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, 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
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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
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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 June 30, 1999
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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 and six months ended June 30, 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 and six months ended June 30, 1999
are not necessarily indicative of the results for the entire fiscal year.
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited) (Derived from
Audited
Financial
Statements)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,452,874 $1,560,403
Accounts receivable 387,514 415,141
Income tax receivable 114,961 142,800
Inventory 2,671,782 2,635,870
Prepaid expenses 245,609 270,685
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TOTAL CURRENT ASSETS 4,872,739 5,024,899
PROPERTY AND EQUIPMENT, NET 1,865,132 1,743,134
OTHER ASSETS 88,489 94,188
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$6,826,360 $6,862,221
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 114,959 $162,244
Income taxes payable 0 0
114,959 162,244
DEFERRED INCOME TAXES 152,871 152,871
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TOTAL LIABILITIES 267,830 315,115
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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 2,721,882
Less treasury stock at cost (62,067
shares in 1999 and 1998) (84,008) (84,008)
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6,558,529 6,547,106
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$6,826,360 $6,862,221
========== ==========
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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
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REVENUES $4,905,056 $4,397,906
COST OF GOODS SOLD 1,559,690 1,329,681
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GROSS PROFITS 3,345,366 3,068,225
SELLING, GENERAL AND ADMINISTRATION 3,325,943 3,239,432
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INCOME(LOSS) BEFORE INCOME TAXES 19,423 (171,207)
PROVISION FOR INCOME TAXES 8,000 (56,502)
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NET INCOME(LOSS) $11,423 ($114,705)
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,084,379 5,831,000
========== ==========
BASIC AND DILUTED INCOME(LOSS) PER SHARE $0.00 ($0.02)
========== ==========
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 JUNE 30, 1999 AND 1998
1999 1998
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REVENUES $2,650,194 $2,232,328
COST OF GOODS SOLD 914,761 674,126
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GROSS PROFITS 1,735,433 1,558,202
SELLING, GENERAL AND ADMINISTRATION 1,661,020 1,703,568
---------- ----------
INCOME BEFORE INCOME TAXES 74,413 (145,366)
PROVISION FOR INCOME TAXES 27,000 (45,596)
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NET INCOME $47,413 ($99,770)
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,084,379 5,904,667
========== ==========
BASIC AND DILUTED INCOME PER SHARE $0.01 ($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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income(loss) $11,423 ($114,705)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 199,469 179,035
Issuance of stock for services - 205,000
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable 27,627 (48,740)
Inventory (35,912) (139,007)
Prepaid expenses 25,076 (63,308)
Increase (Decrease in):
Accounts payable and accrued expenses (47,285) (53,247)
Income taxes payable $27,840 (162,428)
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NET CASH PROVIDED BY OPERATIONS 208,238 (197,400)
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CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (321,467) (275,575)
Other assets 5,699 (5,878)
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NET CASH USED IN INVESTING ACTIVITIES (315,768) (281,453)
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CASH FLOW FROM FINANCING ACTIVITIES
Sale of common stock 720,000
Purchase of treasury stock - (37,952)
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NET CASH USED IN FINANCING ACTIVITIES 0 682,048
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NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (107,530) 203,195
CASH AND CASH EQUIVALENT BALANCE,
Beginning of period 1,560,403 1,321,448
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CASH AND CASH EQUIVALENT BALANCE,
End of period $1,452,873 $1,524,643
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements
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<PAGE>
ELLEGANT ILLUSIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. COMMENTS
The accompanying unaudited consolidated 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. Th SB for 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 and six months ended June 30, 1999 are not
necessarily indicative of the results to be expected for the full fiscal year.
2. RESTATEMENT OF THREE AND SIX MONTH PERIOD ENDED JUNE 30, 1998
Subsequent to the year ended 1998 the Company determined that an error related
to the elimination of inter-company 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 three and six month periods ended June 30, 1998 have
been restated to correct these errors.
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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 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 June 30, 1999 increased $417,866 or 18.7%
when compared to the quarter ended June 30, 1998.
