September 23, 1997
Catherine Dixon, Esq.
Office of Chief Counsel Section 2(3)
Division of Corporation Finance Section 5
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington D.C. 20549
ILX Incorporated
Ladies and Gentlemen:
We are counsel to ILX Incorporated, an Arizona corporation
("ILX"). We write in connection with the proposed distribution (the
"Distribution") of 3,200,000 shares of the common stock, no par value, of ILX's
subsidiary, Sedona Worldwide Incorporated, an Arizona corporation formerly known
as Red Rock Collection Incorporated ("Sedona"). The Distribution would be made
to ILX's common stock holders on a pro rata basis as a taxable dividend without
consideration. At the time of the Distribution the shares of Sedona common stock
to be distributed would constitute 100% of the outstanding shares held by ILX.
On behalf of ILX, we respectfully request that the Staff of
the Division of Corporation Finance (the "Division") either:
A. Concur that the Distribution would not constitute a
"sale" of Sedona common stock under Section 2(3) of
the Securities Act of 1933, as amended (the
"Securities Act"); or
B. Confirm it will recommend that no enforcement action
be taken by the Securities and Exchange Commission
(the "Commission") if the Distribution is effected
without registration of the Sedona common stock under
the Securities Act.
I. The Companies
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ILX was formed in October, 1986 as International Leisure Enterprises
Incorporated. The corporation changed its name to ILX Incorporated in 1994. As
of June 30, 1997, ILX had 13,078,669 shares of common stock (the "ILX Common
Stock") outstanding. The ILX Common Stock is registered pursuant to Section 12
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
EXHIBIT 10A
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
September 23, 1997
Page 2
ILX primarily is engaged in the business of developing, operating,
financing and marketing interval ownership interests, often referred to as
"timeshare" interests, in resort properties. ILX markets timeshare interests in
resorts it owns or controls, as well as in resorts owned by third parties. ILX
markets timeshare interests in resorts located in Arizona, Colorado, Florida,
Indiana, Hawaii and Mexico. The properties owned or controlled by ILX or its
subsidiaries also are operated as hotels, including unused or unsold timeshare
inventory. ILX operates its timeshare and related business activities directly
and through twelve subsidiary corporations and three subsidiary partnerships.
ILX also owns Sedona, the subsidiary corporation that is the subject of this
letter, as well as six subsidiary corporations that hold real estate and related
interests, and five inactive corporations and one inactive limited partnership
that have no assets or liabilities and do not conduct any business at the
present time.
In addition to its timeshare activities, in 1993, ILX undertook to
develop a new business line involving the manufacture and distribution of
personal care products. This business line was developed through Sedona, which
was incorporated in October 1992 as Red Rock Collection Incorporated, an Arizona
corporation. Red Rock Collection Incorporated changed its name to Sedona
Worldwide Incorporated in September, 1997. Sedona began marketing its new
product line in July 1994. The complete product line consists of spa and salon
formulated products for face, body, bath and hair care. The Sedona corporate
headquarters are located at 3840 North 16th Street, Phoenix, Arizona. The
offices house the executive offices, customer service, accounting, warehouse and
shipping operations. Through an arrangement between Sedona and ILX, the location
also contains telemarketing offices for ILX's timeshare sales operations.
Sedona's products primarily have been marketed through resort
properties owned and operated by ILX. This resort-based sales program has
included an upscale amenities line, an in-room gift basket promotion and retail
product sales at ILX resort venues. Sedona products also have been used by ILX
and its subsidiaries as tour promotion incentives. The products are given as
gifts to individuals who attend timeshare tours and presentations. Sedona also
has marketed by direct mail to the resort and tour customers who have received
Sedona products.
To bolster Sedona's business, effective January 1, 1997, ILX and Sedona
entered into personal service agreements (the "Personal Service Agreements")
with celebrity Debbie Reynolds and her son, Todd Fisher. The Personal Service
Agreements provided, among other things, that Ms. Reynolds would endorse
Sedona's line of products. Pursuant to the Personal Service Agreements and
related documents, each of Ms. Reynolds and Mr. Fisher were to receive from ILX
70,000 shares of the 700,000 then issued and outstanding shares of Sedona common
stock.
