UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934
For the fiscal year ended DECEMBER 31, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Act of
1934
For the transition period from _______________ to _______________
Commission File Number 0-25025
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SEDONA WORLDWIDE INCORPORATED
ARIZONA 86-0718104
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3840 North 16th Street, Phoenix, Arizona 85016
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Registrant's telephone number, including area code (602) 263-9600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Name of each Exchange
Title of Class on which registered
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Common Stock, without par value 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. [X]
Indicate the number of shares outstanding of each of the Registrant's classes of
stock, as of the latest practicable date.
Title of Class Outstanding at February 28, 1999
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Common Stock, without par value 4,200,000 shares
At February 28, 1999, all of the Registrant's common shares are held by
affiliates.
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SEDONA WORLDWIDE INCORPORATED
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I 3
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ITEMS 1 AND 2. BUSINESS AND PROPERTIES 3
ITEM 3. LEGAL PROCEEDINGS 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
PART II 11
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 7. FINANCIAL STATEMENTS 14
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 14
PART III 15
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ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 15
ITEM 10. EXECUTIVE COMPENSATION 17
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 17
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 18
ITEM 13. EXHIBITS; BALANCE SHEETS AS OF 12/31/98 AND 12/31/97;
STATEMENTS OF OPERATIONS, SHAREHOLDERS EQUITY AND
CASH FLOWS FOR EACH OF THE THREE YEARS ENDED 12/31/98,
12/31/97 AND 12/31/96; AND REPORTS ON FORM 8-K 19
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PART I
This Form 10-KSB contains certain "forward-looking statements," including
statements regarding, among other items, the Company's growth strategy, industry
and demographic trends, the Company's ability to generate additional sales of
its products and anticipated trends in its business. Actual results could differ
materially from these forward-looking statements as a result of a number of
factors, including, but not limited to, the Company's need for additional
financing, intense competition in various aspects of its business, the risks of
rapid growth, its dependence on key personnel and other factors described in
this 10-KSB and the Form 10-SB filed with the Securities and Exchange Commission
on November 4, 1998.
SEDONA WORLDWIDE(TM) SEDONA SPA(TM) RED ROCK GEAR(TM) AND RED ROCK
COLLECTION(TM) ARE TRADEMARKS AND TRADE NAMES OF THE COMPANY. CERTAIN TRADEMARKS
AND TRADE NAMES INCLUDED IN THIS FORM 10-K ARE THE PROPERTY OF THIRD PARTIES AND
THE USE THEREOF DOES NOT IMPLY A DIRECT OR INDIRECT ENDORSEMENT OF THE COMPANY
BY SUCH THIRD PARTIES.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
THE COMPANY
Sedona Worldwide Incorporated, an Arizona corporation ("SWW" or the
"Company"), is a majority-owned subsidiary of ILX Resorts Incorporated, an
Arizona corporation ("ILX"). Following the effectiveness of a pending
registration statement, ILX intends to make a distribution of all of the shares
of the Company's Common Stock which ILX holds to the ILX shareholders on a pro
rata basis (the "Spin-Off"). As a result of the Spin-Off, ILX's shareholders
will own, in the aggregate, 80% of the Company's then outstanding capital stock.
ILX is registering the Company's Common Stock pursuant to a Registration
Statement on Form 10-SB on a voluntary basis, in order to effect the Spin-Off
without the need to register the distribution of the Company's Common Stock to
ILX's shareholders under the Securities Act of 1933, as amended (the "Securities
Act"). Following the effectiveness of the Registration Statement, ILX intends to
distribute an Information Statement, which contains substantially the same kind
of information as is typically found in a Proxy Statement, to ILX shareholders.
The Information Statement will be distributed at or prior to the Spin-Off and
will disclose certain material information about the Company and the shares of
Common Stock to be distributed to ILX shareholders in the Spin-Off.
The Company is principally engaged in the development, testing, marketing,
and distribution of its own proprietary "Sedona Spa" branded lines of face, hair
and body care products and apparels containing ingredients or materials
indigenous to, and embodying the appeal of, the Southwestern region of the U.S.
and of Sedona, Arizona in particular. In addition, the Company has recently
established a marketing alliance with Robert Shields, founder of Robert Shields
Design, a jewelry and art design company based in Sedona, Arizona, whereby the
Company will be able to offer a line of Southwestern-style jewelry and artwork
similar to Mr. Shield's existing line of products. In addition, the Company has
developed a line of apparel under the brand name "Red Rock Gear." No significant
sales of apparel or jewelry have occurred to date. The Company intends to
introduce additional products such as natural vitamins, mineral supplements, and
herbal remedy products, however, it does not currently have any arrangements in
place with respect to the introduction of any such products. See "--Products"
below.
The Company's personal care products have historically been marketed
primarily through direct sales at the Los Abrigados Resort & Spa, the "flagship"
resort of the Company's parent corporation, ILX. In addition, these products
have historically been offered as in-room amenities to guests at various ILX
resorts and as promotional gifts to targeted customers of such resorts. However,
commencing in 1998, the Company began to shift its focus to increasing the
visibility, brand recognition and sales volume of its products through the
distribution of such products through certain salon, spa and other retail
outlets in California independent of ILX.
The Company intends to market its existing and future planned products
through various marketing media designed to capitalize upon the Company's
upscale niche product offerings. Specifically, the Company intends to target
consumers in the 35- to 65-year age group. The Company believes this demographic
group presents the greatest opportunity for future growth as well as expansion
of its existing customer base. Consistent with this strategy, the Company
entered into an agreement with Debbie Reynolds, pursuant to which Ms. Reynolds
has agreed to act as spokesperson for the Company's Sedona Spa line of products.
See "- Marketing Strategy" below. In addition, the Company is exploring a
variety of marketing strategies including catalog sales, internet sales, direct
mail campaigns, amenities packaging, including corporate gift programs with
banks, law firms and other private groups and other incentive-based distribution
channels. The Company is also exploring marketing activities in direct-response
television campaigns. Additionally, the Company will continue to offer its
products at the ILX resorts.
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All of the Company's production and packaging activities are currently
conducted by third parties through contractual arrangements in accordance with
the Company's specifications. Inventory of the Company's products, distribution
and customer service are handled in-house at the Company's principal offices.
However, such activities may in the future also be conducted by third parties in
response to increased sales volume if the Company's marketing and growth
strategies are successful.
The Company was initially incorporated in Arizona in 1992 under the name
"Red Rock Collection Incorporated." In 1997, the Company changed its corporate
name to Sedona Worldwide Incorporated. The Company's headquarters are located at
3840 North 16th Street, Phoenix, Arizona 85016. Its telephone number is (602)
263-9600. The Company also maintains a website at http://www.Sedonaspa.com.
INDUSTRY OVERVIEW
Substantially all of the Company's current business consists of the sale of
personal care products. The Company intends to expand its product line to
initially include selling apparel and jewelry and management believes there
exist other product lines that may complement these product offerings. As a
result, it is currently pursuing opportunities to market natural health and
other such product categories. Following is a discussion of the various market
segments in which its current and potential future products compete.
COSMETICS AND TOILETRIES MARKET. According to DRUG AND COSMETIC INDUSTRY
MAGAZINE ("DCI"), June 1998 edition, the U.S. cosmetics and toiletries industry
is one of the world's largest markets, with $36.4 billion in sales in 1997 and a
compounded annual growth rate of 3.4%. In addition, this industry has
experienced significant growth in recent years. In 1997, hair care comprised
14.5% of the market share with products sold for in-salon services and retail
representing $1.8 billion at the manufacturer level up from $1.2 billion in the
prior year. Sales of hair care products experienced retail sales reaching
approximately $5.27 million in 1997 up from $4.8 million in 1993. Skin care
products comprised 13.7% of the market with retail sales reaching almost $5.0
billion in 1997. In 1997, U.S. retail sales of skin care products reached $3.98
billion with sales for 1998 projected to be $4.18 billion, $4.37 billion in
1999, and $4.57 billion in 2000, according to Packaged Facts, a marketing
research organization. A major factor contributing to this growth is the current
trend of the skin care market being driven by the aging baby boom generation who
are striving to keep a youthful and healthy appearance. Also, mass market
moisturizer sales jumped 24% to $489.9 million for the year ended February 22,
1998, according to Information Resources, of Chicago, Illinois.
The personal hygiene market, which includes bath and shower products, had
retail sales of $4.3 billion in 1997 and an annual growth rate of 1.0% between
1993 and 1997. The Company believes that the growth experienced in this segment
is primarily attributable to new niche products, product extensions of existing
successful products, as well as packaging and marketing trends which cater to an
increasingly sophisticated consumer. In addition, the Company believes that the
growth experienced in the cosmetics and toiletries industry in general is
largely attributable to a growing number of persons in the 45- to 54-year age
group, which group, on average, consists of the most affluent households
according to HOUSEHOLD SPENDING, 4TH EDITION. Also according to this source, in
1997 U.S. households with incomes of $70,000 and greater spent 79% more than the
average household in personal care products and services.
The cosmetics and toiletries industry is a rapidly changing and highly
competitive global industry and the Company expects it to continue to be so in
the future. The market is dominated by a large number of well-capitalized,
diverse companies, such as Avon, Clairol, Alberto Culver, Revlon, L'Oreal, Estee
Lauder, Unilever, Gillette, Proctor & Gamble, Colgate-Palmolive, Matrix, John
Paul Mitchell Systems, Nexxus and Redken, all of which have strong brand-name
recognition associated with their products. However, more recently, product
offerings by various niche marketers have been able to successfully capture a
significant share of the consumer market dollar. The Company believes this trend
is at least partially attributable to the growing number of aging "baby-boomers"
in the 45- to 60-year age group with significant disposable income, many of whom
are particularly interested in products that seek to erase or reduce visible
effects of aging. According to DCI, June 1998 edition, the "baby boomer" segment
of the U.S. population spends, on average, more per capita than any other age
group. Marked by a lower level of brand loyalty than their parents' generation,
these baby boomers typically are more willing to experiment with new products
they believe may bring their desired results. The Company intends to capitalize
upon this perceived demand for lines of specialty personal care products through
its upscale Sedona Spa products.
