Item 1 - Business
(a) General Development of Business.
The Valley Fair Corporation ("Valley Fair") was incorporated under the laws of the state of Delaware on June 13, 1955. The Valley Fair Corporation together with its subsidiary, L. F. Widmann, Inc. (collectively called the "Registrant" or the "Corporation") is engaged in the business of operating retail discount stores and variety stores.
During its fiscal year ended January 28, 1996, ("1996 fiscal year") the Corporation continued to operate two discount department stores in New Jersey. In addition, the Corporation presently operates, through its wholly owned subsidiary, L.F. Widmann, Inc., 127 retail locations, including 67 departments in stores controlled by its "Parent", Schottenstein Stores Corporation.
(b) Financial Information About Industry Segments.
The Corporation's operations consist of a single line of business.
(c) Narrative Description of Business.
The Corporation currently operates through a combination of owned and licensed departments, two "full line" discount department stores, under the name "Valley Fair", in the State of New Jersey. The stores sell soft goods such as men's and women's clothing, hard goods such as hardware, stationery and health and beauty aids, as well as grocery items in a full line supermarket situated at one of the store locations. Each store is free-standing and offers an in-depth selection of nationally advertised brand products.
Through its wholly owned subsidiary, L. F. Widmann, Inc., the Corporation currently operates 127 retail health and beauty aid variety stores, including 67 licensed departments in Value City Department Stores controlled by its parent Schottenstein Stores Corporation. The stores sell non-prescription proprietary drugs, tobacco and other sundries (including greeting cards, stationery, electronics, toys and small appliances), cosmetics and hair goods and other products.
The merchandise consists mostly of nationally advertised brand products, as well as private label merchandise.
During the last three years no single class of similar products has accounted for ten percent of the Corporation's revenues.
The Corporation does not own any patents, trademarks, licenses, franchises or concessions, other than licenses to operate departments in two stores owned by others. Those licenses are not material to the Corporation's operations.
The Corporation purchases from its suppliers on normal trade credit terms. The Corporation sells at retail for cash and accepts certain charge cards.
Because of the retail nature of the Corporation's business, the Company is not dependent upon a single customer or a few customers and no single customer accounts for 10 percent or more of the Corporation's sales. Likewise, the Corporation does not have a significant backlog of orders.
The Corporation is not materially affected by federal, state or local regulations relating to the discharge of materials into the environment or otherwise relating to the protection of the environment. During the last few fiscal years adequate heating and cooling was available at all of the Corporation's locations. The Corporation is not engaged in any manufacturing operations, so processing fuels are not required.
The Corporation's operations are not generally seasonal except for an increase in sales during the Christmas season.
The Corporation operates in geographical areas in which retail operations are highly competitive. Competition is based upon price, quality, selection and service.
The Corporation competes directly with several types of retailers, including full line department stores, discount department stores, specialty shops, discount houses, supermarkets, pharmacies, and variety stores. Many of the Corporation's direct competitors are national or regional chains and have greater financial resources than the Corporation. Due to the number and variety of competitors, the Corporation is unable to determine its competitive position.
The Corporation's discount department store operations employ approximately 250 persons, of whom approximately 150 are employed full time. Substantially all of such employees are unionized except for supervisory personnel. The Corporation considers its labor relations to be satisfactory. Widmann has approximately 440 employees of whom approximately 330 are employed full time. Except for approximately 90 warehouse personnel, Widmann's employees are not unionized. Widmann considers its labor relations to be satisfactory.
The Corporation does not have sales to customers in foreign countries.
Item 2

Item 2 - Properties
Registrant's two discount department stores are operated at free standing facilities. These units are one story buildings and information concerning each facility is summarized as follows:
APPROXIMATE LEASE LOCATION SQUARE FEET EXPIRATION -------- ----------- ----------
Chancellor Ave. 140,000 Owned Irvington, N.J.
Bergen Turnpike 135,000 February 1, 2004 Little Ferry, N.J. (With 2 Ten Year Options)
Widmann leases space at 124 locations at which it operates health and beauty aid variety stores, in similar cities and towns in central and western Pennsylvania, Ohio, New Jersey, Tennessee, Michigan, Kentucky, Indiana, Virginia, West Virginia, Maryland, Delaware, and New York. The size of the leased properties generally range from 800 to 8,000 square feet, with the average size being approximately 3,000 square feet. These leases, including renewal option periods, expire on dates ranging from April 1996 through January 31, 2025.
In 1980, Widmann purchased 5.54 acres of land in the Clinton County Industrial Park, located in McElhattan, Pennsylvania. Originally, a building containing 43,000 square feet was constructed, and subsequently it was expanded by an additional 30,000 square feet. It is currently in use as headquarters and distribution center.
In addition, L. F. Widmann, Inc. owns the following store locations:
426 Bellefonte Avenue, Lock Haven, Pa. Seventh Street and Huron Ave., Renovo, Pa. 849-851 Diamond Street, Williamsport, Pa.
Item 3

Item 3 - Legal Proceedings
The Corporation is not a party to any material litigation other than routine litigation arising in the ordinary course of business.
Item 4

Item 4 - Submission of Matters to a Vote ofSecurity Holders
None.
PART II
Item 5

Item 5 - Market for the Registrant's Common Stock and Related Security Holder Matters
The Corporation's Common Stock is traded principally in the over-the-counter market.
Effective May 7, 1984 the Board of Directors approved that the Corporation reduce the number of authorized shares of common stock from 20,000,000 to 666,666 and increase the par value per share of its common stock from $.01 per share to $.30 per share. In connection therewith, the Corporation converted each outstanding share of common stock of $.01 par value per share into one-thirtieth (1/30th) of a share of common stock of $.30 par value per share. Fractional shares were not issued. Instead the Corporation paid cash for fractional shares, based on market value of $.625 per share for the former share.
The table below represents the high and low bid price for the Corporation's Common Stock during the quarters of fiscal 1996 and 1995. These prices represent quotations between dealers in securities, and do not include commissions and do not necessarily represent actual transactions.
1996 High Bid Low Bid ---- -------- ------- First Quarter 26.00 26.00 Second Quarter 26.00 26.00 Third Quarter 26.00 26.00 Fourth Quarter 26.00 26.00
---- First Quarter 26.00 26.00 Second Quarter 26.00 26.00 Third Quarter 26.00 26.00 Fourth Quarter 26.00 26.00
No dividends were paid in the reporting period. Long term debt agreements that expire May 8, 1996, include certain restrictive covenants which, among other things, prohibit the Corporation from declaring any dividends (except stock dividends).
The number of holders of record of the Corporation's Common Stock as of January 28, 1996 was 1,164.
Item 6