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Division of Corporation Finance
Securities and Exchange Commission
September 23, 1997
Page 3
Also under the Personal Service Agreements, ILX agreed that, within
sixty (60) days from the issuance of such stock to Ms. Reynolds and Mr. Fisher,
which issuance has not yet occurred, if feasible, ILX would distribute to the
existing ILX shareholders the common stock of Sedona of not less than thirty
percent (30%) of the 700,000 then issued and outstanding shares of Sedona common
stock. The Personal Service Agreements further provided that (i) ILX would
undertake promptly to register the common stock of Sedona with the Securities
and Exchange Commission with a view to listing the stock on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) and (ii)
either concurrently with such registration or by separate registration, and upon
the advice of its underwriters, Sedona would undertake a public offering of
between $2 million and $5 million in shares of Sedona common stock to raise
capital to develop Sedona's business. On July 8, 1997, Debbie Reynolds filed for
bankruptcy protection. Despite the bankruptcy, Ms. Reynolds and Mr. Fisher have
indicated to ILX and Sedona that they intend to perform fully under the Personal
Service Agreements.
In connection with the Distribution, Sedona intends to conduct a stock
split so that there will be 4,000,000 shares of Sedona common stock outstanding
at the time of the Distribution. As more fully described below, to fulfill its
obligations to Ms. Reynolds and Mr. Fisher following the stock split, ILX would
transfer 400,000 shares of Sedona stock to each of Ms. Reynolds and Mr. Fisher.
As a result, ILX would thus hold 3,200,000 shares of Sedona's then outstanding
common stock, all of which it then would distribute prorata to ILX's
shareholders pursuant to the Distribution.
Following the Distribution, ILX and Sedona intend to conduct their
respective businesses independently, although ILX and Sedona management
contemplate certain agreements allowing Sedona to continue marketing its
products through ILX's resorts and to ILX's customers, and allowing ILX to
continue leasing space in Sedona's current headquarters for telemarketing
operations. Moreover, ILX will provide certain management, administrative and
other services to Sedona for a period of time after the Distribution. ILX will
charge Sedona for such services, on terms and conditions determined in
negotiations between the parties.
II. The Distribution.
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A. Mechanics of the Distribution.
Transfer to Reynolds and Fisher. ILX would transfer 400,000 shares of
Sedona's common stock to each of Ms. Reynolds and Mr. Fisher pursuant to the
Personal Service Agreements, as amended. Pursuant to agreements between ILX, Ms.
Reynolds and Mr. Fisher, the Sedona common stock may not be transferred for two
(2) years from the date of issuance. Also, pursuant to the Personal Service
Agreements, the certificates representing the Sedona
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
September 23, 1997
Page 4
common stock transferred to Ms. Reynolds and Mr. Fisher further would be
restricted to prohibit transfer unless and until (1) Sedona is subject to
registration requirements of and does register under Section 12 of the Exchange
Act and (2) Sedona undertakes a registration with the Commission of Sedona's
common stock and qualifies the stock for trading through an appropriate
exchange. Accordingly, Sedona only would allow transfer of any shares following
the absolute, 2-year prohibition if the holder of the stock provided Sedona with
a legal opinion acceptable to Sedona and its counsel that a proposed transfer is
excepted from the registration requirements of the Securities Act and applicable
state securities laws. The transfers to Ms. Reynolds and Mr. Fisher would be
conducted pursuant to Rule 506 of Regulation D and Section 4(2) of the
Securities Act.
The Distribution. Following the transfers to Ms. Reynolds and Mr.
Fisher, the remaining 3,200,000 shares of Sedona common stock held by ILX would
be distributed to ILX's shareholders of record as of a date to be established by
ILX's board of directors (the "Record Date"). The Distribution would be made to
ILX's shareholders on the Record Date on a pro rata basis. Arizona law does not
require approval of the Distribution by ILX's shareholders and ILX would not
seek such approval. The Distribution would occur without any consideration being
paid by ILX's shareholders. To provide all of ILX's shareholders who receive
Sedona common stock with the valuation of the stock dividend for tax purposes,
ILX would engage a third-party appraiser to appraise the value of Sedona.
Fractional Shares. ILX intends only to distribute whole shares of
Sedona stock in the Distribution. To achieve that end cost effectively, ILX has
reached agreement with Martori Enterprises Incorporated ("MEI"), which is ILX's
largest shareholder. MEI has agreed to contribute back to ILX as a capital
contribution Sedona shares that MEI otherwise would receive in the Distribution.
MEI would contribute sufficient Sedona shares to allow ILX to round up to the
next whole share the number of Sedona shares that ILX's other shareholders would
receive in the Distribution.
Transfer Restrictions. ILX does not seek to cause the Sedona common
stock to become immediately tradable and, instead, seeks to have it restricted
from trading following the Distribution. Accordingly, ILX and Sedona would place
legends on the certificates representing the Sedona common stock and enter a
stop transfer order with Sedona's transfer agent to prevent the shares from
being transferred unless and until Sedona becomes subject to and does register
its common stock under Section 12 of the Exchange Act and registers its common
stock with the Commission under the Securities Act. Sedona only would allow
shares to be transferred if the holder of the stock provided Sedona with a legal
opinion acceptable to Sedona and its counsel that a proposed transfer is exempt
from the registration requirements of the Securities Act and applicable state
securities laws.
