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, 1998
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.
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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
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
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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, 1998 were
$9,706,816.
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 19, 1999 is
$2,857,153 based upon $1.625 multiplied by the 1,758,248 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 March 22, 1999 is 6,084,379 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 1999 Annual Meeting of Stockholders (to be filed with the Commission not
later than April 30, 1999).
Transitional Small Business Disclosure Format (check one): Yes No X
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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.
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Form 10-KSB
Year Ended December 31, 1998
Table of Contents
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PART I Page
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Item 1. Description of Business.........................................1
Item 2. Description of Properties.......................................4
Item 3. Legal Proceedings...............................................5
Item 4. Submission of Matters to a Vote of
Security Holders..........................................5
Part II
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Item 5. Market for Common
Equity and Related Stockholder Matters....................6
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............7
Item 7. Financial Statements...........................................12
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures..................................13
Part III
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Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act......................13
Item 10. Executive Compensation.........................................13
Item 11. Security Ownership of Certain Beneficial
Owners and Management....................................13
Item 12. Certain Relationships and Related
Transactions.............................................13
Item 13. Exhibits and Reports on Form 8-K...............................13
Signatures..............................................................14
Supplemental Information................................................15
Financial Statements...................................................F-1
<PAGE>
PART I
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
26 retail copy jewelry stores, three fine jewelry stores and one fine art
gallery.
The retail copy jewelry stores are located in:
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California Indiana Texas
Gilroy, Michigan City Grapevine
Monterey
(two stores), Louisiana U.S. Virgin Islands
Ontario, New Orleans St. Croix and
Palm Springs, St. Thomas (two stores)
Sacramento, Michigan
Santa Barbara, Birch Run Utah
San Diego, Salt Lake City
San Francisco Minnesota
(two stores) and Minneapolis Wisconsin
Tulare Kenosha
Missouri
Florida Branson
Miromar
Nevada
Hawaii Laughlin
Maui and
Oahu
One of the fine jewelry stores (which includes a handcraft, jewelry and
gift store) is located in Monterey, the other fine jewelry stores are located in
St. Croix and St. Thomas.
The fine art gallery is located in New Orleans.
In January 1999, the Company opened an additional copy jewelry location in
St. Thomas at the Royal Dane Mall. It also closed the Portland, Oregon location
where the Company's lease expired and the landlord chose not to renew as it had
a tenant willing to pay higher rent. These post December 31, 1998 events are
reflected above.
1
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In 1997 we announced a 50 store expansion. In this regard, we opened four
locations in 1997, seven in 1998 and one in January 1999. However, management
has elected to shift its focus from opening new locations to bolstering revenues
from existing stores. As a result, the Company is limiting its expansion plans
at this time and only open an additional three locations during the remainder of
1999.
Management has slowed the Company's store expansion plans because it was
not effective in containing costs at already established locations or locations
opened in 1998. In addition, two locations opened in 1998 are performing below
our expectations and four established locations are experiencing substantial
downturns in sales.
The two new locations not performing to expectations are Grapevine, Texas
and Ontario, California. Management has negotiated with landlord to close the
Ontario location in or about June 1999.
The four established locations experiencing revenue declines are Oahu,
Hawaii, two locations in St. Croix (copy jewelry and fine jewelry) and one in
San Francisco. At these locations, revenues were down approximately 21%, 38%,
26% and 28%, respectively.
Management believes that these declines in revenues resulted from:
Hawaii: The ownership of the mall in which the Company's store is located
went through a bankruptcy in 1998 and, subsequently, changed
ownership. This mall was subject to negative publicity during the
bankruptcy. Management has negotiated more favorable terms with
the new owners of the mall. These terms will take effect April 1,
1999. The new owners of the mall are working to increase traffic
flow, something the prior owners did not do, and reopen the clock
tower. The clock tower is a major local and tourist attraction.
Management believes, but cannot assure, that these measures will
result in a reduction in operating losses at this location.
