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 September 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
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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 September 30, 1998
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Common Stock, par value 18,234,338 Shares1
$.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 nine months ended September 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 nine months ended September 30,
1998 are not necessarily indicative of the results for the entire fiscal year.
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
Sepetember 30, December 31,
1998 1997
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(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,162,949 $1,321,448
Accounts receivable 449,697 357,124
Income tax receivable 0 82,192
Inventory 3,149,941 2,424,755
Prepaid expenses 239,914 90,427
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TOTAL CURRENT ASSETS 5,002,502 4,275,946
PROPERTY AND EQUIPMENT, NET 1,647,263 1,216,353
OTHER ASSETS 94,712 91,002
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$6,744,476 $5,583,301
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 117,103 $113,751
Income taxes payable 24,640 0
---------- ----------
141,743 113,751
DEFERRED INCOME TAXES 127,871 127,871
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TOTAL LIABILITIES 269,614 241,622
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STOCKHOLDERS' EQUITY
Common stock-authorized 30,000,000 shares,
$.001 par value, issued and outstanding
18,234,338 shares in 1998 and 17,434,338 in 1997 18,234 17,434
Additional paid in capital 3,697,421 2,978,221
Retained earnings 2,843,215 2,392,080
Less treasury stock at cost (186,200 shares in
1998 and 93,100 shares in 1997) (84,008) (46,056)
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6,474,862 5,341,679
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$6,744,476 $5,583,301
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See Accompanying Notes to Consolidated Condensed Financial Statements
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<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
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REVENUES $2,320,587 $2,134,037
COST OF GOODS SOLD 701,619 708,584
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GROSS PROFITS 1,618,968 1,425,453
SELLING, GENERAL AND ADMINISTRATION 1,155,883 1,185,931
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INCOME BEFORE INCOME TAXES 463,084 239,522
PROVISION FOR INCOME TAXES 175,771 96,000
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NET INCOME $287,314 $143,522
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WEIGHTED AVERAGE SHARES OUTSTANDING 18,048,000 17,434,000
============= ============
BASIC AND DILUTED INCOME PER SHARE $0.01 $0.01
============= ============
See Accompanying Notes to Consolidated Condensed Financial Statements
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<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
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REVENUES $6,718,492 $5,998,393
COST OF GOODS SOLD 2,037,164 1,857,812
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GROSS PROFITS 4,681,328 4,140,581
SELLING, GENERAL AND ADMINISTRATION 3,960,193 3,569,241
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INCOME BEFORE INCOME TAXES 721,134 571,340
PROVISION FOR INCOME TAXES 270,000 229,000
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NET INCOME $451,134 $342,340
============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 17,937,000 17,434,000
============ ===========
BASIC AND DILUTED INCOME PER SHARE $0.03 $0.02
============ ===========
See Accompanying Notes to Consolidated Condensed Financial Statements
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<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $451,134 $342,340
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 293,314 211,246
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable (92,573) (104,191)
Inventory (725,186) (232,374)
Prepaid expenses (149,487) (59,580)
Increase (Decrease in):
Accounts payable and accrued expenses 3,352 6,481
Income taxes payable $106,832 (256,549)
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NET CASH PROVIDED BY OPERATIONS (112,614) (92,627)
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CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (720,679) (489,620)
Other assets (7,255) 419
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NET CASH USED IN INVESTING ACTIVITIES (727,934) (489,201)
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CASH FLOW 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 USED IN FINANCING ACTIVITIES 682,048 (20,000)
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NET INCREASE IN CASH AND CASH EQUIVALENTS (158,499) (601,828)
CASH AND CASH EQUIVALENT BALANCE,
Beginning of period 1,321,448 1,886,297
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CASH AND CASH EQUIVALENT BALANCE,
End of period $1,162,949 $1,284,469
========= =========
See Accompanying Notes to Consolidated Condensed Financial Statements
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<PAGE>
ELLEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
COMMENTS
The accompanying unaudited consolidated condensed financial statements, which
are for interim periods, do not include all disclosure provided in the annual
consolidated financial statements. These unaudited consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and 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 consolidated condensed 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 nine months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the full fiscal
year.
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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 September 30, 1998 increased $186,550 or 8.7%
when compared to the quarter ended September 30, 1997.
