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, 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 June 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 six months ended June 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 six months ended June 30, 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 $1,640,903
Accounts receivable (net of allowance for
doubtful accounts of $16,000 in 1999 and 2000) 415,353 316,786
Income tax receivable 88,130 0
Inventory 2,597,635 2,903,453
Prepaid expenses 299,227 172,057
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TOTAL CURRENT ASSETS 5,160,599 5,033,189
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PROPERTY AND EQUIPMENT, NET 1,892,119 2,314,995
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OTHER ASSETS
Deposits 65,105 309,903
Trade marks and other, net of accumulated amortization 2,430 2,052
Excess cost over net assets acquired, net of accumulated
amortization 18,191 15,003
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85,726 326,958
--------- ---------
$7,138,444 $7,675,152
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of mortgage payable $8,367
Accounts payable and accrued expenses $240,358 179,011
Income taxes payable 0 55,000
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240,358 242,378
LONG TERM LIABILITIES
Mortgage Payable 468,794
Deferred Income taxes payable 213,871 213,871
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213,871 682,665
TOTAL LIABILITIES 454,229 925,042
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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 2,913,463
Less treasury stock at cost
(62,067 shares in 2000 and 1999) (84,008) (84,008)
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6,684,215 6,750,110
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$7,138,444 $7,675,152
========= =========
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
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(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $4,905,056 $5,155,304
COST OF GOODS SOLD $1,559,691 $1,491,842
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GROSS PROFITS 3,345,385 3,663,462
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EXPENSES
SELLING, GENERAL AND ADMINISTRATION 3,126,432 3,280,063
DEPRECIATION AND AMORTIZATION 199,469 216,296
INTEREST EXPENSE 42 26,543
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3,325,943 3,522,902
INCOME(LOSS) BEFORE INCOME TAXES 19,422 140,560
PROVISION FOR INCOME TAXES 8,000 74,665
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NET INCOME(LOSS) $11,422 $65,894
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,084,379 6,084,379
========= =========
BASIC AND DILUTED INCOME(LOSS) PER SHARE $0.00 $0.01
====== ======
</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 JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
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(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES $2,650,104 $2,550,719
COST OF GOODS SOLD 914,781 799,919
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GROSS PROFITS 1,735,433 1,750,800
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EXPENSES
SELLING, GENERAL AND ADMINISTRATION 1,559,241 1,547,949
DEPRECIATION AND AMORTIZATION 101,779 89,447
INTEREST EXPENSE 0 19,652
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1,661,020 1,656,958
INCOME(LOSS) BEFORE INCOME TAXES 74,413 93,843
PROVISION FOR INCOME TAXES 27,000 58,665
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NET INCOME(LOSS) $47,413 $37,178
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 6,084,379 6,084,379
========= =========
BASIC AND DILUTED INCOME(LOSS) PER SHARE $0.01 $0.01
====== ======
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
1999 2000
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(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income(loss) $11,423 $65,894
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 199,469 216,296
Issuance of stock for 0 0
Changes in operating assets and liabilities:
(Increase) Decrease in:
Accounts receivable 27,627 98,567
Inventory (35,912) (305,818)
Prepaid expenses 25,076 127,170
Income tax receivable 0 88,130
Increase (Decrease in):
Accounts payable and accrued expenses (47,282) (61,347)
Income taxes payable 27,839 55,000
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NET CASH PROVIDED BY OPERATIONS 208,240 283,893
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CASH FLOW FROM INVESTING ACTIVITIES
Purchase of property and equipment (321,469) (636,769)
Other assets 5,699 (243,636)
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NET CASH USED IN INVESTING ACTIVITIES (315,770) (880,404)
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CASH FLOW FROM FINANCING ACTIVITIES
Mortgage Payable 0 477,160
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NET CASH USED IN FINANCING ACTIVITIES 0 477,160
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NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS (107,530) (119,352)
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 $1,452,873 $1,640,902
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest Paid $0 $26,543
Income taxes paid $0 $19,600
NON-CASH FINANCING ACTIVITY:
Issuance of shares for services $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 Audited financial statements and
footnotes thereto contained in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999 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 six
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 June 30, 2000 decreased $99,475 or 3.8%
when compared to the quarter ended June 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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Kenosha August 1999;
Oahu January 2000;
Tulare February 2000; and
Mall of America June 2000.
Sales for the six months ended June 30, 2000 increased $250,248 or 5.1%
when compared to the quarter ended June 30, 1999. We believe this is increase
was due primarily to same store sales increases for the period.
