UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Act of 1934
For the fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Act of 1934
For the transition period from _______________ to _______________
Commission File Number 0-25025
SEDONA WORLDWIDE INCORPORATED
ARIZONA 86-0718104
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3840 North 16th Street, Phoenix, Arizona 85016
Registrant's telephone number, including area code (602) 263-9600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Name of each Exchange
Title of Class on which registered
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Common Stock, without par value None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate the number of shares outstanding of each of the Registrant's classes of
stock, as of the latest practicable date.
Outstanding at
Title of Class February 29, 2000
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Common Stock, without par value 4,200,000 shares
At February 29, 2000, there was no public market for the stock. The value of the
common shares held by non-affiliates at February 20, 2000 based on the December
31, 1999 book value per share was approximately $100,000.
Portions of Registrant's definitive Proxy Statement relating to the 2000 Annual
Meeting of Shareholders have been incorporated by reference into Part III, Items
10, 11, 12 and 13.
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SEDONA WORLDWIDE INCORPORATED
1999 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I ..................................................................... 1
Items 1 and 2. Business and Properties ................................... 1
Item 3. Legal Proceedings ................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders .............. 16
PART II .................................................................... 16
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .............................................. 16
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 16
Item 7. Financial Statements ............................................. 16
Item 8. Changes in and Disagreements With Accountants On Accounting
and Financial Disclosure ......................................... 21
PART III ................................................................... 22
Item 9. Directors and Executive Officers of the Registrant;
Compliance With Section 16(A) of the Exchange Act ................ 22
Item 10. Executive Compensation .......................................... 22
Item 11. Security Ownership of Certain Beneficial Owners and Management... 22
Item 12. Certain Relationships and Related Transactions .................. 22
Item 13. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ........................................................ 22
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PART I
This Form 10-KSB contains certain "forward-looking statements," including
statements regarding, among other items, the Company's growth strategy, industry
and demographic trends, the Company's ability to generate additional sales of
its products and anticipated trends in its business. Actual results could differ
materially from these forward-looking statements as a result of a number of
factors, including, but not limited to, the Company's need for additional
financing, intense competition in various aspects of its business, the risks of
rapid growth, its dependence on key personnel and other factors discussed in the
Company's filings with the Securities and Exchange Commission.
SEDONA WORLDWIDE(TM) SEDONA SPA(TM) RED ROCK GEAR(TM) AND RED ROCK
COLLECTION(TM) ARE TRADEMARKS AND TRADE NAMES OF THE COMPANY. CERTAIN TRADEMARKS
AND TRADE NAMES INCLUDED IN THIS FORM 10-KSB ARE THE PROPERTY OF THIRD PARTIES
AND THE USE THEREOF DOES NOT IMPLY A DIRECT OR INDIRECT ENDORSEMENT OF THE
COMPANY BY SUCH THIRD PARTIES.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
THE COMPANY
Sedona Worldwide Incorporated, an Arizona corporation ("SWI" or the
"Company"), was incorporated in 1992 under the name Red Rock Collection
Incorporated. In 1997, the Company changed its name to Sedona Worldwide
Incorporated. The Company was a majority-owned subsidiary of ILX Resorts
Incorporated, an Arizona corporation ("ILX") until December 31, 1999, when ILX
effected a distribution of all of the shares of the Company's Common Stock which
ILX held to the ILX shareholders of record as of December 21, 1999, on a pro
rata basis (the "Spin-Off"). As a result of the Spin-Off, ILX's shareholders
became owners of, in the aggregate, 80% of the Company's outstanding capital
stock. ILX registered the Company's Common Stock pursuant to a Registration
Statement on Form 10-SB on a voluntary basis, in order to effect the Spin-Off,
without the need to register the distribution of the Company's Common Stock to
ILX's shareholders under the Securities Act of 1933, as amended (the "Securities
Act"). In January 2000, ILX distributed 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 disclosed certain
material information about the Company and the shares of Common Stock to be
distributed to ILX shareholders in the Spin-Off.
The Company is principally engaged in the development, testing, marketing,
and distribution of its own proprietary "Sedona Spa" branded lines of face, hair
and body care products and apparels containing ingredients or materials
indigenous to, and embodying the appeal of, the Southwestern region of the U.S.
and of Sedona, Arizona in particular. In addition, the Company has 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.
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The Company's personal care products have historically been marketed
primarily through direct sales at the Los Abrigados Resort & Spa, the "flagship"
resort of 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. Commencing in 1998, the Company began to
shift its focus to increasing the visibility, brand recognition and sales volume
of its products through the distribution of such products through certain salon,
spa and other retail outlets in California independent of ILX.
The Company intends to market its existing and future planned products
through various marketing media designed to capitalize upon the Company's
upscale niche product offerings. Specifically, the Company intends to target
consumers in the 35- to 65-year age group. The Company believes this demographic
group presents the greatest opportunity for future growth as well as expansion
of its existing customer base. Consistent with this strategy, the Company
entered into an agreement with Debbie Reynolds, pursuant to which Ms. Reynolds
has agreed to act as spokesperson for the Company's Sedona Spa line of products.
See "- Marketing Strategy" below. In addition, the Company is exploring a
variety of marketing strategies including catalog sales, internet sales, direct
mail campaigns, amenities packaging, including corporate gift programs with
banks, law firms and other private groups and other incentive-based distribution
channels. The Company is also exploring marketing activities in direct-response
television campaigns. Additionally, the Company will continue to offer its
products at the ILX resorts.
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.
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.
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COSMETICS AND TOILETRIES MARKET. According to DRUG AND COSMETIC INDUSTRY
MAGAZINE ("DCI"), June 1998 edition, the U.S. cosmetics and toiletries industry
is one of the world's largest markets, with $36.4 billion in sales in 1997 and a
compounded annual growth rate of 3.4%. In addition, this industry has
experienced significant growth in recent years. In 1997, hair care comprised
14.5% of the market share with products sold for in-salon services and retail
representing $1.8 billion at the manufacturer level up from $1.2 billion in the
prior year. Sales of hair care products experienced retail sales reaching
approximately $5.27 million in 1997 up from $4.8 million in 1993. Skin care
products comprised 13.7% of the market with retail sales reaching almost $5.0
billion in 1997. In 1997, U.S. retail sales of skin care products reached $3.98
billion with sales for 1998 projected to be $4.18 billion, $4.37 billion in
1999, and $4.57 billion in 2000, according to Packaged Facts, a marketing
research organization. A major factor contributing to this growth is the current
trend of the skin care market being driven by the aging baby boom generation who
are striving to keep a youthful and healthy appearance. Also, mass market
moisturizer sales jumped 24% to $489.9 million for the year ended February 22,
1998, according to Information Resources, of Chicago, Illinois.
