Costs of goods as a percentage of revenues remained essentially unchanged from approximately 29.4% during 2000 to approximately 29.7% during 2001. Management expects costs of goods as a percentage of revenues to improve in the year 2002.
During the year ended December 31, 2001, selling, general and administrative expenses decreased when compared to the year ended December 31, 2000 by $231,866 (approximately 3.8%). However, as a percentage of sales, selling, general and administrative expenses remained essentially unchanged from approximately 64.1% during the year ended December 31, 2000 to approximately 64.2% during the year ended December 31, 2001. Management believes that the decrease in expenses from 2000 to 2001 and the increase in such expenses as a percentage of sales from 2000 to 2001 primarily was the result of the following non-recurring charges in 2000 offset primarily by a $256,000 increase in executive compensation in 2001:
o The costs associated with closing six locations in 2000 of $64,514.
o The costs associated with Staff Accounting Bulletin 101 resulting in a cumulative charge to net income of $96,045 (see the discussion in "Recently Issued Accounting Standards" below).
o The cost associated with the Company's attempt to purchase a building resulting in the loss of the deposit of $250,000.
o Settlement of a lawsuit for $70,000 and associated legal fees of approximately $33,000.
o Residual legal fees resulting from the Company's cancelled plan to take the Company private of $3,000. Penalties and interest on back income taxes from 1996, in the amount of $5,018.
The total of all non-recurring charges is $521,577.
Excluding these non-recurring expenses, during the year ended December 31, 2001, selling, general and administrative expenses increased when compared to the year ended December 31, 2000 by $289,711 (approximately 5.1%). As a percentage of sales, selling, general and administrative expenses increased from approximately 58.5% during the year ended December 31, 2000 to approximately 64.2% during the year ended December 31, 2001.
Revenues Same Store Locations. -----------------------------
As of December 31, 2000, the Company operated 22 locations that were also in operation at December 31, 2001 and open for a full 12 months:
Revenues from same store locations for the year ended December 31, 2001, decreased approximately 1.9% from the same period in 2000. Management attributes this decrease to the events of September 11, 2000.
Net Income
During the year ended December 31, 2001, the Company realized net income of $43,059 compared to a net loss of $6,685 for the year ended December 31, 2000. Excluding the non-recurring cumulative charge to net income of $96,045 resulting from Staff Accounting Bulletin 101 discussed above, the Company, during the year ended December 31, 2000, realized net income of $89,361.
The Company, during the year ended December 31, 2000, realized pre-tax income of $112,960 compared to pretax income of $223,109 for the year ended December 31, 1999. Excluding the non-recurring expenses discussed above, the Company, during the year ended December 31, 2000, realized pre-tax income of $654,137.
Inventory Turnover Ratios
During the year ended December 31, 2001, the Company maintained an inventory that provided a turnover ratio of 0.88 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 0.88 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, 2000 was 1.04 to 1.
Recently Issued Accounting Standards
The Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements, in December 1999. The SAB summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, the SEC issued SAB 101B, which delays the implementation date of SAB 101 until no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. In accordance with SAB 101, during the quarter ending September 30, 2000, the Company adopted a new accounting method pursuant to which it recognizes layaway sales as sales upon delivery of the merchandise to the customer. The impact of this accounting change was a cumulative charge to net income of $96,045 effective at the beginning of the period. The pro forma effect of retroactive application of this accounting change to prior operating periods is immaterial.
Liquidity and Capital Resources
As of December 31, 2001, the Company had $1,609,236 in cash and cash equivalents (compared to $1,899,722 on December 31, 2000) and its current assets exceeded its current liabilities by $5,237,547.
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 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 has expanded the Art Gallery concept and has added Art Reproductions to already existing stores.
Our primary anticipated capital expenditures during the year ending December 31, 2002 include:
o the possible opening of one to three or more fine art and/or copy jewelry stores; o the possible acquisition of real estate to house new stores; and o the acquisition of a building to house the Company's Corporate facilities.
In this regard, we have signed a lease for a store in the town of Wailes on the island of Maui in Hawaii. We anticipate that this store will sell copy jewelry, fine jewelry and fine art and will open within the next 90 to 120 days.
We believe that we have sufficient capital reserves for all of the foregoing activities, except, possibly, for the purchase of real estate. We most likely will mortgage some or all of the real estate that we acquire.
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. In June 2000, we entered into an internet alliance with Vcommerce Corporation to provide for the sale of certain of our jewelry over the internet. We had anticipated that our products would be available on the internet as a result of this alliance in late August or September 2000. Our products became available through Vcommerce commencing in November 2000; however, revenues from this source have not been material to date.
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.
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, 2001
INDEX Page No.
