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, 1999
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
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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. [X]
The Issuer's revenues for its fiscal year ended December 31, 1999 were
$10,626,244.
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 27, 2000 is
$1,868,139 based upon $1.0625 multiplied by the 1,758,248 Shares of Registrant's
Common Stock held by non-affiliates(1).
The number of shares outstanding of each of the registrant's classes of common
stock (which excludes 62,067 treasury shares), as of March 27, 2000 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 2000 Annual Meeting of Stockholders (to be filed with the Commission not
later than April 30, 2000).
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.
<PAGE>
ELEGANT ILLUSIONS, INC.
Form 10-KSB
Year Ended December 31, 1999
Table of Contents
PART I Page
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
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..........................................10
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures.......................................11
Part III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act...........................11
Item 10. Executive Compensation............................................11
Item 11. Security Ownership of Certain Beneficial
Owners and Management.......................................11
Item 12. Certain Relationships and Related
Transactions................................................11
Item 13. Exhibits and Reports on Form 8-K..................................11
Signatures.................................................................12
Supplemental Information...................................................13
Financial Statements......................................................F-1
<PAGE>
PART I
Item 1. Description of Business.
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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
23 retail copy jewelry stores, three fine jewelry stores and one fine art
gallery.
The retail copy jewelry stores are located in:
California
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o Gilroy,
o Monterey (two stores),
o Palm Springs,
o Sacramento,
o Santa Barbara,
o San Diego and
o San Francisco (two stores)
Florida
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o Miromar
o Orlando
Hawaii
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o Maui
Indiana
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o Michigan City
Louisiana
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o New Orleans
Michigan
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o Birch Run
Minnesota
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o Minneapolis
Missouri
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o Branson
Nevada
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o Laughlin
Texas
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o Grapevine
U.S. Virgin Islands
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o St. Croix and
o St. Thomas (two stores)
Utah
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o Salt Lake City
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 1997, the Company announced a store expansion plan. In this regard,
it opened four locations in 1997, seven in 1998 and two in 1999. However, in
1998, management elected to shift its focus from opening new locations to
bolstering revenues from existing stores and exploring other sales mediums, that
potentially could generate greater returns to cash and less capital exposure.
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<PAGE>
Management slowed the Company's store expansion plans because it was
not effective in containing costs at already established locations and certain
locations opened in 1998 did not perform to expectations. The Company has
identified and closed the following stores that it deemed to be non performing:
o Portland, Oregon on January 3, 1999;
o Ontario, California on April 28, 1999;
o Kenosha, Wisconsin on August 3, 1999;
o Oahu, Hawaii on January 3, 2000; and
o Tulare, California on February 27, 2000.
The Company's Grapevine, Texas and Anchorage, San Francisco locations
are performing below expectations. The Company has reduced staffing costs and
store hours at its Anchorage location until the lease expires or it can
negotiate an early termination of the lease.
In addition, the Company is in the process of relocating two locations,
one in Branson, Missouri and one in San Francisco, California, to locations that
management believes will generate more traffic.
For more information on the performance of the Company's existing
locations, see "Part II, Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
In January 2000, the Company purchased a retail site in Vail, Colorado
and plans to open a Fine Art Gallery at this location (see "Part I, Item 2.
Description of Property"). In addition, the Company has a license to reproduce
the works of Norberto Martini, one of the artists featured at the Company's New
Orleans Gallery. The Company plans to sell these reproductions
o in certain of its current copy jewelry and fine jewelry stores,
including the relocated Branson, Missouri store and the Company's
existing Ghirardelli location in San Francisco (the copy jewelry
store at that location is moving to the main retail level of that
mall on June 1, 2000); and
o over the Internet (the Company is exploring the feasibility of
selling art reproductions and copy jewelry through an alliance
with an existing internet sales portal).
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.
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<PAGE>
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 and certain gift ware items.
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. The Company currently
is negotiating with a publisher to produce its art reproductions.
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. In this regard, two copy jewelry concept
stores (neither one part of a chain) opened up within two blocks of our Palm
Springs location. Revenues at that location were down approximately 9% for the
year ending December 31, 1999 as compared to the same period in 1998. However,
revenues for January and February of 2000 are up 21% over the same months in
1999. 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.
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<PAGE>
Employees
At March 24, 2000, the Company had approximately 149 employees, a
decrease of 23 employees since March 1999. These employees include the Company's
three officers, three regional managers, one national sales manager, 14 store
managers, four training managers, 107 sales personnel, one retail computer
systems manager, one office manager and 15 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
New facility assembly 1,700
Manager training 800
Warehouse space 5,000
Computer and file space 900
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10,100
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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 4 to the Company's
Consolidated Financial Statements).