The personal hygiene market, which includes bath and shower products, had
retail sales of $4.3 billion in 1997 and an annual growth rate of 1.0% between
1993 and 1997. The Company believes that the growth experienced in this segment
is primarily attributable to new niche products, product extensions of existing
successful products, as well as packaging and marketing trends which cater to an
increasingly sophisticated consumer. In addition, the Company believes that the
growth experienced in the cosmetics and toiletries industry in general is
largely attributable to a growing number of persons in the 45- to 54-year age
group, which group, on average, consists of the most affluent households
according to Household Spending, 4th Edition. Also according to this source, in
1997 U.S. households with incomes of $70,000 and greater spent 79% more than the
average household in personal care products and services.
The cosmetics and toiletries industry is a rapidly changing and highly
competitive global industry and the Company expects it to continue to be so in
the future. The market is dominated by a large number of well-capitalized,
diverse companies, such as Avon, Clairol, Alberto Culver, Revlon, L'Oreal, Estee
Lauder, Unilever, Gillette, Proctor & Gamble, Colgate-Palmolive, Matrix, John
Paul Mitchell Systems, Nexxus and Redken, all of which have strong brand-name
recognition associated with their products. However, more recently, product
offerings by various niche marketers have been able to successfully capture a
significant share of the consumer market dollar. The Company believes this trend
is at least partially attributable to the growing number of aging "baby-boomers"
in the 45- to 60-year age group with significant disposable income, many of whom
are particularly interested in products that seek to erase or reduce visible
effects of aging. According to DCI, June 1998 edition, the "baby boomer" segment
of the U.S. population spends, on average, more per capita than any other age
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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.
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JEWELRY. The combined value of all goods produced by costume jewelry
manufacturers in the United States totaled $1.6 billion in 1996, according to
the Encyclopedia of American Industries, Second Edition 1998. Unlike many of the
other large consumer markets, there is a lower level of brand identity in the
jewelry arena, and the largest manufacturers have not historically dominated the
market, to the degree experienced in the cosmetics and toiletries industry. In
fact, most manufacturers are relatively small independent operators, often of an
arts and crafts nature. Nonetheless, the industry includes several large
publicly traded companies like Tiffany & Co., with 1995 revenues of $803.0
million; Jostens, Inc. with 1995 revenues of $665.0 million; and Jan Bell
Marketing with 1995 revenues of $254.0 million. The largest company engaged in
the costume jewelry industry in 1995 in the U.S. was Illinois-based Artra Group,
a publicly held conglomerate founded in 1933. Artra's many subsidiaries include
the number two firm, Lori Corp. Lori Corp.'s 1995 sales totaled approximately
$160.0 million. Third in line was the Napa Company, whose origins date back to
1875, making it the oldest costume jewelry manufacturer in the U.S. Their 1995
sales totaled approximately $70.0 million. The New York City based firm of
Trifari Krussman and Fischel, Inc. was fourth in production and sales, with
origins that date back to the early 1920's and sales totaled around $63.0
million in 1995. Most jewelry sales are made through jewelry store chains and
independent retailers as well as department stores, with costume jewelry
achieving notable success on home shopping networks. The Company believes that
there currently exists a trend in the jewelry industry of including the use of
materials and motifs inspired by indigenous cultures and natural elements. The
Company intends to capitalize upon this trend through its offering of The Robert
Shields Collection products.
APPAREL. Retail apparel sales totaled approximately $170.0 billion in 1997,
up 4.9% from 1996, following a 2.2% gain in 1996 from the prior year, according
to the NPD Group Inc. ("NPD").
Apparel is sold at a variety of retail outlets. Based on data from NPD,
discount stores, off price retailers and factory outlets accounted for 26% of
1997 apparel sales, while specialty stores and department stores accounted for
about 22% and 21%, respectively. Another 14.5% of sales are by major chains, and
direct mail/catalogs accounted for 8%. About 30% of the apparel marketed
consisted of national brands (e.g., Liz Claiborne, Fruit of the Loom, Jones
Apparel, Phillips Van Heusen, Polo Ralph Lauren) produced by about 20 different
large companies. The second tier, accounting for about 70% of all apparel
distributed, comprises small brands and store (or private label) goods. The
women's segment has traditionally accounted for more than half of all apparel
sales, according to research from NPD reported in WOMEN'S WEAR DAILY, it totaled
nearly 53% in 1997.
Leaders in the apparel industry included Liz Claiborne ($2.4 billion),
Fruit of the Loom ($2.1 billion), Jones Apparel ($1.3 billion), Phillips-Van
Heusen ($1.3 billion) and Polo Ralph Lauren ($1.2 billion). The Company believes
that one of the most significant trends currently affecting the apparel industry
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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.
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OPERATING STRATEGY
Since 1994, the Company has test marketed its unique line of face, hair and
body care products through promotional use and retail sales at the ILX resorts,
and direct sales, including direct mail, network marketing, in-bound and
out-bound telemarketing, direct wholesaling, trade show, internet and
consignment programs. Based upon such test marketing efforts, the Company
believes that its products will be most favorably received by people 35 to 65
years of age. As a result, the Company intends to proceed with its planned
introduction of botanical based face, hair and body products, a line of
Southwest jewelry and artwork based upon Mr. Robert Shield's existing designs,
expand its "Red Rock Gear" apparel line, as well as develop a line of natural
vitamins and mineral supplements and other products consistent with its Sedona
motif.
The Company's strategy is to seek to satisfy a particular sector of the
consumer population who, because of their attraction to the natural beauty and
mystique of the Southwestern U.S., and particularly Sedona, Arizona, are
attracted to botanically originated products for the face, hair and body, and
jewelry and apparel which seek to represent or capture the "spirit" or the
"essence" of the Southwest and Sedona. The Company's personal care products have
been formulated using a variety of natural botanical extracts, essential oils
and minerals, as demonstrated in the Arizona Mud Masque from the Southwest. The
Company's "Red Rock Gear" line of clothing features natural fibers, Southwest
styling and its particular line of "dirt shirts" uses Sedona red rock materials
as natural dye. Additionally, the Company designs its products with an emphasis
upon branded packaging concepts which stress aesthetic appeal as well as
convenience of use.
