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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-28128
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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 September 30, 2000
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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 nine months ended September 30, 2000.
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, 1999.
The results reflected for the three and nine months ended September 30,
2000 are not necessarily indicative of the results for the entire fiscal year.
2
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ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,760,254 $ 1,478,510
Accounts receivable (net of allowance for
doubtful accounts of $16,000 in 1999 and 2000 415,353 224,410
Income Taxes receivable 88,130 53,200
Inventory 2,597,635 3,026,723
Prepaid expenses 299,227 233,890
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TOTAL CURRENT ASSETS 5,160,599 5,016,733
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PROPERTY AND EQUIPMENT, NET 1,892,119 2,345,795
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OTHER ASSETS
Deposits 65,105 71,293
Patents and trademarks, net of accumulated amortization 2,430 1,862
Excess cost over net assets acquired, net of accumulated
amortization 18,191 13,991
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85,726 87,146
$ 7,138,444 $ 7,449,674
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of mortgage payable 0 9,894
Accounts payable and accrued expenses 240,358 297,945
Income taxes payable 0 0
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240,358 307,839
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MORTGAGE PAYABLE 0 465,140
DEFERRED INCOME TAXES 213,871 213,871
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213,871 679,011
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TOTAL LIABILITIES 454,229 986,850
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STOCKHOLDER EQUITY
Common stock-authorized 30,000,000 shares,
$.001 par value, issued and outstanding
6,146,446 shares in 2000 and 1999 6,146 6,146
Additional paid in capital 3,914,509 3,914,509
Retained earnings 2,847,568 2,626,177
Less treasury stock at cost (62,067 shares in 2000 and 1999) (84,008) (84,008)
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6,684,215 6,462,824
$ 7,138,444 $ 7,449,674
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
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<S> <C> <C>
REVENUES $ 7,428,980 $ 7,134,301
COST OF GOODS SOLD 2,310,201 2,048,349
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GROSS PROFITS 5,118,779 5,085,950
EXPENSES
SELLING, GENERAL AND ADMINISTRATION 4,744,393 4,866,746
DEPRESCIATION AND AMORTIZATION 306,493 284,510
INTEREST EXPENSE 398 29,040
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5,051,284 5,180,296
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INCOME (LOSS)BEFORE INCOME TAXES 67,495 (94,346)
PROVISION (REFUND) FOR INCOME TAXES 25,000 (31,000)
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NET INCOME (LOSS) BEFORE ACCOUNTING CHANGE 42,495 (125,346)
CUMMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (96,045)
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NET INCOME (LOSS) 42,495 (221,391)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,084,379 6,084,379
=========== ===========
BASIC AND DILUTED INCOME(LOSS) PER SHARE
BEFORE ACCOUNTING CHANGE $ 0.01 ($ 0.02)
=========== ===========
AFTER ACCOUNTING CHANGE $ 0.01 ($ 0.04)
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
---- ----
<S> <C> <C>
REVENUES $ 2,523,923 $ 1,978,997
COST OF GOODS SOLD 750,510 556,508
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GROSS PROFITS 1,773,413 1,422,489
EXPENSES
SELLING, GENERAL AND ADMINISTRATION 1,617,961 1,584,281
DEPRESCIATION AND AMORTIZATION 107,024 70,618
INTEREST EXPENSE 356 2,497
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1,725,341 1,657,396
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INCOME (LOSS) BEFORE INCOME TAXES 48,072 (234,907)
PROVISION (REFUND) FOR INCOME TAXES 17,000 (110,666)
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NET INCOME (LOSS) 31,072 (124,241)
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WEIGHTED AVERAGE SHARES OUTSTANDING 6,084,379 6,084,379
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BASIC AND DILUTED INCOME (LOSS) PER SHARE $ 0.01 ($ 0.02)
=========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (Loss) $ 42,496 (221,391)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 306,493 284,510
