalized for tax purposes 36,000 36,000
Tax basis in excess of book on resort property held for
timeshare sales 787,000 980,000
Book recognition of startup costs in excess of tax 354,000 -
Intangible assets capitalized for tax purposes 28,000 31,000
Minority interest allocation in excess of tax 219,000 -
Alternative minimum tax credit 74,000 186,000
Net operating loss carryforwards 1,052,000 1,140,000
Other 4,000 -
----------- ----------
Total deferred tax assets 3,142,000 2,651,000
----------- ----------
Deferred Tax Liabilities:
Installment receivable gross profit deferred for tax purposes (1,018,000) (356,000)
Tax amortization of loan fees in excess of book (80,000) (74,000)
Other -- (107,000)
----------- ----------
Total deferred tax liabilities (1,098,000) (537,000)
----------- ----------
Deferred Taxes 2,044,000 2,114,000
----------- ----------
Valuation allowance (760,000) (1,716,000)
----------- ----------
Deferred Taxes -- Net $ 1,284,000 $ 398,000
=========== ==========
</TABLE>
<TABLE>
A reconciliation of the income tax benefit and the amount that would be computed
using statutory federal and state income tax rates for the years ended December
31, is as follows:
<CAPTION>
1994 1993 1992
------------- ---------------- -----------
<S> <C> <C> <C>
Federal, computed on income before minority
interest and income taxes $1,165,000 $ 949,000 $617,000
Minority interest (490,000) (277,000) (200,000)
State, computed on income after minority interest
and before income taxes 119,000 118,000 74,000
Decrease in valuation allowance (956,000) (890,000) (591,000)
------------ ---------- ----------
Income tax benefit $ (162,000) $(100,000) $(100,000)
============ ========== ==========
</TABLE>
Tax benefits in 1993 and 1992 resulted from decreases in the valuation
allowance, as a result of the ability to utilize net operating loss
carryforwards and built in losses arising principally from Los Abrigados resort.
Reductions in 1992 and 1993 were recorded based upon the accelerated
profitability of this property and the conclusion that the ability to use these
losses was more likely than not. In 1993, a deferred tax asset was recorded to
reflect the future tax benefit of the Genesis net operating loss carryforwards
and a valuation allowance was recorded to offset the full amount of the asset.
Due to the continued profitability of Los Abrigados, the improvement in the
Arizona real estate market and the development of tax strategies, which include
the acquisition by Genesis of timeshare intersts in resort properties that have
historically been sold by the Company on a profitable basis, it was concluded
that it is more likely than not that a portion of the Genesis net operating loss
carryforwards and the remainder of the Los Abrigados tax benefits will be
utilized. Accordingly, the valuation allowance was reduced in 1994.
At December 31, 1994, ILX had federal NOL carryforwards of approximately
$2,640,000 which expire in 2008 and state NOL carryforwards of approximately
$750,000 which expire in 1998. Such losses are limited as to usage because they
arise from built in losses of an acquired company and can only be utilized
through earnings of that subsidiary.
