U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B) OR (G)
OF THE SECURITIES EXCHANGE ACT OF 1934
SEDONA WORLDWIDE INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Arizona 86-0718104
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3840 N. 16th Street, Phoenix, Arizona 85016
(Address of Principal Executive Offices)
Issuer's Telephone Number: (602) 263-9600
Securities to be registered under Section 12(b) of the Act: none
Title of each class to be so registered: N/A
Name of exchange on which each class is to be registered: N/A
Securities to be registered under Section 12(g) of the Act:
Common Stock, no par value.
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THIS REGISTRATION STATEMENT INCLUDES 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 REGISTRATION STATEMENT.
SEDONA WORLDWIDE(TM) SEDONA SPA(R), 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 REGISTRATION STATEMENT 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.
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BUSINESS
GENERAL
Sedona Worldwide Incorporated, an Arizona corporation ("SWW" or the
"Company"), is a majority-owned subsidiary of ILX Resorts Incorporated, an
Arizona corporation ("ILX"). During the third quarter of calendar year 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"). As a result of the Spin-Off, ILX's shareholders will own, in the
aggregate, approximately 80% of the Company's then outstanding capital stock.
SWW is registering the Company's Common Stock pursuant to this 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"). In connection with the Spin-Off, 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 as a result of 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 by 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
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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.
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,
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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
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").
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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.
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 introduction
of botanical based face, hair and body products, its planned introduction of 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
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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 that 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:
SEDONA SPA SKIN CARE (FACIAL)
ADVANCED DAILY CLEANSER: Formulated with natural botanicals and
vitamins, this clear gel cleanser gently
lifts make-up while promoting moisture
balance.
REFRESHING FACIAL TONER: pH balanced and vitamin enriched to soothe
and hydrate the skin while completing the
cleansing process.
WILDBERRY FACIAL MOISTURIZER: Oil-free daytime moisturizer enriched with
Raspberry Extract specially formulated for
combination to oily skin.
HYDRATING FACIAL MOISTURIZER: Rich-textured moisturizer with Sodium
Hyaluronate used to maintain skin's
delicate moisture levels all day.
NIGHTTIME REFINING MOISTURIZER: Water-based beauty treatment with Maritime
Pine Extract, a free radical fighter,
antioxidants, Beta-Carotene and Vitamins
A and E.
ARIZONA MUD MASQUE: Deep cleansing facial mask with natural
botanicals and clays direct from the
Arizona desert to purify and detoxify skin.
SEDONA RED MINERAL FACIAL: A combination of minerals and other natural
ingredients stimulates circulation, absorbs
impurities from environmental pollution and
allows skin to breathe freely, giving the
complexion a softer, smoother texture.
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SEDONA SPA HAIR CARE (HAIR)
MOUNTAIN MOISTURE SHAMPOO: Organic shampoo for normal to dry hair helps
protect color treated and stressed hair with
Yucca, Agave and Vitamin E.
MOUNTAIN MOISTURE CONDITIONER: Organic conditioner with natural humectants to
nourish hair giving it greater strength,
softness and shine.
MAXIMUM BODY SHAMPOO: Formulated with Vitamin B-5 to increase hair
volume along with Arizona Cypress, Juniper
Berries and Agave. Intended to stimulate the
scalp with Juniper Berries and thicken hair.
MAXIMUM BODY CONDITIONER: Weightless formula enhances highlights with
Chamomile and promotes fullness with plant
based thickening system blending botanicals,
Soy Protein and Whole Wheat Amino Acids.
GOLD SHAPING GEL: Water-soluble gel formulated to provide hold
and high shine with Paba-free sunscreen,
vitamins and botanicals.
BOTANICAL SCULPTING SPRAY: Salon formulated working spray to sculpt and
style all hair types, infused with a crystal
shine complex of desert flowers for
unsurpassed shine.
SEDONA SPA SKIN CARE (BODY)
BODY BALM MOISTURIZER: Rich, velvety body moisturizer with
antioxidants and Apricot Kernel Oil to nourish
the skin. Suitable for men and women.
SPA SHOWER GEL: pH compatible, aromatic cleansing gel enriched
with a botanical complex of Cactus, Chamomile
and Grapefruit extracts.
SEA KELP SOAP: Vegetable based, non-irritating soap packed
with sea kelp, produced in an attractive shell
shape. Excellent for men or women.
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 entered into an 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. This alliance is informal in
nature and Mr. Shields has no obligation to provide such products when desired
by the Company.
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.
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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
will include 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.
