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, 1999
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: (831) 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
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State 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, 1999
----------------------- -----------------------------
Common Stock, par value 6,084,379 Shares
$.001 per share
Transitional Small Business Format (check one); Yes No X
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<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, 1999.
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, 1998.
The results reflected for the three months ended March 31, 1999 are not
necessarily indicative of the results for the entire fiscal year.
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents ................... $ 1,349,822 $ 1,560,403
Accounts receivable ......................... 463,780 415,141
Income tax receivable ....................... 161,800 142,800
Inventory ................................... 2,612,762 2,635,870
Prepaid expenses ............................ 279,913 270,685
----------- -----------
TOTAL CURRENT ASSETS ............... 4,868,077 5,024,899
PROPERTY AND EQUIPMENT, NET .......................... 1,851,222 1,743,134
OTHER ASSETS ......................................... 88,888 94,188
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$ 6,808,187 $ 6,862,221
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses ....... 141,651 $ 162,244
Income taxes payable ........................ 0 0
----------- -----------
141,651 162,244
DEFERRED INCOME TAXES ................................ 152,871 152,871
----------- -----------
TOTAL LIABILITIES ........................... 294,522 315,115
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STOCKHOLDERS' EQUITY
Common stock-authorized 30,000,000 shares,
$.001 par value, issued and outstanding
6,146,446 shares in 1999 and 1998 ........... 6,146
6,146
Additional paid in capital .................. 3,914,509 3,914,509
Retained earnings ........................... 2,677,018 2,710,459
Less treasury stock at cost (62,067 shares in
1999 and 1998) .............................. (84,008) (84,008)
----------- -----------
6,513,665 6,547,106
$ 6,808,187 $ 6,862,221
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements
-1-
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
1999 1998
----------- -----------
REVENUES ............................... $2,254,863 $2,165,578
COST OF GOODS SOLD ..................... 644,930 655,555
GROSS PROFITS .......................... 1,609,933 1,510,023
SELLING, GENERAL AND ADMINISTRATION .... 1,662,374 1,535,863
INCOME(LOSS) BEFORE INCOME TAXES ....... (52,441) (25,840)
PROVISION FOR INCOME TAXES ............. (19,000) (10,906)
NET INCOME(LOSS) ....................... ($ 33,441) ($ 14,934)
WEIGHTED AVERAGE SHARES OUTSTANDING .... 6,084,379 5,757,333
BASIC AND DILUTED INCOME(LOSS) PER SHARE ($ 0.01) (0.00)
See Accompanying Notes to Consolidated Condensed Financial Statements
-2-
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income(loss) ...................................... ($ 33,441) ($ 14,934)
Adjustment to reconcile net Income
to net cash provided by (used in)
operating activities:
Depreciation and amortization ................ 97,690
85,755
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts Receivable ................. (48,639) (55,288)
Inventory ........................... 23,108
172,088
Prepaid expenses .................... (9,228) (38,797)
Increase (Decrease in):
Accounts payable and accrued expenses (20,593) (5,360)
Income taxes payable ................ (19,000) (16,958)
NET CASH PROVIDED BY OPERATIONS ................................ (10,103) 126,506
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment .................... (205,780) (54,318)
Other assets .......................................... 5,302 (19,521)
NET CASH USED IN INVESTING ACTIVITIES .......................... (200,477) (73,839)
CASH FLOW FROM FINANCING ACTIVITIES
Sales of common stock
Purchase of treasury stock ............................ - (37,952)
NET CASH USED IN FINANCING ACTIVITIES .......................... 0 (37,952)
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS ............ (210,581) 14,715
CASH AND CASH EQUIVALENT BALANCE,
Beginning of period ................................... 1,560,403 1,321,448
CASH AND CASH EQUIVALENT BALANCE,
End of period ......................................... $ 1,349,822 $ 1,336,163
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements
-3-
<PAGE>
ELLEGANT 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 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, 1998 of
Elegant Illusion, Inc. (the "Company"), as filed with the Securities and
Exchange Commission. The December 31, 1998 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 months ended March 31,
1999 are not necessarily indicative of the results to be expected for the
full fiscal year.