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts Receivable (9,212) 190,943
Inventory (229,161) (429,088)
Prepaid expense (42,906) 65,337
Income tax receivable 0 34,930
(Increase) Decrease in:
Accounts payable and accrued expenses (75,551) 57,587
Income taxes payable 42,800 0
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NET CASH PROVIDED BY OPERATIONS 34,959 (17,172)
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CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (458,741) (734,581)
Other assets (10,095) (5,026)
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NET CASH USED IN INVESTING ACTIVITIES (468,836) (739,606)
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CASH FLOW FROM FINANCING ACTIVITIES
Mortgage payable 0 475,034
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NET CASH USED IN FINANCING ACTIVITIES 0 475,034
NET INCREASE IN CASH AND CASH EQUIVALENTS (433,877) (281,744)
CASH AND CASH EQUIVALENT BALANCE
Beginning of period 1,560,403 1,760,254
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CASH AND CASH EQUIVALENT BALANCE
End of period 1,126,526 1,478,510
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</TABLE>
See Accompanying Notes to Consolidated Financial Statements
6
<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 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, 1999 of
Elegant Illusion, Inc. (the "Company"), as filed with the Securities and
Exchange Commission. The December 31, 1999 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, 2000 are not necessarily indicative of the
results to be expected for the full fiscal year.
2. ACCOUNTING CHANGE
In accordance with Staff Accounting Bulletin 101, during the quarter
ending September 30, 2000, the Company adopted a new accounting method
whereas layaway sales would only be recognized as sales upon delivery of
the merchandise to the customer. The impact of this accounting change was
a cumulative charge to net income of $96,045 effective at the beginning
of the fiscal year. The pro forma effect of retroactive application of
this accounting change to prior operating periods is immaterial.
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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
Sales for the quarter ended September 30, 2000 decreased $544,926 or
approximately 21.6% when compared to the quarter ended September 30, 1999. Sales
for the nine months ended September 30, 2000 decreased $294,679 or approximately
4.0% when compared to the nine months ended September 30, 1999. We believe that
the decrease in sales was due primarily to the closing of the following
locations:
Location Closing Date
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Oahu January 2000;
Tulare February 2000;
Mall of America June 2000; and
Royal Dane Mall July 1 2000
As of September 30, 1999, we operated 29 retail locations and as of
September 30, 2000, we operated 27 retail locations.
Costs of goods sold as a percentage of revenues decreased from 29.7% in
the quarter ended September 30, 1999 to 28.1% in the quarter ended September 30,
2000. Costs of goods sold as a percentage of revenues decreased from 31.1% in
the nine months ended September 30, 1999 to 28.7% in the nine months ended
September 30, 2000. We believe that these decreases were due to our ongoing
efforts to reduce costs.
During the quarter ended September 30, 2000, selling, general and
administrative expenses decreased by $33,680, or approximately 2.1% when
compared to the third quarter of 1999. We believe that this decrease was due
primarily to the closing of the locations mentioned above, that were closed in
the year 2000, offset by
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<PAGE>
o increases in management salaries,
o expenses associated with closing Mall of America, Oahu, Tulare, and
Royal Dane Mall,
o abandoning certain assets, primarily certain improvements, at these
closed locations,
o expenses associated with relocating the Branson and Ghirardelli, San
Francisco locations,
o expenses of maintaining and training new staff in this very tight labor
market,
o expenses incurred in relocating furniture and fixtures from the
proposed Warrenton location back to our home offices as we did not open
this store,
o expenses of $250,000 related to a forfeited deposit in an abandoned
real estate acquisition and
o Expenses of $70,000 in settlement of an employee litigation.
Excluding the last two, one time charges listed above, selling, general
and administrative expenses, for the quarter ending September 30, 2000, would
have decreased by $353,680, or approximately 21.9% when compared to the third
quarter of 1999.