Item 7 - Management's Discussion and Analysis of Financial Conditions and Results of Operations
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
FISCAL 1996 VS. 1995
The consolidated statements of income for fiscal 1996 and 1995 are comprised of 52 week periods. Net sales decreased $2,624,000, or 3.7% to $68,035,000 in fiscal 1996. The decrease in net sales was primarily attributable to increased competition, while adverse economic uncertainties continued to affect consumer buying patterns. Competitive factors continue to affect sales growth and are being evaluated and addressed through emphasis on customer service and promotional activities. Management continues to monitor individual store locations for their contributions to the overall company profit plan (See Liquidity and Capital Resources). Tenant license revenue was approximately $59,000 (1.2%) more than the prior fiscal year.
Gross profit as a percentage of sales was 31.4% in fiscal 1996 as compared to 30.4% for fiscal 1995, resulting from an increase of promotional merchandise purchased at favorable and liquidated values and an improvement in the estimates used to allocate overhead to warehouse inventory.
Selling, general and administrative expenses decreased by 1.3% in fiscal 1996 as compared to a 4% increase in fiscal 1995. The $330,000 decrease in fiscal 1996 was primarily the result of decreased depreciation and payroll tax expense. The decrease in depreciation expense was a result of assets becoming fully depreciated. The decrease in payroll tax expense was a result of a reduction in the unemployment compensation rate. Selling, general and administrative expenses as a percentage of net sales increased 1% in fiscal 1996 compared to fiscal 1995 (i.e. 37.1% in fiscal 1996 versus 36.1% in fiscal 1995).
Interest expense in fiscal 1996 increased approximately $168,000 compared to fiscal 1995, a 20% increase. The increase in expense is attributable to an increase in the borrowings outstanding during 1996, along with higher rates during 1996.
The effective tax rate for fiscal 1996 was 98% compared to (160%) in fiscal 1995. A further analysis of these changes can be found in the notes to the consolidated financial statements.
FISCAL 1995 VS. 1994
The consolidated statements of income for fiscal 1995 and 1994 are comprised of 52 week periods. Net sales increased $782,000, or 1% to $70,659,000 in fiscal 1995. The increase in net sales was partially attributable to the addition of 1 new store. Sales of new store openings (net of closings) were approximately $326,000. Same store sales increased a modest $456,000 in fiscal 1995, as new stores opened in the prior year matured, with competition and economic uncertainties continuing to effect consumer buying patterns. The Company expects same store sales to increase modestly as the economy improves. Competitive factors continue to affect sales growth and are being evaluated and addressed through emphasis on customer service and promotional activities. Management continues to monitor individual store locations for their contributions to the overall company profit plan. Tenant license revenue was approximately $250,000 (5.4%) more than the prior fiscal year, which was the result of the expansion and addition of tenant departments.
Gross profit as a percentage of sales was 30.4% in fiscal 1995 as compared to 31.4% for fiscal 1994, resulting from a significant decrease of promotional merchandise purchased at favorable and liquidated values.
Selling, general and administrative expenses increased by 4.0% and 9.1% in fiscal 1995 and 1994, respectively. The $973,000 increase in fiscal 1995 was primarily the result of increased salaries and employee benefits. Several factors contributed to the increase in salaries and benefits including salaries associated with new store openings, additional supervisory positions as well as annual pay increases. Selling, general and administrative expenses as a percentage of net sales increased .9% in fiscal 1995 compared to fiscal 1994 (i.e. 36.1% for fiscal 1995 versus 35.2% in fiscal 1994).
Interest expense in fiscal 1995 increased approximately $135,000 compared to fiscal 1994, a 19% increase. The increase in expense is principally attributable to higher rates during 1995.
The effective tax rate for fiscal 1995 was (160%) compared to 44% in fiscal 1994. A further analysis of these changes can be found in the notes to the consolidated financial statements.
LIQUIDITY AND FINANCIAL RESOURCES
As of January 28, 1996, the Company's cash and cash equivalent balance was $3,609,000. The Company's principal sources of liquidity are cash available from operations and available borrowings from bank agreements. During 1995, the Company entered into a revolving credit agreement with a new bank. Working capital amounted to $14,710,000 at January 28, 1996 compared to $14,845,000 at January 29, 1995, a decrease of $135,000. The current ratio at January 28, 1996 and January 29, 1995 was 2 to 1.
In March 1996, the Company decided to close 16 of its unprofitable L.F. Widmann, Inc. stores. As a result of these closings, the Company anticipates a $835,000 charge to operations in the first quarter of fiscal 1997. Approximately 76% of the charges represents the expected loss on the liquidation of the inventories at these locations.
The Company believes that its fiscal 1996 working capital needs, capital expenditures and debt repayments can be funded from operations and available credit lines.
NEW ACCOUNTING STANDARDS
The Company adopted a new accounting standard for disclosures about fair value of financial instruments (FAS 107) in fiscal 1996. This new standard did not affect the financial position of the Company.
As discussed more fully in Note 1 to the consolidated financial statements, the Company adopted a new accounting standard for income taxes (SFAS 109) in the first quarter of fiscal 1994. This new standard did not significantly impact the financial statements of the Company.
The Financial Accounting Standards Board (FASB) has established a new accounting standard relating to the accounting for the impairment of long-lived assets (FAS 121). FAS 121 is effective for fiscal years beginning after December 15, 1995. It is anticipated that this new standard will not affect the financial position of the Company.
INFLATION
Although not significant, inflation continues to cause increases in product and occupancy costs. The effects of these cost increases are minimized by increased selling prices and operating efficiencies.
Item 8