The Company seeks to develop products which respond to the sophisticated
demands and concerns of its targeted consumer. For example, no animal testing is
performed; and natural pump sprays as opposed to ozone-depleting propellants are
selected. The Company believes that given its philosophy in developing its
products and their unique marketing appeal, its products will be embraced by its
intended niche market and as a result, the Company seeks to further expand its
current sales volume and product diversity.
The Company maintains a website at http:\\www.Sedonaspa.com. Visitors to
this site can learn about the Company's products as well as order them online.
In addition, customers may speak with customer service representatives and place
orders by calling the toll-free number, 1-800-RED (733)-ROCK (7625).
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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
Refreshing Facial Toner
Wildberry Facial Moisturizer
Hydrating Facial Moisturizer
Nighttime Refining Moisturizer
Arizona Mud Masque
Sedona Red Mineral Facial
SEDONA SPA HAIR CARE (HAIR)
Mountain Moisture Shampoo
Mountain Moisture Conditioner
Maximum Body Shampoo
Maximum Body Conditioner
Gold Shaping Gel
Botanical Sculpting Spray
SEDONA SPA SKIN CARE (BODY)
Body Balm Moisturizer
Spa Shower Gel
Sea Kelp Soap
Sedona Red Soap
The Company's Sedona Spa products emphasize the natural properties of their
botanical ingredients. None of the current product offerings contain any
"active" ingredients. As a result, they are not subject to regulation by the
Food and Drug Administration. In addition, third parties perform all of the
necessary testing, if any, associated with the products they produce for the
Company. Generally, testing is performed when using ingredients classified by
the FDA as "Generally Regarded as Safe." The manufacturer of the Sedona Spa hair
care products does employ a Quality Assurance Program, which includes
microbiological testing, stability and product performance testing. None of the
Company's manufacturers performs any animal testing.
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THE ROBERT SHIELDS COLLECTION. The Company has entered into an informal
arrangement with Robert Shields of "Shields & Yarnell" fame to market a line of
Southwest jewelry, artwork and clothing (to be marketed in conjunction with the
Company's branded Red Rock Gear line as described below) based on his existing
line of such products. The Robert Shields Design is a jewelry and art design
company based in Sedona, Arizona, which distributes Mr. Shields' Southwest style
art and jewelry to retailers, museums, galleries, and resorts across the United
States. Mr. Shields maintains a gallery in Sedona, Arizona to showcase his work,
including one at the Los Abrigados Resort & Spa, which is owned by ILX. His
jewelry often features sterling silver, turquoise, beads and other Southwest
materials, and includes earrings, necklaces, pins and pendants. His artistic
creations include sketches, sculpture, paintings, masks, painted wood and
photography. The marketing alliance is in its early stages and no purchases have
been made by the Company to date.
RED ROCK GEAR. "Red Rock Gear" is the name of the Company's line of apparel
featuring natural fibers and Southwest styling. The line presently includes a
"dirt shirt," made with Sedona red rock materials used as a natural dye, unique
Southwestern style skirts, a terry-cloth spa robe, t-shirts and caps.
Additionally, portions of the successful Robert Shields Design line of clothing
are currently planned to be marketed under the Red Rock Gear label. This line
includes contemporary Southwestern men's and women's apparel and accessories,
predominately in earth and gem tones embellished with Shields' jewelry. The
Company intends to expand its existing line of Red Rock Gear offerings with
other items such as hiking apparel, women's casual wear, men's shirts,
sweatshirts and other accessories.
RED ROCK NATURAL HEALTH. Although the Company does not currently produce or
distribute such products, it is exploring the development of a line of natural
vitamins, mineral supplements and herbal-based products. The Company believes
such products may capitalize on the increasingly mainstream consumer interest in
natural medicine and well being. The Company believes such products will be
attractive to consumers of its Sedona Spa products and Red Rock Gear line and
may be marketed both separately as well as in conjunction with such product
lines. The Company expects to introduce its Red Rock Natural Health products in
2000 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
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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
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 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 two Internet retailers. Although Internet sales
have not been a significant source of revenue to the Company, management may
explore opportunities in the online 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, e-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,
Internet and other direct sales media are being considered, to be supplemented
by traditional advertising, promotion and a public relations campaign, also
supported, in some instances, by Ms. Reynolds' promotion. Pursuant to the
agreement, Ms. Reynolds has agreed to provide certain promotional services,
including two personal appearances, as well as a limited number of radio spots,
newspaper and magazine advertisements and television infomercials. All of Ms.
Reynolds' services are to be performed at ILX's resort, Los Abrigados, except
for certain production activities which may be performed in Las Vegas or Los
Angeles, and may not require more than two weeks of Ms. Reynolds' time. Ms.
Reynolds has also agreed not to use her likeness in connection with any products
competitive to the Company's in the United States. In exchange for her services,
Ms. Reynolds received a number of shares equal to 10% of the Company's
outstanding Common Stock. Ms. Reynolds subsequently transferred these shares to
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her son, Todd Fisher, also a director of the Company. 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 Los
Abrigados. Ms. Reynolds has the right to terminate the agreement for, among
other things, failure of the Company to generate certain minimum royalties and
failure to effect an initial public offering of its securities prior to January
1, 1998. Currently, the agreement is in effect and will expire January 1, 2002,
unless earlier terminated.
The Company intends to focus its marketing efforts initially in the
Southwestern United States, with a national marketing campaign to be implemented
thereafter. The Company also intends to continue to distribute its products
through the ILX resorts, although currently it does not have any contractual
arrangements with ILX for such distribution. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations Concentration."
