FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarter ended October 31, 1998.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the transition period from to .
Commission File number: 0-17623
PALM DESERT ART, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 02-0429620
State or other jurisdiction (I.R.S. Employer
of incorporation or organization Ident. No.)
74-350 Alessandro Drive, Suite A2, Palm Desert, CA 92260
(Address of Principal Executive Office) (Zip Code)
760-346-1192
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 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 [ ] No.
The number of shares of the registrant's Common Stock, $.001 par value,
outstanding as of October 31, 1998 was 5,379,044 shares. The increase in shares
from the last quarter was due primarily to the issuance of additional shares to
the Registrant's largest shareholder, Palm Desert Art Publishers, Ltd., in
completion of its sale of assets to the Registrant in April, 1998. Additional
shares were issued to investors through a private placement, certain consultants
and advisors for services rendered, and for acquisition purposes.
PALM DESERT ART, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
- ------------------------------ ----
Item 1. Financial Statements
Balance Sheet -- October 31, 1998 F-1
Statement of Income -- Three Months and
Six Months Ended October 31, 1998 and 1997 F-3
Statement of Changes in Stockholders'
Equity -- Three Months Ended October 31, 1998 F-4
Statement of Cash Flows -- Six
Months Ended October 31, 1998 and 1997 F-5
Notes to Financial Statements F-6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 1
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 4
Item 2. Changes In Securities 4
Item 3. Defaults Upon Senior Securities 4
Item 4. Submission of Matters to a Vote of
Security Holders 4
Item 5. Other Information 4
Item 6. Exhibits and Reports on Form 8-K 5
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Page
----
Balance Sheet -- October 31, 1998 F-1
Statement of Income -- Three Months and
Six Months Ended October 31, 1998 and 1997 F-3
Statement of Changes in Stockholders'
Equity -- Three Months Ended October 31, 1998 F-4
Statement of Cash Flows -- Six
Months Ended October 31, 1998 and 1997 F-5
Notes to Financial Statements F-6
PALM DESERT ART, INC.
FINANCIAL STATEMENTS
Ended October 31, 1998 and 1997
PALM DESERT ART, INC.
Balance Sheet
ASSETS
10/31/98
(Unaudited)
-----------
Current assets
Accounts receivable $ 526,361
Inventory 646,622
Prepaid expense 25,383
Direct response advertising 166,536
----------
Total current assets 1,364,902
----------
Property and equipment
Leasehold improvements 48,074
Furniture and fixtures 6,500
Vehicles 41,401
Equipment 202,826
----------
298,801
Less accumulated depreciation 5,553
----------
Net property and equipment 293,248
----------
Other assets
Deposits 46,204
Goodwill 128,844
Direct response advertising 39,615
Note receivable 68,561
----------
Total other assets 283,224
----------
Total assets $1,941,374
==========
F-1
PALM DESERT ART, INC.
Balance Sheet
LIABILITIES AND STOCKHOLDERS' EQUITY
10/31/98
(Unaudited)
-----------
Current liabilities
Cash Overdraft $ 2,019
Accounts payable 142,542
Loans payable 232,643
Accrued liabilities 274,591
Accrued interest 2,072
-----------
Total current liabilities 653,864
----------
Stockholders' equity
Common stock - $.001 par value, 25,000,000 shares 5,379
authorized, 5,379,044 shares outstanding
(after deducting 2,500 shares in treasury)
Common stock subscribed 206,696
Common stock subscription receivable (206,696)
Additional paid-in capital 1,143,661
Retained earnings 138,467
Total stockholders' equity 1,287,507
----------
Total liabilities and stockholders' equity $ 1,941,374
===========
F-2
PALM DESERT ART, INC.
Statements of Income
Three Months and Six Months Ended Oct 31, 1998 and 1997
10/31/98 10/31/97 10/31/98 10/31/97
(3 Months) (3 Months) (6 Months) (6 Months)
---------------------------------------------
(Unaudited) (Unaudited) (Unaudited) Unaudited)
Sales $ 924,823 339,496 1,156,758 462,192
Cost of sales $ 277,689 75,379 345,664 104,715
--------- --------- --------- ---------
Gross profit $ 647,134 264,117 811,094 357,477
Selling, general, and administrative expenses $ 498,345 234,204 706,159 305,043
--------- --------- --------- ---------
Operating income $ 148,789 29,913 104,935 52,434
Interest expense $ 306 12 2,378 4,540
--------- --------- --------- ---------
Net income $ 148,483 29,901 102,557 47,894
--------- --------- --------- ---------
Income per share - Basic $ .03 N/A .02 N/A
--------- --------- --------- ---------
F-3
PALM DESERT ART, INC.