St. Croix: This Island experienced a downturn in tourism, primarily in
Cruise Ship visits which resulted in lower than expected foot
traffic to these locations. Management does not anticipate a
change in this situation for the foreseeable future unless
gambling (which has been approved, but has not been implemented)
comes to the island.
San Francisco: The ownership of the mall in which the Company's store is located
changed in 1998. The new landlord elected to restructure the
tenant mix at the mall and vacated tenants from locations
adjacent to that of the Company's store. Management anticipates,
but cannot assure, that these vacancies will be filled in the
near future which should increase foot traffic and, in turn,
revenues. In addition, the landlord has granted the Company's
request to install new interactive signage. Management believes
that this new signage will draw foot traffic to the center of the
mall where the Company's store is located.
2
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Management believes that it can effectively increase revenues and profits
by increasing sales at existing locations with new products and by reducing
operating costs.
Types of Stores
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), Kings Alley Jeweler
(St. Croix) and Seaport Jewelers (St. Thomas), 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.
Purchase of Inventory
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.
3
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Marketing
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).
Competition
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.
Employees
At March 22, 1999, the Company had approximately 172 employees, an increase
of 49 employees since March 1998. These employees include the Company's three
officers, five regional managers, one national sales manager, 24 store managers,
two training managers, 118 sales personnel, one retail computer systems manager,
one art department manager, one office manager and 16 clerical personnel.
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
10,100 square feet. Utilized approximately as follows:
Square
Usage Footage
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Executive office space ........................ 700
Administrative space .......................... 1,100
art production and reproduction ............... 2,500
New facility assembly ......................... 1,700
Manager training .............................. 800
Warehouse space ............................... 2,500
Computer and file space ....................... 900
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10,100
4
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The facility is leased from an unaffiliated party pursuant to a two year
lease that expires on February 28, 2001. Pursuant to the lease the entire base
rent for the 24 month term of $109,000 was paid in March 1999. Management
believes that the current executive facilities are sufficient for its needs over
the next few years.
The Company's stores are leased from unaffiliated parties on various terms.
Certain of the leases provide the landlord with a percentage of revenues
generated at and from the specific leased location (see Note 5 to the Company's
Consolidated Financial Statements).
Item 3. Legal Proceedings.
The Company is not presently a party to any material litigation not in the
regular course of its business, nor to the Company's knowledge is such
litigation threatened.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the last
quarter of the fiscal year ended December 31, 1998.
5
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Marketing Information -- The principal U.S. market in which the Company's
Common Stock ($.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").
The following tables set forth the range of high and low closing 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). The prices do not take into account the
one-for-three reverse split of the Common Stock effected in January 1999.
Bid Prices
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High Low
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Period - Fiscal Year 1997
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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
Period - Fiscal Year 1998
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First Quarter ending March 31, 1998 ................ 0.59375 0.21875
Second Quarter ending June 30, 1998 ................ 1.46875 0.50
Third Quarter ending September 30, 1998 ............ 0.9375 0.5625
Fourth Quarter ending December 31, 1998 ............ 0.875 0.50
(b) Holders -- There were approximately 97 holders of record of the Company's
Common Stock as of March 22, 1999 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.
6
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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. To maintain the listing of the Company's Common Stock
on NASDAQ, the Company effected a one-for-three reverse split of its outstanding
share which resulted in an increase in the bid for the Company's Common Stock to
over $1.00 per share. All references in this report to numbers of shares have
been adjusted to reflect the reverse split, unless the text specifically
indicates otherwise. By letter dated March 12, 1999, NASDAQ determined to
continue the listing of the Company's Common Stock, subject to its right to
change its determination should conditions dictate. 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.
In March 1996, the Company sold 202,021 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 33,334 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 and 1998, in accordance with Rule 10b-18 under the Securities
Exchange Act of 1934, the Company repurchased an aggregate of 33,033 shares and
62,067 shares, respectively, of its Common Stock in the open market.
In May 1998, the Company raised $720,000 from the sale of 266,667 shares in
a private placement to one investor. 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. In addition, the Company issued 68,334 shares to
consultants for public relations services. The sales of these shares was exempt
from registration by reason of the exemption provided by Section 4(2) of the
Act.