Management believes that the increase in sales was due to the addition of
one location (St. Thomas) during the remainder of 1997; and five additional
locations opened during the first nine months of 1998 (Birch Run, Michigan,
Michigan City, Indiana, Grapevine, Texas, Ontario, California and Maui, Hawaii).
As of September 30, 1997, the Company operated 22 retail locations and as
of September 30, 1998, the Company operated 28 retail locations.
The Costs of goods as a percentage of revenues decreased from 33.2% in the
third fiscal quarter of 1997 to 30.2% in the third fiscal quarter of 1998; and,
the cost of goods as a percentage of revenues during the nine month period ended
September 30, 1997 decreased from 31.0% to 30.2% for the nine month period ended
September 30, 1998. Management believes that these decreases were 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 September 30, 1998, selling, general and
administrative expenses decreased when compared to the third quarter of 1997 by
$30,048 (approximately 2.5%). As a percentage of sales, selling, general and
administrative expenses decreased from approximately 55.6% during the third
quarter of 1997 to approximately 49.8% during the third quarter of 1998.
Management believes that this decrease was due to the Company's ability to
stabilize the turnover of store managers; reduce all costs associated with
replacing and training managers; and reduce advertising expenditures and public
relations activities.
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<PAGE>
Revenues Same Store Locations.
As of September 30, 1997, the Company operated 22 locations that were also
in operation at September 30, 1998: two in New Orleans, three in Monterey, one
in Old 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 Gilroy and one in Tulare. Revenues from the above mentioned locations for
the quarter ended September 30, 1998 decreased approximately 6% from the same
period in 1997. Management believes that this decrease in same store revenues
was consistent with soft revenues generally experienced by retailers during this
period. Management does not believe that the Company's same store results of
operations for this quarter are indicative of any trend.
Year 2000 Compliance
Many currently installed computer systems and software products use two
digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations.
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 has confirmed with its credit card processors
that their systems are year 2000 compliant.
During the quarter ended September 30, 1998, the Company maintained an
inventory that provided a turnover ratio of 1:0.97. Management does not believe
that it's current inventory turnover is indicative of impaired or slow-moving
inventory. Management notes that the Company has opened six locations this year
and has not had the opportunity of a full year's sales nor has it had the
opportunity of the Christmas selling season as of the end of the third Quarter.
Management believes that it's current inventory turnover ratio of 1:0.97 is
appropriate for it's 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 prices that still generate a positive
gross margin. The inventory turnover ratio for the quarter ended September 30,
1997 was 1:1.05. Management believes that this slight change in the ratio
between the quarters ended September 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 September 30, 1998, the Company had $1,162,949 in cash and cash
equivalents and its current assets exceeded its current liabilities by
$4,860,759.
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; five
stores (Birch Run, Michigan, Michigan City, Indiana, Grapevine, Texas, Ontario,
California and Maui, Hawaii) during the first three Quarters of 1998; and one
store, Seaport fine Jewelers in St. Thomas, Virgin Islands, subsequent to the
end of the third Quarter. At this point, the Company anticipates opening one
additional store (Naples, Florida)s during the remainder of 1998.
Management believes that the store to be opened at Universal Studios in
Orlando, Florida, previously anticipated to open in February 1999, will open in
March 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 $270,000 to open the Naples, Florida and the Universal
Studios store. Based upon past experience, to open the remaining 16 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 September 30, 1998 and the date hereof, no funds had
been advanced on either of 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
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a vote of Security Holders
None.
Item 5. Other Information
None.
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.
/s/ James Cardinal
Dated: November 12, 1998 ---------------------------------------
James Cardinal, Chief Executive Officer
/s/ Tamara Gear
---------------------------------------
Tamara Gear, Treasurer
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<LEGEND>
</LEGEND>
<CIK> 0000854941
<NAME> Elegant Illusions, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,162,949
<SECURITIES> 0
<RECEIVABLES> 449,697
<ALLOWANCES> 0
<INVENTORY> 3,149,941
<CURRENT-ASSETS> 5,002,502
<PP&E> 1,647,263
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<COMMON> 18,234
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<SALES> 6,718,492
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<CGS> 2,037,164
<TOTAL-COSTS> 2,037,164
<OTHER-EXPENSES> 3,960,193
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