Cosmetics and toiletry products are distributed through a broad variety of
wholesale and retail channels. Recently, beauty products superstore chains such
as Trade Secrets and Ulta3 have emerged, offering convenient one-stop shopping
for all beauty care needs. There has also been a recent proliferation of
private-label products offered by major retailers such as Sears, J.C. Penney,
Target, Wal-Mart, Osco, Walgreens, and Revco, in response to increasing demand
for low-price products of non-prestigious brands. These large merchandisers,
grocery and drugstore chains, and department stores have successfully utilized
traditional mass marketing approaches, such as television commercials and
national magazine advertisements, to distribute their products. In-salon
purchases have proved to be highly successful for hair care products from
Matrix, John Paul Mitchell Systems, Nexxus, Aveda, Redken and others. In
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addition, cataloger retailers such as Avon have also successfully penetrated
this market. Finally, smaller stand-alone specialty retailers such as Origins,
Bodyworks, H2O, and The Body Shop have also emerged more recently with
significant success. The Company expects competition to increase as the number
and variety of entities offering competitive products continues to increase in
the future.
As competition has increased, cosmetics and toiletries manufacturers and
distributors have been engaged in a trend toward consolidation. Recent examples
include Estee Lauder purchasing Aveda, Bristol-Myers Squibb purchasing Redmond
Products, Clairol and Matrix, Jergens purchasing Bausch & Lomb's skin care
business, Cosmair/L'Oreal purchasing Maybelline and Redken, Unilever purchasing
Helene Curtis, and German-based Wella purchasing Sebastian. The Company expects
this consolidating trend to continue in the future resulting in larger,
better-capitalized competitors offering a greater variety of niche products to
an ever-demanding base of consumers.
JEWELRY. The combined value of all goods produced by costume jewelry
manufacturers in the United States totaled $1.6 billion in 1996, according to
THE ENCYCLOPEDIA OF AMERICAN INDUSTRIES, SECOND EDITION 1998. Unlike many of the
other large consumer markets, there is a lower level of brand identity in the
jewelry arena, and the largest manufacturers have not historically dominated the
market, to the degree experienced in the cosmetics and toiletries industry. In
fact, most manufacturers are relatively small independent operators, often of an
arts and crafts nature. Nonetheless, the industry includes several large
publicly traded companies like Tiffany & Co., with 1995 revenues of $803.0
million; Jostens, Inc. with 1995 revenues of $665.0 million; and Jan Bell
Marketing with 1995 revenues of $254.0 million. The largest company engaged in
the costume jewelry industry in 1995 in the U.S. was Illinois-based Artra Group,
a publicly held conglomerate founded in 1933. Artra's many subsidiaries include
the number two firm, Lori Corp. Lori Corp.'s 1995 sales totaled approximately
$160.0 million. Third in line was the Napa Company, whose origins date back to
1875, making it the oldest costume jewelry manufacturer in the U.S. Their 1995
sales totaled approximately $70.0 million. The New York City based firm of
Trifari Krussman and Fischel, Inc. was fourth in production and sales, with
origins that date back to the early 1920's and sales totaled around $63.0
million in 1995. Most jewelry sales are made through jewelry store chains and
independent retailers as well as department stores, with costume jewelry
achieving notable success on home shopping networks. The Company believes that
there currently exists a trend in the jewelry industry of including the use of
materials and motifs inspired by indigenous cultures and natural elements. The
Company intends to capitalize upon this trend through its offering of The Robert
Shields Collection products.
APPAREL. Retail apparel sales totaled approximately $170.0 billion in 1997,
up 4.9% from 1996, following a 2.2% gain in 1996 from the prior year, according
to the NPD Group Inc. ("NPD").
Apparel is sold at a variety of retail outlets. Based on data from NPD,
discount stores, off price retailers and factory outlets accounted for 26% of
1997 apparel sales, while specialty stores and department stores accounted for
about 22% and 21%, respectively. Another 14.5% of sales are by major chains, and
direct mail/catalogs accounted for 8%. About 30% of the apparel marketed
consisted of national brands (e.g., Liz Claiborne, Fruit of the Loom, Jones
Apparel, Phillips Van Heusen, Polo Ralph Lauren) produced by about 20 different
large companies. The second tier, accounting for about 70% of all apparel
distributed, comprises small brands and store (or private label) goods. The
women's segment has traditionally accounted for more than half of all apparel
sales, according to research from NPD reported in WOMEN'S WEAR DAILY, it totaled
nearly 53% in 1997.
Leaders in the apparel industry included Liz Claiborne ($2.4 billion),
Fruit of the Loom ($2.1 billion), Jones Apparel ($1.3 billion), Phillips-Van
Heusen ($1.3 billion) and Polo Ralph Lauren ($1.2 billion). The Company believes
that one of the most significant trends currently affecting the apparel industry
is the increase in casual dressing due to relaxed workplace dress codes, an
aging population, and a growing reluctance among consumers to spend significant
amounts of money on clothes. The Company intends to enter this vast apparel
market with its "Red Rock Gear" line which offers niche apparel products
intended to provide the consumer with quality, comfort, value and a natural
image. The Company believes that this emphasis upon natural products is
consistent with the brand image of its other products, which is intended to
increase awareness of and loyalty to the entire line of the Company's product
offerings.
VITAMINS, MINERALS AND SUPPLEMENTS. The market for vitamins, minerals and
supplements has experienced significant growth in recent years, with sales of an
estimated $910.0 million in 1997 according to Packaged Facts of New York. The
vitamins, minerals and supplements industry has traditionally been dominated by
national and international pharmaceutical companies, with most sales taking
place through drug stores, grocery stores, mass merchandisers and
health/nutrition chains. However, a significant amount of vitamins, minerals and
supplements have more recently been successfully sold through direct marketing
channels, with examples including Herbalife, Equinox and New Vision.
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THE CONSUMER
The profile of a typical consumer of cosmetics and toiletry products spans
virtually all demographic groupings, regardless of age, gender, race, color,
marital status, or socio-economic status. As pointed out in the June 1996 issue
of DCI, aging baby boomers are expected to become an increasingly larger segment
of the market. The segment of the female population within the age range of 40
to 59 is predicted to be more likely to spend money on anti-aging treatments and
the Company believes its product line responds to customer preferences for such
products.
The Company believes that consumers are becoming increasingly sophisticated
and demanding, generally demonstrating an increasing level of concern and
knowledge about the ingredients of a product and, as a result, are more likely
to read the labels of the products they purchase, taking into consideration
objective product comparison factors apart from brand loyalty in making their
purchase decisions. The Company believes this trend could work to the advantage
of truly well positioned niche marketers, including itself.
OPERATING STRATEGY
Since 1994, the Company has test marketed its unique line of face, hair and
body care products through promotional use, and retail sales at the ILX resorts,
and direct sales, including direct mail, network marketing, in-bound and
out-bound telemarketing, direct wholesaling, trade show, internet and
consignment programs. Based upon such test marketing efforts, the Company
believes that its products will be most favorably received by people 35 to 65
years of age. As a result, the Company intends to proceed with its planned
introduction of botanical based face, hair and body products, a line of
Southwest jewelry and artwork based upon Mr. Robert Shield's existing designs,
expand its "Red Rock Gear" apparel line, as well as develop a line of natural
vitamins and mineral supplements and other products consistent with its Sedona
motif.
The Company's strategy is to seek to satisfy a particular sector of the
consumer population who, because of their attraction to the natural beauty and
mystique of the Southwestern U.S., and particularly Sedona, Arizona, are
attracted to botanically originated products for the face, hair and body, and
jewelry and apparel which seek to represent or capture the "spirit" or the
"essence" of the Southwest and Sedona. The Company's personal care products have
been formulated using a variety of natural botanical extracts, essential oils
and minerals, as demonstrated in the Arizona Mud Masque from the Southwest. The
Company's "Red Rock Gear" line of clothing features natural fibers, Southwest
styling and its particular line of "dirt shirts" uses Sedona red rock materials
as natural dye. Additionally, the Company designs its products with an emphasis
upon branded packaging concepts which stress aesthetic appeal as well as
convenience of use.
The Company seeks to develop products which respond to the sophisticated
demands and concerns of its targeted consumer. For example, no animal testing is
performed; and natural pump sprays as opposed to ozone-depleting propellants are
selected. The Company believes that given its philosophy in developing its
products and their unique marketing appeal, its products will be embraced by its
intended niche market and as a result, the Company seeks to further expand its
current sales volume and product diversity.
The Company maintains a website at http:\\www.Sedonaspa.com. Visitors to
this site can learn about the Company's products and even order them on-line.
PRODUCTS
The Company's existing product offerings consist of the Sedona Spa line of
"botanical treats" for the face, hair and body, the Robert Shields Collection of
jewelry, and Red Rock Gear apparel. Each product group is marketed and
distributed in a manner tailored to capitalize upon the perceived greatest
demand for such products, however, all of them are conceived, designed and
distributed in a manner intended to capture the spirit of Sedona, with an
emphasis upon indigenous ingredients and motifs marketed to an upscale niche
market.
SEDONA SPA COLLECTION. The Company's Sedona Spa group of products consists
of a complete line of face, hair and body products. The Company intends to
modify existing products as well as add new products through development or
acquisition in response to consumer demand and as appropriate opportunities
present themselves. The existing line of Sedona Spa products, grouped by
category, is as follows:
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SEDONA SPA SKIN CARE (FACIAL)
Advanced Daily Cleanser
Refreshing Facial Toner
Wildberry Facial Moisturizer
Hydrating Facial Moisturizer
Nighttime Refining Moisturizer
Arizona Mud Masque
SEDONA SPA HAIR CARE (HAIR)
Mountain Moisture Shampoo
Mountain Moisture Conditioner
Maximum Body Shampoo
Maximum Body Conditioner
Gold Shaping Gel
SEDONA SPA SKIN CARE (BODY)
Body Balm Moisturizer
Spa Shower Gel
Sea Kelp Soap
The Company's Sedona Spa products emphasize the natural properties of their
botanical ingredients. None of the current product offerings contain any
"active" ingredients. As a result, they are not subject to regulation by the
Food and Drug Administration. In addition, third parties perform all of the
necessary testing, if any, associated with the products they produce for the
Company. Generally, testing is performed when using ingredients classified by
the FDA as "Generally Regarded as Safe." The manufacturer of the Sedona Spa hair
care products does employ a Quality Assurance Program, which includes
microbiological testing, stability and product performance testing. None of the
Company's manufacturers performs any animal testing.
THE ROBERT SHIELDS COLLECTION. The Company has recently entered into an
informal arrangement with Robert Shields of "Shields & Yarnell" fame to market a
line of Southwest jewelry, artwork and clothing (to be marketed in conjunction
with the Company's branded Red Rock Gear line as described below) based on his
existing line of such products. The Robert Shields Design is a jewelry and art
design company based in Sedona, Arizona, which distributes Mr. Shields'
Southwest style art and jewelry to retailers, museums, galleries, and resorts
across the United States. Mr. Shields maintains galleries in Prescott, Jerome
and Sedona, Arizona to showcase his work, including one at the Los Abrigados
Resort & Spa, which is owned by ILX. His jewelry often features sterling silver,
turquoise, beads and other Southwest materials, and includes earrings,
necklaces, pins and pendants. His artistic creations include sketches,
sculpture, paintings, masks, painted wood and photography. The marketing
alliance is in its early stages and no purchases have been made by the Company
to date.