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.
7
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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, 1998 Compared to Fiscal Year Ended December 31,
1997
Sales for the year ended December 31, 1998 increased $1,321,109 or 15.8%
when compared to the year ended
December 31, 1997.
Management believes that the increase in sales was due to the addition of
seven locations in 1998 (Birch Run, Michigan City, Grapevine, Ontario, Maui,
Miromar and St. Thomas) and a full year of operations at the four stores opened
in 1997 (Gilroy, Kenosha, Tulare and St. Thomas).
As of December 31, 1997, the Company operated 23 retail locations and as of
December 31, 1998, the Company operated 30 retail locations. In January 1999,
the Company opened an additional copy jewelry location in St. Thomas at the
Royal Dane Mall. It also closed the Portland, Oregon location where the
Company's lease expired and the landlord chose not to renew as it had a tenant
willing to pay higher rent.
The Costs of goods as a percentage of revenues increased slightly from
29.2% in fiscal 1997 to 31.2% in fiscal 1998.
During fiscal 1998, selling, general and administrative expenses increased
when compared to fiscal 1997 by $1,066,155 (approximately 22.8%). A significant
portion of this increase ($205,000 or 19.2% of the increase) was due to the
issuance of consultants' shares, a non-recurring event with no impact on cash
flow (see "Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters"). As a percentage of sales, selling, general and administrative
expenses increased from approximately 55.8% during 1997 to approximately 59.2%
during 1998. Absent the non-recurring event mentioned above, selling, general
and administrative expenses as a percentage of sales during fiscal 1998 would
have been approximately 57.1% (an increase of 1.3%). Management believes that
this increase was primarily the result of the expenses incurred in (a) operating
the four stores opened in 1997 for a full year; and (b) opening and operating
the seven new stores opened in 1998. Expenses incurred in setting up and
commencing operations at new locations are non-recurring and are fully expensed
when incurred.
As discussed in "Item 1. Business," two of the new locations opened in
1998, Grapevine, Texas and Ontario, California, are not performing to
expectations. Management has negotiated with landlord to close the Ontario
location in or about June 1999.
8
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Management believes that it can effectively increase revenues and profits
by increasing sales at existing locations and by reducing operating costs.
To generate increased sales, the Company plans to add new products to its
inventory and conduct one-on-one training of its managers and sales staff.
With regard to reducing operating costs:
In September 1998, management identified a problem with payroll
cost control and implemented a software system to manage this.
This system identifies locations, on a payroll-by-payroll basis,
that are not keeping payroll within the designed budget for that
location.
In September 1998, management also began the process of not
renewing certain advertising contracts.
Management has identified "freight" as an operating expense that
is increasing as a percentage of sales and is currently examining
its policies and procedures, particularly in the areas of
distribution of product from the Company's warehouse to its
stores and "customer special orders," to find cost savings.
Revenues same store locations.
As of December 31, 1997, the Company operated 23 locations that were also
in operation at December 31, 1998: two in New Orleans, three 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, one in Gilroy, one in Kenosha, one in Tulare, two
in St Croix one in St. Thomas and one in Oahu. 20 of these locations operated
for the full 12 month periods in fiscal 1997 and 1998. Revenues from these 20
locations for the year ended December 31, 1998, decreased approximately 4% from
the same period in 1997. Management believes that this decrease in same store
revenues was due primarily to decreased revenues at the location in Oahu, one of
the locations in San Francisco and the two locations in St. Croix (copy jewelry
and fine jewelry). At these locations, revenues were down approximately 21%,
28%, 38% and 26%, respectively. For a discussion of the reasons for these
declines in revenues, see "Item 1. Business - General." Absent revenues from
these four locations, same store revenues increased approximately 1% in 1998
compared to 1997.
Inventory Turnover Ratios
During fiscal 1998, the Company maintained an inventory that provided a
turnover ratio of 1.20. Management does not believe that it's current inventory
turnover is indicative of impaired or slow-moving inventory. Management notes
that the Company opened seven locations during 1998 and has not had the
opportunity of a full year's sales.