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
September 23, 1997
Page 5
Escrow. To facilitate a cost-effective distribution of the stock
dividend of Sedona common stock, Sedona common stock would be held in escrow
with a third party on behalf of the recipient ILX shareholders pending
registration with, or determination of the availability of an exemption from,
applicable state securities laws (the "Escrow"). The stock held in escrow would
not be distributed until ILX's counsel confirms (i) the availability of
exemptions from registration under each applicable state's securities laws, (ii)
Sedona undertakes and completes a registration under each such state's laws when
or if required to complete the Distribution, or (iii) a combination of (i) and
(ii). The Distribution of shares from the Escrow would be made with respect to
shareholders in a given state as and when the above determinations are made,
without regard to whether such resolution has been reached with respect to or
under every other applicable states' laws.
The Distribution is subject to final approval of ILX's board of
directors, which approval is expected subject to receipt of an affirmative
response by the Division and determination that the costs of completing the
Distribution, including the costs of complying with federal law and state
securities laws, allow the Distribution to proceed cost effectively.
B. Business Purpose of Distribution. ILX's board of directors believes
that the Distribution will enhance the value of ILX's and Sedona's respective
businesses. The segregation of the businesses will permit each company to focus
its managerial and financial reserves on the growth of its business and to allow
Sedona to implement incentive compensation programs designed to attract, retain
and motivate employees and consultants, including Ms. Reynolds and Mr. Fisher,
by offering economic rewards tied more directly to the success of Sedona's
business. Accordingly, ILX's board of directors believes that the segregation of
the businesses will allow each company to build its management team to meet the
management needs required by its specific business. Further, in recent
discussions with representatives of ILX's new investment broker and consultant,
EVEREN Securities, those representatives have indicated that simplification of
ILX's corporate structure, including the spinoff of Sedona to the holders of the
ILX common stock, likely will enhance ILX's value, which will assist ILX if and
to the extent it pursues additional capital investment.
III. Analysis.
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A. Section 2(3) and 5 of the Securities Act.
For the reasons set forth below, we believe that the Staff should
either (i) concur in our opinion that the Distribution of the Sedona common
stock to holders of the ILX Common Stock would not constitute an "offer," "offer
to sell," "offer for sale" or "sale" under Section 2(3) of
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
September 23, 1997
Page 6
the Securities Act or (ii) confirm that the Staff will not recommend that the
Commission take enforcement action if the Distribution is effected without
registration under the Securities Act.
Unless an exemption is available, Section 5 of the Securities Act
requires registration of securities prior to any offer or sale of them. The term
"offer" is defined in Section 2(3) of the Securities Act to include every
"attempt or offer to dispose of ... a security ... for value" (emphasis added)
and the term "sale" is defined in Section 2(3) to include any "disposition of a
security ... for value" (emphasis added). It is our opinion that the
Distribution will constitute neither an offer to sell nor a sale of securities
within the meaning of Section 2(3). Accordingly, registration of the shares of
Sedona common stock is not required because, among other reasons, there will be
no disposition of securities for value. Instead, the Distribution will take the
form of a special dividend to holders of ILX Common Stock who will exchange no
consideration for the shares of Sedona common stock received and will make no
investment decision in connection with the Distribution.
The Commission has taken the position that a dividend of securities
generally does not constitute a "sale" within the meaning of Section 2(3)
because such dividend does not constitute a disposition "for value" within the
meaning of that section. See, e.g., Release No 33-929 (July 29, 1936). The
underlying policy rationale for this position is that a stockholder who receives
a spin-off stock dividend does not make an independent investment decision or
give any consideration in exchange for the securities received. The stockholder,
therefore, does not need the protection afforded by the Securities Act.
In certain unconventional spin-offs, however, the Commission and the
courts have taken the position that shares of the spun-off subsidiary must be
registered under the Securities Act. The reasoning followed in those cases, and
the policy reasons supporting those conclusions, are not applicable to the
Distribution.
In Release No. 33-4982 (July 2, 1969), the Commission expressed concern
when a company with little business activity issued shares to a public company
for nominal consideration, and the public company subsequently distributed those
shares to its stockholders. In such a case, the distribution is undertaken with
the specific intent to take an unrelated company and create a public market for
such securities with little or no information about the issuer available to the
investing public. In this case, ILX has long held Sedona, and assisted in the
development of Sedona's business and does not seek to create an immediate public
market for Sedona's common stock.
