U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended January 31, 1999
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[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission file number 0-17623
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PALM DESERT ART, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 02-429620
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(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
74-350 Alessandro Drive, Suite A2, Palm Desert, CA 92260
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(Address of Principal Executive Offices)
(760) 346-1192
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(Issuer s Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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
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 X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date.
Common Stock, $.001 par value per share, 4,734,044 shares outstanding
at January 31, 1999
Transitional Small Business Disclosure Format (check one)
Yes No X
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PALM DESERT ART, INC.
INDEX TO FORM 10-QSB
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of January 31, 1999 3
Statements of Income for the three and nine months
ended January 31, 1999 and January 31, 1998 5
Statement of Changes in Stockholders' Equity Nine
Months Ended January 31, 1999 6
Statements of Cash Flows for the nine months ended
January 31, 1999 and January 31, 1998 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submissions of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
PALM DESERT ART, INC.
Balance Sheet
ASSETS
1/31/99
(Unaudited)
Current assets
Cash $ 4,419
Accounts receivable 547,468
Inventory 300,711
Prepaid expense 3,600
Direct response advertising 160,321
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Total current assets 1,016,519
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Property and equipment
Leasehold improvements 48,074
Furniture and fixtures 6,500
Equipment Receivable 40,000
Vehicles 4,552
Equipment 11,197
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110,323
Less accumulated depreciation (6,580)
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Net property and equipment 103,743
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Other assets
Deposits 46,259
Note Receivable 308,315
Direct response advertising 29,757
Total other assets 384,331
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Total assets $1,504,593
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 206,648
Loans payable 300,008
Accrued liabilities 22,835
Accrued interest 2,072
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Total current liabilities 531,563
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Stockholders' equity
Common stock - $.001 par value, 25,000,000 shares authorized,
4,734,044 shares outstanding (after deducting 647,500 shares in
treasury) 5,379
Common stock subscribed 183,887
Common stock subscription receivable (183,887)
Additional paid-in capital 722,734
Retained earnings 245,562
Treasury Stock (645)
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Total stockholders' equity 973,030
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Total liabilities and stockholders' equity $1,504,593
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PALM DESERT ART, INC.
Statements of Income
Three Months and Nine Months Ended January 31, 1999 and 1998
(3 Months) (3 Months) (9 Months) (9 Months)
ended ended ended ended
1/31/99 1/31/98 1/31/99 1/31/98
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Sales $ 622,914 200,483 1,779,672 483,917
Cost of sales $ 253,291 48,016 598,955 103,211
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Gross profit $ 369,623 152,467 1,180,717 380,706
Selling, general, and administrative expenses $(425,106) (121,455) (1,131,265) (282,325)
Interest expense $ (10,746) (2,690) (13,124) (7,230)
Income from Sale of Assets $ 173,324 - 173,324 -
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Net income $ 107,095 28,322 209,652 91,151
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Income per share - Basic $ 0.02 N/A 0.04 N/A
PALM DESERT ART, INC.
Statement of Changes in Stockholders' Equity Nine Months Ended January 31, 1999
Common Retained
Common Stock Additional Earnings
Common stock Subcription Paid-In Treasury (Accumulated
Stock Subscribed Receivable Capital Stock 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 $ -
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Balance, April 30, 1998, as restated $ 2,500 $245,000 $(245,000) $ 491,330 $ - $ 35,910 $ 529,740
Issuance of Common Stock $ 2,879 $ 652,331 $ 655,210
Payment of Stock Subscribed $(38,304) $ 38,304 $ -
Net Income $209,652 $ 209,652
Acquisition of Treasury Stock $(420,927) $(645) $(421,572)
Payment of Stock Subscribed $(22,809) $ 22,809 $ -
Balance, January 31, 1999 (unaudited) $ 5,379 $183,887 $(183,887) $ 722,734 $(645) $245,562 $ 973,030
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PALM DESERT ART, INC.
Statements of Cash Flows
Nine Months Ended January 31, 1999 and 1998
1/31/99 1/31/98
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income $ 209,652 $ 91,151
Adjustments to reconcile net income to net cash used
by operating activities
Depreciation and amortization $ 2,938 $ 226
(Increase) in
Accounts receivable $(464,149) $ (69,707)
Inventory $ (27,668) $(551,552)
Deposits $ (14,423) $ (4,610)
Direct response advertising $ 8,000 $ -
Notes Receivable $(308,315) $ (16,412)
Increase (decrease) in
Accounts payable $ 206,648 $ 71,470
Accrued liabilities $ 12,942 $ 7,107
Accrued interest $ 2,072 $ -
Cash Overdraft $ (13,270) $ -
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Net cash used by operating activities $(385,573) $(472,327)
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Cash flows from investing activities
Additions to property and equipment $ (53,653) $ (48,570)
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Cash flows from financing activities
Net short term borrowing - cash overdraft - $ 14,635
Proceeds from borrowings 210,008 $ 504,162
Proceeds from sale of stock 233,637 $ 100
Capital Investment $ 2,000
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Net cash provided by financing activities $ 443,645 $ 520,897
Net increase in cash $ 4,419 $ -
Cash, beginning of nine months $ - $ -
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Cash, end of nine months $ 4,419 $ -
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PALM DESERT ART, INC.
Notes to Financial Statements
Basis of Presentation
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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 nine months
ended January 31, 1999 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 nine months ended January 31, 1998,
represents the information of Palm Desert Art Publishers, Ltd., L.L.C., the
predecessor entity to the Company.
1. Direct Response Advertising
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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 January 31, 1999, approximately $190,000 of advertising was
reported as assets, of which $29,757 was non-current and $160,321 was
current. Advertising expense was approximately $25,517 for the nine
months ended January 31, 1999.