RED ROCK GEAR. "Red Rock Gear" is the name of the Company's line of apparel
featuring natural fibers and Southwest styling. The line presently includes a
"dirt shirt," made with Sedona red rock materials used as a natural dye, unique
Southwestern style skirts, a terry-cloth spa robe, t-shirts and caps.
Additionally, portions of the successful Robert Shields Design line of clothing
are currently planned to be marketed under the Red Rock Gear label. This line
includes contemporary Southwestern men's and women's apparel and accessories,
predominately in earth and gem tones embellished with Shields' jewelry. The
Company intends to expand its existing line of Red Rock Gear offerings with
other items such as hiking apparel, women's casual wear, men's shirts,
sweatshirts and other accessories.
RED ROCK NATURAL HEALTH. Although the Company does not currently produce or
distribute such products, it is exploring the development of a line of natural
vitamins, mineral supplements and herbal-based products. The Company believes
such products may capitalize on the increasingly mainstream consumer interest in
natural medicine and well being. The Company believes such products will be
attractive to consumers of its Sedona Spa products and Red Rock Gear line and
may be marketed both separately as well as in conjunction with such product
lines. The Company expects to introduce its Red Rock Natural Health products in
1999 or as soon thereafter as is practicable. However, the Company does not
currently have any arrangements in place with respect to the production,
testing, marketing or distribution of such products and such activities remain
subject to a determination by the Company's management of the feasibility and
desirability of offering such products.
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ADDITIONAL PRODUCT CATEGORIES. In addition to the core product lines
described above, the Company believes that opportunities for additional products
indigenous to, or associated with, the Southwest and Sedona may be developed in
the future in a manner consistent with its existing product offerings.
Accordingly, the Company may determine to test market other products such as
spices and condiments, arts and crafts items, coffees and teas, "New Age"
products and others. Preliminary research indicates that such related products
have the potential for market success, however, there can be no assurances in
this regard. The Company does not currently have any agreements, oral or
written, to test, develop or otherwise distribute any such additional products.
MARKETING STRATEGY
The Company's marketing plan emphasizes various direct sales media for
promoting its proprietary branded product lines. Historically, the Company has
primarily offered its Sedona Spa products as part of the marketing efforts of
its parent corporation ILX as in-room amenities to visitors of the Los Abrigados
Resort & Spa ("Los Abrigados"), the flagship resort of ILX, which is located in
Sedona, Arizona, at other ILX resorts and as promotional premiums to potential
purchasers of ILX's vacation ownership interest inventory. Commencing in late
1998, the Company began to pursue the development of a market for its products
independent of its corporate parent ILX. To date, the Company has made some
initial sales to a limited number of spas, salons and other retail outlets in
California. Commencing in 1999, the Company began selling its products to an
Internet retailer. Although Internet sales have never been a significant source
of revenue to the Company, management may explore opportunities in the on-line
market as they arise. In addition, the Company may utilize catalog, direct mail
or other mediums intended to most efficiently expose its products to a targeted
base of potential consumers. The primary objective of the Company's marketing
strategy is to increase the number of consumers who try its products, with the
secondary objective of obtaining a database of potential customers for further
follow-up by direct mail, telemarketing and automatic order programs. Certain
marketing activities, such as billboard advertising and radio campaigns
commenced in 1998 to create brand awareness, recognition, identity and interest
among consumers.
An initial stage of the Company's marketing plan involves the full-scale
launch of its Sedona Spa product line by, when and if appropriate, the
association of Debbie Reynolds as celebrity spokesperson to assist in targeting
the older baby boomer (50+ age) markets. Television commercials, catalogs and
other direct sales media are being considered, to be supplemented by traditional
advertising, promotion and a public relations campaign, also supported, in some
instances, by Ms. Reynolds' promotion. Pursuant to the agreement, Ms. Reynolds
has agreed to provide certain promotional services, including two personal
appearances, as well as a limited number of radio spots, newspaper and magazine
advertisements and television infomercials. All of Ms. Reynolds' services are to
be performed at ILX's resort, Los Abrigados, except for certain production
activities which may be performed in Las Vegas or Los Angeles, and may not
require more than two weeks of Ms. Reynolds' time. Ms. Reynolds has also agreed
not to use her likeness in connection with any products competitive to the
Company's in the United States. In exchange for her services, Ms. Reynolds
received a number of shares equal to 10% of the Company's outstanding Common
Stock. Ms. Reynolds subsequently transferred these shares to her son, Todd
Fisher, also a director of the Company. See "Certain Relationships and Related
Transactions" below. In addition, the Company has agreed to pay a royalty to Ms.
Reynolds equal to 15% of all sales of its products during the term of the
agreement and the three months following its termination, less a deduction for
returns not to exceed 10 - 15%. To date, no royalties have been accrued, but
they will begin to accrue at such time, if ever, as Ms. Reynolds begins to
perform services pursuant to this agreement. ILX also granted to Ms. Reynolds a
one-week Vacation Ownership Interest in its Los Abrigados Resort. Ms. Reynolds
has the right to terminate the agreement for, among other things, failure of the
Company to generate certain minimum royalties, and failure to effect an initial
public offering of its securities prior to January 1, 1998. Currently, the
agreement is in effect and will expire January 1, 2002, unless earlier
terminated.
The Company intends to focus its marketing efforts initially in the
Southwestern United States, with a national marketing campaign to be implemented
thereafter. The Company also intends to continue to distribute its products
through the ILX resorts, although currently it does not have any contractual
arrangements with ILX for such distribution. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations--Concentration."
MANUFACTURING AND DISTRIBUTION
PRODUCT DEVELOPMENT, PRODUCTION AND PACKAGING. All of the Company's product
development, production and packaging functions are performed by third parties
on a contractual basis. The Company believes that outsourcing these aspects of
its operations enables it to access the particular technical expertise of its
third party suppliers while simultaneously realizing certain economic advantages
enjoyed by such suppliers, including flexible production capacity and raw
materials purchasing power. In addition, the Company believes such arrangements
permit it to avoid the costs associated with the facilities maintenance and
administration activities associated with such functions. The Company works
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closely with its outside suppliers in an effort to ensure the quality and
consistency of its products. The Company does not have contractual arrangements
with any of its third party suppliers. Although the Company has worked with each
of such suppliers for a period of one to five years and believes its relations
are good, such suppliers are not obligated to continue to provide products and
services to the Company at all, or on the same terms and conditions as they
currently do.
Development of a new product typically commences with a market research and
feasibility analysis conducted by the Company and its suppliers. When the
Company has determined that a particular product concept is feasible, it employs
an outside supplier to prepare prototype samples in accordance with the
Company's instructions. The Company ultimately selects the desired prototype,
obtains the necessary governmental approvals, if any, and initiates the
manufacturing process.
Manufacturing of the Company's products is typically completed pursuant to
a purchase order by the Company for a specified number of units. The Company
provides precise product specifications to the manufacturer and requires the
manufacturer to undertake documented quality control procedures throughout the
manufacturing process.
Product labeling and packaging are typically obtained by the Company on a
"turn-key" basis from third party suppliers. This means that these third party
suppliers agree to deliver consumer ready product to the Company. To the extent
that such supplier requires the use of other third parties, they are responsible
for negotiating such arrangements, as well as ensuring the quality of the
products or services received by them. Historically, the Company has utilized
particular stock packaging materials in an effort to avoid the costs and long
lead times associated with obtaining custom packaging materials.
Currently, all of the Company's Sedona Spa products are developed,
manufactured and packaged by three suppliers, Hewitt Soap Co. of Dayton, Ohio;
La Dove, Inc., a privately owned cosmetics laboratory and manufacturing company
located in Florida; and Arizona Natural Resources, a privately owned company
located in Phoenix, Arizona. The Company's Red Rock Gear products are
manufactured and packaged through arrangements with third party suppliers. All
of the Robert Shields' Collection products are produced and packaged by Robert
Shields Design, which subcontracts with third parties in connection with the
production of certain products. With the exception of its Robert Shields
Collection, the Company believes there exist multiple alternative suppliers for
each of its personal care product development, manufacturing and packaging
operations. However, there can be no assurance that the Company would be able to
secure the services of such suppliers as and when needed, if ever, or that it
could do so on favorable terms.
PRODUCT DISTRIBUTION. The Company's inventory of its products are currently
maintained at its principal facilities in Phoenix, Arizona. However, in certain
instances the Company's suppliers have agreed to store products produced for the
Company in advance of the time such products are needed by the Company. The
Company may consider alternative inventory warehousing arrangements, including
expansion of its existing facilities or the acquisition of additional
facilities, if warranted by increased demand for its products or other factors.
The Company does not currently have any agreements in place with respect to such
operations and there can be no assurance that such resources will be available
if and when needed, or if available, will be on terms favorable to the Company.
Currently, all of the Company's order processing and fulfillment operations
are conducted internally at the Company's principal facilities in Phoenix,
Arizona. Orders are processed by the Company's customer service employees, and
fulfilled by its shipping and receiving staff from existing inventory. However,
some or all of the Company's customer service, order processing and fulfillment
operations may in the future be conducted by third parties in response to
increased volume or other factors, many of which are beyond the Company's
control. The Company does not currently have any agreements in place with
respect to such operations and there can be no assurance that such resources
will be available if and when needed, or if available, will be on terms
favorable to the Company.
INTELLECTUAL PROPERTY
The Company has registered "Red Rock Collection" and "Sedona Spa" as trade
names with the Arizona Secretary of State and has filed applications with the
U.S. Patent and Trademark Office for the registration of its trademarks, "Sedona
Worldwide" and "Sedona Spa." Such applications are currently pending, although
there can be no assurances regarding when such registrations will be issued, if
at all.
The Company considers its corporate and product names, logos, formulations
and designs proprietary. The Company currently protects its rights to such
intellectual property rights through reliance upon its common law rights
established through the use of such intellectual property. The Company does not
believe there is anything proprietary about the formulation of its products. As
a result, the Company's product formulations and designs are not patented and
the Company has no state and/or federal trademark or patent applications pending
with respect to its products.
