SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-28128
ELEGANT ILLUSIONS, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 88-0282654
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
542 Lighthouse Ave., Suite 5, Pacific Grove, CA 93950
(Address of principal executive offices)
Issuer's telephone number, including area code: (408) 649-1814
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Class Outstanding at June 30, 1997
----- ----------------------------
Common Stock, par value 17,434,338 Shares
$.001 per share
Transitional Small Business Format (check one); Yes No X
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying financial statements are unaudited for the interim
periods, but include all adjustments (consisting only of normal recurring
accruals) which management considers necessary for the fair presentation of
results for the three and six months ended June 30, 1997.
Moreover, these financial statements do not purport to contain complete
disclosure in conformity with generally accepted accounting principles and
should be read in conjunction with the Company's audited financial statements
at, and for the fiscal year ended December 31, 1996.
The results reflected for the three and six months ended June 30, 1997 are
not necessarily indicative of the results for the entire fiscal year.
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1997 1996
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,511,236 $ 1,886,297
Accounts receivable 263,661 190,270
Prepaid income taxes 79,075
Inventory 2,115,000 1,990,174
Prepaid expenses 78,568 45,643
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TOTAL CURRENT ASSETS 4,047,540 4,112,384
PROPERTY AND EQUIPMENT, NET 1,056,807 884,707
OTHER ASSETS 83,269 85,853
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$ 5,187,616 $ 5,082,944
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 90,596 $ 92,827
Income taxes payable 71,915
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TOTAL CURRENT LIABILITIES 90,596 164,742
NOTE PAYABLE 20,000
DEFERRED INCOME TAXES 95,871 95,871
------------ ------------
TOTAL LIABILITIES 186,467 280,613
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - authorized 30,000,000
shares, $.001 par value, issued and
outstanding 17,434,338 shares 17,434 17,434
Additional paid-in capital 2,978,221 2,978,221
Retained earnings 2,005,494 1,806,676
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TOTAL STOCKHOLDERS' EQUITY 5,001,149 4,802,331
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$ 5,187,616 $ 5,082,944
============ ============
See accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
1997 1996
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REVENUES $ 1,956,957 $ 1,816,390
COST OF GOODS SOLD 569,498 546,939
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GROSS PROFIT 1,387,459 1,269,451
EXPENSES
Selling, general and administrative 1,120,960 966,710
Depreciation and amortization 74,442 56,170
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TOTAL EXPENSES 1,195,402 1,022,880
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INCOME BEFORE INCOME TAXES 192,057 246,571
PROVISION FOR INCOME TAXES 77,100 98,200
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NET INCOME $ 114,957 $ 148,371
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 17,434,000 17,401,000
============ ============
NET INCOME PER COMMON SHARE $ .01 $ .01
============ ============
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
1997 1996
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REVENUES $ 3,864,356 $ 3,196,004
COST OF GOODS SOLD 1,149,228 976,226
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GROSS PROFIT 2,715,128 2,219,778
EXPENSES
Selling, general and administrative 2,246,146 1,782,629
Depreciation and amortization 137,164 111,000
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TOTAL EXPENSES 2,383,310 1,893,629
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INCOME BEFORE INCOME TAXES 331,818 326,149
PROVISION FOR INCOME TAXES 133,000 130,000
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NET INCOME $ 198,818 $ 196,149
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 17,434,000 17,065,000
============ ============
NET INCOME PER COMMON SHARE $ .01 $ .01
============ ============
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 198,818 $ 196,149
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 137,164 111,000
Changes in operating assets and
liabilities:
(Increase) Decrease in:
Accounts receivable (73,391) (1,247)
Inventory (124,826) (322,920)
Prepaid expenses (32,925) (53,292)
Increase (Decrease in):
Accounts payable and accrued expenses (2,231) (28,707)
Income taxes payable (150,990)
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (48,381) (99,017)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (307,100) (179,975)
Deposits and other assets 420 10,143
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NET CASH USED BY INVESTING
ACTIVITIES (306,680) (169,832)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of borrowing from bank
credit line (750,000)
Repayment of note payable (20,000) (60,000)
Sale of common stock 950,000
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NET CASH PROVIDED BY FINANCING
ACTIVITIES (20,000) 140,000
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (375,061) (128,849)
CASH AND CASH EQUIVALENTS BALANCE,
Beginning of period 1,886,297 1,699,110
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End of period $ 1,511,236 $ 1,570,261
============ ============
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. COMMENTS
The accompanying unaudited consolidated condensed financial statements,
which are for interim periods, do not include all disclosures provided in the
annual consolidated financial statements. These unaudited consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and the footnotes thereto contained in the Annual Report on
Form 10-KSB for the year ended December 31, 1996 of Elegant Illusions, Inc. (the
"Company"), as filed with the Securities and Exchange Commission. The December
31, 1996 balance sheet was derived from audited consolidated financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (which are of a normal
recurring nature) necessary for a fair presentation of the financial statements.
