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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.0-28128
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ELEGANT ILLUSIONS, INC.
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(Name of small business issuer in its charter)
Delaware 88-0282654
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
542 Lighthouse Ave., Suite 5, Pacific Grove, CA 93950
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (408) 649-1814
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock
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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. [X]
The Issuer's revenues for its fiscal year ended December 31, 1997 were
$8,385,707.
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 10, 1997 is
$1,644,742 based upon $.375 multiplied by the 4,385,978 Shares of Registrant's
Common Stock held by non-affiliates1.
The number of shares outstanding of each of the registrant's classes of common
stock, as of December 31, 1997 and March 10, 1997 is 17,434,338 shares, all of
one class of $.001 par value Common Stock.
The information required by Items 9, 10, 11 and 12 under Part III of this report
is incorporated by reference from the issuer=s definitive proxy statement for
its 1998 Annual Meeting of Stockholders (to be filed with the Commission not
later than April 30, 1998.
Transitional Small Business Disclosure Format (check one): Yes _____ No __X__
____________________
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.
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ELEGANT ILLUSIONS, INC.
Form 10-KSB
Year Ended December 31, 1997
Table of Contents
PART I Page
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Item 1. Description of Business.............................................1
Item 2. Description of Properties...........................................3
Item 3. Legal Proceedings...................................................3
Item 4. Submission of Matters to a Vote of
Security Holders..................................................4
Part II
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Item 5. Market for Common
Equity and Related Stockholder Matters............................5
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................6
Item 7. Financial Statements................................................9
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures...........................................9
Part III
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Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act..............................10
Item 10. Executive Compensation.............................................10
Item 11. Security Ownership of Certain Beneficial
Owners and Management............................................10
Item 12. Certain Relationships and Related
Transactions.....................................................10
Item 13. Exhibits and Reports on Form 8-K...................................10
Signatures..................................................................11
Supplemental Information....................................................11
Financial Statements.......................................................F-1
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PART I
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Item 1. Description of 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 20
retail copy jewelry stores, two fine jewelry stores and one fine art gallery.
The retail copy jewelry stores are located in Monterey, San Francisco, Santa
Barbara, San Diego, Sacramento, Palm Springs, Gilroy and Tulare, California;
Salt Lake City, Utah; Minneapolis, Minnesota; Portland, Oregon; Branson,
Missouri; New Orleans, Louisiana; Laughlin, Nevada; Oahu, Hawaii; Kenosha,
Wisconsin; and St. Croix and St. Thomas, U.S. Virgin Islands. One of the fine
jewelry stores (which includes a handcraft, jewelry and gift store) is located
in Monterey, the second fine jewelry store is located in St. Croix and the fine
art gallery is located in New Orleans.
In October 1997, subsequent to the opening of a new store in Gilroy,
California, the Company announced plans for a 50 store expansion. In January
1998, the Company increased its planned expansion to approximately 81 stores
over an anticipated three year period. Pursuant to this plan, the Company has
opened three stores (Tulare, California, Kenosha, Wisconsin and St. Thomas, U.S.
Virgin Islands) and anticipates opening approximately six new stores in 1998. At
this time, management believes, but cannot assure, that four of these stores
will be located at Universal Studios in Orlando, Florida (anticipated to open in
October 1998); Michigan City, Indiana (April 1998); Birchrun, Michigan; and
Milpitas, California. The Company plans to fund the opening of these six new
locations from current cash reserves and revenues. It is anticipated that the
opening of additional new stores will be funded from current cash reserves and
revenues and, to the extent required, from bank and/or equity financing. No
assurance can be given that the Company will be able to secure such bank and/or
equity financing. Completion of the Company's planned 81 store expansion is
dependant on the Company's ability to obtain adequate financing on acceptable
terms.
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 and laboratory grown 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.
During 1997, the Company consolidated its handcraft, jewelry and gift store,
Steinbeck Lady, into Steinbeck Jewelers. 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.
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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 handcraft,
jewelry and gifts sold in the Steinbeck Lady section of the Steinbeck Jewelers
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 and 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 two copy jewelry retail store chains that
could compete with the Company if they were located within close proximity of
the Company's stores - Impostors 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 8, 1998, the Company had approximately 123 employees, including its
three officers, three regional managers, 13 store managers, three training
managers, 86 sales personnel, one distribution manager, one retail computer
systems manager, one art department manager and 12 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.