<TABLE>
Note 10 - Notes Payable
Notes payable consist of the following:
<CAPTION>
December 31,
------------
1994 1993
---- ----
<S> <C> <C>
Note payable, collateralized by deed of trust on Los Abrigados resort, interest
at prime plus 1.25% (9.75% at
December 31, 1994), guaranteed by affiliates, due through 1996 .............................. $1,660,000 $2,370,000
Note payable, collateralized by deed of trust on Golden Eagle Resort, notes
receivable, and an assignment of the Company's
general partnership interest in LAP, interest at 12%, due through 1998 ...................... 639,916 921,311
Note payable, collateralized by notes receivable and deed of trust on Golden
Eagle Resort, interest at prime plus 4%
(12.5% at December 31, 1994), due through 1998 .............................................. 626,265 --
Note payable, collateralized by notes receivable and deed of trust on Los
Abrigados resort, interest at prime plus 4%
(12.5% at December 31, 1994), due through 1998 .............................................. 423,700 --
$500,000 revolving line of credit, unsecured, interest at
prime plus 1.5% (10% at December 31, 1994), due 1995 ........................................ 400,000 --
Construction note payable, collateralized by deed of trust on Varsity Clubs
of America - Notre Dame, interest at 13%, due through 1998 .................................. 400,784 --
$400,000 revolving line of credit, unsecured, interest
at prime plus 2% (10.5% at December 31, 1994), due 1995 ..................................... 350,000 --
Note payable, collateralized by RRC building, interest
at 8%, due through 1999 ..................................................................... 225,000 --
Note payable, collateralized by deed of trust, interest
at 6.625%, due through 2001 ................................................................. 72,272 --
Note payable, collateralized by a second position on
notes receivable, interest at 12%, due through 1995 ......................................... 45,448 153,201
Other .......................................................................................... 38,476 47,802
Notes payable repaid during 1994 ............................................................... -- 864,676
---------- ----------
$4,881,861 $4,356,990
========== ==========
</TABLE>
Future maturities of notes payable are as follows:
Year ending
December 31,
-------------
1995 $2,642,508
1996 1,225,814
1997 364,741
1998 573,827
1999 57,686
Thereafter 17,285
----------
$4,881,861
==========
Scheduled future maturities may be prepaid to the extent that payments made of
$1,000 per Los Abrigados timeshare interest sold exceed the scheduled payments
on the loan. Any prepaid amounts will be applied to the scheduled payments in
chronological order of maturity.
<TABLE>
Note 11 - Notes Payable to Affiliates
Notes payable to affiliates consist of the following:
<CAPTION>
December 31,
------------
1994 1993
---------- ----------
<S> <C> <C>
Notes payable, collateralized by LAP partnership
interest, interest at 8%, due through 1998 ...................................... $1,100,000 $ --
Note payable, collateralized by notes receivable,
interest at 14%, due through 1997 ................................................ 332,724 521,105
Notes payable, collateralized by RRC common stock,
interest at 10%, due through 1997 ................................................ 225,426 --
Note payable, collateralized by notes receivable,
interest at 16%, due through 1997 ................................................ 104,719 135,231
Notes payable, collateralized by LAP partnership
interest, interest at 12%, due through 1996 ...................................... 115,750 --
Note payable, unsecured, interest at 10%,
due through 1995 ................................................................. 94,000 94,000
Note payable, collateralized by furniture and equipment,
interest at 16%, due through 1995 ................................................ 27,965 77,973
Notes payable repaid during 1994 ..................................................... -- 223,599
---------- ----------
$2,000,584 $1,051,908
========== ==========
</TABLE>
Future maturities of notes payable to affiliates are as follows:
Year ending
December 31,
------------
1995 $594,934
1996 419,925
1997 143,682
1998 842,043
-----------
$2,000,584
===========
Total interest expense on notes payable to affiliates for the years ended
December 31, 1994, 1993 and 1992 was approximately $141,000, $153,000, and
$170,000.
Note 12 - Minority Interests
Minority interests at December 31, 1994, include interests in LAP, the Arizona
limited partnership which owns and operates the Los Abrigados resort, and
Genesis of $2,440,249 and $90,920, respectively (Note 4).
LAP minority interests consist of LAP's limited partners' capital contributions,
the limited partners' interests in the results of operations and cash
distributions to the limited partners. The Company held a 71% interest in LAP
until July 1, 1994, when it acquired the 7.5% Class A minority interest for
$1,587,000, and as a result, at December 31, 1994, holds a 78.5% interest.
Certain of the Class A partners are affiliates of the Company. Non-affiliates
received $365,250 in cash for their partnership interests and affiliates
received $6,000 cash and $1,215,750 in notes (Note 11). The cost in excess of
the minority interest balance at the date of acquisition was recorded as an
increase in resort property held for timeshare sales in the amount of $813,051.