9
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Management believes that it's current inventory turnover ratio of 1.20 is
appropriate for it's plan of operation, including opening new locations out of
inventory on hand and maintaining its strategy of replacing inventory sold at
its retail locations within a 2-3 day time frame. Management reviews items on
hand, on a regular basis, to determine slow moving items, then discounts the
price of those items so they are sold at prices that still generate a positive
gross margin. The inventory turnover ratio for fiscal 1997 was 1.11. Management
believes that this improvement in the ratio between fiscal 1997 and fiscal 1998
was due to management's efforts to more effectively manage inventories.
Recent Accounting Pronouncements
In June of 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards, No. 130, Reporting Comprehensive Income, and
No. 131, Disclosures About Segments of an Enterprise and Related Information,
effective for years beginning after December 15, 1997. In February 1998, FASB
issued Statement of Financial Accounting Standards, No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, effective for
years beginning after December 15, 1997. FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. FAS 131 establishes standards for
reporting information about operating segments and the methods by which such
segments were determined. FAS 132 establishes standards for reporting
disclosures about pensions and postretirement benefit plans.
Effective January 1, 1998, the Company adopted FAS 130, FAS 131 and FAS
132; however, the adoption has not had a material effect on the Company's
consolidated financial statements.
SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method as prescribed in
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees and related interpretations, under which no compensations cost
related to stock options has been recognized as the exercise price of each
option at the date of grant was equal to the fair value of the underlying common
stock.
In April 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of
Start-Up Activities". Costs of start-up activities, including organization
costs, should be expensed as incurred. This SOP is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not expect adoption of SOP No. 98-5 to have a material effect, if any, on its
financial position or results of operations.
10
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Year 2000 Compliance
Many currently installed computer systems and software products use two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations.
Management does not believe that the year 2000 problem will have any
material adverse affects on the Company's operations or revenues. In 1994, the
Company adjusted its Point of Sale and Inventory Control software in light of
the year 2000 problem. The foregoing software now utilizes a database management
system which provides date management tools. Mathematical date calculations were
changed to store date information in an eight character field (YYYYMMDD). In
1996, the credit card authorization modules were adjusted to avoid potential
issues from the year 2000 problem. Although years continue to be expressed in
two digits, any two digits prior to 96 will be read as expiring in the 2000s
rather than the 1900s. The Company has confirmed with its credit card processors
that their systems are year 2000 compliant.
Liquidity and Capital Resources
As of December 31, 1998, the Company had $1,560,403 in cash and cash
equivalents and its current assets exceeded its current liabilities by
$4,862,655.
In 1997 we announced a 50 store expansion. In this regard, we opened four
locations in 1997, seven in 1998 and one in January 1999. However, management
has elected to shift its focus from opening new locations to bolstering revenues
from existing stores. As a result, the Company is limiting its expansion plans
at this time and only plans to open three locations (in addition to the St.
Thomas store opened in January 1999) during the remainder of 1999. For a
discussion of this change in focus, see "Item 1. Business - General."
The anticipated opening of a store to be located at Universal Studios in
Orlando, Florida continues to be delayed due to delays in the construction of
Universal City Walk. We now anticipate that this store will open at the end of
May or beginning of June 1999.
The cost of opening new stores generally ranges from approximately $120,000
to $140,000, depending upon a number of factors. It is anticipated that the
opening of additional new stores will be funded from current cash reserves,
revenues and bank and/or equity financing. In this regard, the Company has a
commitment for a line of credit up to $2,000,000 from Comerica Bank to open new
stores and the Company's subsidiary, Elegant Illusions, Inc. (California), has a
commitment for a $350,000 revolving line of credit from Comerica Bank for
working capital purposes. These lines of credit would be collateralized by the
Company's assets and the Company would be required to maintain certain financial
ratios and covenants. The commitment expires on April 30, 1999. The Company had
a line of credit up to $2,000,000 and its subsidiary had a $350,000 revolving
line of credit, both from Comerica Bank. These credit lines expired in January
1999. As of December 31, 1998 no funds had been advanced on either of these
lines of credit.
