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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 0-28128
ELEGANT ILLUSIONS, INC.
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(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
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(Address of principal executive offices)
Issuer's telephone number, including area code: (408) 649-1814
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, 1998
----------------------- ----------------------------
Common Stock, par value 18,234,338 Shares(1)
$.001 per share
Transitional Small Business Format (check one); Yes _____ No X
_________________
1 Includes 186,200 treasury shares.
<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, 1998.
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, 1997.
The results reflected for the three and six months ended June 30, 1998
are not necessarily indicative of the results for the entire fiscal year.
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
1998 1997
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,524,643 $1,321,448
Accounts receivable 405,864 357,124
Income taxes receivable 71,838 82,192
Inventory 2,810,070 2,424,755
Prepaid expenses 153,735 90,427
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TOTAL CURRENT ASSETS 4,966,150 4,275,946
PROPERTY AND EQUIPMENT, NET 1,315,255 1,216,353
OTHER ASSETS 94,518 91,002
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$6,375,923 $5,583,301
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CURRENT ASSETS
Cash and cash equivalents $1,524,643 $1,321,448
Accounts receivable 405,864 357,124
Income taxes receivable 71,838 82,192
Inventory 2,810,070 2,424,755
Prepaid expenses 153,735 90,427
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TOTAL CURRENT ASSETS 4,966,150 4,275,946
PROPERTY AND EQUIPMENT, NET 1,315,255 1,216,353
OTHER ASSETS 94,518 91,002
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$6,375,923 $5,583,301
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<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 60,504 $ 113,751
Income taxes payable
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TOTAL CURRENT LIABILITIES 60,504 113,751
DEFERRED INCOME TAXES 127,871 127,871
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TOTAL LIABILITIES 188,375 241,622
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - authorized 30,000,000
shares, $.001 par value, issued and
outstanding 18,234,338 shares at June 30,
1998 and 17,434,338 shares at
December 31, 1997 18,234 17,434
Additional paid-in capital 3,697,421 2,978,221
Retained earnings 2,555,901 2,392,080
Less treasury stock at cost (186,200
shares in 1998 and 93,100 in 1997) (84,008) (46,056)
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TOTAL STOCKHOLDERS' EQUITY 6,187,548 5,341,679
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$6,375,923 $5,583,301
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See accompanying Notes to Consolidated Condensed Financial Statements.
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<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
1998 1997
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REVENUES $ 2,232,328 $ 1,956,957
COST OF GOODS SOLD 714,994 569,498
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GROSS PROFIT 1,517,334 1,387,459
EXPENSES
Selling, general and administrative 1,290,408 1,120,960
Depreciation and amortization 93,280 74,442
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TOTAL EXPENSES 1,383,688 1,195,402
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INCOME BEFORE INCOME TAXES 133,646 192,057
PROVISION FOR INCOME TAXES 41,920 77,100
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NET INCOME $ 91,726 $ 114,957
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WEIGHTED AVERAGE SHARES OUTSTANDING 17,714,000 17,434,000
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NET INCOME PER COMMON SHARE $ .00 $ .01
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See accompanying Notes to Consolidated Condensed Financial Statements.
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<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
1998 1997
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REVENUES $ 4,397,906 $ 3,864,356
COST OF GOODS SOLD 1,335,546 1,149,228
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GROSS PROFIT 3,062,360 2,715,128
EXPENSES
Selling, general and administrative 2,623,932 2,246,146
Depreciation and amortization 179,035 137,164
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TOTAL EXPENSES 2,802,967 2,383,310
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INCOME BEFORE INCOME TAXES 259,393 331,818
PROVISION FOR INCOME TAXES 95,572 133,000
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NET INCOME $ 163,821 $ 198,818
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WEIGHTED AVERAGE SHARES OUTSTANDING 18,066,000 17,434,000
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NET INCOME PER COMMON SHARE $ .01 $ .01
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See accompanying Notes to Consolidated Condensed Financial Statements.
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<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 163,821 $ 198,818
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 179,035 137,164
Changes in operating assets and
liabilities:
(Increase) Decrease in:
Accounts receivable (48,740) (73,391)
Inventory (385,315) (124,826)
Prepaid expenses (63,308) (32,925)
Increase (Decrease in):
Accounts payable and accrued expenses (53,247) (2,231)
Income taxes payable 10,354 (150,990)
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NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (197,400) (48,381)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (275,575) (307,100)
Deposits and other assets (5,878) 420
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NET CASH USED BY INVESTING
ACTIVITIES (281,453) (306,680)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable (20,000)
Sale of common stock 720,000
Purchase of treasury stock (37,952)
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NET CASH PROVIDED BY FINANCING
ACTIVITIES 682,048 (20,000)
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NET INCREASE (DECREASE) IN CASH AND CASH 203,195 (375,061)
EQUIVALENTS
CASH AND CASH EQUIVALENTS BALANCE,
Beginning of period 1,321,448 1,886,297
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End of period $ 1,524,643 $ 1,511,236
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See accompanying Notes to Consolidated Condensed Financial Statements.