The 21.5% remaining minority interest at December 31, 1994, is held by the Class
B limited partners whose capital contributions of $500,000 bear interest at
13.5%, payable quarterly.
Income from LAP is allocated; first, to the Class A limited partners until the
cumulative net profits allocated are equal to the cumulative Class A priority
return; then, 76.76% to ILX and 23.24% to the Class B limited partners until the
amounts allocated to the Class B limited partners equal their capital
contributions and; finally, to the partners pro rata in proportion to their
interests in the partnership. Effective July 1, 1994, 21.5% of income is
allocated to the Class B limited partners and 78.5% to ILX.
During 1992, the Company issued to an affiliate, as agent for certain Class A
and B limited partners, a $770,000 promissory note collateralized by $810,630 in
notes receivable. The promissory note was issued to reduce Class A limited
partners' capital contributions by $500,000, Class A priority returns by
$149,954, Class B accrued interest by $73,772 and loan guarantee fees by
$46,274.
Included in due to affiliates at December 31, 1994 and 1993, is approximately
$17,000 and $95,000 in Class A distributions and Class B interest.
A reconciliation of LAP minority interests from 1992 to 1994 is as follows:
Balance December 31, 1992 .................................. $ 1,694,816
Income allocated to Class A ............................. 814,520
and B Partners
Distributions paid or accrued ........................... (168,998)
Issuance of common stock (Note 14) ...................... (204,000)
-----------
Balance December 31, 1993 .................................. 2,136,338
Income allocated to Class A
and B Partners ........................................ 1,204,263
Distributions paid or accrued ........................... (126,403)
Acquisition of Class A Partner interests ................ (773,949)
-----------
Balance December 31, 1994 .................................. $ 2,440,249
===========
Note 13 - Commitments
Future minimum lease payments on noncancelable operating leases are as follows:
Year ending
December 31,
------------
1995 $283,000
1996 144,000
1997 86,000
1998 38,000
1999 18,000
-----------
$ 569,000
===========
Total rent expense for the years ended December 31, 1994, 1993 and 1992, was
approximately $449,000, $316,000 and $139,000.
Note 14 - Shareholders' Equity
Preferred Stock
At December 31, 1994 and 1993, preferred stock includes 77,278 and 77,523 shares
of the Company's Series A Preferred Stock carried at $772,780 and $775,230,
respectively. The Series A Preferred Stock has a par value and liquidation
preference of $10 per share and, commencing July 1, 1996, will be entitled to
annual dividend payments of $.80 per share. Commencing January 1, 1993, on a
quarterly basis, the Company must contribute $100 per timeshare interest sold in
the Los Abrigados resort to a mandatory dividend sinking fund. At December 31,
1994, notes receivable in the amount of approximately $240,000 have been
designated for the sinking fund. Dividends on the Company's common stock are
subordinated to the Series A dividends and to the contributions required by the
sinking fund.
At December 31, 1994 and 1993, preferred stock includes 55,000 shares of the
Company's Series B Convertible Preferred Stock carried at $55,000. The Series B
Convertible Preferred Stock has a $10 par value and a liquidation preference of
$10 per share, which is subordinate to the Series A liquidation preference. The
Series B Convertible Preferred Stock is not entitled to dividends. Commencing
July 1, 1996, the Series B Convertible Preferred Stock may be converted into
common stock on the basis of two shares of common for one share of preferred
stock.
In May 1992, the Company repurchased 220,000 shares of its Series B Convertible
Preferred Stock from an affiliate in exchange for a $175,000 note payable from
the Company and the opportunity to utilize up to a maximum of 500 room nights at
the Los Abrigados resort over a five-year period subject to certain
restrictions. The cost of providing the room nights was valued at $15,000. The
effect of this transaction was to reduce the Series B liquidation preference by
$2,200,000. Principal and interest payments totaling $35,000 were made on the
note payable in August 1992. In conjunction with the payments, the affiliate
purchased ten timeshare interests in the Los Abrigados resort for $35,000 plus
250 of the 500 room nights it had acquired above.