Statement of Changes in Stockholders' Equity
Three Months Ended Oct 31, 1998
Common Retained
Common Common Stock Additional Stock Earnings
Common Stock Subscription Paid-In Deposits (Accumulated
Stock Subscribed Receivable Capital Received Deficit) Total
---------- ---------- ------------- ---------- -------- ------------- -----
Balance, April 30, 1998, as previously
reported (audited) $ 225,750 $ 245,000 $ (245,000) $ 268,080 $ -- $ 35,910 $ 529,740
Reclassification of equity accounts (223,250) -- -- 223,250 -- -- --
--------- ---------- ---------- ---------- --------- --------- -----------
Balance, April 30, 1998, as restated 2,500 245,000 (245,000) 491,330 -- 35,910 529,740
Common stock deposits received
for stock issuance in August 1998 -- -- -- -- 233,600 -- 233,600
Net loss -- -- -- -- -- (45,926) (45,926)
---------- ---------- ---------- ---------- --------- --------- -----------
Balance, July 31, 1998 (unaudited) $ 2,500 $ 245,000 $ (245,000) $ 491,330 $ 233,600 $ (10,016) $ 717,414
Net Income 148,483 148,483
Issuance of Common Stock 2,879 652,331 (233,600) 421,610
Payment of Stock Subscribed (38,304) 38,304 --
Balance, October 31, 1998 (unaudited) $ 5,379 $ 206,696 $ (206,696) $1,143,661 $ 0 $ 138,467 1,287,507
========= ========== ========== ========== ========= ========= ===========
F-4
PALM DESERT ART, INC.
Statements of Cash Flows
Six Months Ended October 31, 1998 and 1997
10/31/98 10/31/97
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities
Net income $ 102,557 $ 47,894
Adjustments to reconcile net income to net cash used
by operating activities
Depreciation and amortization 1,911 226
(Increase) in
Accounts receivable (443,042) (100)
Inventory (373,579) (51,825)
Goodwill (128,844) 0
Deposits (14,368) (4,610)
Direct response advertising (8,074) 0
Pre-paid Expense (21,783) 0
Notes Receivable (68,561) (17,078)
Increase in
Accounts payable 142,542 0
Accrued liabilities 264,698 5,341
Accrued interest 2,072 0
--------- ---------
Net cash used by operating activities (544,471) (20,152)
--------- ---------
Cash flows from investing activities
Additions to property and equipment (242,131) (47,119)
--------- ---------
Cash flows from financing activities
Net short term borrowing - cash overdraft (11,251) 0
Proceeds from borrowings 142,643 64,310
Proceeds from sale of stock 655,210 0
Capital Investment 0 100
--------- ---------
Net cash provided by financing activities 786,602 64,410
Net increase in cash 0 (2,861)
Cash, beginning of six months 0 0
--------- ---------
Cash, end of six months $ 0 $ (2,861)
========= =========
F-5
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Item 310 of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the Company's audited financial
statements at, and for the fiscal year ended, April 30, 1998. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended October 31, 1998 are not necessarily indicative
of the results that may be expected for the year ending April 30, 1999. The
information presented as of April 30, 1998, and the six months ended October 31,
1997, represents the information of Palm Desert Art Publishers, Ltd., L.L.C.,
the predecessor entity to the Company.
1. Direct Response Advertising
The Company expenses the costs of advertising the first time advertising
takes place, except for direct-response advertising, which is capitalized
and amortized over its expected period of future benefits.
Direct-response advertising consists primarily of magazine advertisements
that include response coupons for the Company's products. The capitalized
costs of the advertising are amortized as sales are recognized over a
period, not to exceed three years.
At October 31, 1998, approximately $211,000 of advertising was reported as
assets, of which $39,615 was non-current and $166,536 was current.
Advertising expense was approximately $15,000 for the six months ended
October 31, 1998.
2. Goodwill
Goodwill represent capitalized costs incurred in acquisitions. They are
amortized on a straight-line basis over 60 months. Amortization of these
costs for the six months ended October 31, 1998 was $2,858.
F-6
3. Loans Payable
Loans payable consist of:
Loanpayable to a minority stockholder, interest at 9%, due July 1998. This
note is guaranteed by the majority stockholder, and the guarantee is
collateralized by all of the shares the majority stockholder owns of the
Company's stock. The pledged stock is in the hands of the noteholder. The
original terms have been extended with no due date. $ 55,000
Unsecured 10.5% note payable to First Bank, interest only until October
1998. After October 1998, payable at $1,402 per month until April 1999.
7,950
Unsecured notes payable to individuals due in monthly installments
of $3,375 until May 2000 105,009
Unsecured note payable to an individual, no interest rate with no
scheduled repayment terms 26,588
Bank Loans Payable 38,096
--------
$232,643
========
4. Stockholders' Equity
The Company has entered into a stock subscription agreement for the
issuance of 245,000 shares of common stock for $245,000. The Company has
received confirmation that the proceeds have been deposited with an escrow
agent. The Company has issued the shares upon satisfaction of the deposit
with the escrow agent and creation of share certificates bearing the new
corporate name.