2. Loans Payable
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Loans payable consist of:
Loan payable to a minority stockholder, interest at 9%, due
July 1998. This note is guaranteed by the majority stock-
holder, 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 notes payable to individuals due in monthly installments
of $3,375 until May 2000. 105,009
Unsecured note payable to individuals, no interest rate with no
scheduled repayment terms. 139,999
$300,008
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3. Stockholders' Equity
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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
January 31, 1999.
4. Commitments and Contingencies
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In January 1999, the Company entered into an agreement to sell the
business operations located in Albany, NY. The closing of this
transaction has not been completed as of March 15, 1999.
Negotiations are ongoing. In contemplation of the transaction, the
Company has recorded the transaction as if it occurred in concurrence
with the terms of the agreement. As of January 17, 1999 the business
operations in Albany, NY have not been included in the operations or
Balance Sheet of the Company. If closing does not occur the Company
will have to restate the operations for the third quarter. The
Company has recorded a note receivable of $308,315.
PART I. FINANCIAL INFORMATION
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.
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 nine months ended January 31, 1999, the
company experienced negative cash flow from operating activities of
$385,573. This was due to increases in accounts receivable, direct
acquisition costs and inventory. 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
fiscal year. The Company will continue its efforts to increase sales,
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1998
Sales for the three months ended January 31, 1999 were $622,914, an
increase of $422,431 or 211% compared with the same period in 1998. 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
37% and 24% for the three months ended January 31, 1999 and 1998,
respectively. The increase in the cost of sales percentage from 1998 to
1999 was primarily the result of the changes in sales mix. Selling, general
and administrative expenses increased $303,651, or 250% in the first three
months ended January 31, 1999, compared with the same period the previous
year. Stated as a percentage of sales, these expenses were 63% and 58% for
the first three months ended January 31, 1999 and 1998, 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 for the three months ended January 31,
1999 has increased $78,773, or 278%, from the same three-month period for
the previous year. Through January 31, 1999, the Company's sales have
been generated primarily by the works of approximately seven of the
Company's published artists.
NINE MONTHS ENDED OCTOBER 31, 1998
Sales for the nine months ended January 31, 1999 were $1,779,672, an
increase of $1,295,755 or 267% compared with the same period in 1998. 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
33% and 21% for the nine months ended January 31, 1999 and 1998,
respectively. The increase in the cost of sales percentage from 1998 to
1999 was primarily the result of the changes in sales mix. Selling, general
and administrative expenses increased $848,940, or 300%, in the first nine
months ended January 31, 1999, compared with the same period the previous
year. Stated as a percentage of sales, these expenses were 63% and 58% for
the first nine months ended January 31, 1999 and 1998, 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 for the nine months ended January 31,
1999 has increased $118,501, or 130% from the same nine month period for
the previous year. Through January 31, 1999, 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. The Company intends to continue to
seek out acquisition candidates for privately-owned art framing shops
throughout the country. The Company hopes 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.
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. In January 1999, the
Company entered into an agreement to sell the business operations of RM&M
back to its original shareholders. The closing of this transaction has
not been completed as of March 15, 1999, and negotiations are ongoing. In
contemplation of the transaction, the Company has recorded the transaction
as if it occurred in accordance with the terms of the agreement. As of
January 17, 1999 the business operations of RM&M have not been included in
the operations or Balance Sheet of the Company, and the Company's Income
Per Share for the three and nine months ended January 31, 1999 have been
calculated as if the 645,000 shares of Common Stock issued in the original
transaction were returned to the Company's treasury on January 17, 1999.
If the closing does not occur for any reason, the Company will have to
restate the Company's financial statements for the third quarter. In
connection with this transaction, the Company has recorded a note
receivable of $308,315.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
N/A
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submissions of Matters to a Vote of Security Holders
N/A
Item 5. Other Information
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. In January 1999, the
Company entered into an agreement to sell the business operations of RM&M
back to its original shareholders. The closing of this transaction has
not been completed as of March 15, 1999, and negotiations are ongoing. In
contemplation of the transaction, the Company has recorded the transaction
as if it occurred in accordance with the terms of the agreement. As of
January 17, 1999 the business operations of RM&M have not been included in
the operations or Balance Sheet of the Company, and the Company's Income
Per Share for the three and nine months ended January 31, 1999 have been
calculated as if the 645,000 shares of Common Stock issued in the original
transaction were returned to the Company's treasury on January 17, 1999.
If the closing does not occur for any reason, the Company will have to
restate the Company's financial statements for the third quarter. In
connection with this transaction, the Company has recorded a note
receivable of $308,315.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Merger Agreement dated as of August 1, 1998 Filed as Exhibit 99.1 to the
Registrant's Form 10-QSB for the
quarter ended October 31, 1998
and incorporated herein by
reference.
99.2 Agreement and Plan of Reorganization dated as of Filed as Exhibit 99.2 to the
August 1, 1998 Registrant's Form 10-QSB for the
quarter ended October 31, 1998
and incorporated herein by
reference.
99.3 Guaranty dated as of August 1, 1998 Filed as Exhibit 99.3 to the
Registrant's Form 10-QSB for the
quarter ended October 31, 1998
and incorporated herein by
reference
99.4 Memorandum of Agreement effective January 17, 1999 Filed herewith
between the Registrant, RM&M Acquisition, Inc. Robert
Mohr and Susan Mohr
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended January 31,
1999.
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
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Hugh G. Pike, President
(Duly Authorized Officer)
(Principal Financial Officer)
Date: March 22, 1999