Both the Series A and Series B preferred stock may, at the holder's election, be
exchanged under certain conditions for lodging certificates or, after payment of
$2,100 each, for Los Abrigados timeshare interests. The Company estimates that
the future cash obligations in respect to these in kind redemptions is less than
$170,000.
At December 31, 1994 and 1993, preferred stock includes 298,035 and 305,652
shares of the Company's Series C Convertible Preferred Stock carried at $820,975
and $842,798, respectively (Note 4). The Series C Convertible Preferred Stock
has a $10 par value and is entitled to dividends at the rate of $.60 per share
per annum when declared by the Board of Directors. If dividends are not declared
in any year prior to the fifth anniversary of the merger date (November 1,
1993), such undeclared dividends ("Dividend Arrearage") may be converted to
"Cumulation Shares" at the rate of $6 of Dividend Arrearage per Cumulation
Share. The Series C Preferred Stock and the Cumulation Shares have a liquidation
preference of $10 per share and $6 per share, respectively, and are subordinate
to the liquidation preferences of the Series A and Series B stock. Commencing
November 1, 1994 through October 31, 2004, the Series C Preferred Stock may be
converted to ILX common stock on the basis of five shares of common stock for
three shares of Series C Preferred Stock and one share of ILX common stock for
each $6 in Dividend Arrearages. During 1994, 7,260 Series C convertible shares
were exchanged for 12,100 common shares. In addition, at December 31, 1994, 800
common shares are issuable to such exchanging shareholders for their dividend
arrearage. ILX may redeem the Series C Preferred Stock commencing November 1,
1996, at $10 per share plus payment of all declared but unpaid dividends.
Common Stock
In March 1992, the Company acquired a 50% interest in Varsity Clubs of America
joint venture ("Varsity") in exchange for 150,000 shares of the Company's common
stock valued at $84,375, the assumption of $16,746 of Varsity payables and six
timeshare interests in the Los Abrigados resort valued at $6,720. As a result of
the transaction, the Company, through VCA, owns 100% of Varsity (Note 6).
In March 1992, 4,537,507 shares of common stock, which had been previously
issued as part of the plan of reorganization of BIS-ILE Associates, the
predecessor in interest to the Los Abrigados resort, were contributed back to
the Company by affiliates and were accounted for retroactively as a reverse
stock split.
In 1992, the Company collected a $150,000 note receivable from an affiliate for
the exercise of warrants during 1991.
In March 1993, the Company issued 204,000 shares of restricted common stock,
valued at $1 per share, which was at a premium of $.25 over the approximate
market price at the date of issuance, to two LAP Class A minority partners in
consideration for the reduction of their Class A Priority return from 22% to
13.5%. The minority partners are affiliates of ILX.
In July 1993, the Company issued 102,000 shares of restricted common stock,
valued at $1 per share, which was at a discount of $.50 under the approximate
market price at the date of issuance, to a LAP Class B minority partner in
consideration for accrued and future guarantee fees and Class B interest. The
minority partner is an affiliate of ILX.
In July 1993, the Company issued warrants for 50,000 shares of ILX restricted
common stock exercisable at a price of $1.50 per share, the approximate market
value at date of issuance, in conjunction with the financing of refurbishment at
the Golden Eagle Resort (Note 10). The warrants are exercisable through July 1,
1998.
In February 1994, the Company issued 123,000 shares of restricted common stock,
valued at $1 per share, which was at a discount of a $.56 under the approximate
market price at the date of issuance, to the minority interest shareholders of
RRC (Note 5). The minority interest shareholders are affiliates of the Company.
In March 1994, the Company issued warrants for 100,000 shares of ILX restricted
common stock exercisable at a price of $1.625 per share, the approximate market
value at date of issuance. The warrants were issued in conjunction with the
early collection in March 1994, of a note receivable with a due date of December
31, 1997, in the amount of $900,000 (Note 2).