MANUFACTURING AND DISTRIBUTION
PRODUCT DEVELOPMENT, PRODUCTION AND PACKAGING. All of the Company's product
development, production and packaging functions are performed by third parties
on a contractual basis. The Company believes that outsourcing these aspects of
its operations enables it to access the particular technical expertise of its
third party suppliers while simultaneously realizing certain economic advantages
enjoyed by such suppliers, including flexible production capacity and raw
materials purchasing power. In addition, the Company believes such arrangements
permit it to avoid the costs associated with the facilities maintenance and
administration activities associated with such functions. The Company works
closely with its outside suppliers in an effort to ensure the quality and
consistency of its products. The Company does not have contractual arrangements
with any of its third party suppliers. Although the Company has worked with each
of such suppliers for a period of one to five years and believes its relations
are good, such suppliers are not obligated to continue to provide products and
services to the Company at all, or on the same terms and conditions as they
currently do.
Development of a new product typically commences with a market research and
feasibility analysis conducted by the Company and its suppliers. When the
Company has determined that a particular product concept is feasible, it employs
an outside supplier to prepare prototype samples in accordance with the
Company's instructions. The Company ultimately selects the desired prototype,
obtains the necessary governmental approvals, if any, and initiates the
manufacturing process.
11
<PAGE>
Manufacturing of the Company's products is typically completed pursuant to
a purchase order by the Company for a specified number of units. The Company
provides precise product specifications to the manufacturer and requires the
manufacturer to undertake documented quality control procedures throughout the
manufacturing process.
Product labeling and packaging are typically obtained by the Company on a
"turn-key" basis from third party suppliers. This means that these third party
suppliers agree to deliver consumer ready product to the Company. To the extent
that such supplier requires the use of other third parties, they are responsible
for negotiating such arrangements, as well as ensuring the quality of the
products or services received by them. Historically, the Company has utilized
particular stock packaging materials in an effort to avoid the costs and long
lead times associated with obtaining custom packaging materials.
Currently, all of the Company's Sedona Spa products are developed,
manufactured and packaged by 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, Inc., a privately held company
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.
12
<PAGE>
Currently, all of the Company's order processing and fulfillment operations
are conducted internally at the Company's principal facilities in Phoenix,
Arizona. Orders are processed by the Company's customer service employees, and
fulfilled by its shipping and receiving staff from existing inventory. However,
some or all of the Company's customer service, order processing and fulfillment
operations may in the future be conducted by third parties in response to
increased volume or other factors, many of which are beyond the Company's
control. The Company does not currently have any agreements in place with
respect to such operations and there can be no assurance that such resources
will be available if and when needed, or if available, will be on terms
favorable to the Company.
INTELLECTUAL PROPERTY
The Company has registered "Red Rock Collection" and "Sedona Spa" as trade
names with the Arizona Secretary of State; has registered "Sedona Spa" as a
trademark with the U.S. Patent and Trademark Office; and has filed an
application with the U.S. Patent and Trademark Office for the registration of
its trademark, "Sedona Worldwide." Although the application is currently
pending, there can be no assurances regarding 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
13
<PAGE>
Company's confidentiality agreements, when in place, will not be breached, or
that the Company would have adequate remedies for any breach. In addition, there
can be no assurance that any trade secrets owned by the Company will afford
adequate protection to the Company or not be circumvented, or that any such
interests will provide competitive advantages to the Company.
RESEARCH AND DEVELOPMENT
During each of the fiscal years ended December 31, 1997, 1998 and 1999, the
Company spent an aggregate of approximately $19,000, $3,000 and $0,
respectively, on research and development activities. The Company's research and
development activities have historically consisted primarily of product testing
and logo and packaging design, among other activities. The Company may incur
certain costs in the future in connection with the introduction of additional
products. The 1997 research and development activities include the product
changes and repackaging associated with the introduction of the Sedona Spa line
of products, which replaced the Red Rock Collection line previously marketed by
the Company.
GOVERNMENTAL REGULATION
In certain instances, personal care and health products are subject to
regulation by the U.S. Food and Drug Administration (the "FDA"). None of the
Company's existing products require the Company to obtain the approval of the
FDA or any other state or federal agency in order to sell such products. While
the Company's sunscreen formulation has received FDA approval, it is not
currently being marketed. The Company believes it is in compliance with all
applicable FDA and other governmental regulations. However, there can be no
assurance that any of the Company's current or future planned products will not
become subject to governmental approval in the future. The Company intends to
comply with all governmental regulations which may become applicable in the
future including any related to its planned line of Red Rock Natural Health
products.
PROPERTIES
The Company's headquarters and warehouse facilities are located at 3840
North 16th Street in Phoenix, Arizona. The Company leases approximately 2,000
square feet for these purposes from ILX at a rate of $2,000 per month for a
two-year term expiring December 2001, with three one-year options to renew. The
Company does not own any real estate.
14
<PAGE>
EMPLOYEES
As of December 31, 1999, the Company had four employees, all of whom were
employed on a full-time basis, with none covered by collective bargaining
agreements. For the foreseeable future the Company intends to have its staff be
employed directly by ILX and to lease these employees from ILX, thereby
providing such employees a broader range of employee benefits and at a more
favorable cost than would be available if the employees were employed directly
by the Company. In addition, post spin-off, ILX has agreed to make available the
services of certain of its employees to the Company on a part-time basis as
needed by the Company, for which the Company will pay a fee. The Company intends
to continue to utilize services of ILX only when such services are more cost
effective than either developing in-house resources to perform the functions or
securing such services from alternative third party providers.
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. The Company is currently seeking to secure
general, liability, automobile liability and umbrella insurance coverage
independent of ILX. The Company does not currently have a commitment for any
such insurance and there can be no assurance that it will be able to secure
coverage in the same amounts as ILX has maintained for its benefit or that, even
if secured, the premiums associated with such coverage will be affordable to the
Company. In the foreseeable future the Company intends for ILX to continue to
directly employ the Company's staff, and for the Company to lease such employees
from ILX. Accordingly, workmen's compensation coverage will continue to be
provided through ILX. 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.
CONCENTRATION
The substantial majority of the Company's revenues to date have been
generated from 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 could 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.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently the subject of any pending or, to its
knowledge, threatened legal claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no public market for the Company's Common Stock. At
February 29, 2000, the Common Stock was held by approximately 1100 shareholders
of record. No dividends on the Company's Common Stock have been declared by the
Company since inception and none are anticipated in the foreseeable future.