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The Company is not aware of its products and/or formulations infringing any
intellectual property rights of any other party. However, there can be no
assurances in this regard. The Company would incur substantial costs in
defending itself in infringement litigation brought by others, or in prosecuting
infringement claims against third parties. An adverse party claiming patent,
trademark or copyright infringement might assert claims for substantial damages
or seek to obtain an injunction or other equitable relief, which could
effectively block the ability of the Company to make, use, distribute and sell
its products.
The Company does not currently rely upon any confidentiality or other
agreements to protect its trade secrets and proprietary know-how, although it
may use such agreements in the future. Rather, the Company relies upon its
common law rights in such proprietary information. However, to the extent it
relies upon such agreements in the future, there can be no assurance that the
Company's confidentiality agreements, when in place, will not be breached, or
that the Company would have adequate remedies for any breach. In addition, there
can be no assurance that any trade secrets owned by the Company will afford
adequate protection to the Company or not be circumvented, or that any such
interests will provide competitive advantages to the Company.
RESEARCH AND DEVELOPMENT
During each of the fiscal years ended December 31, 1996, 1997 and 1998, the
Company spent an aggregate of approximately $5,000, $19,000 and $3,000,
respectively, on research and development activities. The Company's research and
development activities have historically consisted primarily of product testing
and logo and packaging design, among other activities. The Company may incur
certain costs in the future in connection with the introduction of additional
products. The 1997 research and development activities include the product
changes and repackaging associated with the introduction of the Sedona Spa line
of products, which replaced the Red Rock Collection line previously marketed by
the Company.
GOVERNMENTAL REGULATION
In certain instances, personal care and health products are subject to
regulation by the U.S. Food and Drug Administration (the "FDA"). None of the
Company's existing products require the Company to obtain the approval of the
FDA or any other state or federal agency in order to sell such products. While
the Company's sunscreen formulation has received FDA approval, it is not
currently being marketed. The Company believes it is in compliance with all
applicable FDA and other governmental regulations. However, there can be no
assurance that any of the Company's current or future planned products will not
become subject to governmental approval in the future. The Company intends to
comply with all governmental regulations which may become applicable in the
future including any related to its planned line of Red Rock Natural Health
products.
PROPERTIES
The Company leases approximately 4,000 square feet for $4,000 per month
($48,000 annually) for its principal offices in Phoenix, Arizona, pursuant to a
lease which expires in 2000. The Company subleases a portion of the building to
ILX, for which it charged ILX $52,500 in 1998, inclusive of utilities, cleaning
and other services. The Company does not own any real estate.
EMPLOYEES
As of December 31, 1998, the Company had four employees, all of whom are
employed on a full-time basis. The Company also utilizes ILX staff from time to
time.
Following the Spin-Off, the Company may seek to enter into an agreement
with ILX, pursuant to which ILX will agree to continue to make available the
services of certain of its employees to the Company on a part-time basis, if
needed by the Company. The Company anticipates that any such agreement will be
on commercially reasonable terms and have a limited term, while the Company
develops independent infrastructure, including the hiring of necessary
personnel. However, no such agreement currently exists and there can be no
assurance that the Company will be able to secure terms favorable to it. If and
when such agreement is entered into, the Company believes that it will enable it
to more easily transition from being a subsidiary of ILX into an independent
operating company.
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INSURANCE
Currently, ILX maintains for the benefit of the Company general liability,
automobile liability, workmen's compensation and umbrella coverage insurance in
amounts which the Company believes are customary for a company of its size
engaged in a comparable industry. In anticipation of the Spin-Off, the Company's
management will seek to secure insurance coverage independent of ILX. The
Company does not currently have a commitment for any such insurance and there
can be no assurance that it will be able to secure coverage in the same amounts
as currently maintained for its benefit or that, even if secured, the premiums
associated with such coverage will be affordable to the Company. However, there
can be no assurance that the Company will not be subject to claims in the future
which its insurance may not cover or as to which its coverage limits may be
inadequate. If the Company is uninsured or underinsured at any time that it
becomes subject to a claim, it may be required to significantly deplete its
financial and other resources.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently the subject of any pending or, to its
knowledge, threatened legal claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no public market for the Company's Common Stock. At
December 31, 1998 and February 28, 1999, all of the shares of the Company's
Common Stock are held by two shareholders: ILX (80%) and Mr. Todd Fisher (20%).
No dividends on the Company's Common Stock have been declared by the Company
since inception and none are anticipated in the foreseeable future. When, if
ever, the Company is able to generate earnings, it intends to invest such
resources in its existing operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
FORM 10-KSB, THE WORDS "ESTIMATE," "PROJECTION," "INTEND," "ANTICIPATE" AND
SIMILAR TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS THAT RELATE TO
THE COMPANY'S FUTURE PERFORMANCE. SUCH STATEMENTS ARE SUBJECT TO SUBSTANTIAL
UNCERTAINTY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS SET FORTH BELOW. THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY UPDATE OR REVISE ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN.
OVERVIEW
Sedona Worldwide Incorporated was formed in 1992 to develop, test, market
and distribute its own proprietary "Sedona Spa" branded lines of face, hair and
body care products and apparels containing ingredients or materials indigenous
to, and embodying the appeal of, the Southwestern region of the United States
and of Sedona, Arizona in particular. To date, the Company has generated revenue
primarily through the sale of its face, hair and body care products to ILX, of
which it is an 80% subsidiary. ILX distributes the Company's products as in-room
amenities at its resorts and hotels, as premiums (incentives) to its customers
for attending vacation ownership sales presentations, and for retail sales at
its resort gift shops, and at the Sedona Spa at Los Abrigados Resort & Spa. The
Company also generates revenue from direct mail sales to consumers (many of whom
were introduced to the products as in-room amenities or premiums) and from
limited retail distribution in specialty shops.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company:
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998
----- ----- -----
Net sales:
Sales to affiliates (1) 71.0% 80.5% 85.7%
Sales to non-affiliates 29.0% 19.5% 14.3%
----- ----- -----
Total sales 100.0% 100.0% 100.0%
===== ===== =====
As a percentage of net sales:
Cost of sales 63.0% 69.7% 65.1%
Contribution margin 37.0% 30.3% 34.9%
Selling, general and administrative
expense 95.0% 128.5% 138.1%
Net Loss 61.1% 100.8% 105.3%
- ----------
(1) Sales to affiliates consist of sales made to ILX. Sales to ILX are made at
lower prices (generally cost plus a small mark up) than sales to
non-affiliates.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO DECEMBER 31, 1998
Net sales decreased 11.7% from $341,000 in 1997 to $301,000 in 1998,
reflecting the full effect of the cessation in 1997 of certain test marketing
and distribution methods as well as the changes in the ILX resorts' use of
products as amenities and premiums. Cost of sales as a percentage of sales for
1998 of 65.1% is slightly lower than 1997 of 69.7% because of a shift in product
sales mix that emphasized the sale of higher margin products.
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Selling, general and administrative expenses decreased from $438,000 in
1997 to $416,000 in 1998, consistent with the reduction of test marketing and
distribution methods described above.
Interest expense of $9,000 for 1997 and $6,000 for 1998 reflects interest
on declining capital lease obligations.
Under SFAS No. 109, deferred tax assets and liabilities are recognized for
the estimated future tax effects attributable to differences between the amounts
of the Company's existing assets and liabilities and their respective tax basis.
Because the Company has not yet generated taxable income, and therefore
sufficient evidence does not exist that differences in financial and taxable
income and net operating loss carryforwards will be utilized to reduce future
income taxes, no income tax benefit has been recorded for 1997 or 1998.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO DECEMBER 31, 1997
Net sales decreased 37% from $542,000 in 1996 to $341,000 in 1997. The
decrease reflects the Company's decision to discontinue several of the
distribution methods it had been testing, including multi-level marketing, and
distribution through professional hair salons and certain retail outlets, as
well as a change in the use of Sedona Spa products by ILX. In 1997, ILX resorts
began distributing a three-pack of Sedona Spa products to the majority of its
tour guests as a complimentary gift to the customer during the sales
presentation, rather than distributing a more extensive array of products to
certain guests as an inducement to tour. Also in 1997, ILX resorts deleted hair
spray from their standard resort room amenities, thereby offering three bottled
products (Body Balm, Mountain Moisture Shampoo and Mountain Moisture
Conditioner) rather than four, plus seaweed soap and glycerin soap. In addition,
during 1997 ILX resorts ceased offering complimentary midweek replenishments of
amenities to its vacation ownership exchange guests. ILX resorts continue to
offer vacation owners and vacation ownership exchange guests the full amenities
described above at check-in, a service not typically offered by vacation
ownership resorts.
As a result of the discontinuation of the trial distribution methods, sales
decreased 58% from $157,000 in 1996 to $66,000 in 1997. Sales to non-affiliates
decreased as a percentage of total sales from 29% in 1996 to 19% in 1997, and
sales to affiliates, while lower in dollar amount in 1997 than 1996, increased
as a percentage of total sales. Sales to affiliates are made at negotiated
prices based on cost plus a nominal agreed upon profit margin, with such pricing
being lower than prices offered to non-affiliates. Accordingly, cost of sales
increased as a percentage of sales from 1996 to 1997.
Selling, general and administrative expenses decreased from $515,000 in
1996 to $438,000 in 1997 as a result of a reduction in sales and marketing
expenses associated with the discontinuation of the trial marketing and
distribution programs earlier described.
Interest expense decreased from $17,000 in 1996 to $9,000 in 1997 due to
repayments of interest bearing indebtedness, including capital leases.
There is no income tax benefit recorded in 1996 or 1997 because the Company
has recorded a valuation allowance equal to its deferred tax asset at December
31, 1996 and 1997, respectively. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the estimated future tax effects attributable to
differences between the amounts of the Company's existing assets and liabilities
and their respective tax basis. To date, the Company has not yet generated
taxable income, and therefore, there is insufficient evidence that differences
in financial and taxable income and net operating loss carryforwards will be
utilized to reduce future income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Historically the Company's cash flows from product sales have not been
sufficient to fund its operations, and shortfalls have been funded by its
majority parent, ILX. ILX advanced the Company $447,000 during 1996, $289,000
during 1997 and $467,000 during 1998. ILX has funded the Company's cash
shortfalls since inception and will continue to do so until the completion of
the Spin-Off. As of December 31, 1998, the Company was indebted to ILX in an
amount in excess of $2,300,000, which is expected to be forgiven in conjunction
with the Spin-Off. Following the Spin-Off there can be no assurances that ILX
will fund the Company's cash needs. Without such a commitment, or other sources
of working capital financing which at present do not exist, the Company's
current cash flows will be insufficient to meet its liquidity, operating and
capital requirements. The Company currently has no credit facility with a bank
or other financial institution. The Company will attempt to obtain a credit
facility to address its cash flow needs; however, there can be no assurance that
any such financing will be available if needed, or, if available will be on
terms acceptable to the Company.