As of June 30, 1999, we operated 30 retail locations and as of June 30,
2000, we operated 26 retail locations.
Costs of goods sold as a percentage of revenues decreased from 34.5% in
the quarter ended June 30, 1999 to 31.4% in the quarter ended June 30, 2000.
Costs of goods sold as a percentage of revenues decreased from 31.8% in the six
months ended June 30, 1999 to 28.9% in the six months ended June 30, 2000 We
believe that these decreases were due to our ongoing efforts to reduce costs.
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<PAGE>
During the quarter ended June 30, 2000, selling, general and
administrative expenses decreased by $11,292, approximately 0.7% when compared
to the second quarter of 1999. We believe that this decrease was due primarily
to the closing of the locations mentioned above, offset by increases in
management salaries and the expenses associated with closing Mall of America,
Oahu and Tulare and abandoning certain assets, primarily certain improvements at
these closed locations. However, selling, general and administrative expenses as
a percentage of sales increased slightly from approximately 58.8% during the
second quarter of 1999 to approximately 60.7% during the second quarter of 2000.
We believe that the increase in selling, general and administrative expenses as
a percentage of sales was primarily the result of decreased revenues as
discussed above and
o increased salaries for management,
o costs associated with closing locations,
o costs associated with relocating the Branson and Ghirardelli,
San Francisco locations, and
o costs of maintaining and training new staff in this very tight
labor market.
During the six months ended June 30, 2000, selling, general and
administrative expenses increased by $153,631, approximately 4.9%, when compared
to the first six months of 1999. We believe that this increase was due primarily
to expenses associated with the increase in sales that we experienced during the
first quarter of 2000. Selling, general and administrative expenses as a
percentage of sales did not change materially between the periods: approximately
63.7% during the first six months of 1999 and approximately 63.6% during the six
months ended June 30, 2000.
Revenues Same Store Locations.
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As of June 30, 1999, we operated 26 locations that were also in
operation at June 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 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 June 30, 2000, increased
approximately 1.4% from the same period in 1999. Revenues for the six months
ending June 30, 2000, increased approximately 8.23% from the same period in
1999. We believe that the overall increase in same store revenues during the
second 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
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During the second quarter of 2000, we maintained an inventory that
provided a turnover ratio of 1.16. 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 June 30, 2000 by $305,818 or approximately 11.8%. This increase is the
result of purchases of art in anticipation of opening our Vail Gallery.
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<PAGE>
We believe that our current inventory turnover ratio of 1.16 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 2nd quarter of
1999 was 1.18.
Liquidity and Capital Resources
As of June 30, 2000, we had $1,640,903 in cash and cash equivalents
down $119,351 from December 31, 1999 and up $189,395 from March 31, 2000.
Current assets exceeded our current liabilities by $4,790,821 down $129,420 from
December 31, 1999. We believe that these decreases primarily represent a deposit
for the purchase of real estate.
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:
|X| We plan to begin distributing our art reproductions in our
existing jewelry and art stores in September 2000.
|X| We anticipate that our first two Reproduction Galleries; one
in Ghiradelli square in San Francisco and one in Branson,
Missouri, will open by September 30, 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 Ghiradelli 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 Ghiradelli Square for use as
reproduction art galleries.
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 have finalized a lease for a new location in Warrenton, Missouri. 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.
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<PAGE>
As noted above, in June 2000, we closed our Mall of America location in
Bloomington. On July 1, 2000, subsequent to the end of the second quarter, we
closed our Royal Dane location in St. Thomas. These stores were not 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.
Our primary anticipated capital expenditures during the remainder of
fiscal 2000 include:
o the opening of the Warrenton store;
o the opening of our fine art gallery in Vail;
o the opening of our Branson reproduction art gallery;
o the opening of our San Francisco reproduction art gallery;
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. 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 anticipate that our products will be available on the internet as a result of
this alliance in late August or September 2000. We hope, but cannot assure, that
this arrangement will result in increased revenues from internet sales.
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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
We held our annual stockholders' meeting on June 1, 2000. At that meeting, we
o reelected management's slate of directors:
In Favor Withhold Authority Abstain
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James Cardinal 5,041,513 334 4,568
Gavin Gear 5,041,513 334 4,568
Tamara Gear 5,041,513 334 4,568
Janet Heinze 5,041,513 334 4,568
Keith Brandon 5,041,513 334 4,568
and
o ratified the appointment of Jeffrey S. Gilbert, CPA, as
auditor for the fiscal year ending December 31, 2000:
5,043,668 in favor, 834 opposed and 1,913 abstained.
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 9, 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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