Item 8 - Financial Statements
Consolidated financial statements
Independent Auditors' Reports Alpern, Rosenthal & Company KPMG Peat Marwick LLP
Consolidated Balance Sheets - January 28, 1996 and January 29, 1995
Consolidated Statements of Income for the Years Ended January 28, 1996, January 29, 1995 and January 30, 1994
Consolidated Statements of Stockholders' Equity for the Years Ended January 28, 1996, January 29, 1995 and January 30, 1994
Consolidated Statements of Cash Flows for the Years Ended January 28, 1996, January 29, 1995 and January 30, 1994
Notes to Consolidated Financial Statements
Independent Auditors' Report
Board of Directors and Stockholders The Valley Fair Corporation Little Ferry, New Jersey
We have audited the accompanying consolidated balance sheets of The Valley Fair Corporation (a subsidiary of Schottenstein Stores Corporation) and subsidiary as of January 28, 1996 and January 29, 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1996 and 1995 financial statements referred to above present fairly, in all material respects, the financial position of The Valley Fair Corporation and subsidiary as of January 28, 1996 and January 29, 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/ Alpern, Rosenthal & Company Pittsburgh, Pennsylvania
March 22, 1996
[GRAPHIC -- COMPANY LOGO] KPMG Peat Marwick LLP
225 Market Street Suite 300 P.O. Box 1190 Harrisburg, PA 17108-1190
Independent Auditor's Report
Board of Directors and Shareholders The Valley Fair Corporation:
We have audited the accompanying consolidated statements of income, stockholders' equity, and cash flows for the year ended January 30, 1994 of The Valley Fair Corporation (a subsidiary of Schottenstein Stores Corporation) and subsidiary. In connection with our audit of the consolidated financial statement, we have also audited the financial statement schedule listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of their operations and their cash flows for the year ended January 30, 1994 of The Valley Fair Corporation and subsidiary in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/KPMG Peat Marwick LLP
April 8, 1994
THE VALLEY FAIR CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
THE VALLEY FAIR CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
- -------------------------------------------------------------------------------- For the Years Ended January 28, 1996, January 29, 1995, and January 30, 1994 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
THE VALLEY FAIR CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
- -------------------------------------------------------------------------------- For the Years Ended January 28, 1996, January 29, 1995, and January 30, 1994 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
THE VALLEY FAIR CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------- For the Years Ended January 28, 1996, January 29, 1995, and January 30, 1994 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
THE VALLEY FAIR CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
- -------------------------------------------------------------------------------- For the Years Ended January 28, 1996, January 29, 1995, and January 30, 1994 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
THE VALLEY FAIR CORPORATION AND SUBSIDIARY
Notes to the Consolidated Financial Statements
Note 1 - Summary of Significant Accounting Policies
A. Reporting Entity and Nature of Business
The consolidated financial statements include the accounts of The Valley Fair Corporation (Valley Fair) and its wholly-owned subsidiary, L.F. Widmann, Inc. (Widmann), collectively referred to as "The Company". All material intercompany transactions have been eliminated in consolidation. The majority of the Company's stock (93%) is controlled by Schottenstein Stores Corporation and affiliated companies (the Parent).
Valley Fair currently operates, through a combination of owned and licensed departments, two discount stores in the state of New Jersey. The stores sell apparel, shoes, hard goods, e.g., hardware, stationery, health and beauty aids, as well as food items in a full-line supermarket at one location.
Widmann currently operates and licenses 127 retail health and beauty aid stores primarily in Pennsylvania and also in 11 other Mid-Atlantic and Mid-Western States. The stores sell non-prescription proprietary drugs, tobacco, greeting cards, stationery, electronics, toys, small appliances, cosmetics, hair care products and other household items.
The Company, excluding licensed departments, is in one segment of business - retail sales to the general public.
The Company's fiscal year ends on the Sunday closest to January 31. The fiscal years ended January 28, 1996, January 29, 1995 and January 30, 1994 contained 52 weeks.
B. Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
C. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Approximately 49% and 37% of cash and cash equivalents as of January 28, 1996 and January 29, 1995, respectively, were held in bankers acceptances. Substantially all of the remaining cash and cash equivalents were maintained in accounts with two banks.
Note 1 - Summary of Significant Accounting Policies (Continued)
D. Merchandise Inventories
Merchandise inventories are valued at the lower of cost (first-in, first-out basis) or market determined by the retail inventory method for store inventories and an average cost method for the warehouse inventory.
During 1996, the Company improved the estimates used to allocate overhead to warehouse inventory. As a result of this change, overhead cost allocated to inventory was approximately $340,000 greater than if the old estimates had been used.
E. Property and Equipment
Depreciation is provided by the straight-line method over the estimated useful lives of assets.
Maintenance and repairs which are not considered to extend the useful lives of assets are charged to operations as incurred. Additions and improvements are capitalized. Upon sale or retirement, the cost of assets and related allowances are removed from the accounts and any resulting gains or losses are included in other income (expense).
F. Store Opening and Closing Costs
Expenditures of a non-capital nature incurred prior to the opening of a new store are charged to operations as incurred. Costs of closing a store are expensed in the year in which the store is closed.
G. Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due and deferred taxes relating to temporary differences. The primary differences are in the basis of property and equipment and deferred compensation between financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred taxes also are recognized for operating losses and tax credits that are available to offset future Federal and state taxable income. (See also Note 8.)
H. Reclassifications
Certain reclassifications have been made to the 1995 and 1994 financial statements in order to conform to 1996 presentations.
Note 1 - Summary of Significant Accounting Policies (Continued)
I. Net Income Per Common Share
Net income per common share has been computed based on the weighted average number of shares of common stock outstanding during the periods.
Note 2 - Transactions with Affiliates
Valley Fair has entered into license agreements for tenant departments with an affiliated company of its Parent. The consolidated statements of income include rental income earned from these licenses with affiliated companies of approximately $2,347,000 in 1996, $2,312,000 in 1995 and $2,243,000 in 1994.
Widmann's has entered into agreements to lease tenant retail space from an affiliated company of Schottenstein Stores Corporation. Rents are based on a percentage of sales. The related rental expense (Note 7) incurred was approximately $2,195,000 in 1996, $2,329,000 in 1995, and $2,498,000 in 1994. In addition, Widmann is charged approximately 2.9% of sales in those stores as reimbursement for certain store operating expenses.
The accounts receivable and payable - affiliate are a result of the above transactions.
The Company was charged $125,000 per year in 1996, 1995, and 1994 by the Parent for certain administrative services provided.
Note 3 - Property and Equipment
Property and equipment consisted of the following:
Note 4 - Accrued Liabilities
Accrued liabilities consist of:
Note 5 - Note Payable - Bank
During 1996, the Company entered into a $14,000,000 unsecured revolving credit agreement with a new bank. Borrowings under this arrangement bear interest at either a Euro-rate or prime at the Company's option. Substantially all the line was subject to a Euro-rate, which was 7.31% at January 28, 1996. The weighted average interest rate at January 28, 1996 and January 29, 1995 was 7.43% and 8.38%, respectively.
The agreement also contains several financial covenants including minimum net worth, minimum working capital, and minimum pre-tax interest coverage.
Note 6 - Long-term Debt
Long-term debt consists of the following:
Note 6 - Long-term Debt (Continued)
Approximate maturities of debt are as follows:
1997 $ 65,000 1998 41,000 1999 33,000 2000 33,000 2001 34,000 Thereafter 93,000 ----------- $ 299,000 ===========
Note 7 - Leases
The Company leases retail store locations and delivery vehicles under operating leases. Store leases provide for base rentals and the payment of additional rentals based on sales levels, at certain locations (see also Note 2). In addition, the Company is typically responsible under its leases for real estate taxes, insurance, maintenance and advertising.
Rent expense charged to operations under these types of arrangements were as follows:
Note 7 - Leases (Continued)
Valley Fair also leases certain retail facilities to various tenants under operating and sublet lease arrangements. The amounts received under tenant sub-lease agreements, included below, were approximately $1,861,000 in 1996, $2,133,000 in 1995 and $1,982,000 in 1994. The rental income under tenant lease and sub-lease arrangements, included in tenant revenue, were as follows:
At January 28, 1996, the approximate minimum rental commitments and tenant income from sub-lease agreements and other operating leases is as follows:
Note 8 - Income Taxes
In 1994, the Company adopted the provisions of FASB 109, Accounting for Income Taxes, effective February 1, 1993. The cumulative effect of the change in accounting principle had no significant effect on the 1994 financial statements.
Note 8 - Income Taxes (Continued)
The provision for (recovery of) income taxes for the years ended January 28, 1996, January 29, 1995 and January 30, 1994 consisted of the following:
The Company has net operating losses totalling approximately $453,000 available to offset future state taxes. These losses expire in various years, depending on state tax laws.
The reconciliation of income tax expense (benefit) at the statutory Federal rate to the reported income tax expense is as follows:
Note 8 - Income Taxes (Continued)
The significant components of deferred income tax expense (benefit) for the years ended January 28, 1996 and January 29, 1995 and January 30, 1994 are as follows:
The deferred income tax liabilities (assets) were as follows at January 28, 1996 and January 29, 1995:
Note 9 - Retirement and Savings Plan
The Company has a defined contribution retirement plan which covers substantially all of its employees. The Plan is a cash deferred arrangement described in Internal Revenue Code Section 401(k). The Company's contribution to the Plan was $100,000 each in 1996, 1995, and 1994.
The Plan provides that employees of the Company may elect to defer a certain portion of their compensation and contribute to the Plan. The Corporation makes discretionary contributions as prescribed by the Plan.
Note 10 - Contingencies
The Company is a defendant in various legal actions and claims arising in the ordinary course of business. After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that such litigation and claims will be resolved without material effect on the Company's financial condition or will be covered by the Company's liability insurance.
Note 11 - Financial Instruments
The Company has several financial instruments, none of which are held for trading purposes. The Company estimates that the fair value of all financial instruments at December 31, 1995, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The fair value amounts have been estimated by the Company using available market information and appropriate valuation methodologies. Considerable judgement is required in interpreting market data to develop the estimates of fair value and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
Note 12 - Subsequent Event
In March 1996, the Company decided to close 16 unprofitable Widmann stores. As a result of these closings, the Company expects to have a charge to operations of approximately $835,000 in the first quarter of fiscal 1997. This charge includes approximately $635,000 of anticipated writedowns in inventories to liquidation value.
Item 9