11
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No assurance can be given that the Company will be able to secure
additional bank and/or equity financing over and above its current resources, if
required. In addition, no assurance can be given as to the actual number or
location of stores that the Company will open in the future.
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, 1998
INDEX
Page No.
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Report of Independent Auditor ........................................ F-1
Consolidated Balance Sheets - December 31, 1997 and 1998 ............. F-2
Consolidated Statements of Operations for the
Years Ended December 31, 1997 and 1998 ............................... F-3
Consolidated Statement of Stockholders'
Equity for the Years
Ended December 31, 1997 and 1998 ..................................... F-4
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997 and 1998 ............................... F-5
Notes to Consolidated Financial Statements ........................... F-6
12
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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.
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 1999 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 Amendment to the Certificate of Incorporation of the Company
concerning the reverse stock split
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)
13
<PAGE>
(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.
Reports of Form 8-K
- -------------------
Form 8-K filed January 4, 1999.
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.
14
<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 24, 1999 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 24, 1999
- ------------------
James Cardinal
/s/ Gavin Gear Director March 24, 1999
- ------------------
Gavin Gear
/s/ Tamara Gear Director March 24, 1999
- ------------------
Tamara Gear
Director March __, 1999
- ------------------
Janet Heinze
Director March __, 1999
- ------------------
Keith Brandon
15
<PAGE>
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.
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
Page
----
Report of Independent Auditor .......................................... F-1
Consolidated Balance Sheets at December 31, 1997 an 1998 ............... F-2
Consolidated Statements of Operations -
Years Ended December 31, 1997 and 1998 ............................ F-3
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1997 and 1998 ............................ F4
Consolidated Statements of Cash Flows -
Years Ended Decmeber 31, 1997 and 1998 ............................. F-5
Notes to Consolidated Financial Statements ............................. F-6
<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, 1997 and 1998, 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, 1997 and 1998 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
Los Angeles, California
March 17, 1999
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents ...................................................... $ 1,321,448 $ 1,560,403
Accounts receivable (net of allowances for
doubtful accounts of $16,000 in 1998) ........................................ 357,124 415,141
Income taxes receivable (Note 4) ............................................... 82,192 142,800
Inventory ...................................................................... 2,424,755 2,635,870
Prepaid expenses ............................................................... 90,427 270,685
----------- -----------
TOTAL CURRENT ASSETS ....................................................... 4,275,946 5,024,899
----------- -----------
PROPERTY AND EQUIPMENT, NET (Note 2) ............................................... 1,216,353 1,743,134
----------- -----------
OTHER ASSETS
Deposits ....................................................................... 65,196 65,090
Patents and trademarks, net of accumulated amortization
of $1,161 and $3,150 in 1997 and 1998, respectively .......................... 3,563 2,807
Excess cost over net assets acquired, net of accumulated
amortization of $18,606 and $14,556 in 1997 and 1998, respectively ........... 22,241 26,291
----------- -----------
TOTAL OTHER ASSETS ......................................................... 91,002 94,188
----------- -----------
$ 5,583,301 $ 6,862,221
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses .......................................... $ 113,751 $ 162,244
Income taxes payable (Note 4) .................................................. 71,915 -
----------- -----------
TOTAL CURRENT LIABILITIES .................................................. 113,751 162,244
DEFERRED INCOME TAXES (Note 4) ..................................................... 127,871 152,871
----------- -----------
TOTAL LIABILITIES .......................................................... 241,622 315,115
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (Notes 6 and 8)
Common stock - authorized 30,000,000 shares, $.001 par value,
issued and outstanding 5,811,446 in 1997 and 6,146,446 in 1998 ............... 5,811 6,146
Additional paid-in capital ..................................................... 2,989,844 3,914,509
Retained earnings .............................................................. 2,392,080 2,710,459