Reclassification of equity accounts is required to properly state the
balance of the common stock account and the additional paid-in capital
account as of October 31, 1998.
F-7
PART I - FINANCIAL INFORMATION (cont'd)
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995. The statements which are not historical facts contained in this Quarterly
Report on Form 10-QSB are forward looking statements that involve a number of
known and unknown risks, uncertainties and other factors, all of which are
difficult or impossible to predict and many of which are beyond the control of
the Company, which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward looking statements.
Such factors include, but are not limited to, uncertainty regarding market
acceptance of current artwork and the ability to successfully develop and market
new artwork, the impact of supply constraints, uncertainties relating to
customer plans and commitments, competition, uncertainties relating to economic
conditions in the markets in which the Company operates, the ability to hire and
retain key personnel and the ability to obtain additional capital if required.
The words "believe", "expect", "anticipate", and "seek" and similar
expressions identify forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date the statement was made.
1. LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to meet its financial needs depends upon funds
generated from operating activities, accounts receivable and inventories, short-
term borrowing capacity and the ability to obtain long-term capital on
satisfactory terms. For the six months ended October 31, 1998, the company
experienced negative cash flow from operating activities of $544,471. This was
due to increases in accounts receivable, direct acquisition costs and inventory.
In August 1998, the Company acquired six gallery and art framing retail outlets
located throughout Upstate New York. The acquisition was accomplished through a
merger of R. M. & M. Framemakers, Inc. into R M & M Acquisition, Inc., a
wholly-owned subsidiary of the Company. Additional expenses were incurred during
the quarter relating to the post-closing audit of R. M. & M. Framemakers.
The Company anticipates that in the fiscal year ending April 30, 1999, its
annual working capital requirements will be in the range of $1 million. The
Company anticipates that, based on its current projections, its cash and capital
resources should be sufficient to meet its financing requirements throughout the
balance of the year. The Company will continue its efforts to increase sales,
1
maintain margins, reduce inventory levels and minimize operational costs.
However, the Company can make no assurances that it will meet its current
projections. The Company may seek to raise additional capital through the sale
of a convertible debenture or common stock or some type of debt financing during
the fiscal year ending April 30, 1999. However there can be no assurances that
financing can be obtained or, if obtained, that it will be of a sufficient
quantity to meet the company's immediate needs or that it will be on reasonable
terms.
2. RESULTS OF OPERATIONS
Effective August 1, 1998, R. M. & M. Acquisitions, Inc. (RAI), a Delaware
corporation and a wholly-owned subsidiary of the Registrant, closed a merger
transaction with R M & M Framemakers, Inc. (RM&M), a New York corporation
engaged in the art framing and gallery business. The transaction was closed on
August 5, 1998, pursuant to a Merger Agreement and an Agreement and Plan of
Reorganization each dated as of August 1, 1998 by and among RAI, the Registrant,
RM&M and Robert and Susan Mohr, the sole shareholders of RM&M. At the closing,
all of the issued and outstanding shares of common stock of RM&M, no par value,
were delivered to RAI in exchange for 645,000 shares of $.001 par value common
stock of the Registrant.
Prior to the merger, RM&M owned and operated six art framing shops and
galleries in the Upstate New York area. The Registrant intends to convert into
gallery space a subtantial portion of the space at each of RM&M's six locations
which had been utilized for material handling and cutting operations and to
remove such operations to one centralized or regional material handling and
cutting location. The framing operations will continue to be performed at the
respective gallery locations.
The audit of the last two years of profit and loss and the last year of
balance sheet for this previously unaudited entity is close to completion as of
the date of this filing. The Registrant has incurred additional professional
fees with respect to this audit. The Registrant has incorporated substantially
all of the audit adjustments in the information reported in this Form 10-QSB for
the second quarter ended October 31, 1998.
As of the date hereof, the operations of RM&M have been substantially,
although not completely integrated with the Registrant's business. The
acquisition and completion of its audit have forced certain key personnel within
the Registrant's management to focus on the acquired entity itself. The
Registrant expects that full integration of its publishing line into the Albany
market and expansion of RM&M's market into a number of new states will continue
into the next quarter.
SIX MONTHS ENDED OCTOBER 31, 1998
Sales for the six months ended October 31, 1998, were $924,823 an increase
$585,327 or 172% compared with the same period in 1997. This increase was due to
its promotional activities, sales of artwork through the publishing side of
Registrant's business and the opening of its new gallery in Tarzana, California.
Cost of sales as a percentage of sales was 30% and 22% for the six months
ended October 31, 1998, and 1997, respectively. The increase in the cost of
sales percentage from 1997 to 1998 was primarily the result of the changes in
2
sales mix.