Item 9 - Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
In December 1994, the Corporation terminated KPMG Peat Marwick LLP as independent auditors for the Corporation for the fiscal year ended January 29, 1995 and engaged Alpern, Rosenthal & Company.
The independent auditor's report on the financial statements of the Corporation for fiscal 1994 did not contain an adverse opinion or disclaimer as to uncertainty, audit scope or accounting principles. The decision to change accountants was approved by the Board of Directors.
In connection with the fiscal year ended January 30, 1994 and the subsequent interim period through December 15, 1994, there was no disagreement with KPMG Peat Marwick LLP on any matter of accounting principles or practices, financial statement disclosure, or audit scope or procedures which, if not resolved to the satisfaction of KPMG Peat Marwick LLP, would have caused KPMG Peat Marwick LLP to make reference to the subject matter of the disagreement in its report.
PART III
Item 10

Item 10 - Directors and Executive Officers of the Registrant
The information required by this Item relating to directors and nominees for election as directors at the Company's Annual Meeting of Shareholders to be held on June 19, 1996 is incorporated herein by reference to the information under the caption "Election of Directors" on pages 2 and 3 of the Corporation's definitive Proxy Statement (the 1996 Proxy Statement) filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934. The information required by this Item relating to executive officers is incorporated herein by reference to the 1996 Proxy Statement on page 2 and page 3.
Item 11

Item 11 - Executive Compensation
The information required by this Item is incorporated herein by reference to the information under the caption "Management Compensation" on page 4 of the 1996 Proxy Statement.
Item 12

Item 12 - Security Ownership of Certain Beneficial Financial Owners and Management
The information required by this Item is incorporated herein by reference to the information under the caption "Voting Securities and Principal Holders Thereof" on pages 1, 2 and 3 of the 1996 Proxy Statement.
Item 13

Item 13 - Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the information under the caption "Transactions with Management" on page 4 of the 1996 Proxy Statement.
Part IV
Item 14

Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(A) (1) The following financial statements are included in Part II, Item 8:
Reports of Independent Certified Public Accountants
Consolidated Financial Statements:
Consolidated Balance Sheets - January 28, 1996 and January 29, 1995
Consolidated Statements of Income for Years Ended January 28, 1996, January 29, 1995 and January 30, 1994
Consolidated Statements of Stockholders' Equity for Years Ended January 28, 1996, January 29, 1995 and January 30, 1994
Consolidated Statements of Cash Flows for Years Ended January 28, 1996, January 29, 1995 and January 30, 1994
Notes to Consolidated Financial Statements
(2) The following financial schedule for the periods 1996, 1995 and 1994 is submitted herewith:
Schedule II - Valuation and Qualifying Accounts IV-2
All other schedules are omitted because they are not required, inapplicable, or the information is otherwise shown in the financial statements or notes thereto.
(B) Reports on Form 8-K (No Reports filed)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(1) Uncollectible accounts written off, net of recoveries.
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 under-signed, thereunto duly authorized.
By: /S/ ROSS N. ALFIERI -------------------------- Ross N. Alfieri Treasurer and Assistant Secretary
DATE: April 24, 1996
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.
/S/ JAY L. SCHOTTENSTEIN - -------------------------------------------- April 24, 1996 Jay L. Schottenstein, Chairman of the Board
/S/ ERWIN LEHR - -------------------------------------------- April 24, 1996 Erwin Lehr, President and Director
/S/ THOMAS R. KETTELER - -------------------------------------------- April 24, 1996 Thomas R. Ketteler, Secretary and Director
/S/ ROSS N. ALFIERI - -------------------------------------------- April 24, 1996 Ross N. Alfieri, Treasurer and Director