When, if ever, the Company is able to generate earnings, it intends to invest
such resources in its existing operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
FORM 10-KSB, THE WORDS "ESTIMATE," "PROJECTION," "INTEND," "ANTICIPATE" AND
SIMILAR TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS THAT RELATE TO
THE COMPANY'S FUTURE PERFORMANCE. SUCH STATEMENTS ARE SUBJECT TO SUBSTANTIAL
UNCERTAINTY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS SET FORTH BELOW. THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY UPDATE OR REVISE ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN.
OVERVIEW
Sedona Worldwide Incorporated was formed in 1992 to develop, test, market
and distribute its own proprietary "Sedona Spa" branded lines of face, hair and
body care products and apparels containing ingredients or materials indigenous
to, and embodying the appeal of, the Southwestern region of the United States
and of Sedona, Arizona in particular. To date, the Company has generated revenue
primarily through the sale of its face, hair and body care products to ILX, of
which it was formerly 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.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company:
Year Ended December 31,
-------------------------
1997 1998 1999
----- ----- -----
Net sales:
Sales to affiliates (1) 80.5% 85.7% 79.1%
Sales to non-affiliates 19.5% 14.3% 20.9%
----- ----- -----
Total sales 100.0% 100.0% 100.0%
===== ===== =====
As a percentage of net sales:
Cost of sales 69.7% 65.1% 60.2%
Contribution margin 30.3% 34.9% 39.8%
Selling, general and administrative expense 138.2% 138.1% 89.0%
Net loss 110.5% 105.3% 49.5%
- ----------
(1) Sales to affiliates consist of sales made to ILX. Sales to ILX have
historically been made at lower prices (generally cost plus a small mark
up) than sales to non-affiliates.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO DECEMBER 31, 1999
Net sales increased 28.9% to $388,000 in 1999 from $301,000 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 60.2% in 1999 from
65.1% in 1998, reflecting higher product prices and reduced product costs as a
result of discounts achieved through higher volume purchasing.
Sales, general and administrative expenses decreased $70,000 to $346,000 in
1999 from $416,000 in 1998, reflecting primarily cost reductions in advertising
and, to a lesser degree, reductions in printing and supplies.
Interest expense decreased to $1,000 for 1999 from $6,000 for 1998,
reflecting declining capital lease obligations.
17
<PAGE>
There is no income tax benefit recorded in 1998 or 1999 because the Company
recorded a valuation allowance equal to its deferred tax asset at December 31,
1998 and did not record a deferred tax asset at December 31, 1999. 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 at December 31, 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.
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 twelve-month periods ended December 31, 1997, 1998 and
1999, cash used in operations was $261,000, $357,000 and $174,000, respectively.
Historically the Company's cash flows from product sales have not been
18
<PAGE>
sufficient to fund its operations, and shortfalls have been funded by its former
parent, ILX. ILX advanced the Company $322,000, $467,000 and $179,000 in the
twelve-month periods ended December 31, 1997, 1998 and 1999, respectively. ILX
has funded the Company's cash shortfalls since inception and continued to do so
until the completion of the Spin-Off. At the time of the Spin-Off, the Company
was indebted to ILX in an amount in excess of $2,545,000, which ILX contributed
to capital 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, with interest payable monthly. The entire
unpaid principal will be due on December 31, 2000.
Without such commitment, the Company's current cash flows are expected to
be insufficient to meet its liquidity, operating and capital requirements over
the next twelve months. The Company currently has no credit facility with a bank
or other financial institution. While the Company will attempt to obtain a
credit facility to address its cash flow needs, 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, 1998 and 1999
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 filing. 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
19
<PAGE>
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 was no formal income tax sharing
agreement to allocate income taxes among the members of the group and the
Company has not recorded an income tax benefit for losses it has incurred that
were utilized or may be utilized by ILX.
USES OF CASH
Investing activities typically reflect a net use of cash for equipment
purchases. Net cash used in investing activities in the twelve-month periods
ended December 31, 1997, 1998 and 1999 was $21,000, $31,000 and $38,000,
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,
except as follows: In October 1999, ILX agreed to provide up to $200,000 of
working capital financing to the Company through November 30, 2000. All amounts
borrowed by the Company under this agreement will bear interest equal to the
prime rate plus 3% per annum, with interest payable monthly, and the entire
unpaid principal amount due on December 31, 2000. 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. 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.
20
<PAGE>
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, 1997, 1998 or 1999.
ITEM 7. FINANCIAL STATEMENTS
See the information set forth on Index to Financial Statements appearing on
page F-1 of this Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Prior to 1998, the Company had not directly engaged independent public
accountants. In conjunction with the Spin-Off, the Company engaged Deloitte &
Touche LLP ("D&T") to audit its financial statements for the years ended
December 31, 1996 and 1997 and such audited statements were included with the
10-SB and Amendment No. 1 to Form 10-SB in the Company's filings with the
Securities and Exchange Commission. The Company selected D&T because D&T were
the principal independent accountants for ILX.
On November 20, 1998, D&T resigned as the principal independent accountants
for ILX and the Company as reported by ILX in its Form 8-K filing on November
30, 1998 and its Form 8-K/A filing on December 11, 1998.
Neither of D&T's reports on the Company's financial statements for the last
two years contained an adverse opinion or a disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
In addition, during such periods and the period from December 31, 1997 until the
date of D&T's resignation, there were no disagreements or "reportable events"
with respect to the Company, as contemplated by Item 304(a)(1) (iv) and (v),
respectively, under Regulation S-K.
As reported on ILX's Form 8-K filed with the Securities and Exchange
Commission on February 16, 1999, on February 8, 1999, the Company engaged
Hansen, Barnett & Maxwell, a professional corporation ("HB&M"), as its principal
accountant to audit the Company's financial statements for the year ended
December 31, 1998. On December 14, 1999, the Company engaged HB&M to audit its
financial statements for the year ended December 31, 1999. Prior to its
engagement, the Company had not consulted HB&M with respect to the application
of accounting principles to a specified transaction or any matter that was the
subject of a disagreement or a reportable event (as described in Item
301(a)(1)(v) of Regulation S-K).
21
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders
and is incorporated herein by reference.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS PAGE OR METHOD OF FILING
------------------------
(i) Report of Hansen, Barnett & Maxwell, a Page F-2
professional corporation
(ii) Financial Statements and Notes to Pages F-3 through F-21
Statements of the Registrant, including
Balance Sheets as of December 31, 1999
and 1998 and Statements of Operations,
Stockholders' Equity/Net Capital
Deficiency and Cash Flows for each of
the three years ended December 31, 1999,
1998 and 1997.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedules other than those mentioned above are omitted because the
conditions requiring their filing do not exist or because the required
information is given in the financial statements, including the notes
thereto.