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The Company anticipates that its expenses will increase in the future as it
attempts to expand its business by acquiring new products and increasing sales
and marketing efforts and other operations. The Company expects to continue to
incur losses until such time, if ever, as it is able to sell a sufficient volume
of products at prices that provide adequate gross profit to cover operating
costs. The Company's working capital requirements will depend upon numerous
factors, including payment cycles for its shipped products, credit arrangements
with suppliers, the scale-up of its sales and marketing resources, acquisition
of new products and the terms upon which such products are acquired, competitive
factors, and marketing activities. There can be no assurance when, if ever, the
Company will be able to generate sufficient revenues from its operations to
offset its expenses or to secure additional capital commitments. IF THE COMPANY
IS UNABLE TO GENERATE MORE CASH FLOWS THAN IT DOES CURRENTLY, IT WILL BE
INSOLVENT AND MAY HAVE TO DISCONTINUE ITS BUSINESS OPERATIONS.
The Company has never accessed commercial financing and to date, all of its
working capital needs have been financed by ILX. However, following the
Spin-Off, ILX does not intend to fund the Company's future cash shortfalls. As a
result, the Company will need to secure alternative financing sources if it
continues to operate at a loss or, even if profitable, it pursues a growth
strategy. The Company has never accessed commercial financing sources and there
can be no assurance that such resources will be available to the Company when
needed and on favorable terms. In addition, any commercial financing obtained is
likely to impose certain financial and other restrictive covenants upon the
Company and result in increased interest expense. Further, any issuance of
additional equity or debt securities by the Company to raise additional capital
or in connection with any future business combination could result in further
dilution to the Company's' stockholders, including those who receive shares as a
result of the Spin-Off. Although the Company anticipates the need for additional
financing, it does not presently have any plans to engage in an equity or debt
financing transaction.
The Company has historically filed its income tax returns as a member of
the ILX consolidated income tax return. There is no formal income tax sharing
agreement to allocate income taxes among the members of the group and,
historically, the Company has not recorded an income tax benefit for losses it
has incurred that were utilized or may be utilized by ILX.
As of December 31, 1998, the Company had approximately $1,117,000 of
federal and state net operating loss ("NOL") carryforwards which will begin to
expire in 2011 for federal income tax purposes and 2001 for state income tax
purposes. Section 382 of the Internal Revenue Code imposes limitations on the
utilization of NOLs by a corporation following various types of ownership
changes which result in more than a 50% change in ownership of a corporation
within a three-year period. Such a change is expected to result from the
Spin-Off of the Company's Common Stock. As a result, following the Spin-Off, the
limitations of Section 382 are expected to apply and may limit or deny the
future utilization of the NOL by the Company.
SEASONALITY
Presently the Company's revenues are only minimally seasonal, with slightly
increased sales during the second and third quarters and December, reflecting
seasonality in resort guests of its major customer, ILX. If the Company is able
to expand its customer base and marketing and distribution methods, it may
experience different seasonality dynamics that may cause operating results to
fluctuate.
CONCENTRATION
The substantial majority of the Company's revenues to date have been
generated from its parent company, ILX. There are no long-term commitments to
purchase by ILX and, in the event ILX ceased to be a customer of the Company,
revenues would be significantly impacted. If ILX remains a customer, revenues
are expected to increase as ILX adds more resorts (which utilize in-room
amenities) and sales offices (which offer premiums to touring guests), although
there can be no assurances in this regard.
YEAR 2000 ISSUES
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit calendar year is commonly referred to as the "Year 2000 Compliance"
issue. As the calendar year 2000 approaches, such systems may be unable to
accurately process certain date-based information, resulting in program
malfunctions and interruptions.
The Company has identified all significant in-house applications that will
require modifications or upgrades to ensure Year 2000 Compliance. Internal and
external resources are being used to make the required modifications and
upgrades and to test Year 2000 Compliance. The modification and upgrade of all
significant applications is currently in process and the Company expects to have
14
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such modifications complete by September 30, 1999. In addition, the Company will
seek to ensure that applications that it purchases in the future will not have
any Year 2000 issues.
Furthermore, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000
Compliance issues. The Company expects to have completed these determinations by
the end of the third fiscal quarter of 1999. However, there can be no guarantee
that the systems of other companies on which the Company's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have a
material adverse effect on the Company's business or financial condition.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. Since the Company commenced its
assessment of its Year 2000 Compliance during early 1998, it has expended
approximately $17,000, consisting primarily of software purchases and associated
training and consultation services. In addition, certain employees of the
Company and ILX have devoted a portion of their time to assessing and
implementing the Company's Year 2000 Compliance, the costs of which have not
been separately allocated by the Company. The Company anticipates that its
additional expenses to be incurred in the future related to Year 2000 Compliance
will not exceed $20,000. These costs and the date on which the Company plans to
complete the Year 2000 Compliance modifications, upgrades and testing processes
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ from those plans.
The Company has not developed a contingency plan in the event that any of
its systems or the systems of any third party with which it has a material
relationship are not Year 2000 compliant. However, it intends to develop such a
plan by September 30, 1999. In the event that the Company is vulnerable to any
such Year 2000 Compliance issue, the worst case scenario could include an
inability to process orders or properly bill and collect its accounts receivable
and it could be forced to suspend its operations and/or become unable to collect
certain accounts owed to it.
INFLATION
Inflation and changing prices have not had a material impact on the
Company's revenues, loss from operations or net loss for the years ended
December 31, 1996, 1997 or 1998.
ITEM 7. FINANCIAL STATEMENTS
See the information set forth on Index to Financial Statements appearing on
page F-1 of this Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Prior to 1998, the Company had not directly engaged independent public
accountants. In conjunction with the Spin-Off, the Company engaged Deloitte &
Touche LLP ("D&T") to audit its financial statements for the years ended
December 31, 1996 and 1997 and such audited statements were included with the
10-SB and Amendment No. 1 to Form 10-SB in the Company's filings with the
Securities and Exchange Commission. The Company selected D&T because D&T were
the principal independent accountants for ILX.
On November 20, 1998, D&T resigned as the principal independent accountants
for ILX and the Company as reported by ILX in its Form 8-K filing on November
30, 1998 and its Form 8-K/A filing on December 11, 1998.
Neither of D&T's reports on the Company's financial statements for the last
two years contained an adverse opinion or a disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
In addition, during such periods and the period from December 31, 1997 until the
date of D&T's resignation, there were no disagreements or "reportable events"
with respect to the Company, as contemplated by Item 304(a)(1) (iv) and (v),
respectively, under Regulation S-K.
On February 25, 1999, the Company engaged the firm of Hansen, Barnett and
Maxwell, a professional corporation ("HB&M") as its independent public
accountants. Additional information concerning this engagement is included in
the Company's current Report on Form 8-K filed on March 2, 1999. The Company has
authorized D&T to respond fully to inquiries of HB&M regarding the subject
matter of the disagreement discussed above.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information as of March 31, 1999
concerning the Company's executive officers and directors. Except as otherwise
noted, none of the executive officers are directors or officers of any publicly
owned corporation or entity.
NAME AGE PRINCIPAL POSITION
---- --- ------------------
Patrick J. McGroder III 53 Chairman of the Board of Directors
James W. Myers 64 Director
Todd Fisher 40 Director
Robert Shields 48 Director
Stephen W. Morgan 52 Acting Chief Financial Officer
Mia A. Martori 45 Director, President and Treasurer
Joelle A. Ciardella 38 Vice President and Secretary
PATRICK J. MCGRODER III has served as Chairman and as a director of the
Company since April 1998. Mr. McGroder has been a trial lawyer engaged in the
practice of law since 1970, and has served since 1990 as a Vice President,
Treasurer and Secretary of the law firm of Goldstein & McGroder, Ltd. of
Phoenix, Arizona (which he co-founded). Mr. McGroder received a B.A. degree from
the University of Notre Dame and a J.D. degree from the University of Arizona
School of Law. Mr. McGroder is also a director of ILX Resorts Incorporated, the
Company's parent, the Common stock of which is currently traded on the American
Stock Exchange (AMEX:ILX).
JAMES W. MYERS has served as a director of the Company since April 1998.
Mr. Myers has served as President and a director of Myers Management and Capital
Group, Inc., a management consulting firm he founded, since December 1995. From
1986 to 1995, Mr. Myers was President, Chief Executive Officer and a director of
Myers Craig Vallone Francois, Inc., an investment banking and management
advisory firm he also founded. Prior thereto, Mr. Myers held executive positions
with a variety of public and private companies from 1956 to 1986. Mr. Myers also
serves as a director of Autom, BG Associates, Distribution Architects
International, Poore Brothers, Inc., Chambers Belt, Inc., China Mist Tea,
Landiscor, Inc., OmniMount, Solar Cells, Inc. and Nanomics, Inc. Mr. Myers
received a B.S. degree from Northwestern University and an M.B.A. degree from
the University of Chicago. Mr. Myers is also a director of ILX Resorts
Incorporated, the Company's parent, the Common Stock of which is currently
traded on the American Stock Exchange (AMEX:ILX).
TODD FISHER has served as a director of the Company since April 1998. He
has also served as Chief Executive Officer and President of Debbie Reynolds
Hotel & Casino, Inc. ("DRHC"), a publicly-traded corporation that owns and
operates the Debbie Reynolds Hotel & Casino in Las Vegas, Nevada; and as
President of two of DRHC's subsidiaries, Debbie Reynolds Resort Inc., a Nevada
corporation that owned, developed and marketed the timeshare intervals at the
Debbie Reynolds Hotel & Casino prior to its recent sale to the Worldwide
Wrestling Federation, and Debbie Reynolds Management, Inc., a Nevada corporation
responsible for management of DRHC's timeshare operations, each since 1994. Mr.
Fisher is also a consultant to Raymax Productions, Inc. Mr. Fisher received his
B.S. degree in Engineering from Brigham Young University.
ROBERT SHIELDS has served as a director of the Company since April 1998.
Mr. Shields has also been employed as a partner of Holy Mackerel, a wholesaler
of wooden art carvings designed by Mr. Shields and produced in Bali, since 1996,
as Director of Clowns for Ringling Bros. & Barnum and Bailey Circus since May
1998 and since 1994, Mr. Shields has owned and operated Robert Shields Design a
wholesaler of his art and jewelry based in Sedona, Arizona, which sells
primarily to other retailers, as well as museums, galleries and resorts across
the country. In addition, Mr. Shields has acted since the 1970s when at the age
of 18 he was discovered by Marcel Marceau. By age 23, his talents led him to his
own hit television show as one-half of the renowned mime duo, Shields & Yarnell.
