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, 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
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 September 30, 1999
----------------------- ---------------------------------
Common Stock, par value 6,084,379 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 and nine months ended September 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 nine months ended September 30,
1999 are not necessarily indicative of the results for the entire fiscal year.
2
<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 and nine
months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full fiscal year.
2. RESTATEMENT OF THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1998
Subsequent to the year ended December 31, 1998 the Company determined
that an error related to the elimination of intercompany inventory
profits affecting operating results in previous quarter of 1998. See
unaudited Note 7 To the Company's 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
nine months period ended September 30, 1998 have been restated to correct
these errors.
3
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1999 1998
(Unaudited) (Derived from
Audited
Financial
Statements)
----------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,126,525 $1,560,403
Accounts receivable 424,353 415,141
Income tax receivable 100,000 142,800
Inventory 2,865,031 2,635,870
Prepaid expenses 313,591 270,685
TOTAL CURRENT ASSETS 4,829,501 5,024,899
PROPERTY AND EQUIPMENT, NET 1,895,382 1,743,134
OTHER ASSETS 104,283 94,188
---------- ----------
$6,829,166 $6,862,221
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses 86,693 $162,244
Income taxes payable 0 0
86,693 162,244
DEFERRED INCOME TAXES 152,871 152,871
---------- ----------
TOTAL LIABILITIES 239,564 315,115
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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 2,752,955 2,710,459
Less treasury stock at cost (62,067 shares in
1999 and 1998) (84,008) (84,008)
---------- ----------
6,589,602 6,547,106
---------- ----------
$6,829,166 $6,862,221
========== ==========
See Accompanying Notes to Consolidated Condensed Financial Statements
4
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- ----------
REVENUES $7,428,980 $6,718,493
COST OF GOODS SOLD $2,310,201 2,178,986
---------- ----------
GROSS PROFITS 5,118,779 4,539,507
SELLING, GENERAL AND ADMINISTRATION 5,051,284 4,373,578
---------- ----------
INCOME(LOSS) BEFORE INCOME TAXES 67,496 165,929
PROVISION FOR INCOME TAXES 25,000 71,463
---------- ----------
NET INCOME(LOSS) $ 42,496 $ 94,466
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,084,379 5,893,000
========== ==========
BASIC AND DILUTED INCOME(LOSS) PER SHARE $0.01 $0.02
========== ==========
See Accompanying Notes to Consolidated Condensed Financial Statements
5
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
---------- ----------
REVENUES $2,523,924 $2,320,587
COST OF GOODS SOLD 750,511 733,721
---------- ----------
GROSS PROFITS 1,773,413 1,586,866
SELLING, GENERAL AND ADMINISTRATION 1,725,341 1,249,731
---------- ----------
INCOME BEFORE INCOME TAXES 48,072 337,135
PROVISION FOR INCOME TAXES 17,000 127,965
---------- ----------
NET INCOME $ 31,072 $ 209,170
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,084,379 6,016,000
========== ==========
BASIC AND DILUTED INCOME PER SHARE $0.01 ($0.03)
========== ==========
See Accompanying Notes to Consolidated Condensed Financial Statements
6
<PAGE>
<TABLE>
<CAPTION>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss) $ 42,496 $ 94,466
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 306,493 293,314
Issuance of stock for services 205,000
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable (9,212) (92,573)
Inventory (229,161) (583,365)
Prepaid expenses (42,906) (149,487)
Increase (Decrease in):
Accounts payable and accrued expenses (75,551) 3,352
Income taxes payable 42,800 116,680
-------- ---------
NET CASH PROVIDED BY OPERATIONS 34,958 (112,613)
-------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (458,741) (720,679)
Other assets (10,095) (7,255)
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NET CASH USED IN INVESTING ACTIVITIES (468,836) (727,934)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Sale of common stock 720,000
Purchase of treasury stock (37,952)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES 0 682,048
--------- ---------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (433,878) (158,499)
CASH AND CASH EQUIVALENT BALANCE,
Beginning of period 1,560,403 1,321,448
--------- ---------
CASH AND CASH EQUIVALENT BALANCE,
End of period $1,126,525 $1,162,949
========= =========
</TABLE>
See Accompanying Notes to Consolidated Condensed Financial Statements
7
<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 September 30, 1999 increased $203,337 or
8.8% when compared to the quarter ended September 30,1998.
We believe that the increase in sales was due to the addition of two
locations in 1998, Seaport Jewelers opened October 1998, and Miromar opened
November 1998, and the addition of two locations in 1999, Royal Dane Mall opened
January 1999 and Universal Studios Citiwalk opened June 1999.
As of September 30, 1998, we operated 28 retail locations and, as of
September 30, 1999, we operated 29 retail locations. Although we added seven
stores in 1998 and two stores in the first half of 1999, we closed our Portland,
Oregon, Ontario, California, and Kenosha, Wisconsin stores on January 3, 1999,
April 28, 1999, and August 3, 1999, respectively.
Costs of goods as a percentage of revenues decreased from 31.6% in the
quarter ended September 30, 1998 to 29.7% in the quarter ended September 30,
1999. We believe that this decrease was due, in part, to normal seasonal
fluctuations and in part to improved purchasing of inventory.