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 these 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.
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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.
During 1997, the Company opened four new copy jewelry stores.
Item 2. Description of Properties.
The Company's executive offices are located at 542 Lighthouse Ave., Suite 5,
Pacific Grove, California 93950. The 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 few 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.
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Item 4. Submission of Matters to a Vote of Security Holders.
During the last quarter of the Company's fiscal year ended December 31, 1997,
the Company's Executive Officers, who collectively hold approximately 75% of the
Company's issued and outstanding Common Stock, approved and adopted, by written
consent in lieu of a meeting of stockholders, a proposal (the "Charter
Amendment") to amend the Company's Certificate of Incorporation to reverse split
the outstanding shares of the Company's Common Stock. Pursuant to the Charter
Amendment, the Board of Directors retained the right to: (i)set the ratio of the
reverse split as low as one-for-two or as high as one-for-six; or (ii) not
proceed with any reverse split. If and when the Board of Directors determines to
effect a reverse split of the Company's issued and outstanding Common Stock, at
least 10 days prior to the anticipated effective date of the reverse split, the
Company will file a Current Report on Form 8-K and issue a press release stating
the ratio and the anticipated effective date of the reverse split.
The Stockholders approved the Charter Amendment to increase the market price
per share. The Company=s Common Stock is listed on the NASDAQ SmallCap Market. A
minimum bid price of $1.00 per share is required to assure continued listing of
the Company's Common Stock on the NASDAQ SmallCap Market. During the last
quarter of 1997 and the first quarter of 1998, the bid price for the Common
Stock has remained below. Management believes but cannot assure that, by reverse
splitting the outstanding shares of Common Stock at a sufficient ratio, the bid
price for the Common Stock will exceed $1.00 per share. See "Part II. Item 5.
Market for Registrant's Common Equity and Related Stockholder Matters."
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
(a) Marketing Information -- The principal U.S. market in which the Company's
Common Stock ($.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"). On February 27, 1998, the Company received a letter from NASDAQ
informing the Company that Company was not in compliance with NASDAQ's $1.00
minimum bid maintenance requirement. Pursuant to the letter, the Company has
until May 28, 1998 to comply with this requirement. The minimum bid price must
remain at or above $1.00 for 10 consecutive business days in order to return to
compliance with the minimum bid requirement. If the Company's Common Stock is
delisted from NASDAQ, stockholders' ability to resell their shares of Company
stock and/or the price at which such shares could be resold could be adversely
affected.
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 two fiscal years 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).
Bid Prices
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High Low
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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
Period - Fiscal Year 1997
First Quarter ending March 31, 1997 2.875 1.25
Second Quarter ending June 30, 1997 1.6875 0.6875
Third Quarter ending September 30, 1997 1.1875 0.6525
Fourth Quarter ending December 31, 1997 0.90625 0.40625
(b) Holders -- There were approximately 78 holders of record of the Company's
Common Stock as of March 10, 1998 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.
5
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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.
During 1997, in accordance with Rule 10b-18 under the Securities Exchange Act
of 1934, the Company repurchased an aggregate of 93,100 shares of its Common
Stock in the open market and, from January 1, 1998 through March 10, 1998, the
Company repurchased an additional 92,900 shares of its Common Stock in the open
market. The Board of Directors is in the process of returning all of these
shares to the status of authorized but unissued shares of the Company=s Common
Stock.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Cautionary Statement on Forward-Looking Statements
Except for the historical information contained herein, certain of the
matters discussed in this annual report are "forward-looking statements," as
defined in Section 21E of the Securities Exchange Act of 1934, which involve
certain risks and uncertainties, which could cause actual results to differ
materially from those discussed herein including, but not limited to, risks
relating to changing economic conditions, the Company's expansion plans and
competitive pressures.
The Company cautions readers that any such forward-looking statements are
based on management's current expectations and beliefs but are not guarantees of
future performance. Actual results could differ materially from those expressed
or implied in the forward-looking statements.