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
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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 have effected 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
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 at least 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 and the Company
does not independently conduct any product labeling or packaging activities. 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 four suppliers, Hewitt Soap Co. of Dayton, Ohio; La
Dove, Inc., a privately owned cosmetics laboratory and manufacturing company
located in Florida; Arizona Natural Resources, a privately owned company located
in Phoenix, Arizona; and Levlad Laboratories Incorporated, a private company
9
<PAGE>
located in Chatsworth, California. 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
tradenames with the Arizona Secretary of State, and has been issued a trademark
registration for "Sedona Spa" by the U.S. Patent and Trademark Office. An
application for the registration of its trademark "Sedona Worldwide" has also
been filed with the U.S. Patent and Trademark Office and is currently pending.
There can be no assurance when such registration 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.
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.
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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. To date, the Company has
not incurred any research and development costs in 1999. To date, the Company
has not incurred any research and development costs in 1999. 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 total rent of $52,500 in 1998 and $18,000 for the
nine months ended September 30, 1999, inclusive of utilities, cleaning and other
services. The Company does not own any real estate.
EMPLOYEES
As of September 30, 1999, the Company had four employees, three 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.
LEGAL PROCEEDINGS
The Company is not currently the subject of any pending or, to its
knowledge, threatened legal claims.
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
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<PAGE>
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. Further, 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 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-SB, 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:
Nine Months Ended
September 30, Year Ended December 31,
----------------- --------------------------
1998 1999 1996 1997 1998
---- ---- ---- ---- ----
Net sales:
Sales to affiliates (1) 85.5% 79.5% 71.0% 80.5% 85.7%
Sales to non-affiliates 14.5% 20.5% 29.0% 19.5% 14.3%
----- ----- ----- ----- -----
Total sales 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
As a percentage of net sales:
Cost of sales 70.5% 63.3% 63.0% 69.7% 65.1%
Contribution margin 29.5% 36.7% 37.0% 30.3% 34.9%
Selling, general and
administrative expense 155.0% 90.5% 95.0% 138.2% 138.1%
Net Loss 127.2% 54.2% 61.1% 110.5% 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.
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COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 1999
Net sales increased 20% or $15,785 to $92,885 for the three months ended
September 30, 1999 from $77,100 for the same period in 1998 and increased 50% or
$94,092 to $283,478 for the nine months ended September 30, 1999 from $189,386
for the same period in 1998, reflecting the emphasis on additional channels of
distribution, use of products as premiums by an additional ILX sales office and
higher product pricing.
Cost of sales as a percentage of sales decreased to 63.8% for the three
months ended September 30, 1999 from 68.6% for the same period in 1998 and
decreased to 63.3% for the nine months ended September 30, 1999 from 70.5% for
the same period in 1998, reflecting higher product prices.
Sales, general and administrative expenses decreased $21,888 to $80,918 for
the three months ended September 30, 1999 from $102,806 for the same period in
1998 and decreased $36,833 to $256,637 for the nine months ended September 30,
1999, from $293,470 for the same period in 1998, reflecting cost reductions in
printing, supplies and advertising.
Interest expense decreased to $210 for the three months ended September 30,
1999 from $871 for the same period in 1998, and decreased to $1,154 for the nine
months ended September 30, 1999 from $3,310 for the same period in 1998,
reflecting declining capital lease obligations.
There is no income tax benefit recorded in 1998 or 1999 because the Company
has recorded a valuation allowance equal to its deferred tax asset at December
31, 1998 and September 30, 1999, 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. 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 the three- and nine-month periods ended September 30, 1999.
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.
Selling, general and administrative expenses decreased from $471,000 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.
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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 $471,000 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
SOURCES OF CASH
The Company generates cash primarily from the sale 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 United States and of Sedona, Arizona in
particular. During the nine-month periods ended September 30, 1998 and 1999,
cash used in operations was $277,524 and $150,432, respectively. 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 $327,854 and $125,461 in the nine-month periods ended
September 30, 1998 and 1999, respectively. ILX has funded the Company's cash
shortfalls since inception. As of September 30, 1999, the Company was indebted
to ILX in an amount in excess of $2,492,000, all of which is expected to be
forgiven in conjunction with the Spin-Off. ILX has agreed to provide up to
$200,000 of additional financing following completion of the Spin-Off through
November 30, 2000. All amounts borrowed by the Company will bear interest equal
to the prime rate plus 3% per annum, payable monthly. The entire unpaid
principal will be due on December 31, 2000. A copy of the letter agreement
pursuant to which ILX has agreed to provide this financing was filed as an
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exhibit to the Company's Amendment No. 2 to this registration statement, filed
with the Securities & Exchange commission on November 12, 1999. See also
"Certain Relationships and Related Transactions." Without such commitment, the
Company's current cash flows will be insufficient to meet its liquidity,
operating and capital requirements over the next twelve months. The Company
expects to generate gross profit (revenue less cost of sales) of $120,000 over
the next twelve months. During this same period the Company expects to generate
operating expenses of $300,000 that will be provided for through a combination
of financing from ILX as well as the Company's gross profit. These anticipated
expenses include approximately $20,000 of legal and accounting costs associated
with satisfying the Company's future reporting obligations under the Exchange
Act for the next twelve months. 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. In light of the Company's inability
to operate profitably, its independent auditors have qualified their opinion as
to the Company's financial statements for the years ended December 31, 1997 and
1998 with a concern that the Company may be unable to continue operating as a
"going concern." A copy of this opinion is included at Page F-2 of this
registration statement. The Company's management believes that the principal
reason for its inability to generate additional revenues is the lack of a larger
customer base and the marketing resources needed to attract such customers. The
Company intends to address these issues by seeking to obtain third party
financing to be used to more aggressively market its products and services
and/or by seeking to identify a suitable third party with whom it may enter into
a merger, acquisition or other business combination. However, the Company
currently has no agreements, binding or non-binding, of any nature for any such
financing or any such business combination and there can be no assurance that it
will be able to complete either of such transactions or that, even if completed,
that they will adequately address the Company's liquidity problems. As discussed
below, if the Company is unable to generate revenues in excess of its expenses,
it may be unable to continue as a going concern.