(a)(3) EXHIBITS
The Exhibit Index attached to this report is hereby incorporated by
reference.
(b) REPORTS ON FORM 8-K
None.
22
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27h day of
March, 2000.
Sedona Worldwide Incorporated,
an Arizona corporation
(Registrant)
By: /s/ Patrick J. McGroder III
------------------------------------
Patrick J. McGroder III
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Patrick J. McGroder III Chairman of the Board March 27, 2000
- -----------------------------
Patrick J. McGroder III
/s/ Mia A. Martori Director, President and March 27, 2000
- ----------------------------- Treasurer
Mia A. Martori
/s/ Margaret M. Eardley Chief Financial Officer of March 27, 2000
- ----------------------------- ILX Resorts Incorporated
Margaret M. Eardley (acting principal financial
and accounting officer)
/s/ Todd Fisher Director March 27, 2000
- -----------------------------
Todd Fisher
/s/ James W. Myers Director March 27, 2000
- -----------------------------
James W. Myers
/s/ Robert Shields Director March 27, 2000
- -----------------------------
Robert Shields
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets at December 31, 1998 and 1999 F-3
Statements of Operations for the years ended December 31, 1997,
1998 and 1999 F-4
Statements of Stockholders' Equity/Net Capital Deficiency for
the years ended December 31, 1997, 1998 and 1999 F-5
Statements of Cash Flows for the years ended December 31, 1997,
1998 and 1999 F-6
Notes to Financial Statements F-7
F-1
<PAGE>
[HANSEN, BARNETT & MAXWELL LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Shareholders of Sedona Worldwide Incorporated
We have audited the accompanying balance sheets of Sedona Worldwide Incorporated
as of December 31, 1998 and 1999 and the related statements of operations,
stockholders' equity/ net capital deficiency, and cash flows for each of the
three years in the period ended December 31, 1999. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sedona Worldwide Incorporated
at December 31, 1998 and 1999 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 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. This
condition raises 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.
HANSEN BARNETT & MAXWELL
Salt Lake City, Utah
February 25, 2000
F-2
<PAGE>
SEDONA WORLDWIDE INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1999
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 68,406 $ 9,564
Accounts receivable 786 12,988
Inventories 134,180 157,546
Prepaid expenses and other current assets 77,022 30,077
----------- -----------
Total current assets 280,394 210,175
----------- -----------
Property and equipment, net (Notes 3 and 5) 42,889 44,077
----------- -----------
TOTAL ASSETS $ 323,283 $ 254,252
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY/NET CAPITAL DEFICIENCY
CURRENT LIABILITIES:
Accounts payable $ 32,163 $ 4,523
Due to parent (Note 2) 2,366,635 --
Accrued expenses 26,284 24,309
Current portion of capital lease obligations (Note 5) 26,171 --
----------- -----------
Total current liabilities 2,451,253 28,832
----------- -----------
Total liabilities 2,451,253 28,832
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY/ 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
Contributed capital -- 2,545,730
Deficit (3,127,970) (3,320,310)
----------- -----------
Total stockholders' equity/ net capital deficiency (2,127,970) 225,420
----------- -----------
TOTAL $ 323,283 $ 254,252
=========== ===========
</TABLE>
See notes to financial statements
F-3
<PAGE>
SEDONA WORLDWIDE INCORPORATED
STATEMENTS OF OPERATIONS
Year Ended December 31,
-------------------------------------------
1997 1998 1999
----------- ----------- -----------
NET SALES (Note 7):
Customers $ 66,472 $ 42,964 $ 81,349
Affiliates 274,501 258,052 307,075
----------- ----------- -----------
Total net sales 340,973 301,016 388,424
COST OF SALES 237,503 195,895 233,706
----------- ----------- -----------
Gross profit 103,470 105,121 154,718
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (Note 7) 471,222 415,843 345,870
----------- ----------- -----------
LOSS FROM OPERATIONS (367,752) (310,722) (191,152)
INTEREST EXPENSE 8,877 6,362 1,188
----------- ----------- -----------
NET LOSS $ (376,629) $ (317,084) $ (192,340)
=========== =========== ===========
WEIGHTED AVERAGE SHARES OF
COMMON STOCK OUTSTANDING 4,200,000 4,200,000 4,200,000
=========== =========== ===========
BASIC AND DILUTED NET LOSS
PER SHARE $ (0.09) $ (0.08) $ (0.05)
=========== =========== ===========
See notes to financial statements
F-4
<PAGE>
SEDONA WORLDWIDE INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY/ NET CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
Common Stock
-------------------------- Contributed
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ 4,200,000 $ 1,000,000 $ -- $(2,434,257) $(1,434,257)
Net loss -- -- -- (376,629) (376,629)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 4,200,000 1,000,000 -- (2,810,886) (1,810,886)
Net loss -- -- -- (317,084) (317,084)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 4,200,000 1,000,000 -- (3,127,970) (2,127,970)
Contributed capital -- -- 2,545,730 -- 2,545,730
Net loss -- -- -- (192,340) (192,340)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 4,200,000 $ 1,000,000 $ 2,545,730 $(3,320,310) $ 225,420
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements
F-5
<PAGE>
SEDONA WORLDWIDE INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(376,629) $(317,084) $(192,340)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 62,404 40,930 36,558
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable 3,725 1,080 (12,202)
(Increase) decrease in inventory 82,948 (58,247) (23,366)
Decrease (increase) in prepaid expenses and other assets (14,107) (39,441) 46,945
(Increase) decrease in accounts payable (4,745) 19,709 (27,640)
Decrease in accrued expenses (14,179) (3,637) (1,975)
--------- --------- ---------
Net cash used in operating activities (260,583) (356,690) (174,020)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (21,138) (30,502) (37,746)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital
lease obligations (45,759) (28,749) (26,171)
Advances from parent 322,450 467,052 179,095
--------- --------- ---------
Net cash provided by financing activities 276,691 438,303 152,924
--------- --------- ---------
(DECREASE) INCREASE IN CASH (5,030) 51,110 (58,842)
CASH, BEGINNING OF PERIOD 22,326 17,296 68,406
--------- --------- ---------
CASH, END OF PERIOD $ 17,296 $ 68,406 $ 9,564
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 8,877 $ 6,362 $ 1,188
========= ========= =========
</TABLE>
See notes to financial statements
F-6
<PAGE>
SEDONA WORLDWIDE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS. Sedona Worldwide Incorporated, an Arizona
corporation ("SWI" or the "Company"), was incorporated in 1992 under the name
Red Rock Collection Incorporated. In 1997, the Company changed its name to
Sedona Worldwide Incorporated. The Company was a majority-owned subsidiary of
ILX Resorts Incorporated, an Arizona corporation ("ILX") until December 31,
1999, when ILX effected a distribution of all of the shares of the Company's
Common Stock which ILX held to the ILX shareholders of record as of December 21,
1999, on a pro rata basis (the "Spin-Off"). As a result of the Spin-Off, ILX's
shareholders became owners of, in the aggregate, 80% of the Company's
outstanding capital stock. ILX registered the Company's Common Stock pursuant to
a Registration Statement on Form 10-SB on a voluntary basis, in order to effect
the Spin-Off without the need to register the distribution of the Company's
Common Stock to ILX's shareholders under the Securities Act of 1933, as amended
(the "Securities Act"). In January 2000, ILX distributed 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 disclosed certain material information about the Company and the
shares of Common Stock to be distributed to ILX shareholders in the Spin-Off.