ITEM 1. Business.
The Company was incorporated under the laws of Utah on April 16, 1986 and subsequently reorganized under the laws of Nevada on December 30, 1993. The Company's reorganization plan was formulated for the purpose of changing the state of domicile and provided that the Company form a new corporation in Nevada which acquired all of the contractual obligations, shareholder rights and identity of the Utah corporation, and then the Utah corporation was dissolved. The Company is in the developmental stage, and its operations to date have been limited to the sale of shares to Capital General Corporation and the gifts of shares to the giftees. The Company is in the process of investigating potential business ventures which, in the opinion of management, will provide a source of eventual profit to the Company. Such involvement may take many forms, including the acquisition of an existing business or the acquisition of assets to establish subsidiary businesses. The Company's management does not expect to remain involved as management of an acquired business; presently unidentified individuals would be retained for such purposes.
As an unfunded venture, the Company will be extremely limited in its attempts to locate potential business situations for investigation. However, the Company's officers, directors and major shareholder have undertaken to make loans to the Company in amounts sufficient to enable it to satisfy its reporting and other obligations as a public company, and to commence, on a limited basis, the process of investigating possible merger and acquisition candidates, and that the Company's status as a publicly-held corporation will enhance its ability to locate such potential business ventures.
No assurance can be given as to when the Company may locate suitable business opportunities and such opportunities may be difficult to locate; however, the Company intends to actively search for potential business ventures for the next five years. The Company intends not to allocate any incoming funds specifically, should there be any in the future, to general use for the purpose of seeking, investigating and acquiring or becoming engaged in a business opportunity. Decisions concerning these matters may be made by management without the participation or authorization of the shareholders.
Management anticipates that due to its lack of funds, and the limited amount of its resources, the Company may be restricted to participation in only one potential business venture. This lack of diversification should be considered a substantial risk because it will not permit the Company to offset potential losses from one venture against gains from another.
Business opportunities, if any arise, are expected to become available to the Company principally from the personal contacts of its officers and directors. While it is not expected that the Company will engage professional firms specializing in business acquisitions or reorganizations, such firms may be retained if funds become available in the future, and if deemed to be advisable. Opportunities may thus become available from professional advisers, securities broker-dealers, venture capitalists, members of the financial community, and other sources of unsolicited proposals. In certain circumstances, the Company may agree to pay a finder's fee or other form of compensation, including perhaps one-time cash payments, payments based upon a percentage of revenues or sales volume, and/or payments involving the issuance of securities, for services provided by persons who submit a business opportunity in which the Company shall decide to participate, although no contracts or arrangements of this nature presently exist. The Company is unable to predict at this time the costs of locating a suitable business opportunity.
The Company will not restrict its search to any particular business, industry or geographical location, and reserves the right to evaluate and to enter into any type of business opportunity, in any stage of their development (including the "start up" stage), in any location. In seeking a business venture, Management will not be influenced primarily by an attempt to take advantage of the anticipated or perceived appeal of a specific industry, management group, or product or industry, but rather will be motivated by the Company's business objective of seeking long term capital appreciation in their real value. In addition, the Exchange Act reporting requirements require the filing of the Form 8-K disclosing any businesses acquired and requires certified financial statements of such companies. These reporting requirements may substantially limit the businesses which may be available for possible acquisition candidates.
The analysis of business opportunities will be undertaken by or under the supervision of the Company's management, none of whom is a professional analyst and none of whom have significant general business experience. Among the factors which management will consider in analyzing potential business opportunities are the available technical, financial and managerial resources; working capital and financial requirements; the history of operation, if any; future prospects; the nature of present and anticipated competition; potential for further research, development or exploration; growth and expansion potential; profit potential; the perceived public recognition or acceptance of products or services; name identification, and other relevant factors.
It is not possible at present to predict the exact manner in which the Company may participate in a business opportunity. Specific business opportunities will be reviewed and, based upon such review, the appropriate legal structure or method of participation will be decided upon by management. Such structures and methods may include, without limitation, leases, purchase and sale agreements, license, joint ventures; and may involve merger, consolidation or reorganization. The Company may act directly or indirectly through an interest in a partnership, corporation or other form of organization. However, it is most likely that the Company will acquire a business venture by conducting a reorganization involving the issuance of the Company's restricted securities. Such a reorganization may involve a merger (or combination pursuant to state corporate statutes, where one of the entities dissolves or is absorbed by the other), or it may occur as a consolidation, where a new entity is formed and the Company and such other entity combine assets in the new entity. A reorganization may also occur, directly or indirectly, through subsidiaries, and there is no assurance that the Company would be the surviving entity. Any such reorganization could result in additional dilution to the book value of the shares and loss of control of a majority of the shares. The Company's present directors may be required to resign in connection with a reorganization.
A reorganization may be structured in such a way as to take advantage of certain beneficial tax consequences available in business reorganizations, in accordance with provisions of the Internal Revenue Code of 1986 (as amended). Pursuant to such a structure, the number of shares held prior to the reorganization by all of the Company's shareholders might be less than 20% of the total shares to be outstanding upon completion of the trans action. Substantial dilution of percentage equity ownership may result to the giftees, in the discretion of management.
Generally, the issuance of securities in a reorganization transaction would be undertaken in reliance upon one or more exemptions from the registration provisions of applicable federal securities laws, including the exemptions provided for non-public or limited offerings, distributions to persons resident in only one state and similar exemptions provided by state law. Shares issued in a reorganization transaction based upon these exemptions would be considered "restricted" securities under the 1933 Act, and would not be available for resale for a period of two years, in accordance with Rule 144 promulgated under the 1933 Act. However, the Company might undertake, in connection with such a reorganization transaction, certain registration obligations in connection with such securities.
The Company may choose to enter into a venture involving the acquisition of or merger with a company which does not need substantial additional capital but desires to establish a public trading market for its securities. Such a company may desire to consolidate its operations with the Company through a merger, reorganization, asset acquisition, or other combination, in order to avoid possible adverse consequences of undertaking its own public offering. (Such consequences might include expense, time delays or loss of voting control.) In the event of such a merger, the Company may be required to issue significant additional shares, and it may be anticipated that control over the Company's affairs may be transferred to others. It should also be noted that this type of business venture might have the effect of depriving the giftee shareholders of the protection of federal and state securities laws, which normally affect the process of a company's becoming publicly held.
It is likely that the investigation and selection of business opportunities will be complex, time-consuming and extremely risky. However, management believes that even though the Company will have limited capital, the fact that its securities will be publicly-held will make it a reasonably attractive business prospect for other firms.
As part of their investigation of acquisition possibilities, the Company's management may meet with executive officers of the business and its personnel; inspect its facilities; obtain independent analysis or verification of the information provided, and conduct other reasonable measures, to the extent permitted by the Company's limited resources and management's limited expertise. Generally, the Company intends to analyze and make a determination based upon all available information without reliance upon any single factor as controlling.
In all likelihood, the Company's management will be inexperienced in the areas in which potential businesses will be investigated and in which the Company may make an acquisition or investment. Thus, it may become necessary for the Company to retain consultants or outside professional firms to assist management in evaluating potential investments, and to hire managers to run or oversee the operations of its acquisitions or investments. The Company can give no assurance that it will be able to find suitable consultants or managers. The Company intends not to employ any of its affiliates, officers, directors or principal shareholders as consultants. The Company has no policy regarding the use of consultants, however, if management, in its discretion, determines that it is in the best interests of the Company, management may seek consultants to review potential merger or acquisition candidates. It is anticipated that the total amount of fees paid to any consultant would not exceed $5,000.00 per transaction. The fee, it is anticipated, would be paid by Capital General Corporation or by the potential target company. There are currently no contracts or agreements between any consultant and any companies that are searching for "shell" companies with which to merge. There have been no preliminary discussions or understandings between the Company and any market maker regarding the participation of any such market maker in the aftermarket for the Company's securities inasmuch as no market for the securities is expected to arise due to the lack of transferability on the Company's shares until an acquisition is made and a Form 8-K is filed with the Commission.
It may be anticipated that the investigation of specific business opportunities and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention, and substantial costs for accountants, attorneys and others. Should a decision thereafter be made not to participate in a specific business opportunity, it is likely that costs already expended would not be recoverable. It is also likely, in the event a transaction should eventually fail to be consummated, for any reason, that the costs incurred by the Company would not be recoverable. The Company's officers and directors are entitled to reimbursement for all expenses incurred in their investigation of possible business ventures on behalf of the Company, and no assurance can be given that if the Company has available funds they will not be depleted in such expenses.
In addition to the severe limitations placed upon the Company by virtue of its unfunded status, the Company will also be limited, in its investigation of possible acquisitions, by the reporting requirements of the Securities Exchange Act of 1934, pursuant to which certain information must be furnished in connection with any significant acquisitions. The Company would be required to furnish, with respect to any significant acquisition, certified financial statements for the acquired company, covering one, two or three years (depending upon the relative size of the acquisition). Consequently, acquisition prospects which do not have the requisite certified financial statements, or are unable to obtain them, may be inappropriate for acquisition under the present reporting requirements of the 1934 Act.
The Company does not intend to take any action which would render it an investment company under The Investment Companies Act of 1940 (the "1940 Act"). The 1940 Act defines an investment company as one which (1) invests, reinvests or trades in securities as its primary business, (2) issues face-amount certificates of the installment type or (3) invests, reinvests, owns, holds or trades securities or owns or acquires investment securities having a value exceeding 40 percent of the value of its total assets (exclusive of Government securities and cash items) on an unconsolidated basis. The above 40 percent limitation may be exceeded so long as a company is primarily engaged, directly or through wholly-owned subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding or trading in securities. A wholly-owned subsidiary is defined as one which is at least 95% owned by the company.
Neither the Company nor any of its officers or directors are registered as investment advisers under the Investment Advisers Act of 1940 (the "Advisers Act"), and so there is no authority to pursue any course of business or activities which would render the Company or its management "investment advisers" as defined in the Advisers Act. Management believes that registration under the Advisers Act is not required and that certain exemptions are available, including the exemptions for persons who may render advice to a limited number of other persons and who may advise other persons located in one state only.
The Company expects to encounter intense competition in its efforts to locate suitable business opportunities in which to engage. The primary competition for desirable investments may come from other small companies organized and funded for similar purposes, from small business development corporations and from public and private venture capital organizations. As the Company will be completely unfunded, it can fairly be said that all of the competing entities will have significantly greater experience, resources, facilities, contacts and managerial expertise than the Company and will, consequently, be in a better position than the Company to obtain access to, and to engage in, business opportunities. Due to its lack of funds, the Company may not be in a position to compete with larger and more experienced entities for business opportunities which are low-risk. Business opportunities in which the Company may ultimately participate are likely to be highly risky and extremely speculative.
ITEM 2.

ITEM 2. Properties.
The Company owns no properties and utilizes space on a rent-free basis in the office of its principal shareholder, Capital General Corporation. This arrangement is expected to continue until such time as the Company becomes involved in a business venture which necessitates its relocation, as to which no assurances can be given. The Company has no agreements with respect to the maintenance or future acquisition of office facilities, however, if a successful merger/acquisition is negotiated, it is anticipated that the office of the Company will be moved to that of the acquired company.
ITEM 3.