During 1994, 24,616 shares of restricted common stock valued at $29,232 were
issued in exchange for services provided to the Company. The stock was valued at
the approximate market price on the date of the agreement.
Note 15 - Employee Stock Option Plan
The Company has adopted 1987 and 1992 Stock Option Plans pursuant to which
options (which term as used herein includes both incentive stock options and
non-statutory stock options) may be granted to key employees, including
officers, whether or not they are directors, and non-employee directors and
consultants, who are determined by the Board of Directors to have contributed in
the past, or who may be expected to contribute materially in the future, to the
success of the Company. The exercise price of the options granted pursuant to
the Plan shall be not less than the fair market value of the shares on the date
of grant. All outstanding stock options require the holder to have been a
director or employee of the Company for at least one year before exercising the
option. Options are exercisable over a five year period from date of grant if
the optionee was a ten percent or more shareholder immediately prior to the
granting of the option and over a ten-year period if the optionee was not a ten
percent shareholder. The aggregate number of shares which may be issued under
the Plans shall not exceed 841,376 shares.
Stock option transactions are summarized as follows:
Outstanding at December 31, 1991 ............................. 205,170
Options granted .............................................. 268,750
Options exercised ............................................ (142,584)
--------
Outstanding at December 31, 1992 ............................. 331,336
Options granted .............................................. 56,250
Options canceled ............................................. (225,000)
--------
Outstanding at December 31, 1993 ............................. 162,586
Options exercised ................................... (162,586)
Options granted ..................................... 508,000
Options canceled .................................... (180,000)
--------
Outstanding at December 31, 1994 .................... 328,000
========
The exercise price on the options exercised during 1994 was $.40 per share for
62,586 shares and $.685 for 100,000 shares and on the options exercised during
1992 was $.40 per share. The exercise price for options granted in 1994 ranged
from $1.625 to $2.00 per share, for options granted in 1993 was $.875 per share
and for options granted during 1992 ranged from $.50 to $1.00 per share. The
exercise price for all options outstanding at December 31, 1994, was $1.625 per
share. Options outstanding at December 31, 1994, consist of 82,500 shares which
expire in 1999 and 245,500 shares which expire in 2004.
Note 16 - Related Party Transactions
In addition to the related party transactions described in notes 2, 3, 5, 7, 11,
12 and 14, the Company had the following related party transactions:
The Company leases from affiliates 41 timeshare interests in the Stonehouse at
Los Abrigados at the rate of $1,000 per time share unit per year, through
October 1, 1996, payable on a quarterly basis. The Company paid $41,000 per year
in lease payments to affiliates for the years ended December 31, 1994, 1993 and
1992. In addition, in 1992 and 1993 the Company made lease payments to
affiliates of $52,424 each year for use of the Stonehouse for periods prior to
1992. The affiliates pay maintenance fees to the Company on an annual basis for
their ownership intervals of $375 per interval in 1994 and $345 per interval in
1993 and 1992.
In September 1992, the Company exchanged two timeshare interests in the Los
Abrigados resort for four timeshare interests in the Golden Eagle resort and
four timeshare interests in the Ventura resort with an affiliate.
In March 1993, the Company exchanged two Stonehouse interests and twenty
one-bedroom timeshare interests in the Los Abrigados resort in satisfaction of
$70,000 in principal and accrued and future interest due on a note payable to an
affiliate. In June 1993, the Company upgraded six of the one-bedroom interests
to two-bedroom interests in exchange for an additional $6,000 principal
reduction.
In December 1994, the Company acquired a condominium adjacent to the Golden
Eagle Resort for $104,915, consisting of cash of $32,643 and the assumption of
the underlying mortgage of $72,272. The condominium is used to house the general
manager of the resort. Timeshare intervals in the property may be marketed in
the future.
Note 17 - Subsequent Events
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
through 1998, pursuant to an agreement reached in December 1994. (Note 10).