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 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.
At 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.
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USES OF CASH
Investing activities typically reflect a net use of cash for equipment
purchases. Net cash used in investing activities in the nine-month periods ended
September 30, 1998 and 1999 was $22,076 and $16,879, respectively.
CREDIT FACILITIES AND CAPITAL RESOURCES
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. 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.
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
such modifications complete by September 30, 1999. In addition, the Company will
seek to ensure that computer applications that it purchases in the future will
not have any Year 2000 issues.
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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 has not identified any significant Year 2000
Compliance readiness issues with others with whom it does significant business.
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 $18,000, 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 $10,000. 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 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. 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 or the nine months ended September 30, 1999.
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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 September 30, 1999 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 of the Company during the year
ended December 31, 1998, and (iv) all directors and executive officers as a
group.
Before Spin-off After Spin-off
----------------------- ----------------------
Name and Address of Amount Percent of Amount of Percent of
Beneficial Owner (1) of Shares(2) Class Shares(3) Class
-------------------- ------------ ----- --------- -----
ILX Resorts Incorporated 3,360,000 80% 0 0
2111 E. Highland Avenue
Suite 210
Phoenix, Arizona 85016
Martori Enterprises Incorporated 0 0 789,191 18%
2111 E. Highland Avenue
Suite 210
Phoenix, Arizona 85016
Joseph P. Martori 0 0 902,997(4) 21%
Edward J. Martori 0 0 818,963(5) 19%
Todd Fisher 840,000 20% 840,000 20%
Patrick J. McGroder 0 0 31,896 0.8%
James W. Myers 0 0 4,031 0.1%
Robert Shields 0 0 0 0
Mia Martori 0 0 902,997(6) 21%
All officers and directors as a
group (6 persons) 840,000 20% 1,778,924 42.4%
- ----------
(1) Unless otherwise indicated, each of these holders has an address of c/o
Sedona Worldwide Incorporated, 3840 N. 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 purpose 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 0.8398 share 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 4,001,073 shares of ILX Common
Stock outstanding as of September 30, 1999.
(4) Includes approximately 789,191 shares to be owned by MEI, of which Joseph
P. Martori is a director and owner of 40% of the voting capital stock: 119
shares to be owned by the Estate of Edward Martori, of which Joseph Martori
is personal representative; 178 shares to be owned by a trust, of which
Joseph Martori is trustee; and 5,459 shares to be owned by Mia A. Martori,
the spouse of Joseph Martori.
(5) Includes approximately 789,191 shares to be owned by MEI, 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.
(6) Includes 5,459 shares to be owned by Ms. Martori and 897,538 shares to be
held (directly or indirectly) by Mr. Joseph P. Martori, Ms. Martori's
husband. See footnote (4) above for further discussion of the shares held
by Mr. Martori.
18
<PAGE>
THE SPIN-OFF
ILX intends to distribute all of the Company's outstanding Common Stock
owned by ILX, representing 80% of the total shares outstanding, to its
shareholders on a pro rata basis. ILX will, however, repurchase for cash
fractional shares issuable to its shareholders. As a result, ILX will continue
to hold a nominal number of shares of SWW Common Stock following the Spin-Off.
ILX shareholders will receive the Company's shares in the form of a dividend and
will not be required to pay any consideration for their receipt. In connection
with the distribution, the Company has applied for inclusion of its Common Stock
on the NASD Bulletin Board.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of September 30, 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 54 Chairman of the Board of Directors
James W. Myers 64 Director
Todd Fisher 41 Director
Robert Shields 48 Director
Stephen W. Morgan 52 Acting Chief Financial Officer
Mia A. Martori 46 Director, President and Treasurer
Joelle A. Ciardella 39 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.
