SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.0-28128
ELEGANT ILLUSIONS, INC.
(Name of small business issuer in its charter)
Delaware 88-0282654
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
542 Lighthouse Ave., Suite 5, Pacific Grove, CA 93950
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (408) 649-1814
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act, 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 _____
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will 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- KSB or any amendment to
this Form 10-KSB.[ ]
The Issuer's revenues for its fiscal year ended December 31, 1996 were
$7,319,259.
The aggregate market value of the voting stock held by non-affiliates (1) of the
registrant based on the closing bid price of such stock, as of March 12, 1997 is
$6,573,719 based upon $1.50 multiplied by the 4,382,478 Shares of Registrant's
Common Stock held by non-affiliates.
The number of shares outstanding of each of the registrant's classes of common
stock, as of December 31, 1996 and March 13, 1997 is 17,434,338 shares, all of
one class of $.001 par value Common Stock.
(1) Affiliates for purposes of this item refers to those persons who, during the
preceding 3 months, were officers, directors and/or owners of 5% or more of the
Company's outstanding stock.
DOCUMENTS INCORPORATED BY REFERENCE See "Item 13."
Transitional Small Business Disclosure Format (check one): Yes _____ No __X__
<PAGE>
ELEGANT ILLUSIONS, INC.
Form 10-KSB
Year Ended December 31, 1996
Table of Contents
PART I Page
Item 1. Business........................................................1
Item 2. Properties......................................................4
Item 3. Legal Proceedings...............................................4
Item 4. Submission of Matters to a Vote of
Security Holders..............................................4
Part II
Item 5. Market for Common
Equity and Related Stockholder Matters........................4
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................6
Item 7. Financial Statements............................................8
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures.......................................8
Part III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act...........................9
Item 10. Executive Compensation.....................................10
Item 11. Security Ownership of Certain Beneficial
Owners and Management.........................................12
Item 12. Certain Relationships and Related
Transactions..................................................13
Part IV
Item 13. Exhibits and Reports on Form 8-K...........................13
Signatures...................................................................14
Supplemental Information and Exhibits........................................15
Financial Statements.........................................................F-1
<PAGE>
PART I
Item 1. Business.
General
Elegant Illusions, Inc. (the "Company"), through its wholly-owned
subsidiary, Elegant Illusions, Inc, a California corporation (the "Subsidiary"),
is primarily in the retail copy jewelry business and currently owns and operates
17 retail copy jewelry stores, two fine jewelry stores, one handcraft, jewelry
and gift store and one fine art gallery. The retail copy jewelry stores are
located in Monterey, San Francisco, Santa Barbara, San Diego, Sacramento and
Palm Springs, California; Salt Lake City, Utah; Minneapolis, Minnesota;
Portland, Oregon; Branson, Missouri; New Orleans, Louisiana; Laughlin, Nevada;
Oahu, Hawaii; and St. Croix, U.S. Virgin Islands. One of the fine jewelry stores
and the handcraft, jewelry and gift store are located in Monterey, the second
fine jewelry store is located in St. Croix and the fine art gallery is located
in New Orleans.
During 1997, the Company plans to open four additional copy jewelry stores.
At this time, management believes, but cannot assure, that these stores will be
located in Bellport, New York; Kenosha, Wisconsin; Fort Lauderdale, Florida and
Gilroy, California. The Company had planned to open a location at Universal
Studios in Orlando, Florida; however, Universal Studios has delayed its plans
until 1988.
The copy jewelry stores sell copies of fine jewelry including rings,
pendants, earrings, necklaces, bracelets, pearl enhancers and ear charms
manufactured in 14 carat gold, sterling silver vermeil, gold bonded brass or
gold bonded white metal. By using synthetic stones, the Company offers copy
jewelry at a fraction of the cost of real fine jewelry.
The fine jewelry stores, Steinbeck Jewelers (Monterey) and Kings Alley
Jeweler (St. Croix), sell fine jewelry including rings, pendants, earrings,
necklaces, bracelets, manufactured in 10 carat, 12 carat and 14 carat gold and
other precious metals set with precious and semi-precious stones.
The handcraft, jewelry and gift store, Steinbeck Lady, primarily sells
jewelry, including rings, pendants, earrings, necklaces and bracelets
manufactured in Sterling silver, other metals and other materials; gift items of
a marine nature; and some pottery.
The fine art gallery, Bourbon Street Gallery, sells predominantly original
oil paintings by contemporary Italian artists.