On January 31, 2000, the Company purchased a retail site in Vail
Colorado located at160 Gore Creek Drive, The Lodge Apartment Condominium, Vail,
Colorado 81657, where it plans to open a Fine Art Gallery. The site is
approximately 504 square feet. The Company has leased these premises back to the
seller through April 30, 2000. The Company takes possession of the premises on
May 1, 2000 at which time it will begin to prepare the premises for use as a
Fine Art Gallery.
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<PAGE>
On October 14, 1999, the Company purchased a condominium in New Orleans
to house staff coming from other locations to train. Previous to this purchase,
staff were housed in hotels. Management believes this purchase will reduce
operating costs.
Item 3. Legal Proceedings.
Except as set forth below, 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.
See footnote 4 to the Company's Consolidated Audited Financial
Statements for the year ended December 31, 1999 included elsewhere herein.
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, 1999. However, on November 19,
1999, the Company's three executive officers and principal stockholders (who
hold, in the aggregate, over 71% of the issued and outstanding shares of the
Company's Common Stock) adopted a resolution to go private by amending the
Company's Certificate of Incorporation to reverse split the Company's issued and
outstanding shares of Common Stock at a ratio that would have cashed out all but
the three principal stockholders (the "Reverse Split"). The Board (including the
three principal stockholders) cancelled its plans to proceed with the Reverse
Split because, after considering all the available information, the Board
decided that it was in the best interest of all the stockholders to remain
public at that time.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Marketing Information -- The principal U.S. market in which the Company's
Common Stock ($.001 par value, all of which are one class) is traded is in the
over-the-counter market (NASDAQ SmallCap Symbol: "EILL").
The 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 NASDAQ (which reflect inter-dealer prices, without
retail mark-up, mark-down, or commission and may not necessarily represent
actual transactions). The prices for periods prior to January 15, 1999 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 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
Period - Fiscal Year 1999
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January 1, 1999 through January 14, 1999 0.65625 0.50
January 15, 1999 through March 31, 1999 2.00 1.00
Second Quarter ending June 30, 1999 3.00 0.8125
Third Quarter ending September 30, 1999 1.28125 0.75
Fourth Quarter ending December 31, 1999 1.1875 0.6875
(b) Holders -- There were approximately 93 holders of record of the Company's
Common Stock as of March 27, 2000 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.
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<PAGE>
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.
During 1998, in accordance with Rule 10b-18 under the Securities
Exchange Act of 1934, the Company repurchased an aggregate of 31,083 shares 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.
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, 1999 Compared to
Fiscal Year Ended December 31, 1998
Sales for the year ended December 31,1999 increased $919,428 or
approximately 9.5% when compared to the year ended December 31,1998.
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<PAGE>
Management believes that the increase in sales was due to the addition
of two locations in 1999 and full years sales from locations opened in 1998.
As of December 31,1998, the Company operated 30 retail locations and,
as of December 31,1999, it operated 29 retail locations. Although the Company
added two stores in 1999, it closed its Portland, Oregon, Ontario, California,
and Kenosha, Wisconsin stores on January 3, 1999, April 28, 1999, and August 3,
1999, respectively. The Company closed two additional stores (Oahu and Tulare)
in the first quarter of 2000.
Costs of goods as a percentage of revenues remained about the same:
approximately 31.2% during 1998 and approximately 31.0% during 1999.
During the year ended December 31,1999, selling, general and
administrative expenses increased when compared to the year ended December
31,1998 by $926,260 (approximately 16.1%). As a percentage of sales, selling,
general and administrative expenses increased from approximately 59.2% during
the year ended December 31,1998 to approximately 62.8% during the year ended
December 31,1999. Management believes that the increase in selling, general and
administrative expenses was the result of the following factors:
o The cost of operating locations opened in 1998 for the full year
of 1999.
o The cost of operating the two locations opened in 1999.
o The costs associated with closing three locations in 1999.
o Increased costs associated with advertising for staff, increased
hiring and training of staff as a result of increased turnover,
and increased travel expenses associated with training new staff
and operating the Company's locations.
o The costs of the Company's "going private" transaction" (see
"Part I. Item 4. Submission of Matters to a Vote of Security
Holders").
o Lower than expected revenues.
Revenues Same Store Locations.
