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.
<PAGE>
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
<PAGE>
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
<PAGE>
PALM DESERT ART, INC.
FINANCIAL STATEMENTS
Ended October 31, 1998 and 1997
<PAGE>
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
<PAGE>
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
<PAGE>
PALM DESERT ART, INC.
Statements of Income
Three Months and Six Months Ended Oct 31, 1998 and 1997
<TABLE>
<CAPTION>
10/31/98 10/31/97 10/31/98 10/31/97
(3 Months) (3 Months) (6 Months) (6 Months)
---------------------------------------------
(Unaudited) (Unaudited) (Unaudited) Unaudited)
<S> <C> <C> <C> <C>
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
--------- --------- --------- ---------
</TABLE>
F-3
<PAGE>
PALM DESERT ART, INC.
Statement of Changes in Stockholders' Equity
Three Months Ended Oct 31, 1998
<TABLE>
<CAPTION>
Common Retained
Common Common Stock Additional Stock Earnings
Common Stock Subscription Paid-In Deposits (Accumulated
Stock Subscribed Receivable Capital Received Deficit) Total
---------- ---------- ------------- ---------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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
========= ========== ========== ========== ========= ========= ===========
</TABLE>
F-4
<PAGE>
PALM DESERT ART, INC.
Statements of Cash Flows
Six Months Ended October 31, 1998 and 1997
<TABLE>
<CAPTION>
10/31/98 10/31/97
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
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)
========= =========
</TABLE>
F-5
<PAGE>
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
<PAGE>
3. Loans Payable
Loans payable consist of:
<TABLE>
<S> <C>
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
========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 526,361
<ALLOWANCES> 0
<INVENTORY> 646,622
<CURRENT-ASSETS> 1,364,902
<PP&E> 298,801
<DEPRECIATION> 5,553
<TOTAL-ASSETS> 1,941,374
<CURRENT-LIABILITIES> 653,864
<BONDS> 0
0
0
<COMMON> 5,379
<OTHER-SE> 1,282,128
<TOTAL-LIABILITY-AND-EQUITY> 1,941,374
<SALES> 924,823
<TOTAL-REVENUES> 924,823
<CGS> 277,689
<TOTAL-COSTS> 776,034
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 306
<INCOME-PRETAX> 148,483
<INCOME-TAX> 0
<INCOME-CONTINUING> 148,483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,483
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
Exhibit 99.1
<PAGE>
MERGER AGREEMENT
This Merger Agreement dated as of August 1, 1998, is by and between R.M.&
M. Acquisition, Inc., a Delaware corporation (and a wholly-owned subsidiary of
Palm Desert Art, Inc., a Delaware corporation) ("RAI") and R M & M Framemakers,
Inc. a New York corporation, such corporations being collectively referred to
below as the "Constituent Corporations", Robert G. Mohr ("Mohr") and Susan Mohr
residing at 162 Sickle Hill Road, Berne, New York 12023 (collectively
"Shareholders").
Recitals
R M & M Framemakers, Inc. (hereinafter "RM&M") is a corporation organized
and existing under the laws of the State of New York, having an authorized
capital of 100 shares of common stock, no par value (the "Common Stock of R M &
M"), of which 100 shares are issued and outstanding as of the date of this
contract;
R. M. & M. Acquisition, Inc. (hereinafter "RAI") is a corporation organized
and existing under the laws of the State of Delaware, having an authorized
capital of 100 shares of common stock, no par value (the "Common Stock of RAI"),
of which 100 shares are issued and outstanding as of the date of this contract;
Palm Desert Art, Inc. (hereinafter "Palm") is a corporation duly organized
and existing under the laws of the State of Delaware having, as of the Merger
Date (as that term is defined herein) an authorized capitalization which
consists of 25,000,000 shares of voting common stock, par value $.001 of which
3,917,974 shares are issued and outstanding (the "Common Stock of Palm");
The respective boards of directors of RM&M, Palm and RAI have each approved
this Merger Agreement providing for the merger of RM&M with and into RAI with
RAI as the surviving corporation as authorized by the statutes of the state of
Delaware.
Palm, RAI, RM&M and Shareholders have entered into an Agreement and Plan of
Reorganization (the "Reorganization Agreement") dated as of August 1, 1998,
setting forth certain representations, warranties, covenants, agreements, and
conditions in connection with the merger;
Shareholders own all the issued and outstanding voting shares of RM&M.