- 1 -
<PAGE>
The Company purchases its copy jewelry merchandise directly from a number
of manufacturers located in and outside the United States; it does not purchase
from distributors. Products purchased include stock items and jewelry designed
by the Company. The jewelry sold in the fine jewelry stores and the products
sold in the handcraft, jewelry and gift store are primarily purchased directly
from manufacturers and, to a lesser extent, from distributors. The Company
purchases its Art for Bourbon Street Gallery directly from the artists. Less
than 5% of the art gallery's revenues are generated from sales of Art on
consignment.
The Company's primary source of business results from "walk by" traffic and
word of mouth. The Company also advertises in magazines, newspapers and on
radio. Management believes that its choice of strategic location is its primary
marketing tool. The Company's stores are located in high trafficked locations
including malls and tourist areas. The strategic locations of the stores also
helps mitigate seasonal factors; the tourist locations do higher volume during
the summer and vacation times while the mall and heavy shopping locations do
higher volume around the traditional holiday times (e.g., Christmas, Valentines
Day and Mothers Day).
At this time, management believes that the Company has little direct
competition. The Company knows of three copy jewelry retail store chains that
could compete with the Company if they were located within close proximity of
the Company's stores - Impostors, Classic Copies and Landau Hyman. Management
believes that the Company would be able to compete even if stores were opened
within close proximity of the Company's stores. The Company's copy jewelry
stores also compete indirectly with fine jewelry and costume jewelry retail
stores; however, due to the type of merchandise sold and the difference in
product price ranges, such competition has minimal if any affect on the
Company's business.
At March 3, 1996, the Company had approximately 94 employees, including its
three officers, four regional managers (who also function as store managers), 14
store managers, one training manager, two store managers-in-training, 55 sales
personnel, one distribution manager, one retail computer systems manager and 13
clerical personnel.
History
The Subsidiary was founded on May 1, 1989 for the purpose of selling
jewelry and jewelry store franchises. Its founders incorporated Copy Jewels,
Inc. ("CJI") in July 1989 for the purpose of supplying jewelry to the Subsidiary
and its franchise stores.
The first franchise store opened in San Diego in September 1989 and the
second franchise store opened in Santa Barbara in July 1990. These stores were
acquired by the Company in May 21, 1993.
- 2 -
<PAGE>
The first Subsidiary-owned store opened in Sacramento in March 1991,
followed by a second in Monterey in May 1991 and a third in Salt Lake City in
July 1992. With the exception of the Subsidiary-owned store in Monterey, which
closed in January 1993, all of the stores are open and operating.
Bay Area Grand Illusions, Inc. ("Bay"), a company then owned by the
Company's current management, opened a Subsidiary jewelry store in San Francisco
in May 1988. The San Francisco store relocated within Ghiradelli Square in April
1994.
Prior to the Company's acquisition of the Subsidiary, CJI and Bay merged
with and into the Subsidiary.
During 1993 and 1994, the Company opened three new copy jewelry stores per
year. In addition, in 1994, the Company, through a newly formed wholly-owned
subsidiary, Bourbon Street, Inc., entered into a partnership to sell original
oil paintings and other art in a storefront that opened on Bourbon Street in New
Orleans on September 15, 1994. The art gallery operates under the name Bourbon
Street Gallery. The Company funded the renting and build out of the storefront
location and the inventory of art. The Company's two partners, a husband and
wife team who are unaffiliated with the Company, run the day-to-day operations
of the store. Material managerial decisions are determined by the Company. The
Company and its partners split store profits on a 50-50 basis. Since the Company
funded the partnership, the Company will be entitled to receive all remaining
inventory of the partnership after payment of partnership expenses.
Effective July 1, 1994, the Company acquired all of the issued and
outstanding shares of common stock of Cannery Row Enterprises, Inc. ("CRE") from
Gavin Gear and Tamara Gear, two officers and directors of the Company, in
exchange for 150,000 shares of the Company's common stock. CRE owns three stores
- - a copy jewelry store, a fine jewelry store and a gift store, all located in
Monterey.
During 1995, the Company opened one new copy jewelry store and one fine
jewelry store and during 1996, the Company opened three new copy jewelry stores.
On January 30, 1997, the Company closed its store at the Pavilions in
Sacramento, California, because that location was not performing up to the
Company's expectations.
- 3 -
<PAGE>
Item 2. Properties.
The Company moved its executive offices to 542 Lighthouse Ave., Suite 5,
Pacific Grove, California 93950. The new facility consists of approximately
5,700 square feet, including approximately 700 square feet of executive office
space, approximately 1,600 square feet of administrative space, approximately
2,500 square feet of warehouse space and approximately 900 square feet of
computer and file space. The facility is leased from an unaffiliated party
pursuant to a three year lease. Initial base rent is $3,300 per month, plus
utilities. Management believes that the current executive facilities are
sufficient for its needs over the next three years.