2. RESTATEMENT OF QUARTER ENDED MARCH 31, 1998
Subsequent to the year ended 1998 the Company determined that an error
related to the elimination of intercompany inventory profits affected
operating results in previous quarters of 1998. See unaudited Note 7 to the
Company's Consolidated Audited Financial Statements included in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1998. As a result, the financial statements herein for the quarter ended
March 31, 1998 have been restated to correct these errors.
<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 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, our shift in expansion plans and competitive pressures.
We caution readers that any such forward-looking statements are based
on our 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(1)
Sales for the quarter ended March 31, 1999 increased $89,285 or 4.1%
when compared to the quarter ended March 31, 1998.
We believe that the increase in sales was due to the addition of seven
locations (Birch Run, Michigan City, Grapevine, Ontario, Maui, Miromar and St.
Thomas) in 1998 and one location (St. Thomas) in 1999, offset by a decrease in
same store sales of approximately 10.5% compared to the first quarter of 1998
and the closing of our Portland, Oregon location in January 1999.
As of March 31, 1998, we operated 23 retail locations and as of March
31, 1999, we operated 30 retail locations. Although we added seven stores in
1998 and one store in the first quarter of 1999, we closed our Ontario,
California store on May 1, 1999 and, as noted above, we closed our Portland,
Oregon store in January 1999.
Costs of goods as a percentage of revenues decreased slightly from
30.3% in the quarter ended March 31, 1998 to 28.6% in the quarter ended March
31, 1999. We believe that this decrease was due to our ongoing efforts to reduce
costs.
During the quarter ended March 31, 1999, selling, general and
administrative expenses increased when compared to the first quarter of 1998 by
$126,511 (approximately 8.2%). As a percentage of sales, selling, general and
administrative expenses increased from approximately 70.9% during the first
quarter of 1998 to approximately 73.7% during the first quarter of 1999.
Excluding depreciation, during the quarter ended March 31, 1999, selling,
general and administrative expenses increased when compared to the first quarter
of 1998 by $37,123 (approximately 2.6%). As a percentage of sales, selling,
general and administrative expenses, excluding depreciation, increased from
approximately 67.0% during the first quarter of 1998 to approximately 69.4%
during the first quarter of 1999. We believe that the increase in selling,
general and administrative expenses was the result of the cost of setting up and
operating the seven new stores opened in 1998 subsequent to the end of the first
quarter of 1998 and setting up and operating one new store opened in January
1999, offset by expenses saved as a result of the closing of the Portland
location. Expenses incurred in setting up and commencing operations at new
locations are non-recurring and are fully expensed when incurred. Labor costs,
in this tight labor market, rose as a percentage of sales from 20.8% for the
period ending March 31, 1998 to 23.6% for the same period in 1999.
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1 The financial information for the quarter ended March 31, 1998 has been
restated. See Note 2 to our unaudited financial statements contained in Part I;
Section 1 of this Form 10-QSB.
<PAGE>
Revenues same store locations.
As of March 31, 1998, we operated 23 locations that were also in
operation at March 31, 1999: 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 Branson, one in Minneapolis, one in
Laughlin, one in Gilroy, one in Kenosha, one in Tulare, two in St Croix, one in
St Thomas and one in Oahu. Revenues from these locations for the quarter ended
March 31, 1999, decreased approximately 10.5% from the same period in 1998.
We believe that the overall decrease in same store revenues during the
first quarter of 1999 was due, in part, to extended periods of bad weather at
certain of our locations which disrupted foot traffic flow. A good portion of
our sales come from walk-in traffic.
We believe, but cannot assure, based on results for April and the
beginning of May 1999, that same store sales will stabilize during the second
quarter of 1999. In this regard, same store sales for the month of April 1999
compared to April 1998 were up approximately 3%.
Net Loss
During the quarter ended March 31, 1999, although we increased
revenues, we incurred a net loss of $33,441. We believe that the primary reason
for this loss was the significant decrease in same store sales, mitigated by our
reduction of same store expenses.
As we discussed in our Annual Report on Form 10-KSB for the year ended
December 31, 1998, we have shifted our focus from expanding the number of our
stores to increasing sales at existing locations and reducing costs.
We have cut costs in corporate operations, cut back staff hours in our
retail stores and increased employees' wages to compete in the fierce labor
market in the retail industry.
During the quarter ended March 31, 1999, we effectively have reduced
selling, general and administrative expenses, exclusive of depreciation, at our
locations that have been operating for at least one full year by approximately
9.8% compared to the first quarter of 1998.