Less treasury stock at cost (31,033 shares in 1997 and 62,067 shares in 1998) .. (46,056) (84,008)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY ................................................. 5,341,679 6,547,106
----------- -----------
$ 5,583,301 $ 6,862,221
=========== ===========
</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, 1997 AND 1998
1997 1998
---------- ----------
REVENUES .............................. $8,385,707 $9,706,816
COST OF GOODS SOLD .................... 2,452,396 3,030,003
---------- ----------
GROSS PROFIT .......................... 5,933,311 6,676,813
EXPENSES
Selling, general and administrative 4,677,435 5,743,590
Depreciation and amortization ..... 311,125 407,369
Interest expense .................. 347 475
---------- ----------
TOTAL EXPENSES ................ 4,988,907 6,151,434
---------- ----------
INCOME BEFORE INCOME TAXES ............ 944,404 525,379
PROVISION FOR INCOME TAXES (Note 4) ... 359,000 207,000
---------- ----------
NET INCOME ............................ $ 585,404 $ 318,379
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING ... 5,810,000 5,988,000
========== ==========
BASIC EARNINGS PER COMMON SHARE ....... $ .10 $ .05
========== ==========
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, 1997 AND 1998
<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, 1996 5,811,446 $ 5,811 $2,989,844 $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 5,811,446 5,811 2,989,844 2,392,080 (46,056) 5,341,679
Treasury Stock
purchased ..... (37,952) (37,952)
Sale of stock ... 266,667 267 719,733 720,000
Issuance of stock
for services .. 68,333 68 204,932 205,000
Net income
for the year .. 318,379 318,379
---------- ---------- ---------- ---------- ---------- ----------
BALANCE
December 31, 1998 6,146,446 $ 6,146 $3,914,509 $2,710,459 $ (84,008) $6,547,106
========== ========== ========== ========== ========== ==========
</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, 1997 AND 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income ................................................. $ 585,404 $ 318,379
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .......................... 311,125 407,369
Expenses related to stock issued for consulting services - 205,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable ................................... (166,854) (58,017)
Inventory ............................................. (434,581) (211,115)
Prepaid expenses ...................................... (44,784) (180,258)
Income tax receivable ................................. (82,192) (60,608)
Increase (decrease) in:
Accounts payable and accrued expenses ................. 20,924 48,493
Income taxes payable and deferred income taxes ......... (39,915) 25,000
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 149,127 494,243
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ......................... (637,688) (947,491)
Deposits and other assets .................................. (10,232) 10,155
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .................. (647,920) (937,336)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (payments) from bank credit line, net
Principal reduction of note payable ........................ (20,000) -
Payments to stockholders/officers
Sale of common stock ....................................... - 720,000
Purchase of treasury stock ................................. (46,056) (37,952)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .............. (66,056) 682,048
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................... (564,849) 238,955
CASH AND CASH EQUIVALENTS BALANCE, Beginning of period ......... 1,886,297 1,321,448
----------- -----------
CASH AND CASH EQUIVALENTS BALANCE, End of period ............... $ 1,321,448 $ 1,560,403
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid .............................................. $ 347 $ 475
Income taxes paid .......................................... $ 480,398 $ 242,528
NON-CASH FINANCING ACTIVITY:
Issuance of shares of common stock in exchange for services - $ 205,000
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
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 three locations and copy jewelry at
locations in California, Nevada, Utah, Minnesota, Missouri, Oregon,
Louisiana, Hawaii Wisconsin, Michigan, Indiana, Florida, Texas 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 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. As of
December 31, 1998, the Company has deposits in excess of the FDIC limit in
the amount of approximately $1,236,000.
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 - SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method as prescribed in Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations, under which no compensations cost
related to stock options has been recognized as the exercise price of each
option at the date of grant was equal to the fair value of the underlying
common stock.
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.
F-6
<PAGE>
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 utilizes the asset and liability method for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Basic and Diluted Loss per Share - Effective December 31, 1997, the Company
adopted SFAS No. 128, Earnings per Share, which established simplified
standards for computing and presenting earnings per share information.