Agreement
In consideration of the premises and mutual agreements, provisions and
covenants contained herein, and for the purpose of setting forth the terms and
conditions of the merger and the manner and basis of causing the shares of RM&M
to be converted into shares
<PAGE>
of common stock of Palm, par value $.001 per share (the "Exchanged Palm Stock")
and such other provisions as are deemed necessary or desirable, it is agreed by
and between the parties that, in accordance with the provisions of the laws of
Delaware and New York, respectively, that RAI and RM&M shall be, and they are,
as of the Merger Date (as defined in paragraph 3 of Article I) merged into a
single surviving corporation (sometimes called the "surviving corporation"),
which shall be and is RAI, one of the constituent corporations, which shall
continue its corporate existence and remain a Delaware corporation governed by
the laws of that state, all on the terms and conditions set forth as follows:
Article I
Merger
1. This Agreement of merger (sometimes called the "Merger Agreement"),
shall be submitted for adoption and approval of the board of directors of Palm
and RAI and of the shareholders of RM&M as provided by their respective state
general corporation law.
2. Upon the adoption and approval of this Agreement by the board and
shareholders of the respective constituent corporations, the facts shall be
certified on this Agreement or in a Certificate of Merger and this Agreement or
a Certificate of Merger shall be signed, acknowledged, filed and recorded in the
manner required by Delaware and New York general corporation law.
3. The merger of RM&M into RAI shall become effective as of August 1, 1998
(the "Merger Date").
Article II
Name and Continued Corporate Existence of
Surviving Corporation
The corporate name of RAI, the constituent corporation whose corporate
existence is to survive this merger and continue thereafter as the surviving
corporation, and its identity, existence, purposes, powers, objects, franchises,
rights and immunities shall continue unaffected and unimpaired by the merger,
and the corporate identity, existence, purposes, powers, objects, franchises,
rights and immunities of RM&M shall be wholly merged into RAI. Accordingly, on
the Merger Date the separate existence of RM&M, except insofar as continued by
statute, shall cease.
Article III
Governing Law
Certificate of Incorporation
As stated, the laws of Delaware shall govern the surviving corporation.
From and after the Merger Date, the amended certificate of incorporation of RAI
attached as Appendix A and incorporated with the same force and effect as if
here set out in
2
<PAGE>
full (which Appendix A represents the composite certificate of incorporation of
RAI filed in the office of the Secretary of State of the State of Delaware on
July 27, 1998 and all amendments now in force, together with further amendments
of articles Third, Fourth and Ninth, to read as set forth, which further
amendments shall become effective upon the Merger Date) shall be and become the
certificate of incorporation of the surviving corporation. In addition to the
powers conferred upon it by law, the surviving corporation shall have the powers
set forth in Appendix A and be governed by those provisions. From and after the
Merger Date, and until further amended as provided by law, Appendix A may be
certified, separate and apart from this Agreement, as the certificate of
incorporation of the surviving corporation.
Article IV
Bylaws of Surviving Corporation
From and after the Merger Date, the present bylaws of RAI shall be and
become the bylaws of the surviving corporation until they shall be altered,
amended or repealed, or until new bylaws shall be adopted, in accordance with
the provisions of law, the bylaws and the certificate of incorporation of the
surviving corporation.
Article V
Directors and Officers
1. The number of directors of the surviving corporation, who shall hold
office until their successors have been duly elected and shall have qualified,
or as otherwise provided in the certificate of incorporation of the surviving
corporation or its bylaws, shall be one (1) until changed by action of the board
of directors of the surviving corporation pursuant to its bylaws; and the name
of the first director of the surviving corporation is as follows:
Hugh G. Pike
2. The first annual meeting of the shareholders of the surviving
corporation after the Merger Date shall be the annual meeting provided by the
bylaws of the surviving corporation for the year 1999.
3. The first officers of the surviving corporation, who shall hold office
until their successors have been elected or appointed and shall have qualified,
or as otherwise provided in its bylaws, are the officers of RAI immediately
prior to the Merger Date.
4. If, on or after the Merger Date, a vacancy shall for any reason exist in
the board of directors of the surviving corporation, or in any of the offices,
the vacancy shall be filled in the manner provided in the certificate of
incorporation of the
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surviving corporation or in its bylaws.
Article VI
Capital Stock of Surviving Corporation
The capitalization of the surviving corporation upon the Merger Date shall
be as set forth in the certificate of incorporation of the surviving
corporation.