As of December 31,1998, the Company operated 21 locations that were
also in operation at December 31,1999 and open for a full 12 months: 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 Branson, one in Minneapolis, one in Laughlin, one in Gilroy, one in Tulare,
two in St Croix, one in St Thomas and one in Oahu.
Revenues from same store locations for the year ended December 31,1999,
increased (approximately 1.2%) from the same period in 1998.
As noted in previous reports, the Company had experienced decreases in
revenues during 1998 at its Oahu, St Croix and San Francisco (Anchorage Mall)
copy jewelry stores and at its St Croix fine jewelry store (Kings Alley). The
Company closed the Oahu store and the Tulare store during the first quarter of
2000 and anticipates closing the Anchorage store when the lease expires, if not
sooner. Revenues at the Kings Alley and St Croix locations increased
approximately 13.0% and 1%, respectively, over 1998 revenues and have continued
to increase during the first quarter of 2000.
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<PAGE>
Net Income
During the year ended December 31,1999, the Company realized net income
of $137,109 compared to net income of $318,379 for the year ended December
31,1998.
Inventory Turnover Ratios
During the year ended December 31,1999, the Company maintained an
inventory that provided a turnover ratio of 1.26 to1. Management does not
believe that the current inventory turnover is indicative of impaired or
slow-moving inventory.
Management believes that the current inventory turnover ratio of 1.26
to 1 is appropriate for the Company's plan of operation, including 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 discount the price of those items so they are
sold at prices that still generate a positive gross margin. The inventory
turnover ratio for the year ended December 31,1998 was 1.20 to 1. Management
believes that this improved inventory turnover ratio is due to the fact that
during the year ended December 31,1999 the Company had more stores open for a
full 12 month period and fewer new stores that were open only a portion of the
period than during the year ended December 31,1998 and the closuring of three
locations in 1999 .
Liquidity and Capital Resources
As of December 31, 1999, the Company had $1,760,254 in cash and cash
equivalents (compared to $1,560,403 on December 31, 1998) and its current assets
exceeded its current liabilities by $4,920,241.
In 1997, the Company announced a store expansion. In this regard, it
opened four locations in 1997, seven in 1998 and two in 1999. However,
management has elected to shift its focus from opening new locations to
bolstering revenues from existing stores and exploring other sales mediums and
products that potentially could generate greater returns to cash with less
capital exposure.
In this regard management is expanding the Art Gallery concept and
adding Art Reproductions to already existing stores. Management continues to
actively seek an internet alliance to sell its jewelry and art reproductions.
In September 1999, the Company established an e-commerce site
(www.elegantillusions.com) to sell its products over the internet. However, to
date internet sales have not made a material contribution to revenues. A
significant amount of the Company's business comes from tourists who visit
certain of the Company's stores but do not have an Elegant Illusions store near
their home. Management anticipates that these tourists and others who will learn
about the Company's e-commerce site at its existing locations will shop on its
e-commerce site. For a discussion of this change in focus, see "Part I, Item 1.
Business."
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<PAGE>
Item 7. Financial Statements.
The following consolidated financial statements have been prepared in
accordance with the requirements of Item 310(a) of Regulation S-B and are
located at the end of this Annual Report on Form 10-KSB.
ELEGANT ILLUSIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED December 31, 1999
INDEX
Page No.
Report of Independent Auditor F-1
Consolidated Balance Sheets - December 31, 1998 and 1999 F-2
Consolidated Statements of Operations for the
Years Ended December 31, 1998 and 1999 F-3
Consolidated Statement of Stockholders'
Equity for the Years
Ended December 31, 1998 and 1999 F-4
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998 and 1999 F-5
Notes to Consolidated Financial Statements F-6
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<PAGE>
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.
-------------------------------------
There have been no changes in, or disagreements with the Company's
independent accountants with respect to accounting and/or financial disclosure,
during the past two fiscal years.
PART III
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 2000 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
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 (4)
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<PAGE>
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 Annual Report on Form 10-KSB
for the year ended December 31, 1998, as filed with the Commission on or about
March 24, 1999, and incorporated herein by reference.
Reports of Form 8-K
Form 8-K filed November 23, 1999, as amended on November 26, 1999
Form 8-K filed December 2, 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.
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<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 30, 2000 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 30, 2000
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James Cardinal
/s/ Gavin Gear Director March 30, 2000
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Gavin Gear
/s/ Tamara Gear Director March 30, 2000
- ---------------------------
Tamara Gear
Director March __, 2000
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Janet Heinze
Director March __, 2000
- ---------------------------
Keith Brandon
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<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.