19
<PAGE>
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
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 is therefore deemed to have beneficial ownership (directly and
indirectly) of 23.6% of the Common Stock of ILX Resorts Incorporated. Following
the Spin-Off, Mr. Martori will hold (directly and indirectly) 19% of the
Company's outstanding Common Stock, all of which will be deemed to be
beneficially owed by Mia Martori. See "Security Ownership of Certain Beneficial
Owners and Management" above.
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.
20
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the total compensation for the person
serving in the capacity as the Company's Chief Executive Officer 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
Compensation Awards
Annual Compensation (3) -----------------------------------
------------------------------------------ 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
Patrick J. McGroder III 1998 0(2) 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) 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.
(3) Excludes ILX Profit Sharing Plan contributions on behalf of Mr Martori. 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.
DIRECTOR COMPENSATION
Directors of the Company do not receive any compensation for their
services.
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.
On October 28, 1999, the Company entered into a letter agreement with ILX,
which holds 80% of its currently outstanding shares prior to the Spin-Off.
Pursuant to this agreement, ILX has committed to provide an operating line of
credit for general working capital purposes and other related uses by the
Company through December 31November 30, 2000. Amounts borrowed under this
agreement accrue interest at a rate equal to the prime rate plus 3% per annum
and are payable monthly. All unpaid principal and interest thereon is payable by
the Company on December 31, 2000. The line of credit is unsecured; however, the
Company is prohibited from obtaining any additional loans or financing during
the term of the agreement without the prior written consent of ILX. A copy of
this agreement was filed as an exhibit to the Company's Amendment No. 2 to this
registration statement, filed with the Securities & Exchange commission on
November 12, 1999.
21
<PAGE>
ILX advanced the Company $327,854 and $125,461 in the nine-month periods
ended September 30, 1998 and 1999, respectively. ILX has funded the Company's
cash shortfalls since inception and, as discussed above, has agreed to continue
to do so following the completion of the Spin-Off. As of September 30, 1999, the
Company was indebted to ILX in an amount in excess of $2,492,000, which is
expected to be forgiven in conjunction with the Spin-Off. Any amounts provided
by ILX after the Spin-Off will be repaid to ILX on terms to be determined in the
agreement. There can be no assurances that ILX's continued advances will be
sufficient to fund the Company's cash needs following the Spin-Off. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" above.
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.
The Company has entered into an informal arrangement with Robert Shields
Design to market a line of Southwest jewelry, artwork and clothing based on the
Robert Shields Design's existing product lines. Robert Shields Design is owned
by Robert Shields, a director of the Company. This agreement is informal in
nature and, as a result, the Company is not obligated to make any minimum
quantity of purchases nor is Robert Shields Design obligated to deliver products
when desired by the Company. To date, no purchases have been made pursuant to
this arrangement.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Articles of Incorporation and Bylaws is a summary
and is qualified in its entirety by the provisions of the Articles of
Incorporation and Bylaws, which have been filed as exhibits to the Company's
Registration Statement.
The Company has authorized capital of fifty (50) million shares of Common
Stock with no par value and five (5) million shares of preferred stock with a
par value of $10 per share ("Preferred Stock"). As of September 130, 19989,
there were 4,200,000 shares of Common Stock outstanding, of which 3,360,000
shares are owned by ILX. All of the shares held by ILX will be distributed on a
pro rata basis to ILX shareholders as a result of the Spin-Off. See "The
Spin-Off" above. The remaining 840,000 shares are held by Mr. Todd Fisher. See
"Certain Relationships and Related Transactions" above. There are currently no
shares of Preferred Stock outstanding.
22
<PAGE>
COMMON STOCK
Each share of the Company's Common Stock entitles the holder thereof to one
vote on all matters submitted to a vote by the Company's shareholders, except
with respect to voting for election of directors. Holders of the Company's
Common Stock are entitled to cumulative voting rights with respect to the
election of directors. Cumulative voting permits each holder of Common Stock to
cast an aggregate number of votes equal to the number of directorships to be
filled multiplied by the number of shares of Common Stock as to which they are
entitled to cast votes. The holders may cast all of such votes in favor of any
individual nominee or may allocate them among multiple nominees as they choose.
None of the shares of Common Stock to be distributed to ILX shareholders in
the Spin-Off will constitute "restricted securities" under the Securities Act.
As a result, such shares will be freely transferable upon their distribution.
The Company intends to apply for inclusion of its Common Stock on the Bulletin
Board system.