Article VII
Manner and Basis of Converting Shares
Each issued share of common stock, of the $.01 par value of RAI, including
shares held in the treasury of RAI, shall, on the Merger Date continue to be
issued shares of common stock, $.01 par value per share, of the surviving
corporation. All of the shares of common stock, no par value, of RM&M
outstanding on the Merger Date (called "RM&M Stock"), and all rights attendant
thereto shall upon the Merger Date be exchanged for 645,000 shares of common
stock, par value $.001 per share of Palm.
Article VIII
Assets and Liabilities
On the Merger Date, all property, real, personal and mixed, and all debts
due to either of the constituent corporations on whatever account, as well for
stock subscriptions as all other choses in action, and all and every other
interest of or belonging to either of constituent corporations shall be taken by
and deemed to be transferred to and vested in the surviving corporation without
further act or deed; and all property and every other interest shall be as
effectively the property of the surviving corporation as it was of the
respective constituent corporations, and the title to any real estate or any
interest, whether vested by deed or otherwise, in either of the constituent
corporations shall not revert or be in any way impaired by reason of the merger;
provided, however, that all rights of creditors and all liens upon the property
of either of the constituent corporations shall be preserved unimpaired, and all
debts, liabilities, obligations and duties of the respective constituent
corporations shall attach to the surviving corporation, and may be enforced
against it to the same extent as if the debts, liabilities, obligations and
duties had been incurred or contracted by it. Any action or proceeding pending
by or against either of the constituent corporations may be prosecuted to
judgment as if the merger had not taken place, or the surviving corporation may
be submitted in place of either of the constituent corporations. The parties
respectively agree that from time to time, when requested by the surviving
corporation or by its successors or assigns, they will execute and deliver or
cause to be executed and delivered all deeds and instruments, and will take or
cause to be taken all further or other action, as the surviving corporation may
deem necessary or desirable in order to vest in and
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confirm to the surviving corporation or its successors or assigns title to and
possession of all the property and rights and otherwise carry out the intent and
purposes of this Agreement.
Article IX
Conduct of Business by Constituent Corporations
Prior to the Merger Date, RM&M shall conduct its business in its usual and
ordinary manner, and shall not enter into any transaction other than in the
usual and ordinary course of such business except as provided. Without limiting
the generality of the above RM&M shall not, except as otherwise consented to in
writing by Palm or RAI or as otherwise provided in this Agreement:
(1) Issue or sell any shares of its capital stock in addition to those
outstanding on this date;
(2) Amend its certificate of incorporation or its bylaws;
(3) Issue or contract to issue funded debt;
(4) Declare or pay any dividend or make any other distribution upon or with
respect to its capital stock;
(5) Repurchase any of its outstanding stock or by any other means transfer
any of its funds to its shareholders either selectively or rateably, in return
for value or otherwise, except as salary or other compensation in the ordinary
or normal course of business;
(6) Undertake or incur any obligations or liabilities except current
obligations or liabilities in the ordinary course of business and except for
liabilities for fees and expenses in connection with the negotiation and
consummation of the merger in amounts to be determined after the Merger Date;
(7) Mortgage, pledge, subject to lien or otherwise encumber any realty or
any tangible or intangible personal property;
(8) Sell, assign or otherwise transfer any tangible assets of whatever
kind, or cancel any claims, except in the ordinary course of business;
(9) Sell, assign, or otherwise transfer any trademark, trade name, patent
or other intangible asset;
(10) Default in performance of any material provision of any material
contract or other obligation;
(11) Waive any right of any substantial value; or
(12) Purchase or otherwise acquire any equity or debt security of another
corporation except to realize on an otherwise worthless
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debt.
Article X
Consummation of Merger
All expenses incurred in consummating the plan of merger shall, except as
otherwise agreed in writing between the constituent corporations, be borne by
the constituent corporations. If the merger is not completed, each of the
constituent corporations shall be liable for, and shall pay, the expenses
incurred by it.