STEPHEN W. MORGAN has served as acting Chief Financial Officer since July
1998. Mr. Morgan performs those services as part of his responsibilities as
Chief Financial Officer of ILX Resorts Incorporated. Mr. Morgan is not an
employee of the Company and does not receive any additional compensation for his
services to the Company. Mr. Morgan has served as Senior Vice President and
Chief Financial Officer of ILX since July 1998. Prior thereto, Mr. Morgan served
16
<PAGE>
as General Manager of A-1 Precision Metal Products from September 1997 to June
1998 and as Vice President and Chief Financial Officer of Aquapore Moisture
Systems from July 1989 to September 1997. Mr. Morgan received B.A. and M.B.A.
degrees from Brigham Young University.
MIA A. MARTORI has served as a director and President of the Company since
April 1998. Prior thereto, Ms. Martori served as Vice President of Operations
from July 1995 and as Secretary and Treasurer from January 1994 until February
1997. Ms. Martori has also served as corporate secretary of Martori Enterprises
Incorporated, a private investment company which owned approximately 22% of the
outstanding ILX Common Stock as of December 31, 1998. Ms. Martori has a
biological sciences background and significant experience in operations and
office management. Ms. Martori earned an M.A. in Biological Sciences from
Northern Arizona University in 1977 and a B.S. in Wildlife Biology from Colorado
State University in 1975. Ms. Martori is the wife of Joseph P. Martori, a
director and holder of a 23.6% beneficial interest (directly and indirectly) of
ILX Resorts Incorporated.
JOELLE A. CIARDELLA has served as Vice President since April 1998 and as
Customer Service Manager of the Company since 1996. Prior to joining the Company
in 1996, Ms. Ciardella was employed with two Fortune 500 companies. She was
employed as a Customer Service Team Leader for Federal Mogul Corp., a
distributor of automotive parts and equipment, from October 1994 until August
1996; and was a Customer Service Representative for Siemens Medical Systems, a
distributor of medical equipment and supplies from October 1989 until May 1994.
Her responsibilities included management, accounting, inventory control,
collections, purchasing and product distribution.
ELECTION AND TERM
Directors are elected to a one-year term at each annual meeting of the
Company's shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the total compensation for the Chief
Executive Officer of the Company for each of the fiscal years ended December 31,
1996, 1997 and 1998 (each, a "Named Officer"). None of the Company's other
employees' compensation exceeded $100,000 or would have exceeded $100,000 on an
annualized basis, for any of such years.
SUMMARY COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION (4) COMPENSATION AWARDS
------------------------------------------------ -----------------------------------
PAYOUTS
RESTRICTED SECURITIES ---------------------
OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
NAME AND TITLE YEAR SALARY BONUS COMPENSATION AWARD OPTIONS/SARS PAYOUTS COMPENSATION
- -------------- ---- ------ ----- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph P. Martori 1998 $5,000(l) $0 0 0 0 0 0
1997 15,000(1) 0 0 0 0 0 0
1996 15,000(1) 0 0 0 0 0 0
Mia A. Martori 1998 48,000(2) 0 0 0 0 0 0
Patrick J. McGroder III 1998 0(3) 0 0 0 0 0 0
</TABLE>
- ----------
(1) Represents a portion of total salary paid to Mr. Martori by the Company's
parent corporation, ILX, in consideration of his services as the Company's
Chief Executive Officer. Mr. Martori ceased to serve as the Company's Chief
Executive Officer in April 1998.
(2) Ms. Martori was appointed as President in April 1998, and exercises the
responsibility of the Company's chief operating officer in that capacity.
However, prior thereto she was employed by the Company as its Vice
President of Operations. This information represents all compensation
received by her for all services to the Company during 1998.
(3) Patrick J. McGroder III has served as Chairman, director and chief
executive officer of the Company since April 1998. Mr. McGroder receives no
salary or other compensation for his services.
(4) Excludes ILX Profit Sharing Plan contributions on behalf of the employee.
ILX has a Profit Sharing Plan under which no ILX employee was allocated
more than $4,100 in 1996 and 1997 nor are they expected to be allocated
more than $4,500 for 1998 for services performed for both ILX and its
subsidiaries, including the Company.
17
<PAGE>
OPTION GRANTS IN THE LAST FISCAL YEAR
The Company does not have a stock option plan. Accordingly, no stock
options or stock appreciation rights were granted in 1998 nor any prior year,
nor have any options been exercised since the Company's inception. There are no
unexercised options at December 31, 1998. No stock option grants have ever been
made to Named Officers of the Company under any ILX Plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Effective January 3, 1999, the Company became a reporting company as
defined by the Securities and Exchange Commission. Under the securities laws of
the United States, effective January 3, 1999, the Company's directors, its
executive officers and any persons holding more than ten percent of the
Company's Common stock will be required to report their initial ownership of the
Company's Common stock and any subsequent changes in the ownership to the
Securities and Exchange Commission. There were no such filing requirements for
1998.
DIRECTOR COMPENSATION
Directors of the Company do not receive any compensation for their
services; however, they are reimbursed for their actual out-of-pocket expenses
incurred in serving on the Board.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares and percentage of all shares
of the Company's Common Stock outstanding as of December 31, 1998 and following
the Spin-Off, held or to be held by (i) any person known to the Company to be
the beneficial owner of 5% or more of the Company's outstanding Common Stock,
(ii) each director, (iii) each Named Officer, and (iv) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
BEFORE SPIN-OFF AFTER SPIN-OFF
NAME AND ADDRESS OF --------------------------------------- ---------------------------------------
BENEFICIAL OWNER (1) AMOUNT OF SHARES (2) PERCENT OF CLASS AMOUNT OF SHARES (3) PERCENT OF CLASS
-------------------- -------------------- ---------------- -------------------- ----------------
<S> <C> <C> <C> <C>
ILX Resorts Incorporated 3,360,000 80% 0 0.0%
2111 E. Highland Avenue
Suite 210
Phoenix, Arizona 85016
Martori Enterprises Incorporated 0 0 758,284 18.1%
2111 E. Highland Avenue
Suite 210
Phoenix, Arizona 85016
Joseph P. Martori 0 0 795,963 (4) 19.0%
Edward J. Martori 0 0 807,470 (5) 19.2%
Todd Fisher 840,000 20% 840,000 20.0%
Patrick J. McGroder III 0 0 0 0.0%
James W. Myers 0 0 0 0.0%
Robert Shields 0 0 0 0.0%
Stephen W. Morgan 0 0 0 0.0%
Mia A. Martori 0 0 0 0.0%
All officers and directors as
a group (6 persons) 840,000 20% 840,000 20.0%
</TABLE>
- ----------
(1) Unless otherwise indicated, each of these holders has an address of c/o
Sedona Worldwide Incorporated, 3840 North 16th Street, Phoenix, Arizona
85016.
(2) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of Common Stock which such person has
the right to acquire within 60 days after the date set forth in the
introductory paragraph above. However, for purposes of computing the
percentage of outstanding shares of Common Stock held by each person or
group of persons named above, any security which such person or group of
persons has or have the right to acquire from the Company within 60 days
from the date set forth in the introductory paragraph above is not deemed
to be outstanding for the purposes of computing the percentage ownership of
any other person.
(3) For purposes of this table, the number of shares of the Company's Common
Stock to be distributed in the Spin-Off was calculated as 0.8415 shares of
the Company's Common Stock for each share of outstanding ILX Common Stock,
based on 3,360,000 shares to be spun-off and 3,992,893 shares of ILX Common
Stock outstanding as of December 31, 1998.
18
<PAGE>
(4) Includes approximately 758,284 shares to be owned by Martori Enterprises
Incorporated, of which Joseph P. Martori is a director and owner of 40% of
the voting capital stock; 120 shares to be owned by the Estate of Edward
Martori, of which Joseph P. Martori is personal representative; 178 shares
to be owned by a trust, of which Joseph P. Martori is trustee; 8,583 shares
to be held in custody for the benefit of Arianne Martori, Mr. Martori's
daughter; and 8,248 shares to be owned by a trust, for the benefit of Mr.
Martori's other daughter.
(5) Includes approximately 758, 284 shares to be owned by Martori Enterprises
Incorporated, of which Edward J.. Martori owns 56% of the outstanding
capital stock; and approximately 119 shares to be held by the Estate of
Edward J. Martori, of which Edward J. Martori is beneficiary.
THE SPIN-OFF
Following the effectiveness of the Company's registration statement on Form
10-SB, ILX intends to distribute all of the Company's outstanding Common Stock
owned by ILX, to its shareholders on a pro rata basis.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of transactions to which the Company or its
subsidiaries is a party in which the amount involved since January 1, 1998
exceeded $60,000 and in which officers, directors, nominees and/or greater than
5% beneficial owners of the Company's Common Stock (or any immediate family
members of the foregoing) had, or will have, a direct or indirect material
interest.
The Company leases an 8,400 square-foot building which houses its principal
offices and warehouse facilities from an affiliate of ILX (Edward J. Martori)
for $4,000 per month. The Company uses a portion of the facilities
(approximately 4,000 square feet) and subleases the remainder to ILX. The
Company paid $48,000 to Edward J. Martori in triple net rent for 1998. The
Company charged ILX $52,000 for its sublease which includes not only rent but
utilities, cleaning, landscaping, property taxes, insurance and other services
provided by the Company as a part of the sublease.
On January 1, 1997, Todd Fisher entered into an agreement with the Company
pursuant to which Mr. Fisher has agreed to provide certain production services
in connection with Debbie Reynolds' services as a spokesperson for the Company's
products pursuant to an agreement entered into by the Company and Ms. Reynolds
also as of January 1, 1997. As consideration for Mr. Fisher's services, Mr.
Fisher received 420,000 shares of Common Stock, which represents 10% of the
Company's outstanding Common Stock. The shares issued to Mr. Fisher had a value
of approximately $16,500 at the time they were transferred. Such valuation was
based upon an independent appraisal. Mr. Fisher will provide such services as
requested in the future. No services were requested in 1998.
Mr. Fisher is the son of Debbie Reynolds, with whom the Company has an
agreement pursuant to which Ms. Reynolds has agreed to provide certain
promotional activities on behalf of the Company. See "Business - General" above.
The Company entered into its agreement with Ms. Reynolds prior to Mr. Fisher's
election to the Company's Board of Directors. The terms of Ms. Reynolds'
agreement were negotiated at arms length and the Company's management believes
that they are reasonable. In 1998, Ms. Reynolds transferred to Mr. Fisher all of
the 420,000 shares of the Company's Common Stock issued to her pursuant to the
agreement described in this paragraph.
