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, 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 March 31, 2000
- ------------------------------------ -----------------------------
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, 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 months ended March 31, 2000 are not
necessarily indicative of the results for the entire fiscal year.
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<PAGE>
ELEGANT ILLUSIONS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
---- ----
(Derived from (Unaudited)
Audited
Financial
Statements)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,760,254 $1,451,508
Accounts receivable (net of allowance for
doubtful accounts of $16,000 in 1999 and 2000) 415,353 363,467
Income tax receivable 88,130 70,130
Inventory 2,597,635 2,536,667
Prepaid expenses 299,227 293,599
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TOTAL CURRENT ASSETS 5,160,599 4,715,372
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PROPERTY AND EQUIPMENT, NET 1,892,119 2,339,803
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OTHER ASSETS
Deposits 65,105 515,104
Trade marks and other, net of accumulated amortization 2,430 11,417
Excess cost over net assets acquired, net of accumulated
amortization 18,191 17,179
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85,726 543,700
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$7,138,444 $7,598,875
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of mortgage payable 8,705
Accounts payable and accrued expenses $240,358 192,071
Income taxes payable 0 0
-
240,358 200,776
LONG TERM LIABILITIES
Mortgage Payable 471,295
Deferred Income taxes payable 213,871 213,871
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213,871 685,166
TOTAL LIABILITIES 454,229 885,942
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STOCKHOLDERS' 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 2,876,285
Less treasury stock at cost
(62,067 shares in 1999 and 1998) (84,008) (84,008)
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6,684,215 6,712,932
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$7,138,444 $7,598,875
========= =========
</TABLE>
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, 2000 AND 1999
<TABLE>
<CAPTION>
1999 2000
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(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $2,254,863 $2,604,585
COST OF GOODS SOLD $ 644,930 $ 691,923
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GROSS PROFITS 1,609,933 1,912,662
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EXPENSES
SELLING, GENERAL AND ADMINISTRATION 1,564,642 1,732,115
DEPRECIATION AND AMORTIZATION 97,690 126,849
INTEREST EXPENSE 42 6,981
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1,662,374 1,865,945
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INCOME(LOSS) BEFORE INCOME TAXES (52,441) 46,717
PROVISION FOR INCOME TAXES (19,000) 18,000
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NET INCOME(LOSS) $ (33,441) $ 28,717
========= ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,146,446 6,146,446
========= =========
BASIC AND DILUTED INCOME(LOSS) PER SHARE $0.01 $0.00
========= =========
</TABLE>
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, 2000 AND 1999
<TABLE>
<CAPTION>
1999 2000
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss) ($33,441) $28,717
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 97,690 126,849
Issuance of stock for 0
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable (48,639) 51,886
Inventory 23,108 60,968
Prepaid expenses (9,228) 5,628
Income tax receivable 0 18,000
Increase (Decrease in):
Accounts payable and accrued expenses (20,593) (48,287)
Income taxes payable (19,000) 0
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NET CASH PROVIDED BY OPERATIONS (10,103) 243,761
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CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (205,778) (574,533)
Other assets 5,300 (457,974)
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NET CASH USED IN INVESTING ACTIVITIES (200,478) (1,032,507)
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CASH FLOW FROM FINANCING ACTIVITIES
Mortgage loan 0 480,000
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NET CASH USED IN FINANCING ACTIVITIES 0 480,000
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NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (210,581) (308,746)
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 $ 1,349,822 $ 1,451,508
============= ============
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest Paid $42 $6,981
Income taxes paid $0 $0
</TABLE>
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 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 Illusions, 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
normal recurring nature), necessary for a fair presentation of the
financial statements. The results of operations for the three months
ended March 31, 2000 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 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 March 31, 2000 increased $349,722 or 15.5%
when compared to the quarter ended March 31, 1999.
We believe that the increase in sales was due primarily to:
o increased revenues from locations that were open and operating
for the full three months of the first quarter of both fiscal
1999 and 2000;
o the operation of the Royal Dane location, which opened January
29, 1999, for the full three months of 2000;
o increases in the retail prices of selected products.
offset by the closing of our Portland, Ontario and Kenosha locations in January
1999, April 1999 and August 1999, respectively, and the closing of our Oahu and
Tulare locations in January 2000, and February 2000, respectively.
As of March 31, 1999, we operated 30 retail locations and as of March
31, 2000, we operated 27 retail locations. Although we added two stores in 1999,
as noted above, we closed three stores in 1999 and two stores in 2000.
Costs of goods sold as a percentage of revenues decreased slightly from
28.6% in the quarter ended March 31, 1999 to 26.6% in the quarter ended March
31, 2000. We believe that this decrease was due to our ongoing efforts to reduce
costs.