Results of Operations
Fiscal Year ended December 31, 1997 Compared to Fiscal Year Ended December 31,
1995
Sales for the year ended December 31, 1997 increased $1,066,448 or 14.6% when
compared to the year ended December 31, 1996.
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Management believes that the increase in sales was due to the addition of
four locations (Gilroy, Kenosha, Tulare and St. Thomas) and a full year of
operations at the three stores opened in 1996 (San Francisco, Monterey and
Laughlin), net of the closing of one location (Pavilions).
As of December 31, 1996, the Company operated 21 retail locations and as of
December 31, 1997, the Company operated 23 retail locations. Although the
Company added four stores in 1997, it closed its Pavilions store in January 1997
and consolidated Steinbeck Lady into Steinbeck Jewelers.
The Costs of goods as a percentage of revenues decreased slightly from 30.5%
in fiscal 1996 to 29.2% in fiscal 1997.
During fiscal 1997, selling, general and administrative expenses increased
when compared to fiscal 1996 by $938,436 (approximately 25.1%). As a percentage
of sales, selling, general and administrative expenses increased from
approximately 51.1% during 1996 to approximately 55.8% during 1997. Management
believes that this increase was the result of a number of factors. One factor
was the cost of opening and operating the four new stores opened in 1997,
including an extraordinary expense of approximately $40,000 incurred in the
setting up and commencement of operations of the St. Thomas store, which opened
at the very end of 1997 (December 19, 1997). Expenses incurred in setting up and
commencing operations at new locations are non-recurring and are fully expensed
when incurred. Another factor was the costs related to operating the three
stores opened in 1996 for a full 12 months. In addition, labor costs rose by
approximately 17%. Management raised labor costs to stabilize the Company's
workforce in light of the strong economic conditions in the United States over
the past year. Management believes that increased salaries will lead to a
decrease in job turnover and added revenues in 1998. The Company also spent
approximately $80,000 in advertising costs designed to increase the long-term
visibility and name recognition of the Company and approximately $50,000 for
financial public relations. Finally, the Company incurred a loss of
approximately $50,000 at its Kenosha store. The Company is currently negotiating
to move the Kenosha store to a new location within the same mall. Management
believes, but cannot assure, that changing the location and a full year of
operations at the Kenosha store should yield operating profits at that location
in 1998.
Revenues same store locations.
As of December 31, 1996, the Company operated 20 locations (which includes
Steinbeck Lady) that were also in operation at December 31, 1997: two in New
Orleans, four in Monterey, one in Sacramento, one in San Diego, one in Santa
Barbara, two in San Francisco, one in Palm Springs, one in Salt Lake City, one
in Portland, one in Branson, one in Minneapolis, one in Laughlin, two in St
Croix and one in Oahu. The Company's Pavilions store in Sacramento, which was
operating on December 31, 1996, closed in January 1997. Revenues from the above
mentioned 20 locations for the year ended December 31, 1997, increased
approximately 8% from the same period in 1996. Management believes that this
increase in same store revenues was due primarily to the fact that 1997 revenues
include a full 12 months of operations for the stores opened in 1996. Revenues
for the stores that operated for a full 12 months during fiscal 1996 and 1997
were down slightly (1%).
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In 1996, the Company adjusted some of its software in light of the year 2000
problem. Management does not believe that the year 2000 problem will have any
material adverse affect on the Company's operations or revenues.
Liquidity and Capital Resources
As of December 31, 1997, the Company had $1,321,448 in cash and cash
equivalents and its current assets exceeded its current liabilities by
$4,162,195.
In October 1997, subsequent to the opening of a new store in Gilroy,
California, the Company announced plans for a 50 store expansion. In January
1998, the Company increased its planned expansion to approximately 81 stores
over an anticipated three year period. Pursuant to this plan, the Company has
opened three stores (Tulare, California, Kenosha, Wisconsin and St. Thomas, U.S.