The Company's stores are leased from unaffiliated parties on various terms.
Certain of the leases provide the landlord with a percentage of revenues
generated at and from the specific leased location (see Note 5 to the Company's
Consolidated Financial Statements).
Item 3. Legal Proceedings.
The Company is not presently a party to any material litigation not in the
regular course of its business, nor to the Company's knowledge is such
litigation threatened.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of Security Holders in the last quarter
of the Company's fiscal year ended December 31, 1996.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Marketing Information -- The principal U.S. market in which the
Company's Common Stock ($.001 par value, all of which are one class) is traded
is in the over-the-counter market (NASDAQ SmallCap Symbol: "EILL"). The
Company's Common Stock was listed for trading on the NASDAQ Smallcap Market on
August 16, 1996. Prior thereto, it traded in the over-the- counter market
(Bulletin Board Symbol: "EILL").
The following tables set forth the range of high and low bid prices for the
Company's Common Stock on a quarterly basis for the past fiscal year as reported
by the National Quotation Bureau (which reflect inter-dealer prices, without
retail mark-up, mark-down, or commission and may not necessarily represent
actual transactions).
- 4 -
<PAGE>
COMMON STOCK
Bid Prices
--------------------
High Low
---- ---
Period - Fiscal Year 1995
First Quarter ending March 31, 1995 2 1
Second Quarter ending June 30, 1995 2 3/4
Third Quarter ending September 30, 1995 2 1
Fourth Quarter ending December 31, 1995 2 1
Period - Fiscal Year 1996
First Quarter ending March 31, 1996 3 2
Second Quarter ending June 30, 1996 3.125 3
July 1, 1996 - August 15, 1996 3.125 2.75
August 16, 1996 - September 30, 1996 3.1875 3
Fourth Quarter ending December 31, 1996 3.25 1.625
(b) Holders -- There were approximately 67 holders of record of the
Company's Common Stock as of March 12, 1997 inclusive of those brokerage firms
and/or clearing houses holding the Company's securities for their clientele
(with each such brokerage house and/or clearing house being considered as one
holder).
(c) Dividends -- The Company has not paid or declared any dividends upon
its Common Stock since its inception and, by reason of its present financial
status and its contemplated financial requirements, does not contemplate or
anticipate paying any dividends upon its Common Stock in the foreseeable future.
In March 1996, the Company sold 606,061 shares of its common stock to a
foreign investor for gross proceeds of $1,000,000 and paid a commission of
$50,000 on the transaction. The sales of these shares was exempt from
registration by reason of the exemption provided by Regulation S promulgated
under the Securities Act of 1933 (the "Act").
In April 1996, the Company sold 100,000 shares of its common stock to a
supplier in exchange for inventory valued at $200,000. The sales of these shares
was exempt from registration by reason of the exemption provided by Rule 506 of
Regulation D promulgated under the Act.
- 5 -
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.1
Results of Operations
Fiscal Year ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995
Sales for the year ended December 31, 1996 increased $1,381,980 or 23% when
compared to the year ended December 31, 1995.
Management believes that the increase in sales was due to the addition of
three locations (San Francisco, Monterey and Laughlin) and a full year of
operations at the two stores in St. Croix (copy jewelry and fine jewelry).
As of December 31, 1995, the Company operated 18 retail locations and as of
December 31, 1996, the Company operated 21 retail locations.
The Costs of goods as a percentage of revenues increased slightly from 29%
in fiscal 1995 to 31% in fiscal 1996.
During fiscal 1996, selling, general and administrative expenses increased
when compared to fiscal 1995 by $605,559 (approximately 20%). Management
believes that this increase was primarily the result of: (i) the cost of opening
three new stores; and (ii) the costs related to operating the two stores opened
in 1995 for a full 12 months. However, as a percentage of sales, selling,
general and administrative expenses decreased from approximately 53% during 1995
to approximately 51% during 1996.
Revenues same store locations.
As of December 31, 1995, the Company operated 18 locations: two in New
Orleans, three in Monterey, two in Sacramento, one in San Diego, one in Santa
Barbara, one in San Francisco, one in Palm Springs, one in Salt Lake City, one
in Portland, one in Branson one in Minneapolis, two in St Croix and one in Oahu.