19
<PAGE>
ITEM 13. EXHIBITS; BALANCE SHEETS AS OF 12/31/98 AND 12/31/97; STATEMENTS OF
OPERATIONS, SHAREHOLDERS EQUITY AND CASH FLOWS FOR EACH OF THE THREE
YEARS ENDED 12/31/98, 12/31/97 AND 12/31/96; AND REPORTS ON FORM 8-K
(a)(1) Financial Statements Page or Method of Filing
-------------------- ------------------------
(i) Financial Statements and Pages F-3 through F-21
Notes to Statements of the Registrant,
including Balance Sheets as of
December 31, 1998 and 1997 and Statements
of Operations, Shareholders' Equity and
Cash Flows for each of the three years
ended December 31, 1998, 1997 and 1996.
Report of Hansen, Barnett & Maxwell,
a professional corporation Page F-2
(a)(2) Financial Statement Schedules
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
The Company filed a report on Form 8-K on March 2, 1999, which reported the
engagement on February 25, 1999 of Hansen, Barnett & Maxwell, a professional
corporation ("HB&M"), as its principal accountant to audit the Company's
financial statements for the year ended December 31, 1998. Prior to its
engagement, the Company had not consulted HB&M with respect to the application
of accounting principles to a specified transaction or any matter that was the
subject of a disagreement or a reportable event (as described in Item
301(a)(1)(v) of Regulation S-K).
20
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 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, thereunto duly authorized, on the 13th day of
April, 1999.
Sedona Worldwide Incorporated,
an Arizona corporation
(Registrant)
By: /s/ Patrick J. McGroder III
---------------------------
Patrick J. McGroder III
Chairman of the Board
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/ Patrick J. McGroder III Chairman of the Board April 13, 1999
- ----------------------------
Patrick J. McGroder III
/s/ Mia A. Martori Director, President and April 13, 1999
- ---------------------------- Treasurer
Mia A. Martori
/s/ Stephen W. Morgan Chief Financial Officer of April 13, 1999
- ---------------------------- ILX Resorts Incorporated
Stephen W. Morgan (acting principal financial
and accounting officer)
/s/ Todd Fisher Director April 13, 1999
- ----------------------------
Todd Fisher
/s/ James W. Myers Director April 13, 1999
- ----------------------------
James W. Myers
/s/ Robert Shields Director April 13, 1999
- ----------------------------
Robert Shields
21
<PAGE>
EXHIBITS
TO
1998 FORM 10-KSB
SEDONA WORLDWIDE INCORPORATED
EXHIBIT LOCATION IN
NO. DESCRIPTION EDGAR FILING
------- ----------- ------------
10.1 Articles of Incorporation of Registrant, as amended *
10.2 Bylaws of Registrant, as amended *
10.3 Agreement, dated as of January 1, 1997, among the
Registrant and ILX Incorporated, on the one hand,
and Todd Fisher, on the other hand *
10.4 Agreement, dated as of January 1, 1997, among the
Registrant and ILX Incorporated, and Debbie Reynolds,
on the other hand *
10.5 Lease Agreement, dated December 29, 1995, among the
Registrant and Edward John Martori *
10.6 Agreement, dated as of December 29, 1995, among ILX
Incorporated, Martori Enterprises Incorporated,
Los Abrigados Partners Limited Partnership,
Registrant, Edward J. Martori and Joseph P. Martori,
as trustee for Cynthia J. Polich Irrevocable Trust
dated June 1, 1989 relating to the sale/leaseback
of certain real property and amendment of other
agreements in connection therewith *
10.7 Master Lease Agreement, dated as of April 13, 1993,
among ILX Incorporated and CRA, Inc. *
27 Financial Data Schedule filed herewith
- ----------
* Incorporated by reference as an exhibit to the Company's Registration
Statement on Form 10-SB filed with the Securities and Exchange Commission
on November 8, 1998.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following financial statements include the Company's audited statements
for fiscal year 1998 and unaudited statements for fiscal years 1997 and 1996.
The 1998 statements have been audited by Hansen, Barnett & Maxwell, a
professional corporation. The 1996 and 1997 statements were previously audited
by another accounting firm. The predecessor auditor's report on the 1996 and
1997 financial statements dated October 14, 1998 was unqualified; however, the
predecessor auditor has not consented to release its report for inclusion in
this filing. The Company intends to have the 1996 and 1997 years reaudited by
Hansen, Barnett & Maxwell as soon as practical and amend this 1998 Report on
Form 10-KSB to include the reaudited information as soon as possible.
PAGE
----
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets at December 31, 1997 (unaudited) and 1998 F-3
Statements of Operations for the years ended December 31, 1996
(unaudited), 1997 (unaudited), and 1998 F-4
Statements of Stockholders' Net Capital Deficiency for the years
ended December 31, 1996 (unaudited), 1997 (unaudited), and 1998 F-5
Statements of Cash Flows for the years ended December 31, 1996
(unaudited), 1997 (unaudited), and 1998 F-6
Notes to Financial Statements F-7
F-1
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
MEMBER OF AICPA DIVISION OF FIRMS Fax (801) 532-7944
MEMBER OF SECPS 345 East Broadway, Suite 200
MEMBER OF SUMMIT INTERNATIONAL ASSOCIATES Salt Lake City, Utah 84111-2693
INDEPENDENT AUDITORS' REPORT
To the Stockholders
of Sedona Worldwide Incorporated
We have audited the accompanying balance sheet of Sedona Worldwide Incorporated
as of December 31, 1998, and the related statements of operations, stockholders'
net capital deficiency and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sedona Worldwide Incorporated
as of December 31, 1998, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 2 to the
financial statements, the company has incurred net losses since inception and
has liabilities that exceed its assets. These conditions raise substantial doubt
about its ability to continue as a going concern. Management's plans regarding
those matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 27, 1999
F-2
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A Majority-owned Subsidiary of ILX Resorts Incorporated)
BALANCE SHEETS
ASSETS
December 31,
--------------------------
1997 1998
(unaudited)
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 17,296 $ 68,406
Accounts receivable 1,866 786
Inventories 75,933 134,180
Prepaid expenses and other current assets 37,581 77,022
----------- -----------
Total current assets 132,676 280,394
----------- -----------
Property and equipment, net (Notes 3 and 5) 53,316 42,889
----------- -----------
TOTAL ASSETS $ 185,992 $ 323,283
=========== ===========
LIABILITIES AND STOCKHOLDERS' NET CAPITAL DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 12,454 $ 32,163
Due to parent 1,866,583 2,333,635
Accrued expenses 29,921 26,284
Current portion of capital lease obligations
(Note 5) 30,964 26,171
----------- -----------
Total current liabilities 1,939,922 2,418,253
----------- -----------
CAPITAL LEASE OBLIGATIONS - Less current
portion (Note 5) 23,956 --
----------- -----------
Total liabilities 1,963,878 2,418,253
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' NET CAPITAL DEFICIENCY:
Preferred stock, $10 par value - authorized,
5,000,000 shares, none issued
Common stock, no par value - 50,000,000 shares
authorized, 4,200,000 shares issued and
outstanding 1,000,000 1,000,000
Deficit (2,777,886) (3,094,970)
----------- -----------
Total stockholders' net capital deficiency (1,777,886) (2,094,970)
----------- -----------
TOTAL $ 185,992 $ 323,283
=========== ===========
See notes to financial statements.
F-3
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A Majority owned Subsidiary of ILX Resorts Incorporated)
STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------
1996 1997 1998
(unaudited) (unaudited)
----------- ----------- -----------
NET SALES (Note 7):
Customers $ 157,123 $ 66,472 $ 42,964
Affiliates 384,874 274,501 258,052
----------- ----------- -----------
Total net sales 541,997 340,973 301,016
COST OF SALES 341,233 237,503 195,895
----------- ----------- -----------
Gross profit 200,764 103,470 105,121
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (Note 7) 514,772 438,222 415,843
----------- ----------- -----------
LOSS FROM OPERATIONS (314,008) (334,752) (310,722)
INTEREST EXPENSE 17,256 8,877 6,362
----------- ----------- -----------
NET LOSS ($ 331,264) ($ 343,629) ($ 317,084)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING 4,200,000 4,200,000 4,200,000
=========== =========== ===========
BASIC AND DILUTED NET LOSS
PER SHARE ($ 0.08) ($ 0.08) ($ 0.08)
=========== =========== ===========
See notes to financial statements.
F-4
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A Majority-owned Subsidiary of ILX Resorts Incorporated)
STATEMENTS OF STOCKHOLDERS' NET CAPITAL DEFICIENCY
COMMON STOCK
---------------------
SHARES AMOUNT DEFICIT TOTAL
------ ------ ------- -----
BALANCE, JANUARY 1, 1996 4,200,000 $1,000,000 ($2,102,993) ($1,102,993)
(unaudited)
Net loss 0 0 (331,264) (331,264)
--------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1996 4,200,000 1,000,000 (2,434,257) (1,434,257)
(unaudited)
Net loss 0 0 (343,629) (343,629)
--------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1997 4,200,000 1,000,000 (2,777,886) (1,777,886)
(unaudited)
Net loss 0 0 (317,084) (317,084)
--------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1998 4,200,000 $1,000,000 ($3,094,970) ($2,094,970)
========= ========== =========== ===========
See notes to financial statements.
F-5
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A Majorityowned Subsidiary of ILX Resorts Incorporated)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1997 1998
(unaudited) (unaudited)
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($331,264) ($343,629) ($317,084)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 59,064 62,404 40,929
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,677) 3,725 1,080
(Increase) decrease in inventory (21,013) 82,948 (58,247)
Increase in prepaid expenses and other assets (18,573) (14,107) (39,441)
Decrease (increase) in accounts payable (33,249) (4,745) 19,709
Decrease in accrued expenses (35,370) (14,179) (3,637)
--------- --------- ---------
Net cash used in operating activities (383,082) (227,583) (356,691)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (890) (21,138) (30,502)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital
lease obligations (58,816) (45,759) (28,749)
Advances from parent 446,964 289,450 467,052
--------- --------- ---------
Net cash provided by financing activities 388,148 243,691 438,303
--------- --------- ---------
INCREASE (DECREASE) IN CASH 4,176 (5,030) 51,110
CASH, BEGINNING OF PERIOD 18,150 22,326 17,296
--------- --------- ---------
CASH, END OF PERIOD $ 22,326 $ 17,296 $ 68,406
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION Cash paid during the period for interest $ 29,644 $ 8,877 $ 6,362
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES Notes payable assumed by
buyer of property and equipment with net book value
of $180,000 (Note 7) ($180,000) -- --
========= ========= =========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A MAJORITY-OWNED SUBSIDIARY OF ILX RESORTS INCORPORATED)
NOTES TO FINANCIAL STATEMENTS
ALL AMOUNTS AND REFERENCES RELATED TO DECEMBER 31, 1996
AND DECEMBER 31, 1997 ARE UNAUDITED
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. Sedona Worldwide Incorporated, formerly Red Rock
Collection Incorporated (the "Company"), commenced operations in April 1992, and
is incorporated in the State of Arizona. The Company is an 80 percent-owned
subsidiary of ILX Resorts Incorporated ("ILX").