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<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, 1997 of Elegant Illusions, Inc. (the
"Company"), as filed with the Securities and Exchange Commission. The December
31, 1997 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, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.
2. SALE OF COMMON STOCK
In May 1998, the Company sold 800,000 shares of common stock for $.90 per share
in a private transaction.
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<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 annual report are "forward-looking statements," as
defined in Section 21E of the Securities Exchange Act of 1934, which involve
certain risks and uncertainties, which could cause actual results to differ
materially from those discussed herein including, but not limited to, risks
relating to changing economic conditions, the Company's expansion plans and
competitive pressures.
The Company cautions readers that any such forward-looking statements
are based on management's current expectations and beliefs but are not
guarantees of future performance. Actual results could differ materially from
those expressed or implied in the forward-looking statements.
Results of Operations
Sales for the quarter ended June 30, 1998 increased $275,371 or 14.1%
when compared to the quarter ended June 30, 1997.
Management believes that the increase in sales was due to the addition
of two locations (Gilroy and Kenosha) during the quarter ended June 30, 1997;
two additional locations during the remainder of 1997 (Tulare and St. Thomas);
and two additional locations opened during the first six months of 1998 (Birch
Run, Michigan, and Michigan City, Indiana).
As of June 30, 1997, the Company operated 22 retail locations
(including Steinbeck Lady) and as of June 30, 1998, the Company operated 26
retail locations. Two additional locations ( Grapevine, Texas, and Ontario,
California) opened in July 1998.
The Costs of goods as a percentage of revenues increased from 29.1% in
the second fiscal quarter of 1997 to 32.0% in the second fiscal quarter of 1998;
however, the cost of goods as a percentage of revenues during the six month
period ended June 30, 1998 stayed relatively the same as the six month period
ended June 30, 1997 (approximately 30%). Management believes that the increase
from the second quarter of 1997 to the second quarter of 1998 was due to normal
seasonal fluctuations. The Company has inventory categories at varying markups;
if one sales category increases compared to another, the cost of goods can be
affected.
During the quarter ended June 30, 1998, selling, general and
administrative expenses increased when compared to the second quarter of 1997 by
$169,448 (approximately 15.1%). As a percentage of sales, selling, general and
administrative expenses increased slightly from approximately 57.3% during the
second quarter of 1997 to approximately 57.8% during the second quarter of 1998.
Management believes that this increase was due to the cost of operating the four
new stores opened in 1997, the one time costs associated with downsizing the
Kenosha location, the costs of opening and operating the two locations opened
during the first six months of 1998 and the preliminary costs associated with
opening two additional locations in July 1998 (Grapevine, Texas, and Ontario,
California).
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<PAGE>
Results of operations and expense to revenues ratios were generally
affected by the following three items during the period. First, management
anticipated higher sales at the Kenosha and St. Thomas locations than actually
occurred during the first months of their respective operations. This resulted
in the expenses to sales ratios being higher. Management has downsized the
Kenosha location and revenues have improved; however fixed overhead is not
anticipated to be reduced until the first quarter of 1999 when management
believes that the Kenosha store will relocate to new smaller premises within the
same foot traffic corridor of this mall.
Second, the St. Thomas store opened in a new mall and, until August of
1998, was the only tenant open in the mall. Other Tenants are now opening in
anticipation of the upcoming tourist season. Revenues at this location have
begun to increase. Management chose to open the St. Thomas location when it did,
to obtain favorable lease terms and believes that the lease terms obtained will
counter the initial results of operations from this location.
Third, the two St. Croix locations (copy jewelry and fine jewelry),
usually high revenue producers, experienced reduced foot traffic and revenues as
a result of significantly fewer Cruise ships visiting this island. Management
believes, but cannot assure, that this is a temporary trend.
Revenues Same Store Locations.
As of June 30, 1997, the Company operated 22 locations (which included
Steinbeck Lady) that were also in operation at June 30, 1998: two in New
Orleans, three in Monterey, one in Sacramento, one in San Diego, one in Santa
Barbara, two in San Francisco, one in Palm Springs, one in Salt Lake City, one
in Portland, one in Branson, one in Minneapolis, one in Laughlin, two in St
Croix, one in Oahu, one in Kenosha, one in Anchorage (California) and one in
Gilroy. Revenues from the above mentioned locations for the quarter ended June
30, 1998 increased approximately 6% from the same period in 1997. Management
believes that this increase in same store revenues was due primarily to
management's efforts to increase in-store foot traffic.
Management does not believe that the year 2000 problem will have any
material adverse affects on the Company's operations or revenues. In 1994, the
Company adjusted its Point of Sale and Inventory Control software in light of
the year 2000 problem. The foregoing software now utilizes a database management
system which provides date management tools. Mathematical date calculations were
changed to store date information in an eight character field (YYYYMMDD). In
1996, the credit card authorization modules were adjusted to avoid potential
issues from the year 2000 problem. Although years continue to be expressed in
two digits, any two digits prior to 96 will be read as expiring in the 2000s
rather than the 1900s. The Company plans to check with its credit card
processors to confirm that their systems are year 2000 compliant.