Revenues from these locations for the year ended December 31, 1996 increased
approximately 11% from the same period in 1995. Management believes this
increase was primarily due the fact that the two locations opened in 1995 were
in operation for the full twelve month period in fiscal 1996. Excluding revenues
from the two St Croix stores, in 1996, same store revenues increased
approximately 4% from the same period in 1995.
- --------
1 The following discussion takes into account certain reclassifications
of balances to the 1995 Consolidated Financial Statements to conform
to the presentation of the 1996 Consolidated Financial Statements (see
Note 1 to the Consolidated Financial Statements).
- 6 -
<PAGE>
Liquidity and Capital Resources
As of December 31, 1996, the Company had $1,886,297 in cash and cash
equivalents and its current assets exceeded its current liabilities by
$3,947,642.
During 1997, the Company plans to open four additional copy jewelry stores.
At this time, management believes, but cannot assure, that these stores will be
located in Bellport, New York; Kenosha, Wisconsin; Fort Lauderdale, Florida, and
Gilroy, California.
Management believes that it will cost approximately $1,050,000 to open
these three new stores. Management believes that the cost of opening these new
store will be paid from current cash reserves. No assurance can be given as to
the actual number of stores that the Company will open during 1997.
The Company has a $1,000,000 line of credit with a bank effective December
1996 due on demand. Interest is at annual base rate as announced by the bank
(initial base rate was 8.25%) plus 1.75%. This line of credit is collateralized
by the Company's accounts receivable, inventory and equipment. The Company also
is required to maintain certain financial ratios and covenants. As of December
31, 1996 and the date hereof, no funds had been advanced on the line of credit.
As of the date hereof, the Company is in compliance with all financial ratios
and covenants.
- 7 -
<PAGE>
Item 7. Financial Statements.
The following consolidated financial statements have been prepared in
accordance with the requirements of Item 310(a) of Regulation S-B.
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
Report of Independent Auditors ............................... F-1
Consolidated Balance Sheets at December 31, 1995 and 1996..... F-2
Consolidated Statements of Operations - ...................... F-3
Years Ended December 31, 1995 and 1996
Consolidated Statement of Stockholders' Equity - ............. F-4
Years Ended December 31, 1995 and 1996
Consolidated Statements of Cash Flows - ...................... F-5
Years Ended December 31, 1995 and 1996
Notes to Consolidated Financial Statements ................... F-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Elegant Illusions, Inc.
We have audited the accompanying consolidated balance sheets of Elegant
Illusions, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Elegant
Illusions, Inc. and Subsidiaries as of December 31, 1995 and 1996 and the
consolidated results of operations, stockholders' equity and cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Hollander, Gilbert & Co.
Los Angeles, California
February 27, 1997
F-1
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................. $ 1,699,110 $ 1,886,297
Accounts receivable ........................................ 103,876 190,270
Inventory .................................................. 1,369,348 1,990,174
Prepaid expenses ........................................... 17,915 45,643
----------- -----------
TOTAL CURRENT ASSETS .............................. 3,190,249 4,112,384
----------- -----------
PROPERTY AND EQUIPMENT, NET (Note 2) ................................ 751,181 884,707
----------- -----------
OTHER ASSETS
Deposits ................................................... 46,740 55,764
Patents and trademarks, net of accumulated amortization
of $648 and $928 in 1995 and 1996, respectively .................... 4,078 3,798
Excess cost over net assets acquired, net of accumulated amortization
of $10,506 and $14,556 in 1995 and 1996, respectively .............. 30,341 26,291
----------- -----------
TOTAL OTHER ASSETS ................................ 81,159 85,853
----------- -----------
$ 4,022,589 $ 5,082,944
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - bank (Note 3) ............................... $ 750,000 $ --
Accounts payable and accrued expenses ...................... 119,982 92,827
Income taxes payable (Note 4) .............................. -- 71,915
----------- -----------
TOTAL CURRENT LIABILITIES ......................... 869,982 164,742
NOTE PAYABLE (Note 3) ............................................... 100,000 20,000
DEFERRED INCOME TAXES (Note 4) ...................................... 69,778 95,871
----------- -----------
TOTAL LIABILITIES ................................. 1,039,760 280,613
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (Note 6)
Common stock - authorized 30,000,000 shares, $.001 par value,
issued and outstanding 16,728,277 and 17,434,338 in
1995 and 1996, respectively ........................................ 16,728 17,434
Additional paid-in capital ................................. 1,828,927 2,978,221
Retained earnings .......................................... 1,137,174 1,806,676
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ........................ 2,982,829 4,802,331
----------- -----------
$ 4,022,589 $ 5,082,944
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
