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 March 31, 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.
(Exact name of small business issuer as specified in its charter)
DELAWARE 88-0282654
(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
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 March 31, 1998
------------- -------------------------------
Common Stock, par value 17,155,038 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 months ended March 31, 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 months ended March 31, 1998 are not
necessarily indicative of the results for the entire fiscal year.
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ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND MARCH 31, 1998 (UNAUDITED)
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<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1998 1997
--------- ------------
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,336,163 $ 1,321,448
Accounts receivable 412,412 357,124
Income taxes receivable 82,192 82,192
Inventory 2,403,253 2,424,755
Prepaid expenses 129,224 90,427
----------- -----------
TOTAL CURRENT ASSETS 4,363,244 4,275,946
PROPERTY AND EQUIPMENT, NET 1,185,980 1,216,353
OTHER ASSETS 109,459 91,002
----------- -----------
$ 5,658,683 $ 5,583,301
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 108,391 $ 113,751
Income taxes payable 46,599
----------- -----------
TOTAL CURRENT LIABILITIES 154,990 113,751
DEFERRED INCOME TAXES 127,871 127,871
----------- -----------
TOTAL LIABILITIES 282,861 241,622
----------- -----------
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 2,464,175 2,392,080
Less treasury stock at cost
(93,100 shares in 1997 and
186,200 shares in 1998) (84,008) (46,056)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,375,822 5,341,679
----------- -----------
$ 5,658,683 $ 5,583,301
=========== ===========
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 MARCH 31, 1998 AND 1997 (UNAUDITED)
1998 1997
------------ ------------
REVENUES $ 2,165,578 $ 1,907,399
COST OF GOODS SOLD 620,552 579,730
------------ ------------
GROSS PROFIT 1,545,026 1,327,669
EXPENSES
Selling, general and administrative 1,334,525 1,125,186
Depreciation and amortization 85,755 62,722
------------ ------------
TOTAL EXPENSES 1,420,280 1,187,908
------------ ------------
INCOME BEFORE INCOME TAXES 124,746 139,761
PROVISION FOR INCOME TAXES 52,651 55,900
------------ ------------
NET INCOME $ 72,095 $ 83,861
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 17,272,000 17,434,000
============ ============
BASIC EARNINGS PER COMMON SHARE $ .00 $ .00
============ ============
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 THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 72,095 $ 83,861
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 85,755 62,722
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable (55,288) 14,011
Inventory 21,502 44,934
Prepaid expenses (38,797) 1,209
Increase (Decrease in):
Accounts payable and accrued expenses (5,360) 22,574
Income taxes payable 46,599 (14,015)
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 126,506 215,296
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (54,318) (46,288)
Deposits (19,521) 2,045
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (73,839) (44,243)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of note payable (20,000)
Purchase of treasury stock (37,952)
------------ ------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES (37,952) (20,000)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 14,715 151,053
CASH AND CASH EQUIVALENTS BALANCE,
Beginning of period 1,321,448 1,886,297
------------ ------------
CASH AND CASH EQUIVALENTS BALANCE,
End of period $ 1,336,163 $ 2,037,350
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid $ $ 291
Income taxes paid $ 6,053 $ 69,914
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 condensed 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
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 months ended March 31,
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 March 31, 1998 increased $258,179 or 13.5% when
compared to the quarter ended March 31, 1997.
Management believes that the increase in sales was due to the addition of
four locations (Gilroy, Kenosha, Tulare and St. Thomas) in 1997.
As of March 31, 1997, the Company operated 20 retail locations and as of
March 31, 1998, the Company operated 24 retail locations. Although the Company
added four stores in 1997, it closed its Pavilions store in January 1997 and
consolidated Steinbeck Lady into Steinbeck Jewelers.
The Costs of goods as a percentage of revenues decreased slightly from
30.1% in fiscal 1996 to 28.7% in fiscal 1997. Management believes that this
decrease was due to the Company's ongoing efforts to reduce costs.
During the quarter ended March 31, 1998, selling, general and
administrative expenses increased when compared to the first quarter of 1997 by
$209,339 (approximately 18.6%). As a percentage of sales, selling, general and
administrative expenses increased from approximately 59.0% during the first
quarter of 1997 to approximately 61.6% during the first quarter of 1998.