ITEM 3. Legal Proceedings.
On January 7, 1994, the Bureau of Securities of the State of New Jersey filed a complaint in the matter of Capital General Corporation, David R. Yeaman and 74 other named defendants, Nevada and Utah corporations including the Company, which complaint proposes that civil monetary penalties totalling $30,000.00 be assessed against Capital General Corporation for alleged violations of the Uniform Securities Law (1967), N.J.S.A. 49:3-47 et. seq. by (1) selling to 24 New Jersey residents between April 1986 and May 1991, securities in 25 of the 74 above referred to respondent corporations named in the proceeding, including the Company, which were neither registered nor exempt from registration, and (2) making untrue statements of material fact and omitting to state material facts in connection with said New Jersey sales in 6 of the 74 above referred to resident corporations named in the proceeding, not including the Company. Also on January 7, 1994, the Bureau of Securities of the State of New Jersey, based on substantially similar allegations as in the above referred complaint, issued its Order Denying Exemptions and to Cease and Desist. This order summarily denied the exemptions contained in N.J.S.A. 49:3- 50(b), (1), (2), (3), (9), (11) and (12) of the securities of Capital General Corporation and the other 74 respondent corporations, including the Company, except that excluded from the summary denial of the exemption contained in N.J.S.A. 49-3-50(b)(12) is the Offer of Rescission by Capital General Corporation to 24 New Jersey residents pursuant to the offer of rescission which began about April 28, 1993. This order also ordered Capital General Corporation and David Yeaman to Cease and Desist from offering or selling any securities in blind pool corporations into, or from the State of New Jersey.
Capital General and David Yeaman filed answers denying the material allegations of said complaint and resisting the imposition of said civil monetary penalties, and the said Order Denying Exemptions and to Cease and Desist. Subsequently the issues raised in said complaint and order were settled by agreement between the said Bureau of Securities and Mr. Yeaman and Capital General Corporation in a consent order dated July 11, 1994 and approved by an administrative law judge of the State of New Jersey Office of Administrative Law September 2, 1994. Under the terms of said consent order, all claims in the complaint against all named respondents were settled by the payment of $3,000 civil penalty, and the order was modified so that it does not apply to 27 of the respondent companies; however said order does still apply to the Company.
During 1986 and 1987, Capital General gifted very small percentages of stock (usually 100 shares to each giftee) in the following companies, which includes the Company, to approximately 1,000 persons or entities: Amenity, Inc., Dogmatic, Inc., Mystic Industries, Inc., Highland Mfg., Inc., Kowtow, Inc., Noble Industries, Inc., Oryan Capital Corporation, Pegasus Star Enterprise, Inc., Showstoppers, Inc., Hightide, Inc., Grandeur, Inc., Fantastic Industries, Inc., Jugglar, Inc., Xebec Galleon, Inc., Golden Home Health Care Equipment Centers, Inc., Nighthawk Capital, Inc., Instrument Development Corporation, Panther Industries, Inc., Owl Enterprises, Inc., Quail, Inc., GBS Technologies Corporation, H & B Carriers, Inc., Florida Growth Industries, Inc., Macaw, Inc., Longhorn Enterprise, Inc., Koala Corporation, Yahwe Corporation, Star Dolphin, Inc., Jackal, Inc., Hyena Capital, Inc., Gopher, Inc., Flamingo Capital, Inc., Egret, Inc., Cetacean Industries, Inc., Bonito, Inc., Alpaca, Inc., Zeus Enterprise, Inc., Tamarind, Inc., Saber, Inc., Radar, Inc., Quiescent Corporation, Vanadium, Inc., Upsilon, Inc., Why Not?, Inc., Bestmark, Inc., Missouri Illinois Mining Co., Inc.
Capital General did not register the gifts of shares in these companies with the Securities Division of the State of Utah or with the Securities Exchange Commission because it believed these gifts to be outside the scope of the Utah Uniform Securities Act and the Securities Act of 1933 in as much as such acts require registration for sales and do not require registration of gifts. Nevertheless, in connection with the distribution of shares of its subsidiaries, Capital General was found by the Utah Securities Advisory Board, in two decisions affirmed by the Utah State Courts, to have violated the
registration provisions of the Utah Uniform Securities Act. See In re Amenity Inc., No. SD-86-11 (Utah Sec. Adv. Bd. February 18, 1987) aff'd C87-2625 (3d Dist. Ct. September 18, 1987) aff'd sub nom Capital General Corp. v. Utah Dep't of Business Reg., 777 P.2d 494, 498 (Utah Ct. App.) cert. denied, 781 P.2d 873 (Utah S.Ct. 1989); In re H&B Carriers Inc., No. 87-09-28-01 (Utah Sec. Adv. Bd., Apr. 15, 1988) aff'd No. 88-5900053 (3d Dist. Ct. Sept 10, 1990) aff'd sub nom Capital General Corp. v. Utah Dep't of Business Reg., Case No 91-196 (Utah Ct. App. February 10, 1992. All of the remaining companies listed above were parties to the H&B Carriers order.
Both of these actions sought suspension of transactional exemptions respecting the shares of these companies pursuant to Section 14 (3) of the Utah Uniform Securities Act. Capital General defended both actions on the grounds that the Utah Uniform Securities Act did not apply to gifts of securities, that the gifts were good faith gifts specifically exempted by the Act, and that in any event even if it had "sold" shares in violation of the Act, suspension of transactional exemptions was not an authorized remedy under the statute. These defenses were rejected at the administrative agency level, and upon judicial review at the District Court level and by the Utah Court of Appeals.
See also Item 10 regarding legal proceedings against officers and directors.
ITEM 4.

ITEM 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to the Company's security holders for a vote during the fiscal year ending December 31, 1996.
PART II
ITEM 5.

ITEM 5. Market for Registrant's Common Equity and Related Stockholders Matters.
There currently is not a trading market for the Company's $.001 par value common stock nor has there been a trading market for the Company's stock since its inception.
As of February, 1997, there were 744 record holders of the Company's common stock. The Company has not previously declared or paid any dividends on its common stock and does not anticipate declaring any dividends in the foreseeable future.
ITEM 6.

ITEM 6. Selected Financial Data.
ITEM 7.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operation.
The Company has had no operational history and has yet to engage in business of any kind. All risks inherent in new and inexperienced enterprises are inherent in the Company's business. The Company has not made a formal study of the economic potential of any business. At the present, the Company has not identified any assets or business opportunities for acquisition.
As of February, 1997, the Company has no liquidity and no presently available capital resources, such as credit lines, guarantees, etc. and should a merger or acquisition prove unsuccessful, it is possible that the Company may be dissolved by the State of Nevada for failing to file reports, at which point the Company would no longer be a viable corporation under Nevada law and would be unable to function as a legal entity. Should management decide not to further pursue its acquisition activities, management may abandon its activities and the shares of the Company would become worthless. However, the Company's officers, directors and major shareholder, have made an oral undertaking to make loans to the Company in amounts sufficient to enable it to satisfy its reporting requirements and other obligations incumbent on it as a public company, and to commence, on a limited basis, the process of investigating possible merger and acquisition candidates. The Company's status as a publicly-held corporation may enhance its ability to locate potential business ventures. The loans will be interest free and are intended to be repaid at a future date, if or when the Company shall have received sufficient funds through any business acquisition. The loans are intended to provide for the payment of filing fees, professional fees, printing and copying fees and other miscellaneous fees.
Based on current economic and regulatory conditions, Management believes that it is possible, if not probable, for a company like the Company, without assets or liabilities, to negotiate a merger or acquisition with a viable private company. The opportunity arises principally because of the high legal and accounting fees and the length of time associated with the registration process of "going public". However, should any of these conditions change, it is very possible that there would be little or no economic value for anyone taking over control of the Company.
ITEM 8.