----------- -----------
REVENUES ................................... $ 5,937,279 $ 7,319,259
COST OF GOODS SOLD ......................... 1,722,162 2,234,297
----------- -----------
GROSS PROFIT ............................... 4,215,117 5,084,962
EXPENSES
Selling, general and administrative 3,133,440 3,738,999
Depreciation and amortization ..... 178,890 225,416
Interest expense .................. 12,312 9,445
----------- -----------
TOTAL EXPENSES ........... 3,324,642 3,973,860
----------- -----------
INCOME BEFORE INCOME TAXES ................. 890,475 1,111,102
PROVISION FOR INCOME TAXES (Note 4) ........ 366,959 441,600
----------- -----------
NET INCOME ................................. $ 523,516 $ 669,502
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ........ 16,639,821 17,291,661
=========== ===========
NET INCOME PER COMMON SHARE ................ $ .03 $ .04
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional
Shares Paid-in Retained
Outstanding Amount Capital Earnings Total
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 ............. 16,346,800 $ 16,347 1,479,308 $ 613,658 $2,109,313
Sale of stock ................. 381,477 381 349,619 -- 350,000
Net income for the year ....... -- -- -- 523,516 523,516
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1995 ............. 16,728,277 16,728 1,828,927 1,137,174 2,982,829
Sale of stock ................. 606,061 606 949,294 -- 950,000
Issuance of stock for inventory 100,000 100 199,900 -- 200,000
Net income for the year ....... -- -- -- 669,502 669,502
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1995 ............. 17,434,338 $ 17,434 $2,978,221 $1,806,676 $4,802,331
========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ................................................. $ 523,516 $ 669,502
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .......................... 178,890 225,416
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable ..................................... (8,542) (86,394)
Inventory ............................................... (249,080) (620,826)
Prepaid expenses ........................................ (11,788) (27,729)
Increase (decrease) in:
Accounts payable and accrued expenses ................... 19,684 (27,155)
Income taxes payable and deferred income taxes .......... 4,078 98,008
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................ 456,758 230,822
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ......................... (278,943) (354,611)
Deposits ................................................... (4,000) (9,024)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .................... (282,943) (363,635)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payments) from bank credit line, net ............. 750,000 (750,000)
Principal reduction of note payable ........................ -- (80,000)
Payments to stockholders/officers .......................... (10,000) --
Sale of common stock ....................................... 350,000 1,150,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES ............... 1,090,000 320,000
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................... 1,263,815 187,187
CASH AND CASH EQUIVALENTS BALANCE, Beginning of period ....... 435,295 1,699,110
----------- -----------
CASH AND CASH EQUIVALENTS BALANCE, End of period ............. $ 1,699,110 $ 1,886,297
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid .............................................. $ 12,312 $ 9,445
Income taxes paid .......................................... $ 362,881 $ 330,517
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business - Elegant Illusions, Inc. was
incorporated in Delaware in March 1988. The Company is engaged in the retail
sale of fine jewelry in two locations and copy jewelry at locations in
California, Nevada, Utah, Minnesota, Missouri, Oregon, Louisiana, Hawaii and
U.S. Virgin Islands. Copy jewelry items are replications of fine jewelry,
manufactured with synthetic stones set in 14 carat gold, sterling silver vermeil
or plated brass. In addition, the Company sells original oil paintings,
lithographs and other art in its store in New Orleans.
Principles of Consolidation - The financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Cash and Cash Equivalents - Cash equivalents are purchased short-term highly
liquid investments readily convertible to cash with original maturities of no
more than three months.
Inventories - Inventories are stated at the lower of cost or market determined
on a first-in, first-out (FIFO) basis.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accouting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Impairment of Long-Lived Assets - The Company periodically assesses the
recoverability of the carrying amounts of long-lived assets, including
intangible assets. A loss is recognized when expected undiscounted future cash
flows are less than the carrying amount of the asset. The impairment loss is the
difference by which the carrying amount of the assets exceeds its fair value.
The Company does not expect to have any significant losses resulting from its
review of impairment of long-lived assets.
Stock-Based Compensation - The Company plans to account for stock options under
SFAS No. 123, which retains the original accounting prescribed by APB Opinion
No. 25. As a result, options granted at fair value will not result in charges to
earnings. Disclosures will be made, however, of compensation costs determined
under SFAS No. 123's fair value methodology.