Selling, general and administrative expenses as a percentage of sales
increased from approximately 64.1% during the third quarter of 1999 to
approximately 80.1% during the third quarter of 2000. However, excluding the two
charges of $250,000 and $70,000 stated above, selling, general and
administrative expenses as a percentage of sales decreased slightly from
approximately 64.1% during the third quarter of 1999 to approximately 63.9%
during the third quarter of 2000.
During the nine months ended September 30, 2000, selling, general and
administrative expenses increased by $122,354 or approximately 2.6%, when
compared to the first nine months of 1999. Selling, general and administrative
expenses as a percentage of sales increased from approximately 63.9% during the
first nine months of 1999 to approximately 68.2% during the nine months ended
September 30, 2000.
As with the three month figures, we believe that this increase was due
primarily to the $250,000 charge related to a forfeited real estate deposit and
the $70,000 settlement charge related to an employee litigation.
Excluding the two charges of $250,000 and $70,000 stated above, during
the nine months ended September 30, 2000:
o selling, general and administrative expenses decreased by
$197,646, or approximately 4.2%, when compared to the first
nine months of 1999; and
o Selling, general and administrative expenses as a percentage
of sales did not change materially between the periods:
approximately 63.9% during the first nine months of 1999 and
approximately 63.7% during the nine months ended September 30,
2000.
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<PAGE>
Revenues Same Store Locations.
As of September 30, 1999, we operated 25 locations that were also in
operation at September 30, 2000: 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 Laughlin, one in
Gilroy, two in St Croix, two in St Thomas, one in Birch Run, one in Grapevine,
one in Maui, one in Orlando, one in Michigan City and one in Miromar.
Revenues from these locations for the quarter ended September 30, 2000
decreased approximately 4.3% from the same period in 1999. Revenues for the nine
months ending September 30, 2000 decreased approximately 2.0% from the same
period in 1999. We believe that the decrease in same store revenues during the
third quarter of 2000 was primarily due to a downturn in revenues at the New
Orleans location. With New Orleans excluded, revenues from these locations for
the quarter ended September 30, 2000 decreased approximately 2.3% from the same
period in 1999. With New Orleans excluded, revenues for the nine months ending
September 30, 2000 showed no change from the same period in 1999. We believe
that 1999 New Orleans revenues were higher than prior years. Revenues so far
during 2000 are consistent with historical revenues for this location. We note
that, if revenues continue at this level through the fourth quarter of 2000, we
will have our second best year at this location.
Inventory Turnover Ratios
During the third quarter of 2000, we maintained an inventory that
provided a turnover ratio of 0.79. We do not believe that our current inventory
turnover is indicative of impaired or slow-moving inventory. We note that we
have increased inventory from the quarter ended March 31, 2000 to the quarter
ended September 30, 2000 by $429,088 or approximately 16.5%. This increase is
primarily the result of purchases of art in anticipation of opening our Vail
Gallery and the result of closing five locations in the year 2000. We have
reduced and will continue to reduce purchases of inventory until the inventory
backlog decreases. In addition, we have allocated certain inventory to locations
that are in or shortly will be coming into their major selling season.
In accordance with Staff Accounting Bulletin 101, during the quarter
ending September 30, 2000, we adopted a new accounting method pursuant to which
we recognize layaway sales as sales upon delivery of the merchandise to the
customer. The impact of this accounting change was a cumulative charge to net
income of $96,045 effective at the beginning of the period. The pro forma effect
of retroactive application of this accounting change to prior operating periods
is immaterial.
Taking into account the closing of the stores and the purchases of art
discussed above, we believe that our current inventory turnover ratio of 0.79 is
appropriate for our plan of operation, including maintaining our strategy of
replacing inventory sold at our retail locations within a two to three 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 1999 was 1.12.
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Liquidity and Capital Resources
As of September 30, 2000, we had $1,478,510 in cash and cash
equivalents down $281,744 from December 31, 1999 and down $162,393 from June 30,
2000. Current assets exceeded our current liabilities by $4,708,894 down
$211,347 from December 31, 1999.