Virgin Islands) and anticipates opening approximately six new stores in 1998. At
this time, management believes, but cannot assure, that four of these stores
will be located at Universal Studios in Orlando, Florida (anticipated to open in
October 1998); Michigan City, Indiana (April 1998); Birchrun, Michigan; and
Milpitas, California. During 1998, the Company also anticipates moving its
Kenosha store from one location to a new location within the same mall. The
Company plans to fund the opening of these six new locations and the relocation
of the Kenosha store from current cash reserves and revenues. It is anticipated
that the opening of additional new stores will be funded from current cash
reserves and revenues and, to the extent required, from bank and/or equity
financing. No assurance can be given that the Company will be able to secure
such bank and/or equity financing. Completion of the Company's planned 81 store
expansion is dependant on the Company's ability to obtain adequate financing on
acceptable terms. In addition, no assurance can be given as to the actual number
or location of stores that the Company will open in the future.
The Company is in the process of changing its $1,000,000 line of credit from
Comerica Bank with two new lines from that bank. The Company has a commitment
from Comerica Bank for a specific advance line of credit up to $1,500,000 to
open new stores. The commitment also provides the Subsidiary with a $200,000
revolving line of credit for working capital purposes. These lines of credit
will be collateralized by the Company's assets and the Company also will be
required to maintain certain financial ratios and covenants. These new credit
lines and the actual terms and conditions thereof are subject to the preparation
and execution of a definitive loan agreement and other documentation acceptable
to the Bank. As of December 31, 1997 and the date hereof, no funds had been
advanced on the existing $1,000,000 line of credit.
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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 and are
located at the end of this Annual Report on Form 10-KSB.
ELEGANT ILLUSIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED December 31, 1997
INDEX
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Page No.
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Report of Independent Auditor F-1
Consolidated Balance Sheets - December 31, 1996 and 1997 F-2
Consolidated Statements of Operations for the
Years Ended December 31, 1996 and 1997 F-4
Consolidated Statement of Stockholders'
Equity for the Years Ended December 31, 1996 and 1997 F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996 and 1997 F-6
Notes to Consolidated Financial Statements F-8
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. However, Jeffrey S. Gilbert, CPA, who audited
the consolidated financial statements included herein, is a successor to the
auditing firm of Hollander, Gilbert & Co. Hollander, Gilbert & Co. was the
accounting firm that audited the Company's 1996 consolidated financial
statements.
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PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;compliance
with Section 16(a) of the Exchange Act.
The information required by this Item 9 is set forth in the section
entitled "Election of Directors in the Company's definitive proxy statement for
its 1998 Annual meeting of Stockholders" (the "Proxy Statement"), and is
incorporated herein by this reference.
Item 10. Executive Compensation.
The information required by this Item 10 is set forth in the section entitled
"Executive Compensation" in the Company's Proxy Statement, and is incorporated
herein by this reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item 11 is set forth in the section entitled
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement, and is incorporated herein by this reference.
Item 12. Certain Relationships and Related Transactions.
The information required by this Item 11 is set forth in the section entitled
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement, and is incorporated herein by this reference.
Item 13. Exhibits and Reports on Form 8-K.
Exhibits
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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)
3.e Form of Certificate of Amendment to the Certificate of Incorporation
of the Company concerning the possible reverse stock split (4)
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 Appendix A 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.
(4) Previously filed as an Exhibit to the Company's Information Statement
pursuant to Section 14(c) of the Securities Exchange Act of 1934, as filed with
the Commission on or about December 31, 1997, 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.
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SIGNATURES
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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 11, 1998 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, 1998
------------------------
James Cardinal
/s/Gavin Gear Director March 11, 1998
------------------------
Gavin Gear
/s/Tamara Gear Director March 11, 1998
------------------------
Tamara Gear
SUPPLEMENTAL INFORMATION
------------------------
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.
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ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
Report of Independent Auditor F-1
Consolidated Balance Sheets at
December 31, 1996 and 1997 F-2
Consolidated Statements of Operations - F-4
Years Ended December 31, 1996 and 1997
Consolidated Statement of Stockholders' Equity - F-5
Years Ended December 31, 1996 and 1997
Consolidated Statements of Cash Flows - F-6
Years Ended December 31, 1996 and 1997
Notes to Consolidated Financial Statements F-8
<PAGE>
REPORT OF INDEPENDENT AUDITOR
To the Board of Directors and Stockholders
Elegant Illusions, Inc.