Property and Equipment - Property and equipment is stated at cost. Depreciation
is computed on the straight-line method based upon the estimated useful life of
the asset. Useful lives are generally as follows:
Office furniture, fixtures & equipment 5-7 years
Store furniture, fixtures & equipment 5-7 years
Leasehold improvements 5-7 years
Patents and Trademarks - The costs of patents and trademarks are being amortized
on the straight line method over a 17 year life.
Excess cost over net assets acquired - The excess of cost over fair value of net
assets acquired related to acquisition of the Company's two franchised stores is
being amortized over 10 years on a straight line basis.
Income Taxes - The Company uses the asset and liability method of accounting for
income taxes. The objective of the asset and liability method is to establish
deferred tax assets and liabilities for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities at enacted tax rates expected to be in effect when such amounts are
realized or settled.
Reclassifications - Certain 1995 balances have been reclassified to conform with
1996 presentation.
F-6
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1995 and 1996:
1995 1996
---------- ----------
Office furniture, fixtures & equipment ........... $ 96,920 $ 100,845
Store furniture, fixtures & equipment ............ 764,989 1,032,269
Vehicles ......................................... 19,500 19,500
Leasehold improvements ........................... 291,084 374,491
---------- ----------
1,172,493 1,527,105
Less: accumulated depreciation and amortization 421,312 642,398
---------- ----------
$ 751,181 $ 884,707
========== ==========
3. NOTES PAYABLE
The Company has entered into a loan agreement with an individual who loaned
$100,000 in March 1990 without a due date requiring monthly interest payments of
$850 (10% per annum). The amount is deemed long term as the creditor in the past
has not requested payoff. The Company repaid $80,000 of the loan during 1996.
The Company has a $1,000,000 line of credit with a bank effective December 1996
due on demand. Interest is at annual base rate as announced by the bank (initial
base rate was 8.25%) plus 1.75%. The line of credit is collateralized by the
Company's accounts receivable, inventory and equipment. The Company shall also
maintain certain financial ratios and covenants. As of December 31, 1996, no
amount was due on the creditline.
4. INCOME TAXES
The components of income tax expense for the years ended December 31, 1995 and
1996 follow:
Federal State Total
--------- --------- ---------
1995:
Current $ 250,000 $ 76,000 $ 326,000
Deferred 34,000 6,959 40,959
--------- --------- ---------
$ 284,000 $ 82,959 $ 366,959
========= ========= =========
1996:
Current $ 338,000 $ 74,000 $ 412,000
Deferred 23,600 6,000 29,600
--------- --------- ---------
$ 361,600 $ 80,000 $ 441,600
========= ========= =========
The component of deferred tax liability was as follows at December 31, 1996:
Deferred tax liability:
Depreciation $ 95,871
=========
F-7
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Income tax expense amounted to $366,959 in 1995 and $441,600 in 1996 (effective
tax rates of 41% and 40%, respectively). The actual tax expense differs from the
expected tax expense (computed by applying the Federal corporate tax rate of 34%
to earnings before income taxes) as follows:
1995 1996
--------- ---------
Expected statutory tax $ 302,700 $ 377,775
State income tax, net of federal tax benefit 50,100 68,200
Other 14,159 (4,375)
--------- ---------
Actual tax $ 366,959 $ 441,600
========= =========
5. OPERATING LEASES
The Company leases its office and retail store facilities and certain equipment
under operating leases with terms ranging from three to ten years. Certain of
the leases include percentage rates of 3% to 12% of revenues as defined. Future
minimum lease payments by year and in the aggregate, under noncancelable
operating leases with initial or remaining lease terms in excess of one year, as
of December 31, 1996 are as follows:
Year Ended
December 31,
------------
1997 $ 776,906
1998 780,404
1999 557,703
2000 274,818
2001 43,473
Thereafter 97,162
-----------
$ 2,530,466
===========
Rent expense for the fiscal years ended December 31, 1995 and 1996 were $726,126
and $1,014,489, respectively.
6. STOCKHOLDERS' EQUITY
During 1995 the Company sold 381,477 common shares for $350,000. During 1996 the
Company sold 606,061 common shares for $950,000, net and also, issued 100,000
common shares, valued at approximately $200,000, in connection with its
acquisition of inventory.
F-8
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
There have been no changes in, or disagreements with the Company's
independent accountants with respect to accounting and/or financial disclosure,
during the past two fiscal years.
- 8 -
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; compliance
with Section 16(a) of the Exchange Act.
Name Position(s) Held
James Cardinal Chief Executive Officer and Director
Gavin Gear President and Director
Tamara Gear Secretary-Treasurer and a Director
The foregoing persons became officers and directors of the Company upon the
consummation of the Company's acquisition of the Subsidiary in May 1993. Mr.