ITEM 8. Financial Statements and Supplementary Data.
See Item 14.
ITEM 9.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
PART III
ITEM 10.

ITEM 10. Directors and Executive Officers of the Registrant.
The following table shows the positions held by the Company's officers and directors. The directors were appointed at inception and will serve until the next annual meeting of the Company's stockholders, and until their successors have been elected and have qualified. The officers were appointed to their positions, and continue in such positions, at the discretion of the directors.
Name Age Position Krista Nielson 34 President, Director
David R. Yeaman 50 Secretary/Treasurer, Director
KRISTA NIELSON, has been Director of the Company since inception. In addition to her management position with the Company, she has been since 1986 an officer and director of Capital General Corporation, a Utah-based financial consulting firm, and has been involved in the organization and promotion of various shell companies. Ms. Nielson received a Business degree from Salt Lake Community College in 1987. She serves as an officer and/or director in the following private corporations: Yeaman Enterprises, Inc. and Universal Associates, Inc., family holding companies, Yeaman Auto Sales, Inc., an automobile dealership company, Four Star Ranch, Inc., a farmland development company, Creative Financial Corporation and Visual Impact Corporation, financial consulting companies, and National Stock Transfer, Inc., a stock transfer agency company. Ms. Nielson devotes her time primarily to her role as Vice President of Capital General and to the financial consulting activities in which Capital General engages.
DAVID R. YEAMAN, has been Director of the Company since inception, and, in addition to his management position with the Company, has been President of Capital General Corporation since its inception in 1971 to the present. Mr. Yeaman has been involved in numerous development stage companies since he assisted in organizing Capital General. During the last five years, in connection with Capital General, he has been primarily involved in the organization and promotion of various shell companies. Mr. Yeaman serves as an officer and/or director in the following private corporations: Yeaman Enterprises, Inc., a family holding company, Four Star Ranch, Inc., a farmland development company, Yeaman Auto Sales, Inc., an automobile dealership company, Financial Connections, Inc. and Peak Experience, Inc., financial consulting companies. Mr. Yeaman devotes his time primarily to his role as President of Capital General and to the financial consulting activities in which Capital General engages.
The management of Capital General is essentially the same as that of the Company and, as the Company's largest shareholder, Capital General exerts considerable influence in the election of the Company's officers and directors. Capital General is a private venture capital and financial consulting firm, incorporated in Utah in 1971. Capital General is a closely held corporation with eight shareholders and is not an investment company under The Investment Companies Act of 1940. A majority of the stock of Capital General is owned by Yeaman Enterprises, Inc., a private corporation which is, in turn, owned by certain members of the family of David R. Yeaman; Krista Nielson is also an officer and director of Yeaman Enterprises, Inc.
Management of the Company have, in their various capacities at Capital General over the past ten years, assisted in the organization of approximately 75 corporations similar to the Company which are in varying stages of development and approximately 50 of such corporations have completed a merger/ acquisition transaction. In merger/acquisition transactions similar to those contemplated by the Company, present management would be replaced by new management and additional shares would be issued in consideration for the assets being transferred into the Company. Present management does not anticipate operating the business of the Company subsequent to any acquisition and therefore the future success of the Company will be primarily dependent on new management which is now unknown.
Each of the above directors of the Company is a director of Arrow Management, Inc., Saber Capital, Inc., Vicuna, Inc., Why Not?, Inc., Grandeur, Inc., Kowtow, Inc., Radar Resources, Inc., Alpaca, Inc., Bonito Industries, Inc., Cetacean Industries, Inc., Flamingo Capital, Inc., Gopher, Inc., Hyena Capital, Inc., Jackal Industries, Inc., Longhorn, Inc., Macaw Capital, Inc., Environmental Development Corporation, Ultronics Corporation, Bioethics, Ltd., Quantitative Methods Corporation, and Bio-Chem, Inc. which are companies subject to the requirements of section 15(d) of the Exchange Act. None of the directors are directors or officers of any other company with a class of securities registered pursuant to Section 12 of the Exchange Act or the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940.
On February 8, 1996, David R. Yeaman was charged in the United States District Court for the Eastern District of Pennsylvania with conspiracy, wire fraud and fraud in the offer, purchase and sale of securities, in violation of 18 U.S.C. Sections 2, 371 and 1343; 15 U.S.C. Sections 77q(a), 77x, 78j(b), and 78ff; and Rule 10b-5 promulgated by the Securities and Exchange Commission, Title 17, Code of Federal Regulations, Section 240.10b-5 (1986).
On February 22, 1996, Mr. Yeaman entered his not guilty plea to all charges. The allegations against Mr. Yeaman are based on the government's claims that he and five of the other defendants named in the proceeding violated the aforesaid laws by inflating the apparent worth of certain reinsurance companies by leasing them alleged worthless securities. Specifically, it is alleged that Mr. Yeaman, with other defendants, engaged in practices which falsely increased the quoted prices of the securities and misrepresented restricted securities as free trading securities. Based on these allegations, the charges against Mr. Yeaman include one count of conspiracy, seven counts of wire fraud, six counts of securities fraud, and aiding and abetting with respect to each count. This matter is scheduled for trial on March 10, 1997.
The U.S. Securities and Exchange Commission, Securities Act of 1933 Release No. 7008 and Securities Exchange Act of 1934 Release No. 32669 announced that on July 23, 1993, it ordered David R. Yeaman and Capital General Corporation to permanently cease and desist from committing or causing further violations of Section 5(a) and (c) and 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(g) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20 and 13d-1(c) thereunder.
Krista Nielson was ordered to permanently cease and desist from committing or causing further violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 and 12b-20 thereunder. In addition, the Commission ordered the revocation of the registration of the common stock of Altara International, Inc., Arrow Management, Inc., Atlas Equity, Inc., Dynamic Associates, Inc., Energy Systems, Inc., Four Star Ranch, Inc., Panorama Industries, Inc., Partisan Corporation, Quiescent Corporation, Saber, Inc., Upsilon, Inc., Vicuna, Inc., Why Not?, Inc., Xebec Galleon, Inc., Zebu, Inc., and Zeus Enterprises, Inc. pursuant to Section 12(j) of the Exchange Act. The Commission found that each of the issuers had filed a registration statement on Form 10 that contained materially false and misleading statements in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Each of the respondents had submitted an Offer of Settlement consenting to the entry of the Order without admitting or denying the allegations in the Order. Prior to the submission of the Offers of Settlement, Capital General, on behalf of the above mentioned companies, except for Panorama Industries, Inc., filed a registration statement on Form S-1 during December of 1992 to register the common stock of those companies under the Securities Act of 1933. Concurrently with the signing of the Offers of Settlement, the Registration Statement was declared effective on June 30, 1993. A Post Effective Amendment was filed and declared effective September 2, 1993. Although the registration of the common stock under Section 12(g) of the 1934 Act was revoked on July 23, 1993, the companies are now registered and reporting under the Securities Act of 1933 by virtue of the filing of Form S-1 as indicated by Commission File No. 33-55254.
ITEM 11.