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<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
Report of Independent Auditor F-1
Consolidated Balance Sheets at December 31, 1998 and 1999 F-2
Consolidated Statements of Operations - F-3
Years Ended December 31, 1998 and 1999
Consolidated Statement of Stockholders' Equity - F-4
Years Ended December 31, 1998 and 1999
Consolidated Statements of Cash Flows - F-5
Years Ended December 31, 1998 and 1999
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, 1998 and 1999, 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, 1998 and 1999 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 22, 2000
F-1
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------------ -----------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,560,403 $ 1,760,254
Accounts receivable (net of allowances for
doubtful accounts of $16,000 in 1998 and 1999) 415,141 415,353
Income taxes receivable 142,800 88,130
Inventory 2,635,870 2,597,635
Prepaid expenses 270,685 299,227
------------------ ------------------
TOTAL CURRENT ASSETS 5,024,899 5,160,599
------------------ ------------------
PROPERTY AND EQUIPMENT, NET 1,743,134 1,892,119
------------------ ------------------
OTHER ASSETS
Deposits 65,090 65,105
Patents and trademarks, net of accumulated amortization
of $3,150 and $3,908 in 1998 and 1999, respectively 2,807 2,430
Excess cost over net assets acquired, net of accumulated
amortization of $18,606 and $22,656 in 1998 and 1999, respectively 26,291 18,191
------------------ ------------------
TOTAL OTHER ASSETS 94,188 85,726
------------------ ------------------
$ 6,862,221 $ 7,138,444
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 162,244 $ 240,358
----------------- -----------------
TOTAL CURRENT LIABILITIES 162,244 240,358
DEFERRED INCOME TAXES 152,871 213,871
------------------ ------------------
TOTAL LIABILITIES 315,115 454,229
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - authorized 30,000,000 shares, $.001 par value,
issued and outstanding 6,146,553 in 1998 and 1999 6,147 6,147
Additional paid-in capital 3,914,508 3,914,508
Retained earnings 2,710,459 2,847,568
Less treasury stock at cost (62,066 shares in 1998 and 1999) (84,008) (84,008)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 6,547,106 6,684,215
------------------ ------------------
$ 6,862,221 $ 7,138.444
================== ==================
</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, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------------ ------------------
<S> <C> <C>
REVENUES $ 9,706,816 $ 10,626,244
COST OF GOODS SOLD 3,030,003 3,298,529
------------------ ------------------
GROSS PROFIT 6,676,813 7,327,715
EXPENSES
Selling, general and administrative 5,743,590 6,669,850
Depreciation and amortization 407,369 434,358
Interest expense 475 398
------------------ ------------------
TOTAL EXPENSES 6,151,434 7,104,606
------------------ ------------------
INCOME BEFORE INCOME TAXES 525,379 223,109
PROVISION FOR INCOME TAXES 207,000 86,000
------------------ ------------------
NET INCOME $ 318,379 $ 137,109
================== ==================
WEIGHTED AVERAGE SHARES OUTSTANDING 5,988,000 6,084,000
================== ==================
BASIC EARNINGS PER COMMON SHARE $ .05 $ .02
================== ==================
</TABLE>
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, 1998 AND 1999
<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, 1997 5,811,553 $ 5,812 $ 2,989,843 $ 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 6,146,553 6,147 3,914,508 2,710,459 (84,008) 6,547,106
Net income
for the year 137,109 137,109
-------------- -------------- --------------- -------------- -------------- --------------
BALANCE
December 31, 1999 6,146,553 $ 6,1467 $ 3,914,5098 $ 2,847,568 $ (84,008) $ 6,684,215
============== ============== =============== ============== ============== =============
</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, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 318,379 $ 137,109
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 407,369 434,358
Expenses related to stock issued for consulting services 205,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (58,017) (212)
Inventory (211,115) 38,235
Prepaid expenses (180,258) (28,540)
Income tax receivable (60,608) 54,670
Increase (decrease) in:
Accounts payable and accrued expenses 48,493 78,113
Income taxes payable and deferred income taxes 25,000 61,000
---------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 494,243 774,733
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (947,491) (676,580)
Deposits and other assets 10,155 101,698
------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (937,336) (574,882)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of common stock 720,000
Purchase of treasury stock (37,952)
------------------ ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 682,048
------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 238,955 199,851
CASH AND CASH EQUIVALENTS BALANCE, Beginning of period 1,321,448 1,560,403
----------------- ------------------
CASH AND CASH EQUIVALENTS BALANCE, End of period $ 1,560,403 $ 1,760,254
================= ==================
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ 475 $ 398
Income taxes paid $ 242,528 $ 19,657
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
DECEMBER 31, 1998 AND 1999
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 a 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, 1999, the Company has deposits in excess of
the FDIC limit in the amount of approximately $1,200,000.