The filing and recording of this Agreement may be deferred from time to
time by mutual consent of the respective boards of directors of each of the
constituent corporations, and, to the extent provided in (1), (2), (3) and (4)
below, the merger may be abandoned:
(1) By the mutual consent of the respective boards of directors of each of
the constituent corporations;
(2) At the election of the board of directors of RAI, if, in the judgment
of board any judgment is rendered relating to any legal proceeding not commenced
and the existence of the judgment will or may materially affect the rights of
either constituent corporation to sell, convey, transfer or assign any of its
assets or materially interfere with the operation of its business, renders the
merger impracticable, undesirable or not in the best interests of its
shareholders; or
(3) At the election of the board of directors of either constituent
corporation if-
(a) The warranties and representations of the other constituent
corporation contained in this Agreement shall not be substantially accurate
in all material respects on and as of the date of merger; or the covenants
of the other constituent corporation shall not have been performed or
satisfied in all material respects; or
(b) It shall not have received an opinion of counsel for the other
constituent corporation to the effect that: (i) any other constituent
corporation is a corporation duly organized, validly existing and in good
standing under the laws of their respective states of incorporation; (ii)
all outstanding shares of stock of the constituent corporation have been
duly and validly authorized, are validly issued and outstanding, and are
fully paid and nonassessable; and (iii) all corporate action (other than
the filing and recording of this Agreement)
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required for the consummation of the merger contemplated hereby has been
taken by the constituent corporation; or
(c) The taking of any steps necessary to effect the merger by either
of the constituent corporations shall be permanently or temporarily
enjoined by a court having jurisdiction; or
(d) It shall not have received an opinion of counsel selected by Palm
and RAI to the effect that the shares of stock of the surviving corporation
to be issued, as provided, upon conversion of shares of stock of RM&M will
be legally and validly authorized and, when issued, will be validly issued,
fully paid and nonassessable shares of stock of the surviving corporation.
(4) If the Merger Date shall not have occurred by 5:00 p.m. August 22, 1998
then, at the option of the board of directors of either constituent corporation
the merger may be abandoned.
In the event of the abandonment of the merger pursuant to the foregoing
provisions, this Agreement shall become void and have no effect, without any
liability on the part of either of the constituent corporations or its
shareholders or directors or officers in respect of this merger except the
obligation of each constituent corporation to pay its own expenses as provided
in this Article X.
Article XI
Resident Agent
The respective names of the county and the city within the county in which
the principal office of the surviving corporation is to be located in the State
of California, the street and number of the principal office, the name of the
registered agent will, as of the Merger Date, be as set forth in article second
of the certificate of incorporation of the surviving corporation.
Article XII
Right to Amend Certificate of Incorporation
The surviving corporation reserves the right to amend, alter, change or
repeal its certificate of incorporation in the manner now or later prescribed by
statute or otherwise authorized by law; and all rights and powers conferred in
the certificate of incorporation on shareholders, directors or officers of the
surviving corporation, or any other person, are subject to this reserved power.
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Article XIII
Miscellaneous
1. The representations and warranties contained in the Agreement and Plan
of Reorganization and any liability of one constituent corporation to the other
for any default under the provisions of Article IX of this Agreement, shall
expire with, and be terminated and extinguished by, the merger under this
Agreement on the Merger Date.
2. To enable RAI to coordinate the activities of RM&M into those of RAI on
and after the Merger Date, RM&M shall, before the Merger Date, afford to the
officers and authorized representatives of RAI free and full access to the
plants, properties, books and records of RM&M, and the officers of RM&M will
furnish RAI with financial and operating data and other information as to the
business and properties of RM&M as RAI shall from time to time reasonably
request. Palm, RAI and RM&M agree that, unless and until the merger contemplated
by this Agreement has been consummated, Palm, RAI and RM&M and their officers
and representatives will hold in strict confidence all data and information
obtained from one another as long as it is not in the public domain, and if the
merger provided for is not consummated as contemplated, Palm, RAI and RM&M will
each return to the other party all data as the other party may reasonably
request.
3. For the convenience of the parties and to facilitate the filing or
recording of this Agreement, any number of counterparts may be executed and each
executed counterpart shall be deemed to be an original instrument.
In witness, the directors, or a majority of them, of each of the
constituent corporations have duly subscribed their names to this Agreement
under the corporate seal of their respective corporation, all as of the day and
year first written above.
WITNESS: PALM DESERT ART, INC.
By: /s/ Hugh G. Pike
- ----------------------- ---------------------------
Hugh G. Pike, President
WITNESS: R. M. & M. ACQUISITION, INC.
By: /s/ Hugh G. Pike
- ----------------------- ---------------------------
Hugh G. Pike, President
WITNESS: R. M. & M. FRAMEMAKERS, INC.