PREFERRED STOCK
Shares of Preferred Stock may be issued without shareholder approval. The
Board of Directors is authorized to issue such shares in one or more series and
to fix the rights, preferences, privileges, qualifications, limitations and
restrictions thereof, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series, without any vote or action by the shareholders. No shares of Preferred
Stock are currently outstanding and the Company has no present intention to
issue any shares of Preferred Stock. Any Preferred Stock to be issued could rank
prior to the Common Stock with respect to dividend rights and rights on
liquidation. The Board of Directors, without shareholder approval, may issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of holders of Common Stock and discourage, delay or prevent a
change in control of the Company.
CERTAIN SHAREHOLDER AGREEMENTS
No holder of Company Common Stock has any preemptive right to subscribe for
or purchase additional shares of Company's stock, however, the Company has
agreed not to issue additional shares of its Common Stock or otherwise effect
any change in its capital structure which would result in Mr. Fisher holding
less than 10% of the Common Stock outstanding at any time prior to the Company's
completion of a firmly underwritten initial public offering of its Common Stock,
if ever. Holders of Company Common Stock are entitled to share ratably in all
dividends that are declared by the Board of Directors, and in all assets
available for distribution upon liquidation.
TRANSFER AGENT
Harris Bank, Chicago, Illinois will be appointed to serve as Transfer Agent
for the shares of the Company's Common Stock to be distributed to ILX
shareholders in the Spin-Off.
ARIZONA ANTI-TAKEOVER LEGISLATION AND ANTI-TAKEOVER DEVICES
Arizona Revised Statutes ("ARS") Sections 10-2701 ET SEQ. were adopted by
the Arizona legislature in an attempt to prevent corporate "greenmail" and
restrict the ability of a potential suitor to acquire domestic corporations.
These statutes generally apply to business combinations or control share
acquisitions of "issuing public corporations," which defined term includes the
Company. These statutes could impede an acquisition of the Company and its
affiliates. ARS Section 10-2704 limits the ability of a corporation to
repurchase stock from a beneficial owner of more than 5% of the voting power of
an issuing public corporation unless certain conditions are satisfied. ARS
Section 10-2705 limits the ability of the issuing public corporation to enter
into or amend any agreements containing provisions that increase the current or
future compensation of any officer or director of the issuing public corporation
during any tender offer or request or invitation for tenders of any class or
series of shares of the issuing public corporation (other than an offer, request
or invitation by the issuing public corporation). ARS Sections 10-2721, ET SEQ.
regulates "control share acquisitions," defined as a direct or indirect
23
<PAGE>
acquisition of beneficial ownership of shares of an issuing public corporation
that would, when added to all other shares of the issuing public corporation
beneficially owned by the acquiring person, entitle the acquiring person
immediately after the acquisition to exercise either (a) at least 20% but less
than 33-1/3% or (b) at least 33-1/3% but less than or equal to 50% or (c) more
than 50% of the voting power in the election of directors. Among other things,
control share acquisitions exclude statutory mergers and acquisitions, and
acquisitions pursuant to security agreements. Within ten days after engaging in
a control share acquisition, the acquiring person must deliver to the issuing
public corporation an information statement setting forth the identity of the
acquiring person and all of its affiliates, the number and class of securities
of the issuing public corporation beneficially owned before, and to be acquired,
the control share acquisition, and the terms of the control share acquisition.
The shares acquired in a control share acquisition have all the same voting
rights as other shares in elections for directors, but do not have the right to
vote on other matters unless approved by a resolution of shareholders of the
issuing public corporation other than the acquiring person and any officer or
director. If the shareholders vote not to accord voting rights to the shares
acquired by the acquiring person, the issuing public corporation may redeem the
control shares at their then current market price. Finally, in certain
circumstances, ARS Section 10-2741 prohibits an issuing public corporation or a
subsidiary thereof from engaging in a business combination with any interested
shareholder (i.e., a beneficial owner of at least 10% of the outstanding shares
of the company or an affiliate thereof) of the issuing public corporation or any
affiliate or associate of the interested shareholder for three years after the
interested shareholder's share acquisition date.
The constitutionality of these provisions of Arizona law has not been
tested under Arizona or federal law. No assurance can be given that such
statutes would withstand any such constitutional challenge. The existence of
these statutes may make the Company a less attractive merger or acquisition
candidate.
Except as described above with respect to the statutory provisions of the
Arizona anti-takeover laws, the Company has not adopted any anti-takeover
devices with respect to its capital stock.
CERTAIN CHARTER AND BY-LAW PROVISIONS
In general, each director and officer of the Company is eligible to be
indemnified by the Company against all expenses, including attorneys' fees,
judgments, fines, punitive damages and amounts paid in settlement, that were
incurred in connection with a proceeding to which such director or officer was a
party by reason of the fact that such officer or director was acting on behalf
of the Company to the fullest extent permissible under the ARS.