We believe that the increase in sales was due to the addition of seven
locations (Birch Run, Michigan City, Grapevine, Ontario, Lahini-Maui, Seaport
and Miromar) in 1998 and two locations (Royal Dane in St. Thomas and Universal
Studios in Orlando) in 1999 and occurred in spite of closing two locations in
1999 as noted below.
As of June 30, 1998, we operated 25 retail locations and, as of June
30, 1999, we operated 30 retail locations. Although we added seven stores in
1998 and two stores in the first half of 1999, we closed our Portland, Oregon
and Ontario, California stores on January 3, 1999 and April 28, 1999,
respectively. In our last quarterly report we noted that we were considering
closing our Kenosha, Wisconsin store. The Kenosha store closed on August 3,
1999.
Costs of goods as a percentage of revenues increased from 30.2% in the
quarter ended June 30, 1998 to 34.5% in the quarter ended June 30, 1999. We
believe that this increase was due to a shift in the type of products purchased
by our customers to higher priced products that have a lower gross margin and
increases in sales of our discounted merchandise.
During the quarter ended June 30, 1999, selling, general and
administrative expenses decreased when compared to the second quarter of 1998 by
$42,548 (approximately 2.5%). As a percentage of sales, selling, general and
administrative expenses decreased from approximately 76.3% during the second
quarter of 1998 to approximately 62.7% during the second quarter of 1999. We
believe that the decrease in selling, general and administrative expenses was
the result of our closing of the Portland and Ontario locations, our eliminating
certain media advertising and the 2% increase in same store sales.
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1 The financial information for the quarter ended June 30, 1998 has been
restated. See Note 2 to our unaudited financial statements contained in Part I;
Section 1 of this Form 10-QSB Revenues same store locations.
-6-
<PAGE>
Revenues same store locations.
As of June 30, 1998, we operated 24 locations that were also in
operation at June 30, 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, one in Oahu, one in Birch Run and one in Michigan City. Our Portland
location was in operation at June 30, 1998, but was closed prior to June 30,
1999. Accordingly, same store revenues excludes our Portland location.
Revenues from same store locations for the quarter ended June 30, 1999,
increased approximately 2% from the same period in 1998.
Net Income
During the quarter ended June 30, 1999, we realized net income of
$47,413 compared to a net loss of ($99,770) for the second quarter of 1998.
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.
We also evaluated the profitability of our locations and, as a result,
we closed our Portland and Ontario locations during the first half of 1999 and
we closed our Kenosha location on August 3, 1999.
Inventory Turnover Ratios
During the second quarter of 1999, we maintained an inventory that
provided a turnover ratio of 1.18:1. 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 two in the first half of 1999 and
have not had the opportunity of a full year's sales.
We believe that our current inventory turnover ratio of 1.18:1 is
appropriate for our plan of operation, including 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 second quarter of
1998 was 1.02:1.
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<PAGE>
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 June 30, 1999, we had $1,452,874 in cash and cash equivalents,
down $107,529 from December 31, 1998, and our current assets exceeded our
current liabilities by $4,757,780, down $104,875 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 two in 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 do not plan
to open any additional stores during the remainder of 1999.
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 early September 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.
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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: August 13, 1999 s/James Cardinal
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James Cardinal, Chief Executive Officer
s/Tamara Gear
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Tamara Gear, Treasurer
-10-
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<ARTICLE> 5
<CIK> 0000854941
<NAME> Elegant Illusions, Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,452,874
<SECURITIES> 0
<RECEIVABLES> 387,514
<ALLOWANCES> 0
<INVENTORY> 2,671,782
<CURRENT-ASSETS> 4,872,739
<PP&E> 3,412,929
<DEPRECIATION> 1,547,797
<TOTAL-ASSETS> 6,826,360
<CURRENT-LIABILITIES> 114,959
<BONDS> 0
0
0
<COMMON> 6,146
<OTHER-SE> 6,552,383
<TOTAL-LIABILITY-AND-EQUITY> 6,826,360
<SALES> 4,905,056
<TOTAL-REVENUES> 4,905,056
<CGS> 1,559,690
<TOTAL-COSTS> 1,559,690
<OTHER-EXPENSES> 3,325,943
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,423
<INCOME-TAX> 8,000
<INCOME-CONTINUING> 19,423
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,423
<EPS-BASIC> 0.00
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</TABLE>