Basic loss per common share is based upon the net loss applicable to common
shares after preferred dividend requirements and upon the weighted average
number of common shares outstanding during the period. Diluted loss per
common share adjusts for the effect of convertible securities, stock
options and warrants only in the periods presented in which effect would
have been dilutive. The Company did not grant options and warrants during
1997 and 1998.
Start-up Costs - In April 1998, the Accounting Standards Executive
Committee of the AICPA issued Statement of Position ("SOP") No. 98-5
"Reporting on the Costs of Start-Up Activities". Costs of start-up
activities, including organization costs, should be expensed as incurred.
This SOP is effective for financial statements for fiscal years beginning
after December 15, 1998. The Company does not expect adoption of SOP No.
98-5 to have a material effect, if any, on its financial position or
results of operations.
Advertising - Advertising costs are expensed the first time the
advertisement is run. Total advertising and promotion expenses were
$259,674 and $255,088 for the years ended December 31, 1997 and 1998,
respectively.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Office furniture, fixtures & equipment ................... $ 93,360 $ 161,804
Store furniture, fixtures & equipment .................... 1,550,423 2,156,526
Vehicles ................................................. 19,500 19,500
Leasehold improvements ................................... 483,096 756,037
---------- ----------
2,146,379 3,093,867
Less: accumulated depreciation and amortization..... 930,026 1,350,733
---------- ----------
$1,216,353 $1,743,134
========== ==========
</TABLE>
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 had a $2,350,000 line of credit with a bank effective March
1998 due on demand expiring in January 1999. The bank has issued a
commitment for a $2,350,000 line of credit through April 1999. Interest is
at annual base rate as announced by the bank (initial base rate was 8.25%)
plus .25% to 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, 1998,
no amount was due on the creditline.
F-7
<PAGE>
4. INCOME TAXES
The components of income tax expense for the years ended December 31, 1997
and 1998 follow:
Federal State Total
------------------------------
1998:
Current ........................... $151,000 $ 31,000 $182,000
-------- -------- --------
Deferred .......................... 24,000 1,000 25,000
-------- -------- --------
$175,000 $ 32,000 $207,000
======== ======== ========
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,
1998:
Deferred tax liability:
Depreciation......................... $ 152,871
=================
Income tax expense amounted to $359,000 in 1997 and $207,000 in 1998
(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:
1997 1998
-------- --------
Expected statutory tax ..................... $321,097 $178,629
State income tax, net of federal tax benefit 34,282 21,120
Other ...................................... 3,621 7,251
-------- --------
Actual tax ............................ $359,000 $207,000
======== ========
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, 1998 are as follows:
Year Ended
December 31,
1999............... $1,299,000
2000............... 1,051,000
2001............... 624,000
2002............... 350,000
2003............... 207,000
Thereafter......... 116,000
----------
$3,626,000
F-8
<PAGE>
Rent expense for the fiscal years ended December 31, 1997 and 1998 were
$1,197,460 and $1,477,595, respectively.
6. STOCKHOLDERS' EQUITY
During 1998 the Company sold 266,667 common shares for $720,000, net and
also, issued 68,333 common shares, valued at approximately $205,000, in
connection with services performed by consultants. During 1997 and 1998 the
Company acquired 31,083 shares in each year of its common stock for an
aggregate price of $46,056 in 1997 and $37,952 in 1998.
7. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Subsequent to the year ended 1998 the Company determined that an error
related to the elimination of intercompany inventory profits affected
operating results in previous quarters of 1998. Also, the Company failed to
reflect an issuance of common stock during the quarter ended June 30, 1998.