In March 1995, the Company reached an agreement to acquire the Kohl's Ranch, a
10 acre rustic resort near Payson, Arizona for a purchase price of $1,650,000,
consisting of a $50,000 cash down payment, assumption of an existing mortgage of
approximately $950,000, issuance of a $350,000 note payable to seller and the
issuance of 150,000 shares of ILX restricted common stock valued at $2 per
share. The agreement provides for a 60 day right of cancellation by ILX. The
Company intends to offer timeshare intervals in the property.
<TABLE>
Note 18 - Quarterly Financial Data (Unaudited)
Quarterly financial information is presented in the following summary:
<CAPTION>
1994
----
Three months ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues ................................... $6,334,998 $8,025,982 $8,196,292 $7,393,397
Operating income ........................... 1,173,947 1,347,869 1,167,184 1,067
Net income ................................. 721,183 804,682 469,056 153,366
Net income per share ....................... .06 .06 .04 .01
</TABLE>
<TABLE>
<CAPTION>
1993
----
Three months ended
---------------------------------------------------------------------------
March 31 June 30 September 30 December 31
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues ................................... $4,024,809 $4,811,495 $5,598,382 $6,024,693
Operating income ........................... 414,482 786,180 781,936 1,047,483
Net income ................................. 255,824 494,690 470,932 854,785
Net income per share ....................... .02 .04 .04 .07
</TABLE>
The 1993 net income per share does not equal the summation of the quarters due
to rounding or weighting of average shares.
The reduced net income in the third quarter 1994 is due to recognition of income
taxes of $241,818.
The reduced operating income in the fourth quarter 1994 is due to amortization
of RRC deferred costs and recognition of VCA marketing costs (Notes 5 and 6).
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, there unto duly authorized, on the
28th day of March, 1995.
ILX Incorporated
(Registrant)
By /s/Joseph P. Martori
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/Joseph P. Martori
- ------------------------- President, and Chairman As of March 28, 1995
Joseph P. Martori of the Board
/s/Nancy J. Stone
- ------------------------- Executive Vice President, As of March 28, 1995
Nancy J. Stone Chief Financial Officer
and Director
/s/Denise L. Janda
- ------------------------- Controller As of March 28, 1995
Denise L. Janda
/s/Edward J. Martori
- ------------------------- Director As of March 28, 1995
Edward J. Martori
- ------------------------- Director As of March 28, 1995
Alan J. Tucker
/s/Ronald D. Nitzberg
- ------------------------- Director As of March 28, 1995
Ronald D. Nitzberg
<PAGE>
<TABLE>
ILX INCORPORATED
SCHEDULE IX
RESERVE FOR POSSIBLE CREDIT LOSSES
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1994
<CAPTION>
Charged
Balance a Charged to to Other Balance at
Beginning Costs and Accounts- Deductions- end of
of Period Expenses Describe Describe (a) Period
----------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Reserve for possible ............ 1994 $ 816,000 764,000 28,000(b) 345,000 $1,263,000
credit losses =========== ========== ========== ============= ===========
Reserve for possible ............ 1993 $ 692,000 667,000 543,000 $ 816,000
credit losses =========== ========== ============= ===========
Reserve for possible ............ 1992 $ 895,000 630,000 833,000 $ 692,000
credit losses =========== ========== ========== ============= ===========
(a) Deductions represent the write-off of notes deemed uncollectible.
(b) Recoveries of prior year write-offs.
</TABLE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 3 to
Registration Statement No. 33-61477 of ILX Incorporated on Form S-2 of our
report dated March 10, 1995, included in the Annual Report on Form 10-K/A-3 of
ILX Incorporated for the year ended December 31, 1994. We also consent to the
use of our report dated July 26, 1995, on the financial statements of Varsity
Clubs of America Incorporated as of December 31, 1994 and 1993, and for the year
ended December 31, 1994, appearing in the Prospectus, which is part of such
Registration Statement.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 31, 1995