The Company markets and distributes skin and hair care products through ILX
resorts located in Arizona, Colorado and Indiana and on a limited basis through
sales primarily in the southwestern United States.
BASIS OF PRESENTATION. The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As shown
in the financial statements, during the years ended December 31, 1997 and 1998,
the Company incurred net losses of $343,629 and $317,084, respectively, and, as
of those dates, the Company's current liabilities exceeded its current assets by
$1,807,246 and $2,137,859 respectively, and its total liabilities exceeded its
total assets by $1,777,886 and $2,094,970, respectively.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis, to
obtain financing as may be required, and ultimately to attain profitable
operations. ILX has funded the Company's cash shortfalls since inception. The
Company filed a Form 10-SB Registration on November 4, 1998, which became
effective by lapse of time on January 3, 1999. ILX intends to make a
distribution of all of the shares of the Company's common stock which ILX holds
to the ILX shareholders on a pro rata basis ("the Spin-Off"). The Company is
attempting to obtain a credit facility to address its cash flow needs.
SIGNIFICANT ACCOUNTING POLICIES.
STOCK SPLIT
On August 24, 1998, the Company's shareholders approved an amendment to the
Company's Articles of Incorporation to effect a six-for-one stock split of the
Company's issued and outstanding shares of common stock. The stock split has
been retroactively reflected in the accompanying financial statements.
INVENTORIES
Inventories are recorded at the lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets, which
range from three to five years. Property and equipment under capitalized leases
are stated at the lesser of fair value or the present value of future minimum
lease payments at the date placed in service, and amortized on the straight-line
method over the term of the lease.
INCOME TAXES
Income taxes are accounted for using Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting For Income Taxes." Under SFAS No. 109,
deferred tax assets and liabilities are recognized for the estimated future tax
effects attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis. The
Company provides for taxes as if the Company had operated on a stand-alone
basis.
REVENUE RECOGNITION
The Company recognizes sales of products when the products are shipped.
Revenue from consigned goods is recognized when sold and is not considered
significant to the operations of the Company.
F-7
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A MAJORITY-OWNED SUBSIDIARY OF ILX RESORTS INCORPORATED)
NOTES TO FINANCIAL STATEMENTS
ALL AMOUNTS AND REFERENCES RELATED TO DECEMBER 31, 1996
AND DECEMBER 31, 1997 ARE UNAUDITED
ACCOUNTING MATTERS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which is effective for fiscal years beginning
after December 31, 1996. During 1997, SFAS No. 125 was adopted and had no impact
on the Company's financial position, results of operations or of cash flows.
The Company has adopted SFAS No. 128, "Earnings Per Share." Loss per share
data in 1996 has been restated to reflect the adoption of SFAS No. 128. Basic
and diluted net loss per common share is computed by dividing net loss by the
weighted average number of common shares outstanding during the year.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
About Capital Structure," which is effective for financial statements for
periods ending after December 15, 1997 and establishes standards for disclosing
information about an entity's capital structure. During 1997, SFAS No. 129 was
adopted and had no significant effect on the Company's disclosures about its
capital structure.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which is effective for financial statements for periods beginning after
December 15, 1997 and establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. During 1998, SFAS No. 130
was adopted and had no material impact on the Company's financial statement
presentation or related disclosures.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997 and establishes standards for the way that
public business enterprises report information about operating segments in
annual financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company has a single segment in the personal care products
industry. Revenue from the Company's only major customer is reported on the
income statement under Affiliates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. BUSINESS CONDITION
As shown in the accompanying financial statements, the Company incurred a
net loss of $317,084 during the year ended December 31, 1998, and as of that
date, the Company's current liabilities exceeded its current assets by
$2,137,859 and its total liabilities exceeded its total assets by $2,094,970.
Those factors create an uncertainty about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going concern.
In conjunction with the Spin-Off, the Company believes ILX will forgive the
intercompany indebtedness from the Company to ILX of $2,333,635 at December 31,
1998. The Company has incurred net losses since its inception. In order to
achieve profitability it will be necessary for the Company to substantially
increase its revenue. While there are presently some opportunities in progress
that may generate sufficient additional sales to generate profits, there can be
no assurance that such revenues will be generated from current sources. Post
Spin-Off, the Company may pursue debt or equity financing that will enable it to
invest in marketing and distribution geared toward generating greater revenues.
However, there can be no assurance that such financing will be available or that
the marketing and distribution efforts will be successful in generating
sufficient sales to achieve profitability.
F-8
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A MAJORITY-OWNED SUBSIDIARY OF ILX RESORTS INCORPORATED)
NOTES TO FINANCIAL STATEMENTS
ALL AMOUNTS AND REFERENCES RELATED TO DECEMBER 31, 1996
AND DECEMBER 31, 1997 ARE UNAUDITED
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
1997 1998
--------- ---------
Leasehold improvements (Note 5) $ 2,600 $ 2,600
Furniture and fixtures (Note 5) 178,128 183,610
Computer equipment 77,087 102,107
--------- ---------
Total 257,815 288,317
Less accumulated depreciation (204,499) (245,428)
--------- ---------
Property and equipment, net $ 53,316 $ 42,889
========= =========
NOTE 4. INCOME TAXES
Deferred income taxes are provided for temporary differences between
financial statement and income tax reporting for certain transactions, primarily
net operating loss carryover and amortization of start-up costs capitalized. Net
deferred income taxes at December 31, 1998 consist of the following:
1997 1998
--------- ---------
Deferred income tax assets $ 467,012 $ 462,785
Valuation allowance (467,012) (462,785)
--------- ---------
Net deferred income tax asset $ -- $ --
========= =========
The Company files its income tax returns as a member of the ILX
consolidated income tax return. However, there is no formal income tax sharing
agreement to allocate income taxes among the members of the consolidated group.
Historically, the Company has not recorded an income tax benefit for losses it
has incurred that were utilized or may be utilized by ILX.
The Company has recorded a valuation allowance equal to its deferred tax
asset at December 31, 1997 and 1998 because, on a stand-alone basis, the Company
has never generated taxable income and there is insufficient evidence that
temporary differences between financial and taxable income, as well as net
operating loss carryovers, can be utilized to reduce future income taxes. This
treatment results in no income tax benefit being recorded in 1997 and 1998.
The Company has approximately $1,117,000 of federal and state net operating
loss carryovers which will begin to expire in 2011 for federal and 2001 for
state.
NOTE 5. LEASE COMMITMENTS
OPERATING LEASES. The Company leases its facilities under an operating
lease. The facilities are currently being leased under a renewable one-year
option at an annual rate of $48,000. The Company also has an option to renew its
lease annually through December 2000. Total rent expense for the years ended
December 31, 1997 and 1998 was $48,000.
CAPITAL LEASES. The Company leases furniture and fixtures and computer
equipment under capital leases. Capital lease assets and accumulated
amortization included in property and equipment in the accompanying financial
statements as of December 31 are as follows:
1997 1998
------- -------
Furniture and fixtures and computer
equipment $97,400 $97,400
Less accumulated amortization 67,700 71,200
------- -------
Net $29,700 $26,200
======= =======
F-9
<PAGE>
Capital lease obligations at December 31 consist of the following
1997 1998
------- -------
Obligations under capital leases $60,736 $27,702
Less amount representing interest 5,816 1,531
------- -------
54,920 26,171
Less current portion 30,964 26,171
------- -------
Long-term portion of capital lease
obligations $23,956 $ --
======= =======
NOTE 6. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates are made at a specific point in time and are
based on relevant market information and information about the financial
instrument; they are subjective in nature and involve uncertainties, matters of
judgment and, therefore, cannot be determined with precision. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular instrument. Because the
fair value is estimated as of December 31, 1998, the amounts that will actually
be realized or paid in settlement of the instruments could be significantly
different.
For the Company's cash, the carrying amount is the fair value. The carrying
amount is assumed to be the fair value for accounts receivable, accounts payable
and other accrued expenses because of the short maturity of the portfolios. The
fair value of the Company's capital lease obligations approximates the terms in
the marketplace under which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
NOTE 7. RELATED PARTIES
Sales to affiliates for the years ended December 31, 1997 and 1998 were
$274,501 and $258,052 representing approximately 81% and 86%, respectively, of
total sales.
Certain administrative expenses aggregating $19,800 and $9,800 during the
years ended December 31, 1997 and 1998, respectively, have been allocated to the
Company by ILX based on a budget formula that was agreed upon by ILX and its
subsidiaries at the beginning of the respective year. Management of the Company
believes that such allocation is reasonable.
In December 1995, the Company sold its building to an affiliate for
$500,000. The purchase price consisted of a reduction in the principal balance
of the Company's note payable to the affiliate of $320,000 in December 1995 and,
in January 1996, payment by the affiliate of the $180,000 note collateralized by
a deed of trust on the building. The Company leased back the building for a
one-year term, with four one-year options to renew through December 2000. Rent
of $48,000 was paid in 1997 and in 1998.
NOTE 8. SHAREHOLDERS' EQUITY
On October 13, 1998, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to increase the number of the Company's
authorized shares of common stock to 50,000,000.
F-10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS DECEMBER 31, 1998 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 68,406
<SECURITIES> 0
<RECEIVABLES> 786
<ALLOWANCES> 0
<INVENTORY> 134,180
<CURRENT-ASSETS> 280,394
<PP&E> 288,317
<DEPRECIATION> 245,428
<TOTAL-ASSETS> 323,283
<CURRENT-LIABILITIES> 2,418,253
<BONDS> 0
0
0
<COMMON> 1,000,000
<OTHER-SE> (3,094,970)
<TOTAL-LIABILITY-AND-EQUITY> 323,283
<SALES> 301,016
<TOTAL-REVENUES> 301,016
<CGS> 195,895
<TOTAL-COSTS> 415,843
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,362
<INCOME-PRETAX> (317,084)
<INCOME-TAX> 0
<INCOME-CONTINUING> (317,084)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (317,084)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