Listed below are those restated quarterly results:
Three Months Ended
------------------
March 31 June 30 September 30,
1998 1998 1998
----------- ----------- -----------
REVENUES ...................... $ 2,165,578 $ 2,232,328 $ 2,320,587
COST OF GOODS SOLD ............ 771,139 674,126 733,721
----------- ----------- -----------
GROSS PROFITS ................. 1,394,439 1,558,202 1,586,866
SELLING, GENERAL AND
ADMINISTRATION ............. 1,420,280 1,498,568 1,249,731
FINANCIAL CONSULTING
(PAID IN STOCK) ............ 205,000
1,420,280 1,703,568 1,249,731
----------- ----------- -----------
(25,841) (145,366) 337,135
PROVISION FOR INCOME TAXES .... (10,906) (45,596) 127,965
----------- ----------- -----------
NET INCOME .................... $ (14,934) $ (99,770) $ 209,170
=========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING (GIVES EFFECT TO
REVERSE 3 FOR 1 STOCK SPLIT) 5,757,333 5,904,667 6,016,000
=========== =========== ===========
BASIC AND DILUTED INCOME
PER SHARE .................. $ (0.00) $ (0.02) $ 0.03
=========== =========== ===========
8. COMMON STOCK REVERSE SPLIT
On January 2, 1999, the Board of Directors approved a one for three reverse
stock split. The number of authorized shares and par value remained the
same. The effect of the reverse stock split has been retroactively
reflected as of December 31, 1996 in the financial statements. All
references to the number of common shares and per share amounts elsewhere
in the consolidated financial statements and related footnotes have been
restated as appropriate to reflect the effect of the reverse stock split
for all periods presented.
F-9
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
ELEGANT ILLUSIONS, INC.
Under Section 242 of the
Corporation Law of the State of Delaware
James Cardinal and Tamara Gear, respectively, the Chief Executive
Officer and the Secretary of ELEGANT ILLUSIONS, INC. (the "Company"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, DO HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, by written consent filed
with the minutes of the Board, adopted the following resolution proposing and
declaring advisable the following amendment to the Certificate of Incorporation
of said corporation:
"1. The Certificate of Incorporation is hereby amended to effect a
reverse split of the Company's outstanding Common Stock in the ratio of one
share for every three shares outstanding. The Company currently has
authorized 30,000,000 shares of Common Stock with a par value of $.001 per
share, of which 18,439,338 shares of Common Stock are issued and
outstanding, and 11,560,662 shares are unissued. Under the new structure,
the Company will have 30,000,000 shares of Common Stock, par value $.001,
authorized, of which approximately 6,146,446 shares will be issued and
outstanding and 23,853,554 shares will be unissued. All fractional shares
resulting from the reverse split will be rounded up to the next whole share.
The number of authorized shares shall not change. The reverse split shall
take effect (i) at 12:01 a.m. Eastern Standard Time on January 15, 1999: or
(ii) the filing of the Charter Amendment with the Secretary of State of the
State of Delaware, which ever occurs later."
SECOND: That the aforesaid amendments were duly adopted in accordance with the
applicable provisions of section 242 of the General Corporation Law of the State
of Delaware by obtaining the written consent of the holders of the majority of
the stock of the Company entitled to vote at a meeting of stockholders pursuant
to section 228 of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, we, the undersigned, have executed and
subscribed this certificate this 4th day of January, 1999.
/s/James Cardinal /s/Tamara Gear
--------------------------------------- ----------------------
James Cardinal, Chief Executive Officer Tamara Gear, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000854941
<NAME> ELEGANT ILLUSIONS, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,560,403
<SECURITIES> 0
<RECEIVABLES> 431,141
<ALLOWANCES> 16,000
<INVENTORY> 2,635,870
<CURRENT-ASSETS> 5,024,899
<PP&E> 3,093,867
<DEPRECIATION> 1,350,733
<TOTAL-ASSETS> 6,862,221
<CURRENT-LIABILITIES> 162,244
<BONDS> 0
0
80,000
<COMMON> 6,146
<OTHER-SE> 3,914,509
<TOTAL-LIABILITY-AND-EQUITY> 6,862,221
<SALES> 9,706,816
<TOTAL-REVENUES> 9,706,816
<CGS> 3,030,003
<TOTAL-COSTS> 3,030,003
<OTHER-EXPENSES> 6,150,959
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 475
<INCOME-PRETAX> 525,379
<INCOME-TAX> 207,000
<INCOME-CONTINUING> 318,379
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 318,379
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