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<PAGE>
During the quarter ended March 31, 2000, selling, general and
administrative expenses increased when compared to the first quarter of 1999 by
$167,473, or approximately 10.7%. We believe that this increase was due
primarily to expenses associated with the increase in sales. However, as a
percentage of sales, selling, general and administrative expenses decreased from
approximately 69.4% during the first quarter of 1999 to approximately 66.5%
during the first quarter of 2000. We believe that the decrease in selling,
general and administrative expenses as a percentage of sales was primarily the
result of:
o increased revenues at locations open and operating during the
entire three months of the first quarter of both fiscal 1999
and 2000;
o increased revenues company wide even though we operated three
fewer locations;
o operating three fewer locations;
o reduced advertising expenses; and o reduced costs associated
with hiring staff.
Revenues Same Store Locations.
As of March 31, 1999, we operated 26 locations that were also in
operation at March 31, 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 Minneapolis, one in
Laughlin, one in Gilroy, two in St Croix, three in St Thomas, one in Birch Run,
one in Grapevine, one in Maui, one in Michigan City and one in Miromar. Revenues
from these locations for the quarter ended March 31, 1999, increased
approximately 15.8% from the same period in 1999.
We believe that the overall increase in same store revenues during the
first quarter of 2000 was due to increased customer service, management's focus
in producing greater sales and increased retail prices on selected products.
Inventory Turnover Ratios
During the first quarter of 2000, we maintained an inventory that
provided a turnover ratio of 1.08. 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 1.08 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 first quarter of
1999 was 0.98.
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<PAGE>
Liquidity and Capital Resources
As of March 31, 2000, we had $ 1,451,508 in cash and cash equivalents,
down $308,746 from December 31, 1999, and our current assets exceeded our
current liabilities by $4,514,596, down $405,645 from December 31, 1999. We
believe that these decreases primarily represents two deposits for the purchase
of real estate. One of these deposits for $200,000 was returned to us in April
2000.
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. 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 plan 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. We plan to prepare the premises for use as a
fine art gallery and, at this time, we anticipate that the gallery will open in
September 2000.
We are finalizing a lease for a new location in Warrenton, Missouri. If
the lease is finalized, we anticipate opening this location in the Fall of 2000.
We are utilizing furniture, fixtures, equipment and inventory from our recently
closed Tulare store. The cost of moving these assets from Tulare to Warrenton
was incurred in and is reflected in the financial statements for the first
quarter of fiscal 2000.
In June 2000, we plan to close two additional locations - Royal Dane in
St. Thomas and Mall of America in Bloomington. These stores have not been
performing up to expectations.
Although we have curtailed our rapid expansion plans, we are still
looking for new locations to open copy jewelry and/or fine art stores. As with
the forthcoming 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.
In addition, we are actively negotiating to purchase an office building
to house our corporate and executive offices. Depending upon the cost, we may
purchase the building alone or with others.
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<PAGE>
Our primary anticipated capital expenditures during the remainder of
fiscal 2000 include:
o the opening of the Warrenton store;
o the relocation of our Branson store;
o the opening of our fine art gallery in Vail;
o the possible opening of one to three more fine art and/or copy
jewelry stores;
o the acquisition of real estate to house these new stores;
o art reproduction inventory; and
o the acquisition of an office building.
We believe that we have sufficient capital reserves for all of the
foregoing activities, except, possibly, for the purchase of real estate.
We are in the process of finalizing a $2,000,000 line of credit with a
bank. We plan to use this line of credit, if needed, for the acquisition of
store locations and an office building. In addition, we most likely will
mortgage some or all of the properties 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. We are
actively seeking an internet alliance to sell our jewelry and art reproductions.
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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 10, 2000 s/James Cardinal
---------------------------------------
James Cardinal, Chief Executive Officer
s/Tamara Gear
---------------------------------------
Tamara Gear, Treasurer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,451,508
<SECURITIES> 0
<RECEIVABLES> 363,467
<ALLOWANCES> 16,000
<INVENTORY> 2,536,667
<CURRENT-ASSETS> 4,715,372
<PP&E> 4,149,975
<DEPRECIATION> 1,810,172
<TOTAL-ASSETS> 7,598,875
<CURRENT-LIABILITIES> 200,776
<BONDS> 0
0
0
<COMMON> 6,146
<OTHER-SE> 3,914,509
<TOTAL-LIABILITY-AND-EQUITY> 7,598,875
<SALES> 2,604,585
<TOTAL-REVENUES> 2,604,585
<CGS> 691,923
<TOTAL-COSTS> 691,923
<OTHER-EXPENSES> 1,865,945
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,981
<INCOME-PRETAX> 46,717
<INCOME-TAX> 18,000
<INCOME-CONTINUING> 28,717
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,717
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