Management believes that this increase was the result of a number of factors.
One factor was the cost of operating the four new stores opened in 1997. Another
factor was labor costs. In this regard sales staff wages, as a percentage of
sales, increased from 11.2% during the first quarter of 1997 to 12.4% during the
first quarter of 1998 and management salaries, as a percentage of sales,
increased from 7.0% during the first quarter of 1997 to 8.4% during the first
quarter of 1998. Management raised labor costs to stabilize the Company's
workforce in light of the strong economic conditions in the United States over
the past year. Management believes that increased salaries will lead to a
decrease in job turnover and added revenues during the remainder of 1998.
Increased labor costs also reflects an increase in staff in anticipation of
meeting the additional administrative burdens of operating the stores to be
opened pursuant to the Company's expansion plans. The Company also increased
media advertising in the first quarter of 1998 as compared to the first quarter
of 1997. As a percentage of sales, media advertising increased from 1.8% during
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<PAGE>
the first quarter of 1997 to 2.3% during the first quarter of 1998. This
increase in media advertising is part of the Company's long-term plan to promote
name recognition.
Revenues same store locations.
As of March 31, 1997, the Company operated 20 locations (which includes
Steinbeck Lady) that were also in operation at March 31, 1998: two in New
Orleans, four 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 and one in Oahu. The Company's Pavilions store in Sacramento, which was
operating on March 31, 1996, closed in January 1997. Revenues from the above
mentioned 20 locations for the quarter ended March 31, 1998, decreased
approximately 10% from the same period in 1997. Management believes that this
decrease in same store revenues was due primarily to an exceptionally good first
quarter in 1997. Same store sales for the first quarter ended March 31, 1997
exceeded same store sales for the first quarter of 1996 by approximately 19%. In
this regard, during March 1997, the Company's Bourbon Street Gallery had a
single $100,000 transaction. Excluding this transaction, same store sales
decreased by 4.7% during the first quarter of 1998 when compared to the first
quarter of 1997.
In 1996, the Company adjusted some of its software in light of the year
2000 problem. Management does not believe that the year 2000 problem will have
any material adverse affect on the Company's operations or revenues.
Liquidity and Capital Resources
As of March 31, 1998, the Company had $1,336,163 in cash and cash
equivalents and its current assets exceeded its current liabilities by
$1,181,173.
In October 1997, subsequent to the opening of a new store in Gilroy,
California, the Company announced plans for a 50 store expansion over a three
year period. Pursuant to the Company's expansion plan, the Company opened three
stores (Tulare, California, Kenosha, Wisconsin and St. Thomas, U.S. Virgin
Islands) during the remainder of 1997. The Company plans to open approximately
25 of the stores over the next 19 months and anticipates opening approximately
six of these new stores in 1998. At this time, management believes, but cannot
assure, that six of these stores will be located at Birch Run, Michigan (opening
May 27, 1998); Michigan City, Indiana (opening June 2, 1998); Universal Studios
in Orlando, Florida (anticipated to open in October 1998); Ontario Mills,
California; Grapevine Mills, Texas; and Maui, Hawaii. The Company also plans to
move its Kenosha store from one location to a new location within the same mall.
The cost of opening new stores ranges from approximately $ 120,000 to $
140,000, depending upon a number of factors. Based upon past experience,
management anticipates that it will need approximately $ 3,500,000 to open the
planned 25 stores over the next 19 months. Factored into the anticipated amount
of funds needed to complete the planned expansion, are funds required to further
increase the Company's management and administrative staff to handle the
increased operations that will result from the planned expansion. It is
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<PAGE>
anticipated that the opening of additional new stores will be funded from
current cash reserves and revenues and, to the extent required, from bank and/or
equity financing. No assurance can be given that the Company will be able to
secure additional bank and/or equity financing, if required. Completion of the
Company's planned store expansion is 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.
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 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 March 31, 1998 and the
date hereof, no funds had been advanced on the these lines of credit.
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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.
Dated: May 19, 1998 /s/ James Cardinal
James Cardinal, Chief Executive Officer
/s/ Tamara Gear
Tamara Gear, Treasurer
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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