During the quarter ended September 30, 1999, selling, general and
administrative expenses increased when compared to the third quarter of 1998 by
$475,610 (approximately 38.1%). As a percentage of sales, selling, general and
administrative expenses increased from approximately 53.9% during the third
quarter of 1998 to approximately 68.4% during the third quarter of 1999. We
believe that the significant increase in selling, general and administrative
expenses was the result of the following factors:
- ----------------------------------
1. The financial information for the quarter ended September 30, 1998 has been
restated. See Note 2 to our unaudited financial statements contained in
Part I; Section 1 of this Form 10-QSB.
8
<PAGE>
- - The cost of operating the Birch Run, Michigan City, Grapevine Mills and
Lahina (Maui) locations for the full nine months of 1999. These locations
were opened in May 1998, June 1998, July 1998 and September 1998,
respectively, and, accordingly, did not operate for the full nine months
ended September 30, 1998.
- - The cost of operating Seaport Jewelers and Miromar locations for the full
nine months of 1999. These locations were opened in October 1998, and
November 1998, respectively.
- - The cost of operating Royal Dane Mall and Universal Studios Citiwalk
locations which opened January 1999 and June 1999, respectively.
- - Significantly Lower than anticipated revenues for the new locations,
Seaport Jewelers and Royal Dane Mall. Management believes that revenues
were down as the result of lower than expected bookings on the visiting
cruise ships during the summer season; however the Cruise Ship industry has
announced an additional 100 visits to the port of St Thomas for the coming
Cruise Ship season that began November 1, 1999.
- - Lower than expected revenues at the Universal Citiwalk location. However,
management notes that revenues for this location were closer to
expectations for the month of October 1999
- - One time costs associated with the opening of Royal Dane Mall and Universal
Citiwalk locations.
- - Increased payroll costs incurred due to the very competitive labor market.
Payroll costs as a percentage of revenues increased from 22.42% to 24.08%
an increase of 1.66 percentage points.
Revenues same store locations.
As of September 30, 1998, we operated 24 locations that were also in
operation at September 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 Tulare, two in St Croix, one in St Thomas, one
in Oahu, one in Birch Run, one in Grapevine and one in Michigan City. Our
Portland and Kenosha locations were in operation at September 30, 1998, but were
closed prior to September 30, 1999. Accordingly, same store revenues exclude our
Portland and Kenosha locations. Further, Lahina (Maui) was open for one month of
the quarter ending September 30, 1998 so its revenues are excluded.
Revenues from same store locations for the quarter ended September 30,
1999, increased approximately 6.68% from the same period in 1998. Management
believes that this increase was due to the Company's diversification into new
products and the results of its ongoing one-on-one training of its managers and
sales staff.
9
<PAGE>
Net Income
During the quarter ended September 30, 1999, we realized net income
of $31,072 compared to net income of $209,170 for the third 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 in August 1999.
Inventory Turnover Ratios
During the third quarter of 1999, we maintained an inventory that
provided a turnover ratio of 1.12:1. We do not believe that our current
inventory turnover is indicative of impaired or slow-moving inventory.
We believe that our current inventory turnover ratio of 1.12:1 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 third quarter of
1998 was 1:0.97. We believe that this improved inventory turnover ratio is due
to the fact that during the third quarter of 1999 we had more stores open for a
full 12 month period and fewer new stores that were open only a portion of the
period than during the third quarter of 1998.
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.
10
<PAGE>
Liquidity and Capital Resources
As of September 30, 1999, we had $1,126,525 in cash and cash
equivalents, down $433,878 from December 31, 1998, and our current assets
exceeded our current liabilities by $4,742,808, down $119,847 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.
In September 1999, we established an e-commerce site
(www.elegantillusions.com) to sell our products over the internet. 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.
11
<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.
12
<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: November 8, 1999 /s/ James Cardinal
---------------------------------------
James Cardinal, Chief Executive Officer
/s/ Tamara Gear
---------------------------------------
Tamara Gear, Treasurer
13
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000854941
<NAME> ELEGANT ILLUSIONS, INC.
<MULTIPLIER> 1
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.000
<CASH> 1,126,525
<SECURITIES> 0
<RECEIVABLES> 424,353
<ALLOWANCES> 0
<INVENTORY> 2,865,031
<CURRENT-ASSETS> 4,829,501
<PP&E> 3,549,001
<DEPRECIATION> 1,653,619
<TOTAL-ASSETS> 6,829,166
<CURRENT-LIABILITIES> 86,693
<BONDS> 0
0
0
<COMMON> 6,146
<OTHER-SE> 6,583,455
<TOTAL-LIABILITY-AND-EQUITY> 6,829,166
<SALES> 7,428,980
<TOTAL-REVENUES> 7,428,980
<CGS> 2,310,201
<TOTAL-COSTS> 2,301,201
<OTHER-EXPENSES> 5,051,284
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 67,496
<INCOME-TAX> 25,000
<INCOME-CONTINUING> 42,496
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