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
retail and catalog sales primarily in the southwestern United States.
F-7
<PAGE>
SEDONA WORLDWIDE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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 provided for taxes as if the Company had operated on a stand-alone basis
at December 31, 1998. At December 31, 1999, the Company is no longer a majority
owned subsidiary of ILX. See Note 4 for additional information.
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 February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS 129"), which was
effective for financial statements for periods ending after December 15, 1997
and establishes standards for disclosing information about an entity's capital
structure. SFAS 129 was adopted by the Company in 1997. There were no
significant effects on the Company's disclosures about its capital structure, as
that term is defined in SFAS 129, in the years ended December 31, 1997, 1998 or
1999.
F-8
<PAGE>
SEDONA WORLDWIDE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which was 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. The Company adopted SFAS 130 in 1998. There were no items
of other comprehensive income, as that term is defined in SFAS 130, in the years
ended December 31, 1997, 1998 or 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"), 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 statements and requires
that those enterprises report selected information about operating segments in
interim 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.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The standard also provides specific guidance for accounting for derivatives
designated as hedging instruments. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of Statement No. 133" ("SFAS
No. 137"), which delayed the effective date of SFAS No. 133 for the company
until 2001. The Company is currently evaluating what impact this standard will
have on its financial statements.
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.
F-9
<PAGE>
SEDONA WORLDWIDE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 2. BUSINESS CONDITION
As shown in the accompanying financial statements, the Company incurred a
net loss of $192,340 during the year ended December 31, 1999. As of that date,
the Company's current assets exceeded its current liabilities by $181,343 and
its total assets exceeded its total liabilities by $225,420 due to ILX
contributing in excess of $2,545,000 of intercompany debt to capital. However,
as shown in the accompanying financial statements, the Company incurred net
losses of $376,629, $317,084 and $192,340 in 1997, 1998 and 1999, respectively,
and has an accumulated deficit of $3,320,310. 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.
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. At the time of the Spin-Off, the Company was indebted to ILX in an
amount in excess of $2,545,000, which ILX contributed to capital in conjunction
with the Spin-Off. 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. 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. 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, and is payable monthly. The entire unpaid
principal will be due on December 31, 2000. At December 31, 1999, there had been
no funds advanced under this agreement.
F-10
<PAGE>
SEDONA WORLDWIDE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of the following:
1998 1999
--------- ---------
Leasehold improvements (Note 5) $ 2,600 $ 2,600
Furniture and fixtures (Note 5) 183,610 204,478
Computer equipment 102,107 118,986
--------- ---------
Total 288,317 326,064
Less accumulated depreciation (245,428) (281,987)
--------- ---------
Property and equipment, net $ 42,889 $ 44,077
========= =========
Depreciation expense, which includes amortization of assets under capital
leases, was $62,404, $40,930 and $36,558 for 1997, 1998 and 1999, respectively.
NOTE 4. INCOME TAXES
Deferred income taxes are provided for temporary differences between
financial statement and income tax reporting for certain transactions, primarily
net operating loss carryover and amortization of start-up costs capitalized. Net
deferred income taxes at December 31 consist of the following:
1998 1999
--------- ---------
Deferred income tax assets $ 462,785 $ --
Valuation allowance (462,785) --
--------- ---------
Net deferred income tax asset $ -- $ --
========= =========
Through December 31, 1999, the Company filed 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. The Company has not recorded an income tax benefit for
losses it has incurred that were utilized or may be utilized by ILX.
As part of the consolidated financial statements of its former parent, ILX,
the Company recorded a valuation allowance equal to its deferred tax asset at
December 31, 1998. At December 31, 1999, as a result of the Spin-Off, the
Company recorded no deferred tax asset or a corresponding valuation allowance
because all tax benefits created by the Company's net operating losses were
retained by ILX. This treatment results in no income tax benefit being recorded
in either 1998 or 1999.
F-11
<PAGE>
SEDONA WORLDWIDE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NOTE 5. LEASE COMMITMENTS
OPERATING LEASES. Effective January 1, 2000, the Company leases from ILX
2,000 square feet for $2,000 per month ($24,000 annually) for its principal
offices and warehouse facilities in Phoenix, Arizona, pursuant to a twenty-four
month lease that expires in December 2001, with three 12-month options to renew.
During 1999, the Company leased these facilities directly from an affiliate of
ILX through a lease of the entire facility, of which it sublet a portion to ILX.
For the years ended December 31, 1997, 1998 and 1999, the Company paid $48,000
in lease payments to an affiliate of ILX. The Company collected from ILX
$63,000, $52,000 and $24,000 for the years ended December 31, 1997, 1998 and
1999, respectively. The Company charged ILX for its sublease which included
rent, utilities, cleaning, landscaping, property taxes, insurance and other
services provided by the Company.
The Company had lease expenses for office equipment of $524, $2,654 and
$1,344 for the years ended December 31, 1997, 1998 and 1999, respectively.