We also are evaluating our locations and are in the process of shedding
those locations that are not and, in our opinion will not, generate sufficient
profits. In this regard, we have closed our Ontario location and plan to close
our Kenosha location.
<PAGE>
Inventory Turnover Ratios
During the first quarter of 1999, we maintained an inventory that
provided a turnover ratio of 0.98. We do not believe that our current inventory
turnover is indicative of impaired or slow-moving inventory. We note that we
opened seven locations during 1998 and one in the first quarter of 1999 and have
not had the opportunity of a full year's sales.
We believe that our current inventory turnover ratio of 0.98 is
appropriate for our plan of operation, including opening new locations out of
inventory on hand and maintaining our strategy of replacing inventory sold at
our retail locations within a 2-3 day time frame. We review items on hand, on a
regular basis, to determine slow moving items, then discount the price of those
items so they are sold at prices that still generate a positive gross margin.
The inventory turnover ratio for the first quarter of 1998 was 1.03.
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.
We do not believe that the year 2000 problem will have any material
adverse affects on the our operations or revenues. In 1994, we adjusted our
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. We have
confirmed with our credit card processors that their systems are year 2000
compliant.
Liquidity and Capital Resources
As of March 31, 1999, we had $1,349,822 in cash and cash equivalents,
down $210,581 from December 31, 1998, and our current assets exceeded our
current liabilities by $4,726,472, down $136,183 from December 31, 1998.
In 1997 we announced a 50 store expansion. In this regard, we opened
four locations in 1997, seven in 1998 and one in January 1999. However,
management has elected to shift its focus from opening new locations to
bolstering revenues from existing stores and expanding into e-commerce. As a
result, we are limiting our expansion plans at this time. We opened one
additional store at the Royal Dane Mall in St Thomas, USVI during the first
quarter of 1999 and plan to open two additional locations during the remainder
of 1999.
<PAGE>
We anticipate that one of these stores, Universal Studios in Orlando,
Florida will open on May 27, 1999.
The cost of opening new stores generally ranges from approximately
$120,000 to $140,000, depending upon a number of factors. We anticipate that the
opening of additional new stores will be funded from current cash reserves,
revenues and/or equity financing.
We also are in the process of setting up an e-commerce site to sell our
products over the internet. We anticipate, but cannot assure, that the site will
be operational in August 1999. We believe that internet sales may be a more cost
effective and faster method of expanding sales beyond the current geographic
boundaries of our existing stores. A significant amount of our business comes
from tourists who visit certain of our stores but do not have an Elegant
Illusions store near their home. We anticipate that these tourists and others
who will learn about our e-commerce site at our existing locations will shop on
our e-commerce site.
We had a commitment for a line of credit up to $2,000,000 from Comerica
Bank to open new stores and our subsidiary, Elegant Illusions, Inc.
(California), had a commitment for a $350,000 revolving line of credit from
Comerica Bank for working capital purposes. However, we have elected not to go
forward with these lines of credit.
No assurance can be given that the Company will be able to secure
additional financing over and above its current resources, if required. In
addition, no assurance can be given as to the actual number or location of
stores that the Company will open in the future.
<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.
<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 14, 1999 /s/ James Cardinal
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James Cardinal, Chief Executive Officer
/s/ Tamara Gear
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Tamara Gear, Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000854941
<NAME> Elegant Illusions, Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,349,822
<SECURITIES> 0
<RECEIVABLES> 479,780
<ALLOWANCES> 16,000
<INVENTORY> 2,612,762
<CURRENT-ASSETS> 4,868,078
<PP&E> 3,298,443
<DEPRECIATION> 1,447,221
<TOTAL-ASSETS> 6,808,187
<CURRENT-LIABILITIES> 141,651
<BONDS> 0
0
0
<COMMON> 6,146
<OTHER-SE> 3,914,509
<TOTAL-LIABILITY-AND-EQUITY> 6,808,187
<SALES> 2,254,863
<TOTAL-REVENUES> 2,254,863
<CGS> 644,930
<TOTAL-COSTS> 644,930
<OTHER-EXPENSES> 1,662,374
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (52,441)
<INCOME-TAX> (19,000)
<INCOME-CONTINUING> (33,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,441)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