Report of Independent Auditor F-1
Consolidated Balance Sheets - December 31, 2000 and 2001 F-2
Consolidated Statements of Operations for the Years Ended December 31, 2000 and 2001 F-3
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2000 and 2001 F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000 and 2001 F-5
Notes to Consolidated Financial Statements F-6
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 following table sets forth certain information concerning the directors and executive officers of the Company:
First Became Name Age Director Position
James Cardinal 55 1993 Chief Executive Officer & Director
Gavin Gear 50 1993 President & Director
Tamara Gear 43 1993 Secretary-Treasurer & Director
Janet Heinze 53 1998 Director
Directors are elected at the meeting of stockholders called for that purpose and hold office until the next stockholders meeting called for that purpose or until their resignation or death. Officers of the corporation are elected by the directors at meetings called by the directors for its purpose.
JAMES CARDINAL has been the Company's Chief Executive Officer since May 1994 and a director of the Company since May 1993. He was President of the Company from May 1993 to May 1994. He has been a director of the Company's wholly-owned California Subsidiary, Elegant Illusions, Inc.(the "Subsidiary") since 1992 and a business consultant for Subsidiary since 1989. He was a director of Bay Area Grand Illusions, Inc. ("Bay") from June 1992 until its merger in to the Subsidiary. Prior thereto, he was self-employed as a business consultant and capital organizer to start-up companies.
GAVIN GEAR has been the Company's President since May 1994 and a director of the Company since May 1993. He was Vice President of the Company from May 1993 to May 1994. He was a founder and has been the President, Chief Financial Officer and a director of the Subsidiary since 1989. Mr. Gear was President, Chief Financial Officer and a director of Copy Jewels, Inc. ("CJI") from 1989 until its merger into the Subsidiary and President and a director of Bay from 1988 until its merger in to the Subsidiary. Since 1979, he also has been the President, Chief Financial Officer and a director of Cannery Row Enterprises, Inc. ("CRE"). CRE was acquired by the Company in July 1994.
TAMARA GEAR has been the Secretary-Treasurer and a director of the Company since May 1993. She was a founder and has been the Secretary-Treasurer and a director of the Subsidiary since 1989. She was the Secretary-Treasurer and a director of CJI (from 1989) and of Bay (from 1988) until their merger in to the Subsidiary. Since 1985, she also has been an officer and director of CRE. From 1984 to 1985, Ms. Gear was a gemologist for Sun Studies in Carmel. From 1980 to 1984, she was the retail manager for Cannery Row Enterprises.
JANET HEINZE currently is the Superintendent at the American School in Guadalajara, Mexico. Prior thereto, she taught elementary school at the Park School in Hayward, California since September 1997. Ms. Heinze taught at the American School in Guadalajara, Mexico from September 1991 to August 1996. Ms. Heinze graduated from the University of California, Berkeley ("UCB") in 1969 with a degree in Sociology, received her teaching credentials at UCB in 1970 and her Masters degree from Framingham State University, Framingham, Massachusetts in 1996.
In March 2001, Keith Brandon, one of the Company's Directors and a member of the Audit Committee, passed away. The Company's Board of Directors appointed Barbara Z. Bokanovich to the Board and the Audit Committee. In October 2001, Ms. Bokanovich resigned as a director and the Company disbanded its Audit Committee.
Item 10. Executive Compensation. ----------------------
The following table sets forth a summary of the compensation of the three Officers of the Company for the fiscal years ended December 31, 2001, 2000 and 1999. Total compensation paid to all three executive officers as a group during 2001 was $715,000.
In respect of the year ended December 31, 2001, both of the non-employee directors were paid an annual director's fee of $2,000. One of the non-employee directors resigned during 2001. None of the other directors received compensation for their services as directors of the Company. The Company also reimburses its directors for travel, lodging and related expenses they may incur attending Board of Directors and committee meetings.
Item 11. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------
The following table sets forth information with respect to the beneficial ownership of the Company's Common Stock as of March 19, 2002 by: (i) each of the Company's directors and executive officers; (ii) each person who is known by the Company to be the beneficial owner of five percent or more of the outstanding shares of Common Stock; and (iii) all of the Company's directors and executive officers as a group:
(1) Gavin and Tamara Gear are husband and wife. Although each is deemed to be the beneficial owner of the shares held by the other, the shares listed for Gavin Gear do not include the shares owned by Tamara Gear and the shares listed for Tamara Gear do not include the shares owned by Gavin Gear.
(2) Ms. Bokanovich resigned as a Director of the Company in October 2001.
Item 12. Certain Relationships and Related Transactions. ----------------------------------------------
During the fiscal years ended December 31, 2001 and 2000, there were no transactions to which the Company was a party, in which any executive officer, director, principal stockholder or immediate family member of any of the foregoing persons had a direct or indirect material interest, except as follows:
In September 2001, the Company entered into a triple net lease for its Cardinal Gallery in Sarasota, Florida. The store is located at John Ringling Blvd, Sarasota, Florida. The store is owned by James Cardinal, Gavin Gear and Tamara Gear, executive officers, directors and principal stockholders of the Company. For information on the terms of this lease, see "Part I,