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 accounting principles requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
Fair Value of Financial Instruments - The Company's financial
instruments consists of cash equivalents, receivables, accounts
payable, accrued expenses, notes payable and due to related parties.
The fair values of the Company's financial instruments approximates the
carrying value of the instruments
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 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>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
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 - Basic earnings per common share is
based upon the net earnings 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
diluted. The Company did not grant options and warrants during 1998 and
1999.
Start-up Costs - Costs of start-up activities, including organization
costs, is expensed as incurred.
Advertising - Advertising costs are expensed the first time the
advertisement is run. Total advertising and promotion expenses were
$255,088 and $314,850 for the years ended December 31, 1998 and 1999,
respectively.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1998
and 1999:
<TABLE>
<CAPTION>
1998 1999
------------------ ------------------
<S> <C> <C>
Real Estate $ 0 $ 221,246
Office furniture, fixtures & equipment 161,804 194,264
Store furniture, fixtures & equipment 2,156,526 2,438,499
Vehicles 19,500 19,500
Leasehold improvements 756,037 707,038
------------------ ------------------
3,093,867 3,580,547
Less: accumulated depreciation and amortization 1,350,733 1,688,428
------------------ ------------------
$ 1,743,134 $ 1,892,119
================== ==================
</TABLE>
F-7
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. INCOME TAXES
The components of income tax expense for the years ended December 31,
1998 and 1999 follow:
<TABLE>
<CAPTION>
Federal State Total
----------------- ----------------- ------------------
<S> <C> <C> <C>
1999:
Current $ 12,000 $ 13,000 $ 25,000
Deferred 59,000 2,000 61,000
------------------ ------------------ ------------------
$ 71,000 $ 15,000 $ 86,000
================== ================== ==================
1998:
Current $ 151,000 $ 31,000 $ 182,000
------------------ ------------------ ------------------
Deferred 24,000 1,000 25,000
------------------ ------------------ ------------------
$ 175,000 $ 32,000 $ 207,000
================== ================== ==================
</TABLE>
The component of deferred tax liability was as follows at December 31,
1999:
Deferred tax liability:
Depreciation $ 213,871
=================
Income tax expense amounted to $207,000 in 1998 and $86,000 in 1999
(effective tax rates of 38% and 38.5%, 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:
<TABLE>
<CAPTION>
1998 1999
------------------ ------------------
<S> <C> <C>
Expected statutory tax $ 178,629 $ 75,857
State income tax, net of federal tax benefit 21,120 9,866
Other 7,251 277
------------------ ------------------
Actual tax $ 207,000 $ 86,000
================== ==================
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
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, 1999
are as follows:
Year Ended
December 31,
------------
2000 $ 1,075,000
2001 687,000
2002 485,000
2003 340,000
2004 154,000
Thereafter 46,000
-------------
$ 2,787,000
Rent expense for the fiscal years ended December 31, 1998 and 1999 were
$1,477,595 and $1,781,583, respectively.
F-8
<PAGE>
LITIGATION:
The Company has been named as a defendnat by a former manager /
employee in a lawsuit claiming among other things that the Company
misclassified him and certain other store managers in the Company's
California locations as managers excluding them from receiving
overtime pay. The Company intends to vigorously defend against this
action and the Company's management is of the opinion that any
liability is immaterial.
5. 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
1998 the Company acquired 31,083 shares of its common stock for an
aggregate price of $37,952.
6. 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, 1997 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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,760,254
<SECURITIES> 0
<RECEIVABLES> 431,353
<ALLOWANCES> 16,000
<INVENTORY> 2,597,635
<CURRENT-ASSETS> 3,580,547
<PP&E> 3,093,867
<DEPRECIATION> 1,688,428
<TOTAL-ASSETS> 7,138,444
<CURRENT-LIABILITIES> 240,358
<BONDS> 0
0
0
<COMMON> 6,147
<OTHER-SE> 3,914,508
<TOTAL-LIABILITY-AND-EQUITY> 7,138,444
<SALES> 10,626,244
<TOTAL-REVENUES> 3,298,529
<CGS> 3,030,003
<TOTAL-COSTS> 3,030,003
<OTHER-EXPENSES> 7,104,208
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 398
<INCOME-PRETAX> 223,109
<INCOME-TAX> 86,000
<INCOME-CONTINUING> 137,109
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 137,109
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