Selling, general and administrative expenses increased $264,141 in the
first six months ended October 31, 1998, compared with the same period the
previous year. Stated as a percentage of sales, these expenses were 61% and 66%
for the first six months ended October 31, 1998 and 1997, respectively. Selling
expenses include such items as retail sales location occupancy costs,
advertising, sales commissions, brochures and other promotional material costs,
freight and certain salary expenses. General and administrative expenses include
all corporate overhead costs.
Selling expenses have remained relatively higher primarily due to increased
promotional costs and fixed and variable compensation associated with the
increase in sales. Sales location occupancy costs also increased over the same
period last year due to the opening of the Company's new gallery and the
acquisition of RM&M's framing shops. Depreciation, amortization and other
expenses increased as compared with the same period last year.
Overall, the Company's net income has increased $118,582 from the same
three-month period for the previous year. More significantly, the Company's net
income for the three months ended October 31, 1998 is $148,483 as compared to a
net loss of $45,926 for the three months ended July 31, 1998, representing a
change in the second quarter of $194,409.
Through October 31, 1998, the Company's sales have been generated primarily
by the works of approximately seven of the Company's published artists. This
also includes a substantial order of approximately $200,000 from the Company's
largest customer. The Company's strategy is to continue to seek to attract new
promising artists and to promote their works while providing the consumer with
substantial value at reasonable prices. The Company also intends to establish a
network of sales agents throughout the country to sell its newly-acquired Heart
of America line of artwork which is moderately priced and is typically sold in
gift shops and novelty stores.
The Company intends to continue as well with the acquisition of
privately-owned art framing shops throughout the country. In addition to the six
shops acquired in August 1998, the Company has entered two more letters of
intent and is currently negotiating with other companies to acquire
approximately 29 more framing shops and galleries in the Southeast and Midwest.
The Company plans to convert these framing retail outlets into fine art
galleries with art framing sales offices whereby all art framing operations will
be performed in regional framing centers to be located through the country.
Although management is of the opinion that administrative expenses will continue
to rise as a result of its plan to acquire and consolidate art galleries and
art-framing operations, by expanding its gallery facilities and moving all
material handling and cutting operations to regional centers, the Company
believes it will realize substantial economies of scale in the foreseeable
future.
3
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes In Securities
In the three month period ended October 31, 1998, the Company issued a
total of 2,879,044 shares of its common stock.
Of this amount, 1,267,974 shares were issued to Palm Desert Art Publishers,
Ltd. ("PDAP") in completion of its transaction with the Registrant on April 22,
1998, on which date PDAP sold its assets to the Registrant in exchange for
32,763,661 shares of Registrant's common stock, of which only 20,083,918 was
delivered to PDAP at closing.
On August 5, 1998, the Registrant issued an aggregate of 645,000 shares to
all of the shareholders of R. M. & M. Framemakers, Inc., a privately-held
company which merged with Registrant's wholly-owned subsidiary, R M & M
Acquisition Inc., as of August 1, 1998.
On or about August 20, 1998, the Company issued 150,000 shares of common
stock to two of its financial and legal advisors/consultants in exchange for
services rendered.
On or about August 27, 1998, the Company issued 800,000 shares of its
common stock to three private investors for a price of $.____ per share. The
proceeds from this private placement were used to retire post-acquisition debt.
On the same date, the Company issued an additional 16,000 shares of common stock
to a non-employee advisor for services rendered.
So as to avoid issuing fractional shares, the Company issued an additional
70 shares as a consequence of the 10-for-1 reverse stock split which became
effective on July 31, 1998.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
4
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(1) The following financial statements are included in Part I, Item 1:
Financial Statements
Balance Sheet -- October 31, 1998 F-1
Statement of Income -- Three Months and
Six Months Ended October 31, 1998 and 1997 F-3
Statement of Changes in Stockholders'
Equity -- Three Months Ended October 31, 1998 F-4
Statement of Cash Flows -- Six
Months Ended October 31, 1998 and 1997 F-5
Notes to Financial Statements F-6
(2) Exhibits included herein:
99. Additional Exhibits
99.1 Merger Agreement dated as of August 1, 1998
99.2 Agreement and Plan of Reorganization dated as of
August 1, 1998
99.3 Guaranty dated as of August 1, 1998
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter
ended October 31, 1998:
August 20, 1998 Merger between R M & M Acquisition, Inc., a
wholly-owned subsidiary of Registrant, and R. M. &
M. Framemakers, Inc.
5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALM DESERT ART, INC.
By: /s/ Hugh G. Pike
-----------------------------------
Hugh G. Pike
President
(Duly Authorized Officer)
(Principal Financial Officer)
Dated: December 31, 1998
6