I have audited the accompanying consolidated balance sheets of Elegant
Illusions, Inc. and Subsidiaries as of December 31, 1996 and 1997, 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. My responsibility is to express an
opinion on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audits provide a reasonable basis for my opinion.
In my 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, 1996 and 1997 and the
consolidated results of operations, stockholders' equity and cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Jeffrey S. Gilbert, CPA
(Jeffrey S. Gilbert, CPA is
a successor to the audit
firm of Hollander, Gilbert
& Co., which performed the
1996 audit.)
Los Angeles, California
March 10, 1998
F-1
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
1996 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,886,297 $ 1,321,448
Accounts receivable 190,270 357,124
Income taxes receivable 82,192
Inventory 1,990,174 2,424,755
Prepaid expenses 45,643 90,427
------------ ------------
TOTAL CURRENT ASSETS 4,112,384 4,275,946
------------ ------------
PROPERTY AND EQUIPMENT, NET (Note 2) 884,707 1,216,353
------------ ------------
OTHER ASSETS
Deposits 55,764 65,196
Patents and trademarks, net of
accumulated amortization
of $928 and $1,161 in 1996
and 1997, respectively 3,798 3,563
Excess cost over net assets acquired,
net of accumulated amortization
of $14,556 and $18,606 in 1996
and 1997, respectively 26,291 22,241
------------ ------------
TOTAL OTHER ASSETS 85,853 91,002
------------ ------------
$ 5,082,944 $ 5,583,301
============ ============
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, continued
DECEMBER 31, 1996 AND 1997
1996 1997
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable - bank (Note 3) $ $
Accounts payable and accrued expenses 92,827 113,751
Income taxes payable (Note 4) 71,915
------------ ------------
TOTAL CURRENT LIABILITIES 164,742 113,751
NOTE PAYABLE (Note 3) 20,000
DEFERRED INCOME TAXES (Note 4) 95,871 127,871
------------ ------------
TOTAL LIABILITIES 280,613 241,622
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (Note 6)
Common stock - authorized 30,000,000
shares, $.001 par value,
issued and outstanding 17,434,338
in 1996 and 1997 17,434 17,434
Additional paid-in capital 2,978,221 2,978,221
Retained earnings 1,806,676 2,392,080
Less treasury stock at cost
(93,100 shares in 1997) (46,056)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,802,331 5,341,679
------------ ------------
$ 5,082,944 $ 5,583,301
============ ============
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
1996 1997
------------ ------------
REVENUES $ 7,319,259 $ 8,385,707
COST OF GOODS SOLD 2,234,297 2,452,396
------------ ------------
GROSS PROFIT 5,084,962 5,933,311
EXPENSES
Selling, general and administrative 3,738,999 4,677,435
Depreciation and amortization 225,416 311,125
Interest expense 9,445 347
------------ ------------
TOTAL EXPENSES 3,973,860 4,988,907
------------ ------------
INCOME BEFORE INCOME TAXES 1,111,102 944,404
PROVISION FOR INCOME TAXES (Note 4) 441,600 359,000
------------ ------------
NET INCOME $ 669,502 $ 585,404
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 17,292,000 17,430,000
============ ============
BASIC EARNINGS PER COMMON SHARE $ .04 $ .03
============ ============
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Common Stock
------------ Additional
Shares Paid-in Retained Treasury
Outstanding Amount Capital Earnings Stock Total
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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, 1996 17,434,338 17,434 2,978,221 1,806,676 4,802,331
Treasury Stock
purchased (46,056) (46,056)
Net income
for the year 585,404 585,404
----------- ---------- ---------- ---------- ---------- ----------
BALANCE
December 31, 1997 17,434,338 $ 17,434 $2,978,221 $2,392,080 $ (46,056) $5,341,679
=========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
1996 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 669,502 $ 585,404
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 225,416 311,125
Changes in operating assets
and liabilities:
(Increase) decrease in:
Accounts receivable (86,394) (166,854)
Inventory (420,826) (434,581)
Prepaid expenses (27,729) (44,784)
Income tax receivable (82,192)
Increase (decrease) in:
Accounts payable and accrued expenses (27,155) 20,924
Income taxes payable and deferred
income taxes 98,008 (39,915)
------------ ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 430,822 149,127
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (354,611) (637,688)
Deposits and other assets (9,024) (10,232)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (363,635) (647,920)
------------ ------------
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
1996 1997
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payments) from bank
credit line, net (750,000)
Principal reduction of note payable (80,000) (20,000)
Payments to stockholders/officers
Sale of common stock 950,000
Purchase of treasury stock (46,056)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 120,000 (66,056)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 187,187 (564,849)
CASH AND CASH EQUIVALENTS BALANCE,
Beginning of period 1,699,110 1,886,297
------------ ------------
CASH AND CASH EQUIVALENTS BALANCE,
End of period $ 1,886,297 $ 1,321,448
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 12,312 $ 347
Income taxes paid $ 362,881 $ 480,398
NON-CASH FINANCING ACTIVITY:
Issuance of shares of common stock
in exchange for inventory $ 200,000
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
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
Wisconsin, 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. There are cash balances in certain
Federal insured banks that exceed the maximum insured amounts. However,
management of the Company does not consider this a significant risk.