Cardinal was President and Mr. Gear was Vice President of the Company from May
1993 until May 1994, at which time Mr. Gear became President.
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.
Officers are appointed to serve until the meeting of the Board of Directors
following the next annual meeting of stockholders and until their successors
have been elected and have qualified.
A summary of the business experience for each officer and director of the
Company is as follows:
JAMES CARDINAL, age 50, has been a Director of Subsidiary since 1992 and a
business consultant for Subsidiary since 1989. He was a Director of Bay from
June 1992 until it s merger in to the Subsidiary. Prior thereto, he was
self-employed as a business consultant and capital organizer to start-up
companies.
GAVIN GEAR, age 45, was a founder and has been the President, Chief
Financial Officer and a Director of the Subsidiary since 1989. Mr. Gear was
President, Chief Financial Officer and a Director of CJI from 1989 until its
merger in to the Subsidiary and President and a Director of Bay from 1988 until
its merger in to the Subsidiary. Since 1979, he also has been the President,
Chief Financial Officer and a Director of CRE. CRE was acquired by the Company
in July 1994.
- 9 -
<PAGE>
TAMARA GEAR, age 38, was a founder and has been the Secretary-Treasurer and
a Director of the Subsidiary since 1989. She was the Secretary-Treasurer and a
Director of CJI (from 1989) and of Bay (from 1988) until their merger in to the
Subsidiary. Since 1985, she also has been an officer an director of CRE. From
1984 to 1985, Ms. Gear was a gemologist for Sun Studies in Carmel. From 1980 to
1984, she was the retail manager for Cannery Row Enterprises.
Compliance With Section 16(a) of The Securities Exchange Act of 1934
To the Company's knowledge, based solely on a review of such materials as
are required by the Securities and Exchange Commission, no officer, director or
beneficial holder of more than ten percent of the Company's issued and
outstanding shares of Common Stock failed to timely file with the Securities and
Exchange Commission any form or report required to be so filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year
ended September 30, 1996, except that Gavin and Tamara Gear filed Forms 5 late.
Item 10. Executive Compensation.
The following table shows all the cash compensation paid or to be paid by
the Company or its parent, as well as certain other compensation paid or
accrued, during the fiscal years indicated, to the Chief Executive Officer
("CEO") for such period in all capacities in which he served. No Executive
Officer received total annual salary and bonus in excess of $100,000. Total
compensation paid to all three executive officers as a group during 1996 was
$190,282.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------
Annual Compensation Awards Payouts
-------------------------------- ------------------ ----------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
- -------------------- ------- ------- ------- -------- --------- -------- --------- ------
Other Restrict- All Other
Annual ed Stock LTIP Compensa
Name and Principal Bonus Compen- Award Options Payouts -tion
Position Year* Salary ($) sation($) ($) SARs ($) (i)
- -------------------- ------- ------- ------- --------- --------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
James Cardinal 1996 59,394 0 0 0 0 0 0
CEO 1995 54,108 0 0 0 0 0 0
1994 21,000 0 0 0 0 0 0
</TABLE>
- 10 -
<PAGE>
The following table sets forth information with respect to the Executives
concerning the grants of options and Stock Appreciation Rights ("SAR") during
the past fiscal year:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
(a) (b) (c) (d) (e)
- ---- ------- ---------------- ---------------- ----------
Percent of Total
Options/SARs
Options/ Granted to
SARs Employed in Exercise or Base Expiration
Name Granted Fiscal Year Price ($/SH) Date
- ---- ------- ---------------- ---------------- ----------
James Cardinal 0 0 0
The following table sets forth information with respect to the Executives
concerning exercise of options during the last fiscal year and unexercised
options and SARs held as of the end of the fiscal year:
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR
(a) (b) (c) (d) (e)
- ---- ------------ -------- ------------- ----------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options/SARs Option/SARs
Shares at FY-End(#) at FY-End(#)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized Unexercisable Unexercisable(1)
- ---- ------------ -------- ------------- ----------------
James Cardinal 0 0 0 0
The following table sets forth information with respect to the Executives
concerning awards under long term incentive plans during the last fiscal year:
Estimated Future Payouts under Non-Stock
Price Based Plans
(a) (b) (c) (d) (e) (f)
- ---- ------------ ------------- --------- -------- --------
Performance
Number of or Other
Shares,Units Period Until
or Other Maturation or Threshold Target Maximum
Name Rights(#) Payout ($ or #) ($ or #) ($ or #)
- ---- ------------ ------------- --------- -------- --------
James Cardinal 0 0 0 0 0
- 11 -
<PAGE>
Directors are not compensated for acting in their capacity as Directors.