In 1999, we elected to shift our primary focus from opening new
locations to bolstering revenues from existing stores and exploring other sales
mediums and products that potentially could generate greater returns to cash
with less capital exposure.
In this regard we are expanding the Art Gallery concept and adding art
reproductions to already existing stores:
o We began distributing our art reproductions in our existing
jewelry and art stores in September 2000.
o We opened our first two Reproduction Galleries; one in
Ghirardelli square in San Francisco and one in Branson,
Missouri, in September 2000. To accomplish this, we relocated
our copy jewelry stores in these locations in June and July
2000. We moved the Branson copy jewelry store from the Falls
Center to downtown Branson and the Ghirardelli Square store to
the Main Plaza within Ghirardelli Square. We leased additional
space adjacent to our new copy jewelry operation in downtown
Branson and we retained our lease at the former copy jewelry
location in Ghirardelli Square for use as reproduction art
galleries. However, the lease for the old Ghirardelli Square
location expired in November 2000. At that time, based upon
initial sales results of reproduction art in that location, we
determined not to renew the lease. Reproductive art inventory
from the Ghirardelli Square location is being transferred to
our other stores.
As discussed in our annual report on form 10-KSB for the year ended
December 31, 1999, on January 31, 2000, we purchased a retail site in Vail
Colorado where we planned to open a fine art gallery. We leased these premises
back to the seller through April 30, 2000 and regained possession on May 1,
2000. This Gallery opened on November 3, 2000.
As noted above, in June 2000, we closed our Mall of America location in
Bloomington and in July 2000, we closed our Royal Dane location in St. Thomas.
These stores were not performing up to expectations. Subsequent to the end of
the third quarter we consolidated the Seaport Jewelers location, St. Thomas,
into the Elegant Illusions location also in St. Thomas.
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<PAGE>
Although we have curtailed our rapid expansion plans, we are still
looking for new locations to open copy jewelry and/or fine art stores. In this
regard, we had planned to enter into a lease for a new copy jewelry store in
Warrenton, Missouri. However, after further investigation, we determined not
proceed at this location.
As with the Vail location, we may purchase rather than rent properties
where we believe owning properties will be more advantageous than leasing
properties. By purchasing rather than leasing properties, we hope to avoid
increased base rents, sales percentage rents an, common area maintenance
expenses while taking advantage of appreciation of real estate values.
We had been negotiating to purchase an office building to house our
corporate and executive offices. In November 2000, after the end of the third
quarter, we terminated negotiations. As a result, we lost a $250,000 deposit on
the property.
Our primary anticipated capital expenditures during the remainder of
fiscal 2000 include:
o the possible opening of one to three more fine art and/or copy jewelry stores;
o the possible acquisition of real estate to house these new stores; and o the
purchase of additional art reproduction inventory.
We believe that we have sufficient capital reserves for all of the
foregoing activities, except, possibly, for the purchase of real estate. We most
likely will mortgage some or all of the real estate that we acquire.
In September 1999, we established an e-commerce site
(www.elegantillusions.com) to sell our products over the internet. However, to
date internet sales have not made a material contribution to revenues. In June
2000, we entered into an internet alliance with Vcommerce Corporation to provide
for the sale of certain of our jewelry and art reproductions over the internet.
We had anticipated that our products would be available on the internet as a
result of this alliance in late August or September 2000. Vcommerce has informed
us that this site should be up later in November 2000. We anticipate, but cannot
assure, that this arrangement will result in increased revenues from internet
sales.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As noted in footnote 4 to our Consolidated Audited Financial Statements
for the year ended December 31, 1999, the Company had been named as a defendant
by a former manager/employee in a lawsuit claiming among other things that the
Company misclassified him and certain other store managers in the Company's
California locations as managers excluding them from receiving overtime pay. In
November 2000, after the end of the third quarter, we settled the suit for
$70,000.
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: November 14, 2000 /s/ James Cardinal
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James Cardinal, Chief Executive Officer
/s/ Tamara Gear
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Tamara Gear, Treasurer
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