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
F-8
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996 and
1997:
1996 1997
------------ ------------
Office furniture, fixtures &
equipment $ 100,845 $ 93,360
Store furniture, fixtures & equipment 1,032,269 1,550,423
Vehicles 19,500 19,500
Leasehold improvements 374,491 483,096
------------ ------------
1,527,105 2,146,379
Less: accumulated depreciation
and amortization 642,398 930,026
------------ ------------
$ 884,707 $ 1,216,353
============ ============
3. NOTES PAYABLE
The Company had 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 was deemed long term as the
creditor in the past has not requested payoff. The Company repaid $80,000
of the loan during 1996 and the remainder 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%. 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, 1997, no amount was due on the creditline.
F-9
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. INCOME TAXES
The components of income tax expense for the years ended December 31, 1996
and 1997 follow:
Federal State Total
------------ ------------ ------------
1996:
Current $ 338,000 $ 74,000 $ 412,000
Deferred 23,600 6,000 29,600
------------ ------------ ------------
$ 361,600 $ 80,000 $ 441,600
============ ============ ============
1997:
Current $ 279,000 $ 48,000 $ 327,000
Deferred 28,000 4,000 32,000
------------ ------------ ------------
$ 307,000 $ 52,000 $ 359,000
============ ============ ============
The component of deferred tax liability was as follows at December 31,
1997:
Deferred tax liability:
Depreciation $ 127,871
============
Income tax expense amounted to $441,600 in 1996 and $359,000 in 1997
(effective tax rates of 41% and 38%, 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:
1996 1997
------------ ------------
Expected statutory tax $ 377,775 $ 321,097
State income tax, net of federal
tax benefit 68,200 34,282
Other (4,375) 3,621
------------ ------------
Actual tax $ 441,600 $ 359,000
============ ============
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, 1997 are as follows:
F-10
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
Year Ended
December 31,
1998 $ 978,000
1999 836,000
2000 574,000
2001 310,000
2002 162,000
Thereafter 158,000
------------
$ 3,018,000
============
Rent expense for the fiscal years ended December 31, 1996 and 1997 were
$1,014,489 and $1,197,460, respectively.
6. STOCKHOLDERS' EQUITY
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. During 1997 the Company
acquired 93,100 shares of its common stock for an aggregate price of
$46,056.
F-11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000854941
<NAME> Elegant Illusions
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 1,321,448
<SECURITIES> 0
<RECEIVABLES> 439,316
<ALLOWANCES> 0
<INVENTORY> 2,424,755
<CURRENT-ASSETS> 4,275,946
<PP&E> 2,146,379
<DEPRECIATION> 930,026
<TOTAL-ASSETS> 5,583,301
<CURRENT-LIABILITIES> 113,751
<BONDS> 0
0
0
<COMMON> 17,434
<OTHER-SE> 5,324,245
<TOTAL-LIABILITY-AND-EQUITY> 5,583,301
<SALES> 8,385,707
<TOTAL-REVENUES> 8,385,707
<CGS> 2,452,396
<TOTAL-COSTS> 2,452,396
<OTHER-EXPENSES> 4,988,907
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 944,404
<INCOME-TAX> 359,000
<INCOME-CONTINUING> 585,404
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 585,404
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.03
</TABLE>