The results of operations for the three and six months ended June 30, 1997 are
not necessarily indicative of the results to be expected for the full fiscal
year.
Reclassifications - Certain 1996 balances have been reclassified to conform
with 1997 presentation.
6
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Cautionary Statement on Forward-Looking Statements
Except for the historical information contained herein, certain of the
matters discussed in this quarterly report are "forward-looking statements," as
defined in Section 21E of the Securities Exchange Act of 1934, which involve
certain risks and uncertainties, which could cause actual results to differ
materially from those discussed herein including, but not limited to, risks
relating to changing economic conditions, the Company's expansion plans and
competitive pressures.
The Company cautions readers that any such forward-looking statements are
based on management's current expectations and beliefs but are not guarantees of
future performance. Actual results could differ materially from those expressed
or implied in the forward-looking statements.
Results of Operations
Sales for the three months ended June 30, 1997 increased $140,567 or
approximately 7.7% when compared to the three months ended June 30, 1996.
Management believes that the increase in sales was due to the fact that two
locations (San Francisco and Monterey, California), which opened during the
three months ended June 30, 1996, operated for the full quarter ended June 30,
1997.
As of June 30, 1996, the Company operated 20 retail locations and as of
June 30, 1997, the Company operated 22 retail locations.
The Costs of goods as a percentage of revenues decreased slightly from
approximately 30% during the three months ended June 30, 1996 to 29% during the
three months ended June 30, 1997.
During the three months ended June 30, 1997, selling, general and
administrative expenses increased when compared to the three months ended June
30, 1996 by $154,250 (approximately 16%). Management believes that this increase
was primarily the result of (1) operating the new San Francisco and Monterey
locations for a full quarter; (2) operating the Laughlin, Nevada location which
opened subsequent to the quarter ended June 30, 1996; (3) hiring and training
additional personnel in the accounting and distribution department in
anticipation of future expansion; and (4) opening and operating the new
locations in Kenosha, Wisconsin and Gilroy, California. In this regard, the
Company incurred higher than normal expenses in opening the Kenosha store due to
the size of the store and, because the Kenosha store was opened at the very end
of the June 30, 1997 quarter, there were minimal revenues from this location to
offset the opening expenses. As a percentage of sales, selling, general and
administrative expenses increased from approximately 53% during the three months
ended June 30, 1996 to approximately 57% during the three months ended June 30,
1997.
- 7 -
<PAGE>
Revenues same store locations.
As of June 30, 1996, the Company operated 20 locations: two in New Orleans,
four in Monterey, two in Sacramento, one in San Diego, one in Santa Barbara, two
in San Francisco, one in Palm Springs, one in Salt Lake City, one in Portland,
one in Branson, one in Minneapolis, two in St Croix and one in Oahu. Revenues
from these locations for the three months ended June 30, 1997, which includes
revenues from the Pavilions Sacramento store that closed in January 1997,
decreased approximately 4% from the same period in 1996. Excluding the Pavilions
Sacramento store from same store operations, same store revenues decreased
approximately 2% during the three months ended June 30, 1997 from the same
period in 1996. Management believes that this decrease in same store revenues is
consistent with the general down turn in retail sales for the quarter.
Liquidity and Capital Resources
As of June 30, 1997, the Company had $1,511,236 in cash and cash
equivalents and its current assets exceeded its current liabilities by
$3,956,944.
During the quarter ended June 30, 1997, the Company opened two new copy
jewelry stores; one in Gilroy, California and one in Kenosha, Wisconsin. During
the third and fourth quarters of 1997, the Company plans to open two additional
copy jewelry stores. At this time, management believes, but cannot assure, that
these stores will be located in New Orleans and Tulare, California.
Management believes that it will cost approximately $300,000 to open these
two new stores. Management believes that the cost of opening these new stores
will be paid from current cash reserves. No assurance can be given as to the
actual number or location of stores that the Company will open in the future.
The Company has a $1,000,000 line of credit with a bank effective December
1996 due on demand. Interest is at annual base rate as announced by the bank
(initial base rate was 8.25%) plus 1.75%. This line of credit is collateralized
by the Company's accounts receivable, inventory and equipment. The Company also
is required to maintain certain financial ratios and covenants. As of June 30,
1997 and the date hereof, no funds had been advanced on the line of credit. As
of the date hereof, the Company is in compliance with all financial ratios and
covenants.
- 8 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a vote of Security Holders
None.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
None.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registration has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ELEGANT ILLUSIONS, INC.
Dated: August 11, 1997 /s/James Cardinal
...........................
James Cardinal, Chief Executive Officer
/s/Tamara Gear
...........................
Tamara Gear, Treasurer
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<ARTICLE> 5
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<NAME> Elegant Illusions, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1.000
<CASH> 1,511,236
<SECURITIES> 0
<RECEIVABLES> 263,661
<ALLOWANCES> 0
<INVENTORY> 2,115,000
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<PP&E> 1,056,807
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0
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<CGS> 1,149,228
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<INCOME-TAX> 133,000
<INCOME-CONTINUING> 198,818
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