The Company's Bylaws also require the Company to indemnify its officers,
directors, employees and agents against all expenses incurred by them in
connection with any legal action, including shareholder derivative suits, based
on any action or omission alleged to have been committed while acting within the
scope of such relationship to the Company to the fullest extent permissible
under the ARS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
DIVIDENDS
The Company has never paid a dividend on its Common Stock and does not
anticipate paying any dividends on its Common Stock in the foreseeable future.
It is the current policy of the Company's Board of Directors to retain any
earnings to finance operations and expansion of the Company's business. The
payment of future dividends is within the discretion of the Board of Directors
and will depend upon the Company's future earnings, if any, its capital
requirements, financial condition and other relevant factors.
24
<PAGE>
PART II
ITEM 1-MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
There currently is no public trading market for the Company's Common Stock.
However, the Company has applied for inclusion of the Common Stock on the
Bulletin Board system in connection with the Spin-Off.
Two shareholders, ILX and Todd Fisher, a director of the Company, currently
hold all of the Company's outstanding Common Stock. As of September 30, 1999,
there were no outstanding options, warrants to purchase or securities
convertible into shares of the Company's Common Stock. All of the currently
outstanding shares of Common Stock became eligible for resale pursuant to Rule
144 of the Securities Act as of April 5, 1999.
The Company has never paid cash dividends on its Common Stock.
Additionally, the Company intends to retain available future earnings, if any,
for its working capital purposes.
ITEM 2-LEGAL PROCEEDINGS
The Company is not currently the subject of any pending or, to its
knowledge, threatened legal claims.
ITEM 3-CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS
On November 20, 1998, Deloitte & Touche LLP ("D&T") resigned as the
principal independent accountants for ILX and the Company. D&T delivered its
resignation at a meeting held with the Audit Committee of ILX's Board of
Directors. Prior to such meeting, the ILX Audit Committee had determined to
terminate D&T as a result of issues relating to that Committee's evaluation of
the quality of service provided by D&T.
D&T advised the ILX Audit Committee that it was resigning due to a
disagreement over the proper treatment of the extinguishment by ILX of certain
debt. In September 1998, ILX prepaid a promissory note to an affiliated party in
exchange for the forgiveness of $200,000 of the principal amount of such note.
This transaction was reflected as approximately $200,000 of income in ILX's
income statement for the fiscal quarter ended September 30, 1998. The nature of
this transaction was also disclosed in Note 3 to ILX's financial statements for
such period. This transaction is not reflected in the stand-alone financial
statements of the Company. D&T indicated that its view was that, because this
transaction was with a related party, it should have been treated as a capital
transaction under APB 26. ILX has stated that it believed that its treatment of
this extinguishment of debt is consistent with Paragraph 20 of APB 26.
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, except for the disagreement discussed in the
preceding paragraph, there were no disagreements or "reportable events", as
contemplated by Item 304(a)(1) (iv) and (v), respectively, under Regulation S-K.
On December 11, 1998, ILX filed an Amendment No. 1 to its Current Report on
Form 8-K, dated November 20, 1998 for the purpose of filing a letter from D&T in
which D&T indicated that it disagreed with certain portions of the foregoing
description of the events related to its resignation. Copies of that Form 8-K
and the Amendment thereto are publicly available.
On February 25, 1999, the Company filed a Current Report on Form 8-K for
the purpose of announcing that it had engaged Hansen, Barnett & Maxwell, a
professional corporation ("HB&M"), as its principal accountants to audit the
Company's financial statements for the year ended December 31, 1998. The Company
will authorize D&T to respond fully to the inquiries of HB&M concerning the
subject matter of the disagreement discussed above.
25
<PAGE>
ITEM 4-RECENT SALES OF UNREGISTERED SECURITIES.
On January 1, 1997, the Company issued 420,000 shares of its Common Stock
to each of Mr. Todd Fisher and Ms. Debbie Reynolds. All of these shares were
issued as partial consideration to Mr. Fisher and Ms. Reynolds pursuant to
service agreements entered into by them with the Company as of that date. See
"Certain Relationships and Related Transactions" above. These shares were issued
in a transaction exempt from registration under the Securities Act in reliance
upon Section 4(2) of the Act. In relying upon such exemption, the Company made a
determination, based upon an investigation and review of each investor's
financial condition, that each of the purchasers was a sophisticated investor
and understood the risks of investing in SWW Common Stock. Additionally, all of
the shares were offered to the purchasers without any form of general
solicitation or advertising. Restrictive legends have been placed on the
certificates representing the shares issued to Mr. Fisher and Ms. Reynolds in
order to assure that the shares covered by such certificates will not be sold
other than pursuant to a registration statement filed under the Securities Act
or an applicable exemption therefrom.