During the quarter ended June 30, 1998, the Company maintained an
inventory that provided a turnover ratio of 1:1. Management believes that this
level is appropriate for its plan of operation, including opening new locations
out of inventory on hand and maintaining its strategy of replacing inventory
sold at its retail locations within a 2-3 day time frame. Management reviews
items on hand, on a regular basis, to determine slow moving items, then
discounts the price of those items so they are sold at a price that still
generates a positive gross margin. Accordingly, management does not believe that
its current inventory turnover ratio is indicative of impaired or slow-moving
inventory. The inventory turnover ratio for the quarter ended June 30, 1997 was
1.12:1. Management believes that this slight change in the ratio between the
quarters ended June 30, 1997 and 1998 was due to the anticipated increase
in the pace of store openings.
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<PAGE>
Liquidity and Capital Resources
As of June 30, 1998, the Company had $1,524,643 in cash and cash
equivalents and its current assets exceeded its current liabilities by
$4,905,646.
In October 1997, the Company announced plans for a 50 store expansion
over a three year period, including approximately 25 stores by the end of 1999.
Pursuant to the Company's expansion plan, the Company opened one additional
store (St. Thomas, U.S. Virgin Islands) during the remainder of 1997; and four
stores (Birch Run, Michigan, Michigan City, Indiana, Grapevine, Texas, and
Ontario, California) during the first seven months of 1998. At this point, the
Company anticipates opening approximately three additional stores during the
remainder of 1998. The Company has signed leases for two additional stores, one
in Hawaii (copy jewelry) and one in the US Virgin Islands (fine jewelry), and is
negotiating a lease for a copy jewelry store on the west coast of Florida.
Management believes that the store to be opened at Universal Studios in Orlando,
Florida, previously anticipated to open in October 1998, will open in February
1999. The anticipated opening date has been pushed back due to delays in the
construction of Universal City Walk. As a result of these delays, management
does not believe that the Company will obtain possession of its premises until
at least December 1, 1998.
The cost of opening new stores generally ranges from approximately
$120,000 to $140,000, depending upon a number of factors. Management estimates
that it will cost approximately $830,000 to open the five locations anticipated
to be opened between July 1998 (including the two stores opened in July 1998)
and the end of the current fiscal year and the Universal Studios store (now
scheduled for February 1999). Based upon past experience, to open the remaining
17 stores by the end of 1999, management anticipates that it will need
approximately $2,400,000. It is anticipated that the opening of additional new
stores will be funded from current cash reserves, revenues and bank and/or
equity financing. In this regard, the Company has an advance line of credit up
to $2,000,000 from Comerica Bank to open new stores and the Company's
subsidiary, Elegant Illusions, Inc. (California), has a $350,000 revolving line
of credit from Comerica Bank for working capital purposes. These lines of credit
are collateralized by the Company's assets and the Company is required to
maintain certain financial ratios and covenants. As of June 30, 1998 and the
date hereof, no funds had been advanced on the these lines of credit.
Additional Company management and administrative staff to handle the
increased operations that will result from the planned expansion will be funded
from revenues.
No assurance can be given that the Company will be able to secure
additional bank and/or equity financing over and above its current resources, if
required. Completion of the Company's planned store expansion may be dependant
on the Company's ability to obtain adequate financing on acceptable terms. In
addition, no assurance can be given as to the actual number or location of
stores that the Company will open in the future.
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<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
In May 1998, the Company raised $720,000 from the
sale of 800,000 shares in a private placement
pursuant to Rule 506 of Regulation D under the
Securities Act of 1933. The Company plans to use the
proceeds from this private offering for the opening
of new stores pursuant to its expansion plans.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a vote of Security Holders
None.
Item 5. Other Information
During the six months ended June 30, 1998, in
accordance with Rule 10b-18 under the Securities
Exchange Act of 1934, the Company repurchased an
aggregate of 186,200 shares of its Common Stock in
the open market. The Company repurchased 93,100
shares during 1997. The Board of Directors plans to
return all of these shares to the status of
authorized but unissued shares of the Company's
Common Stock.
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 13, 1998 /S/James Cardinal
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James Cardinal, Chief Executive Officer
/S/ Tamara Gear
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Tamara Gear, Treasurer
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000854941
<NAME> Elegant Illusions
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1.000
<CASH> 1,524,643
<SECURITIES> 0
<RECEIVABLES> 405,864
<ALLOWANCES> 0
<INVENTORY> 2,810,070
<CURRENT-ASSETS> 4,966,150
<PP&E> 1,315,255
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,375,923
<CURRENT-LIABILITIES> 60,504
<BONDS> 0
0
0
<COMMON> 18,234
<OTHER-SE> 6,169,314
<TOTAL-LIABILITY-AND-EQUITY> 6,375,923
<SALES> 4,397,906
<TOTAL-REVENUES> 4,397,906
<CGS> 1,335,546
<TOTAL-COSTS> 1,335,546
<OTHER-EXPENSES> 2,802,967
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 259,393
<INCOME-TAX> 95,572
<INCOME-CONTINUING> 163,821
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 163,821
<EPS-PRIMARY> 0.01
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</TABLE>