ITEM 11. Executive Compensation.
The Company has made no arrangements for the remuneration of its officers and directors, except that they will be entitled to receive reimbursement for actual, demonstrable out-of-pocket expenses, including travel expenses if any, made on the Company's behalf in the investigation of business opportunities. No remuneration has been paid to the Company's officers or directors prior to the filing of this form. There are no agreements or understandings with respect to the amount or remuneration that officers and directors are expected to receive in the future. Management takes no salaries from the Company and does not anticipate receiving any salaries in the foreseeable future. No present prediction or representation can be made as to the compensation or other remuneration which may ultimately be paid to the Company's management, since upon the successful consummation of a business opportunity, substantial changes may occur in the structure of the Company and its management. At such time, contracts may be negotiated with new management requiring the payment of annual salaries or other forms of compensation which cannot presently be anticipated. Use of the term "new management" is not intended to preclude the possibility that any of the present officers or directors of the Company might be elected to serve in the same or similar capacities upon the Company's decision to participate in one or more business opportunities.
Capital General and the Company's management may benefit directly or indirectly by payments of consulting fees, payment of finders fees to others from Capital General's consulting fees, sales of insiders' stock positions in whole or in part to the private company, the Company or management of the Company, or through the payment of salaries, or any other methods of payments through which insiders or current investors receive funds, stock, other assets or anything of value whether tangible or intangible. There are no plans, proposals, arrangements or understandings with respect to the sale of additional securities to affiliates, current shareholders or others prior to the location of a business opportunity.
ITEM 12.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth, as of December 31, 1996, information regarding the beneficial ownership of shares by each person known by the Company to own five percent or more of the outstanding shares, by each of the directors and by the officers and directors as a group.
(1)Capital General Corporation, Yeaman Enterprises, Inc., Krista Nielson and David R. Yeaman may be deemed to be the Company's "parents" and "promoters," pursuant to the Rules and Regulations promulgated under the 1933 Act.
(2)Capital General Corporation is a private corporation. The majority of its shares (80%) are owned by another private corporation, Yeaman Enterprises, Inc. The stockholders of Yeaman Enterprises are members of the family of David R. Yeaman, who is also an officer and director of the Company and Capital General. Mr. Yeaman's beneficial ownership of the securities of the Company includes shares directly owned by Capital General and Yeaman Enterprises. Although Yeaman Enterprises is nominally owned by Mr. Yeaman's children, Mr. Yeaman beneficially owns shares nominally owned by Yeaman Enterprises in that he has the power to vote or direct the voting of the shares and the power to dispose of or to direct the disposition of the shares. Other owners of the stock of Capital General include Krista Nielson, the Company's president. Mr. Yeaman and Ms. Nielson control and have beneficial ownership of the shares owned by Capital General and Yeaman Enterprises and exercise shared voting power and shared investment power over those shares.
ITEM 13.

ITEM 13. Certain Relationships and Related Transactions.
No officer, director, nominee for election as a director, or associate of such officer, director or nominee is or has been in debt to the Company during the last fiscal year. However, the Company's officers, directors and major shareholder, have made an oral undertaking to make loans to the Company in amounts sufficient to enable it to satisfy its reporting requirements and other obligations incumbent on it as a public company, and to commence, on a limited basis, the process of investigating possible merger and acquisition candidates. The Company's status as a publicly-held corporation may enhance its ability to locate potential business ventures. The loans will be interest free and are intended to be repaid at a future date, if or when the Company shall have received sufficient funds through any business acquisition. The loans are intended to provide for the payment of filing fees, professional fees, printing and copying fees and other miscellaneous fees.
PART IV
ITEM 14.

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Financial Statements and Financial Statement Schedules.
Financial Statements - December 31, 1996, 1995 and 1994.
Reports on Form 8-K.
There were no reports on Form 8-K filed during the fiscal year ending December 31, 1996.
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.
STAR DOLPHIN, INC.
Date: February 25, 1997 By: s\Krista Nielson ------------------------------------------- Krista Nielson, President, CEO and Director
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.
Date: February 25, 1997 By: s\Krista Nielson ------------------------------------------- Krista Nielson, President, CEO and Director
Date: February 25, 1997 By: s\David R. Yeaman ------------------------------------------- David R. Yeaman, Secretary/Treasurer, CFO and Director
SMITH & COMPANY CERTIFIED PUBLIC ACCOUNTANTS
MEMBERS OF: CRANDALL BUILDING SUITE 700 AMERICAN INSTITUTE OF 10 WEST 100 SOUTH CERTIFIED PUBLIC ACCOUNTANTS SALT LAKE CITY, UTAH 84101 UTAH ASSOCIATION OF TELEPHONE: (801) 575-8297 CERTIFIED PUBLIC ACCOUNTANTS FACSIMILE: (801) 575-8306 - - --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
Board of Directors STAR DOLPHIN, INC. (A Development Stage Company)
We have audited the accompanying balance sheets of STAR DOLPHIN, INC. (a development stage company) as of December 31, 1996 and 1995, and the related statements of operations, changes in stockholders' equity, and cash flows for the years ended December 31, 1996, 1995 and 1994 and for the period of April 16, 1986 (date of inception) to December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of STAR DOLPHIN, INC. (a development stage company) as of December 31, 1996 and 1995 and the results of its operations, changes in stockholders' equity and its cash flows for the years ended December 31, 1996, 1995 and 1994 and for the period of April 16, 1986 (date of inception) to December 31, 1996 in conformity with generally accepted accounting principles.
s\Smith & Company CERTIFIED PUBLIC ACCOUNTANTS
Salt Lake City, Utah February 28, 1997
STAR DOLPHIN, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS December 31, 1996
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES Accounting Methods The Company recognizes income and expenses based on the accrual method of accounting.
Dividend Policy: The Company has not yet adopted any policy regarding payment of dividends.
Organization Costs: The Company amortized its organization costs over a five year period.
Income Taxes: The Company records the income tax effect of transactions in the same year that the transactions enter into the determination of income, regardless of when the transactions are recognized for tax purposes. Tax credits are recorded in the year realized. Since the Company has not yet realized income as of the date of this report, no provision for income taxes has been made.
In February, 1992, the Financial Accounting Standards Board adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which supersedes substantially all existing authoritative literature for accounting for income taxes and requires deferred tax balances to be adjusted to reflect the tax rates in effect when those amounts are expected to become payable or refundable. The Statement was applied in the Company's financial statements for the fiscal year commencing January 1, 1993.
At December 31, 1996 a deferred tax asset has not been recorded due to the Company's lack of operations to provide income to use the net operating loss carryover of $2,000 which expires as follows:
Year Ended Expires Amount
December 31, 1986 December 31, 2001 $ 1,950 December 31, 1987 December 31, 2002 10 December 31, 1988 December 31, 2003 10 December 31, 1989 December 31, 2004 10 December 31, 1990 December 31, 2005 10 December 31, 1991 December 31, 2006 10 ---------- $ 2,000 ==========
NOTE 2: DEVELOPMENT STAGE COMPANY The Company was incorporated under the laws of the State of Utah on April 16, 1986 and has been in the development stage since incorporation. On December 30, 1993, the Company was dissolved as a Utah corporation and reincorporated as a Nevada corporation.
NOTE 3: CAPITALIZATION On the date of incorporation, the Company sold 1,000,000 shares of its common stock to Capital General Corporation for $2,000 cash for an average consideration of $.002 per share. The Company's authorized stock includes 100,000,000 shares of common stock at $.001 par value.
NOTE 4: RELATED PARTY TRANSACTIONS The Company neither owns or leases any real property. Office services are provided, without charge, by Capital General Corporation. Such costs are immaterial to the financial statements, and, accordingly, have not been reflected therein. The officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities. If a specific business opportunity becomes available, such persons may face a conflict in selecting between the Company and their other business interests. The Company has not formulated a policy for the resolution of such conflicts.