ITEM 5-INDEMNIFICATION OF DIRECTORS AND OFFICERS
In general, each director and officer of the Company is eligible to be
indemnified by the Company against all expenses, including attorneys' fees,
judgments, fines, punitive damages and amounts paid in settlement, that were
incurred in connection with a proceeding to which such director or officer was a
party by reason of the fact that such officer or director was acting on behalf
of the Company to the fullest extent permissible under the ARS.
The Company's Bylaws also require the Company to indemnify its officers,
directors, employees and agents against all expenses incurred by them in
connection with any legal action, including shareholder derivative suits, based
on any action or omission alleged to have been committed while acting within the
scope of such relationship to the Company to the fullest extend permissible
under the ARS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
26
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets at December 31, 1997 and 1998 and September 30, 1999
(unaudited) F-3
Statements of Operations for the years ended December 31, 1996, 1997,
and 1998 and for the nine months ended September 30, 1998 and
1999 (unaudited) F-4
Statements of Stockholders' Net Capital Deficiency for the years
ended December 31, 1996, 1997, and 1998 F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997,
and 1998 and for the nine months ended September 30, 1998 and
1999 (unaudited) 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 sheets of Sedona Worldwide Incorporated
as of December 31, 1998 and 1997, and the related statements of operations,
stockholders' net capital deficiency and cash flows for each of the three years
in the period ended December 31, 1998. 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 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 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 May 13, 1999
F-2
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A Majority-owned Subsidiary of ILX Resorts Incorporated)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
September 30, --------------------------
1999 1997 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,013 $ 17,296 $ 68,406
Accounts receivable 391 1,866 786
Inventories 132,472 75,933 134,180
Prepaid expenses and other current assets 80,966 37,581 77,022
----------- ----------- -----------
Total current assets 218,842 132,676 280,394
----------- ----------- -----------
Property and equipment, net (Notes 3 and 5) 30,117 53,316 42,889
----------- ----------- -----------
TOTAL ASSETS $ 248,959 $ 185,992 $ 323,283
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' NET CAPITAL DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 3,169 $ 12,454 $ 32,163
Due to parent 2,492,096 1,899,583 2,366,635
Accrued expenses 30,744 29,921 26,284
Current portion of capital lease obligations
(Note 5) 4,627 30,964 26,171
----------- ----------- -----------
Total current liabilities 2,530,636 1,972,922 2,451,253
----------- ----------- -----------
CAPITAL LEASE OBLIGATIONS - Less current
portion (Note 5) -- 23,956 --
----------- ----------- -----------
Total liabilities 2,530,636 1,996,878 2,451,253
----------- ----------- -----------
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 1,000,000
Deficit (3,281,677) (2,810,886) (3,127,970)
----------- ----------- -----------
Total stockholders' net capital deficiency (2,281,677) (1,810,886) (2,127,970)
----------- ----------- -----------
TOTAL $ 248,959 $ 185,992 $ 323,283
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A Majority owned Subsidiary of ILX Resorts Incorporated)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
-------------------------- ------------------------------------------
1998 1999 1996 1997 1998
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
NET SALES (Note 7):
Customers $ 27,377 $ 57,990 $ 157,123 $ 66,472 $ 42,964
Affiliates 162,009 225,488 384,874 274,501 258,052
----------- ----------- ----------- ----------- -----------
Total net sales 189,386 283,478 541,997 340,973 301,016
COST OF SALES 133,467 179,394 341,233 237,503 195,895
----------- ----------- ----------- ----------- -----------
Gross profit 55,919 104,084 200,764 103,470 105,121
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (Note 7) 293,470 256,637 514,772 471,222 415,843
----------- ----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (237,551) (152,553) (314,008) (367,752) (310,722)
INTEREST EXPENSE 3,310 1,154 17,256 8,877 6,362
----------- ----------- ----------- ----------- -----------
NET LOSS (240,861) (153,707) (331,264) (376,629) (317,084)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OF COMMON
STOCK OUTSTANDING 4,200,000 4,200,000 4,200,000 4,200,000 4,200,000
BASIC AND DILUTED NET
LOSS PER SHARE $ (0.06) $ (0.04) $ (0.08) $ (0.09) $ (0.08)
=========== =========== =========== =========== ===========
</TABLE>
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
<TABLE>
<CAPTION>
Common Stock
-----------------------
Shares Amount Deficit Total
------ ------ ------- -----
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 4,200,000 $1,000,000 $(2,102,993) $(1,102,993)
Net loss 0 0 (331,264) (331,264)
--------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1996 4,200,000 1,000,000 (2,434,257) (1,434,257)
Net loss 0 0 (376,629) (376,629)
--------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1997 4,200,000 1,000,000 (2,810,886) (1,810,886)