Directors are reimbursed for their accountable expenses incurred in attending
meetings and conducting their duties.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners -- The persons listed
in the chart below are known to the Company to be the beneficial owners of more
than 5% of the 17,434,338 Shares of the Company's outstanding Common Stock,
$.001 par value, as of March 13, 1997.
(b) Security Ownership of Management -- The number and percentage of Shares
of Common Stock of the Company owned of record and beneficially by each officer
and director of the Company and by all officers and directors of the Company as
a group are set forth on the chart below.
Name and Address Amount of Record
of Beneficial and Beneficial Percent of
Owner Ownership Class
- ---------------- ---------------- ----------
James C. Cardinal 6,380,000 36.6%
542 Lighthouse Ave., Suite 5
Pacific Grove, CA 93950
Gavin M. Gear 3,346,930(1) 19.2%
542 Lighthouse Ave., Suite 5
Pacific Grove, CA 93950
Tamara Gear 3,324,930(1) 19.1%
542 Lighthouse Ave., Suite 5
Pacific Grove, CA 93950
All Officers and
Directors as a Group
(3 Persons) 13,051,860 74.9%
(1) Gavin and Tamara Gear are husband and wife. The shares listed for Gavin
Gear do not include the shares owned by Tamara Gear and the shares listed
for Tamara Gear do not include the shares owned by Gavin Gear.
- 12 -
<PAGE>
Item 12. Certain Relationships and Related Transactions.
During the first quarter of 1996, the Company amended its Certificate of
Incorporation to increase its authorized shares of common stock from 20,000,000
shares, $.001 par value, to 30,000,000 shares, $.001 par value. PART IV
Item 13. Exhibits and Reports on Form 8-K.
Exhibits
--------
3.a Certificate of Incorporation of the Company (1)
3.b Amendment to the Certificate of Incorporation of the Company (1)
3.c Amendment to the Certificate of Incorporation of the Company (3)
3.d By-Laws of the Company (1)
10.a May 12, 1993 Agreements between the Company, Subsidiary and the
Subsidiary's Stockholders(2)
10.b Agreement of purchase of the two franchise stores(2)
(1) Previously filed as an Exhibit to the Registration Statement on Form S-18,
file No. 33- 42851-D filed with the Commission at its Denver Regional Office and
declared effective by the Commission on February 14, 1992.
(2) Previously filed as an Exhibit to the Company's Form 8-K dated June 1, 1993,
as filed with the Commission on or about August 26, 1993, and incorporated
herein by reference.
(3) Previously filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1995, as filed with the Commission on or about
March 22, 1996, and incorporated herein by reference.
Reports of Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.
Statements contained in this 10-KSB as to the contents of any agreement or
other document referred to are not complete, and where such agreement or other
document is an exhibit to the Company's Registration Statement or is included in
the forms indicated above, each such statement is deemed to be qualified and
amplified in all respects by such provisions.
- 13 -
<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.
ELEGANT ILLUSIONS, INC.
Dated: March 13, 1996 By: s/James Cardinal
----------------
James Cardinal,
Chief Executive Officer,
s/Tamara Gear
-------------
Tamara Gear, Treasurer
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/James Cardinal Director March 13, 1996
- ----------------
James Cardinal
s/Gavin Gear Director March 13, 1996
- ----------------
Gavin Gear
s/Tamara Gear Director March 13, 1996
- ----------------
Tamara Gear
- 14 -
<PAGE>
SUPPLEMENTAL INFORMATION AND EXHIBITS
Supplemental Information to be Furnished With Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.
Not Applicable.
- 15 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,886,297
<SECURITIES> 0
<RECEIVABLES> 190,270
<ALLOWANCES> 0
<INVENTORY> 1,990,174
<CURRENT-ASSETS> 4,112,384
<PP&E> 884,707
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,082,944
<CURRENT-LIABILITIES> 164,742
<BONDS> 0
0
0
<COMMON> 17,434
<OTHER-SE> 4,784,897
<TOTAL-LIABILITY-AND-EQUITY> 5,082,944
<SALES> 7,319,259
<TOTAL-REVENUES> 7,319,259
<CGS> 2,234,297
<TOTAL-COSTS> 3,964,415
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,445
<INCOME-PRETAX> 1,111,102
<INCOME-TAX> 441,600
<INCOME-CONTINUING> 669,502
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 669,502
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.00
</TABLE>