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:
1998 1999
--------- ---------
Furniture and fixtures and computer equipment $ 97,400 $ 97,400
Less accumulated amortization 71,200 97,400
--------- ---------
Net $ 26,200 $ --
========= =========
Capital lease obligations at December 31 consist of the following:
1998 1999
--------- ---------
Obligations under capital leases $ 27,702 $ --
Less amount representing interest 1,531 --
--------- ---------
26,171 --
Less current portion 26,171 --
--------- ---------
Long-term portion of capital lease obligations $ -- $ --
========= =========
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
F-12
<PAGE>
SEDONA WORLDWIDE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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, 1999, the amounts that will actually
be realized or paid in settlement of the instruments could be significantly
different.
For the Company's cash, the carrying amount is the fair value. The carrying
amount is assumed to be the fair value for accounts receivable, accounts payable
and other accrued expenses because of the short maturity of the portfolios. The
fair value of the Company's capital lease obligations approximates the terms in
the marketplace under which they could be replaced. Therefore, the fair value
approximates the carrying value of these financial instruments.
NOTE 7. RELATED PARTIES
In addition to the related party transactions discussed elsewhere in the
financial statements, the Company had the following related party transactions:
Sales to affiliates for the years ended December 31, 1997, 1998 and 1999
were $274,501, $258,052 and $307,075, representing approximately 81%, 86% and
79%, respectively, of total sales.
Certain administrative expenses aggregating $19,800, $9,800 and $0 during
the years ended December 31, 1997, 1998 and 1999, 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 1999.
F-13
<PAGE>
SEDONA WORLDWIDE INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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.
In December 1999, ILX spun off its 80% ownership interest in the Company
through a prorata distribution to the common shareholders of ILX of the
3,360,000 common shares of the Company held by ILX. In conjunction with the
Spin-Off, ILX contributed $2,545,730 to capital, which was recorded as a
reduction in capital deficiency.
F-14
<PAGE>
SEDONA WORLDWIDE INCORPORATED
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page Numbers or
Numbers Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
3.1 Articles of Incorporation of Registrant, Incorporated by reference to
as amended Registration Statement on Form SB No.
000-25025, filed on November 4, 1998
3.2 Bylaws of Registrant, as amended Incorporated by reference to
Registration Statement on Form SB No.
000-25025, filed on November 4, 1998
4 Form of Common Stock Certificate Filed herewith
10.1 Agreement, dated as of January 1, 1997, Incorporated by reference to
among Todd Fisher, on the one hand, and Registration Statement on Form SB No.
ILX Incorporated and Red Rock Collection 000-25025, filed on November 4, 1998
Incorporated, on the other hand
10.2 Agreement, dated as of January 1, 1997, Incorporated by reference to
among Debbie Reynolds, on the one hand, Registration Statement on Form SB No.
and ILX Incorporated and Red Rock 000-25025, filed on November 4, 1998
Collection Incorporated, on the other
hand
10.3 Lease Agreement, dated December 29, Incorporated by reference to
1995, between Edward John Martori and Registration Statement on Form SB No.
Red Rock Collection Incorporated 000-25025, filed on November 4, 1998
10.4 Agreement, dated as of December 29, Incorporated by reference to
1995, among ILX Incorporated, Martori Registration Statement on Form SB No.
Enterprises Incorporated, Los Abrigados 000-25025, filed on November 4, 1998
Partners Limited Partnership, Red Rock
Collection Incorporated, Edward J.
Martori and Joseph P. Martori, as
trustee for Cynthia J. Polich
Irrevocable Trust dated June 1, 1989
relating to the sale/leaseback of
certain real property and amendment of
other agreements in connection therewith
10.5 Master Lease Agreement, dated as of Incorporated by reference to
April 13, 1993, between ILX Incorporated Registration Statement on Form SB No.
and CRA, Inc. 000-25025, filed on November 4, 1998
</TABLE>
<PAGE>
SEDONA WORLDWIDE INCORPORATED
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page Numbers or
Numbers Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.6 Sedona Worldwide Incorporated Form 10-SB Incorporated by reference to Form
10-SB on Form 10SB12G No. 000-25025,
filed November 4, 1998
10.7 Sedona Worldwide Incorporated Amendment Incorporated by reference to Amendment
No. 1 to Form 10-SB No. 1 to Form 10-SB on Form 10-12G/A
No. 000-25025, filed July 2, 1999
10.8 Sedona Worldwide Incorporated Amendment Incorporated by reference to Amendment
No. 2 to Form 10-SB No. 2 to Form 10-SB on Form 10-12G/A
No. 000-25025, filed November 12, 1999
10.9 Sedona Worldwide Incorporated Amendment Incorporated by reference to Amendment
No. 3 to Form 10-SB No. 3 to Form 10-SB on Form 10-12G/A
No. 000-25025, filed December 8, 1999
10.10 Letter agreement, dated as of October Incorporated by reference to 9/30/99
28, 1999, between ILX Resorts 10-QSB
Incorporated and Sedona Worldwide
Incorporated
10.11 ILX Resorts Incorporated Schedule 14C Incorporated by reference to Schedule
Definitive Information Statement 14C on Form No. DEF 14C No. 001-13855,
pursuant to Section 14(c) of the filed by ILX on January 3, 2000
Securities Exchange Act of 1934 for
Sedona Worldwide Incorporated
27.1 Financial Data Schedule - Year Ended Filed herewith
December 31, 1999
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS DECEMBER 31, 1999 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,564
<SECURITIES> 0
<RECEIVABLES> 12,988
<ALLOWANCES> 0
<INVENTORY> 157,546
<CURRENT-ASSETS> 210,175
<PP&E> 326,064
<DEPRECIATION> 281,987
<TOTAL-ASSETS> 254,252
<CURRENT-LIABILITIES> 28,832
<BONDS> 0
0
0
<COMMON> 1,000,000
<OTHER-SE> (774,580)
<TOTAL-LIABILITY-AND-EQUITY> 254,252
<SALES> 388,424
<TOTAL-REVENUES> 388,424
<CGS> 233,706
<TOTAL-COSTS> 345,870
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,188
<INCOME-PRETAX> (192,340)
<INCOME-TAX> 0
<INCOME-CONTINUING> (192,340)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (192,340)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