Net loss 0 0 (317,084) (317,084)
--------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1998 4,200,000 1,000,000 (3,127,970) (2,127,970)
Net loss (unaudited) 0 0 (153,707) (153,707)
--------- ---------- ----------- -----------
BALANCE, SEPTEMBER 30, 1999 4,200,000 $1,000,000 $(3,281,677) $(2,281,677)
========= ========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A Majority owned Subsidiary of ILX Resorts Incorporated)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended Year Ended
September 30, December 31,
----------------------- ------------------------------------
1998 1999 1996 1997 1998
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(240,861) $(153,707) $(331,264) $(376,629) $(317,084)
Depreciation and amortization 30,608 29,650 59,064 62,404 40,929
Decrease in accounts receivable 892 395 (2,677) 3,725 1,080
(Increase) decrease in inventory (49,866) 1,708 (21,013) 82,948 (58,247)
Increase in prepaid and other 16,407 (3,944) (18,573) (14,107) (39,441)
Increase (decrease) in accounts payable 7,198 (28,994) (33,249) (4,745) 19,709
Increase (decrease) in accrued expense (9,088) (4,460) (35,370) (14,179) (3,637)
--------- --------- --------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (277,524) (150,432) (383,082) (260,583) (356,691)
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (22,034) (16,879) (890) (21,138) (30,502)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt and leases (22,076) (21,544) (58,816) (45,759) (28,749)
Advances from parent 327,854 (125,461) 446,964 322,450 467,052
--------- --------- --------- --------- ---------
Net cash provided by financing activities 305,778 (103,917) 388,148 276,691 438,303
--------- --------- --------- --------- ---------
DECREASE IN CASH (6,220) (63,393) 4,176 (5,030) 51,110
CASH AT BEGINNING OF PERIOD 17,296 68,406 18,150 22,326 17,296
--------- --------- --------- --------- ---------
CASH AT END OF PERIOD $ 23,516 $ 5,013 $ 22,326 $ 17,296 $ 68,406
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 3,310 $ 1,154 $ 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
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 $376,629 and $317,084, respectively, and, as
of those dates, the Company's current liabilities exceeded its current assets by
$1,840,246 and $2,170,859 respectively, and its total liabilities exceeded its
total assets by $1,810,886 and $2,127,970, 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.
F-7
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A MAJORITY-OWNED SUBSIDIARY OF ILX RESORTS INCORPORATED)
NOTES TO FINANCIAL STATEMENTS
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.
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
$2,170,859 and its total liabilities exceeded its total assets by $2,127,970.
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.
F-8
<PAGE>
SEDONA WORLDWIDE INCORPORATED
(A MAJORITY-OWNED SUBSIDIARY OF ILX RESORTS INCORPORATED)
NOTES TO FINANCIAL STATEMENTS
In conjunction with the Spin-Off, the Company believes ILX will forgive the
intercompany indebtedness from the Company to ILX of $2,366,635 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.
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 which have been
capitalized for tax purposes but have been charged to expense for financial
statement purposes. 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.
F-9
<PAGE>
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
======= =======
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.
F-10
<PAGE>
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.
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.
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-11
<PAGE>
PART III
ITEM 1 - INDEX TO EXHIBITS
Exhibit Location in
No. Description EDGAR Filing
- ------ ----------- ------------
3.1 Articles of Incorporation of Registrant, as amended
(previously filed as Exhibit 2.1 to this Registration
Statement) **
3.2 Bylaws of Registrant, as amended(previously filed as
Exhibit 2.2 to this Registration Statement) **
10.1 Agreement, dated as of January 1, 1997, among the
Registrant and ILX Incorporated, on the one hand, and
Todd Fisher, on the other hand (previously filed as
Exhibit 6.1 to this Registration Statement) **
10.2 Agreement, dated as of January 1, 1997, among the
Registrant and ILX Incorporated, and Debbie Reynolds,
on the other hand (previously filed as Exhibit 6.2 to
this Registration Statement) **
10.3 Lease Agreement, dated December 29, 1995, among the
Registrant and Edward John Martori (previously filed as
Exhibit 6.3 to this Registration Statement) **
10.4 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
(previously filed as Exhibit 6.4 to this Registration
Statement) **
10.5 Master Lease Agreement, dated as of April 13, 1993, among
ILX Incorporated and CRA, Inc. (previously filed as
Exhibit 6.5 to this Registration Statement) **
10.6 Letter agreement, dated as of October 28, 1999, among the
Registrant and ILX Resorts Incorporated *
27 Financial Data Schedule *
* Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
for the period ended September 30, 1999.
** Previously filed
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant has caused this Amendment No. 3 to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
SEDONA WORLDWIDE INCORPORATED
December 7, 1999 By: /s/ Mia A. Martori
---------------------------------
Name: Mia A. Martori
Title: President