In SEC v. Datronics Engineers, Inc., 490 F.2d 250 (4th Cir. 1973),
cert. denied, 416 U.S. 937 (1974), and SEC v. Harwyn Industries Corporation, 326
F.Supp. 943 (S.D.N.Y.
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
September 23, 1997
Page 7
1971), the courts interpreted Section 2(3) broadly to satisfy the disclosure
objectives of the Securities Act, and found dispositions for value in connection
with certain contrived spin-off transactions that also involved alleged
securities frauds. In Datronics and Harwyn, neither corporation had a
demonstrable business purpose for the spin-off transaction, neither had a
history of owning and operating the subsidiary's business, and each created
public trading markets in the securities distributed while furnishing misleading
information to the public. In Datronics, Harwyn and Release No. 33-4982, the
Commission and the courts relied on policy considerations to support a
registration requirement under Section 2(3) of the Securities Act in connection
with contrived spin-offs. We do not believe these policy considerations are
present in the case of the proposed Distribution.
First, as discussed above, the Distribution is motivated by legitimate
business reasons. Second, ample information is currently available to the
investing public regarding ILX. Third, the Sedona stock shall be restricted so
that no trading in Sedona common stock may take place unless and until Sedona
becomes subject to and registers its common stock under the Exchange Act and
Sedona undertakes a registration of its common stock with the Commission.
Accordingly, no public market is intended for the Sedona common stock until
Sedona registers its stock under the Exchange Act and, accordingly, supplies the
public market with appropriate and sufficient information about Sedona. In
short, the proposed Distribution is, in form and substance, a bona fide
dividend. As such, the Distribution should not be subject to Section 5 of the
Securities Act.
As listed below, the Staff has issued many "no-action" letters
concerning distributions of shares of subsidiaries. In each instance, the Staff
took a no-action position with respect to the unregistered distribution of
securities to existing stockholders for no consideration where (i) the
distribution was pro rata and only existing stockholders received shares as part
of the transaction and (ii) there was a legitimate business purpose for the
distribution, and (iii) at the time the distributed stocks would become
tradeable, sufficient information would be available to the public under the
Exchange Act. See e.g. Marriott Corporation, available March 19, 1993; Ball
Corporation, available February 12, 1993; Baxter International Inc., available
September 11, 1992; Control Data Corporation, available July 30, 1992; the Penn
Central Corporation, available June 24, 1992; Union Carbide Corporation,
available March 16, 1992; Sun Company, Inc., available February 18, 1992; Home
Shopping Network, Inc., available December 31, 1991; Johnson Controls, Inc.,
available September 13, 1991; Whitman Corporation, available April 5, 1991;
Quaker Oats Company, available September 11, 1990; Honeywell Inc., available
October 5, 1990; VWR Corporation, available February 7, 1990; Ethyl Corporation,
available April 5, 1989; the Henley Group, Inc., available December 8, 1988;
Newmont Mining Corporation, available May 14, 1987; and Allied-Signal, available
January 23, 1986.
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
September 23, 1997
Page 8
Based on the foregoing, the Distribution is not a vehicle for the quick
creation of a trading market in the shares of Sedona common stock without the
disclosure required by registration under the Securities Act. See Securities Act
Release No. 33-4982 (July 2, 1969) at 1; Harwyn, supra, 326 F. Supp. at 953.
Instead, because ILX and Sedona intend to restrict the transfer of Sedona common
stock until Sedona qualifies as an Exchange Act filer and Sedona registers its
common stock pursuant to the Securities Act, no public trading market in the
Sedona common stock will be created until sufficient information regarding
Sedona has been made available to the public. Accordingly, we ask the Staff to
concur in our opinion that the Distribution may be conducted as described above
without registration under Section 5 of the Securities Act. If the Staff is
unable to concur, we request that the Staff conclude that it will not recommend
any enforcement action to the Commission if the Distribution is conducted as
outlined above without registration under the Securities Act.
We appreciate the Staff's assistance in this matter. If the Staff is
not inclined to grant any portion of the requested relief, we request the
opportunity to discuss the matter with the Staff prior to any final
determination. If the Staff needs additional information, please contact me at
(602) 956-3336, or in my absence, Anthony A. Bonacci of this office at (602)
956-3334. In accordance with Release No. 33-6269, two additional copies of this
letter are enclosed.
Very truly yours,
/s/ Hugh L. Hallman
---------------------------------
Hugh L. Hallman
Colombo & Bonacci, P.C.
2525 E. Camelback Road, Suite 840
Phoenix, AZ 85016
(602) 956-5800
HLH:bw
Enclosures