By: /s/ Robert Mohr
- ----------------------- ---------------------------
Robert Mohr, President
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WITNESS:
/s/ Robert Mohr
- ----------------------- ---------------------------
Robert Mohr, Shareholder
WITNESS:
/s/ Susan Mohr
- ----------------------- ---------------------------
Susan Mohr, Shareholder
9
Exhibit 99.2
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (hereinafter referred to as
"Agreement"), is made as of the 1st day of August, 1998, by and among Palm
Desert Art, Inc., and R. M. & M. Acquisition, Inc., each having their respective
principal places of business at 39-725 Garand Lane, Suite J, Palm Desert,
California ("Palm" and "RAI" respectively) and R M & M Framemakers, Inc., having
its principal place of business at 60 Railroad Avenue, Albany, New York
("RM&M"), Robert G. Mohr ("Mohr") and Susan Mohr residing at 162 Sickle Hill
Road, Berne, New York 12023 (collectively "Shareholders").
WHEREAS, Palm is a public corporation engaged in the business of owning
contracts with various artists which grant Palm the right to reproduce and sell
their artwork. Palm is committed to acquiring privately owned and operated art
framing businesses, which businesses will provide art framing services and shall
display for sale artwork presently under contract, or which shall become under
contract with Palm;
WHEREAS, RAI is a wholly-owned subsidiary of Palm formed for the purpose of
acquiring a privately-owned and operated art framing business;
WHEREAS, RM&M is in the business of owning and operating several art
framing shops and galleries at the following locations throughout Upstate New
York as more specifically set forth in Schedule 1 hereto.
WHEREAS, Shareholders are joint and sole owners, of record and
beneficially, of all of RM&M's issued and outstanding capital stock, and Mohr
currently manages the operations of each of the art framing shops/galleries
owned by RM&M.
WHEREAS, the parties desire to merge RM&M into RAI in exchange for a
specified number of shares of Palm as set forth in the Merger Agreement annexed
hereto as Exhibit A.
WHEREAS, to induce Shareholders to accept Palm's common stock, Palm has
agreed to execute and deliver to Shareholders its guaranty (the "Guaranty") as
to the value of such stock which Guaranty shall be secured by way of a UCC
filing statement and to enter into an employment agreement with Mohr
("Employment Agreement") to ensure his continued operation of the aforementioned
shops/galleries;
WHEREAS the parties desire that this transaction shall be a reorganization
within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986,
as amended. RM&M shall merge into RAI pursuant to an agreement of merger where
the separate corporate existence of RM&M shall cease, and Shareholders shall
receive common stock of Palm.
<PAGE>
NOW THEREFORE, in order to consummate the above Plan of Reorganization and
in consideration of the mutual benefits to be derived and the mutual agreements
contained herein, Palm, RAI and RM&M approve and adopt this Agreement and Plan
of Reorganization and mutually covenant and agree with each other as follows:
1. Merger of RM&M Into RAI.
1.1 Incorporation of Agreement of Merger.
The agreement of merger attached as Exhibit A is incorporated by reference
(the "Merger Agreement"). Palm, RAI, RM&M and the Shareholders agree to take
action to execute and deliver further instruments as may be necessary to carry
out the terms of the agreement of merger. The merger shall become effective as
of August 1, 1998.
1.2 Consideration to be Given.
(a) On the Closing Date, Shareholder shall deliver 100 shares constituting
all of the common stock, no par value, of RM&M ("RM&M's Stock"). On the Closing
Date, Palm and RAI shall deliver to RM&M two share certificates to Shareholders,
each certificate representing 322,500 shares of Palm's common stock, par value
$.001, registered in the names of Robert Mohr and Susan Mohr or in such other
names and denominations as Shareholders may specify. The shares, when delivered,
shall have been duly and validly issued and shall be fully-paid and
non-assessable.
(b) The Guaranty of Palm, which shall be substantially in the form set
forth in Exhibit B hereto which is acceptable in form and substance to RM&M and
its counsel; and
(c) The Employment Agreement, which shall be substantially in the form set
forth in Exhibit C hereto which is acceptable in form and substance to Mohr and
his counsel.
2. Representations and Warranties of RM&M.
RM&M represents and warrants as follows:
2.1 Organization and Authority.
(a) RM&M is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York with all requisite
corporate power and authority to own, operate and lease its properties and
to carry on its business as now being conducted, and is duly qualified and
in good standing in every jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes
qualification necessary, except as otherwise disclosed in writing to RAI
and Palm.
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(b) The outstanding shares of RM&M are legal and validly issued, fully
paid and nonassessable.
(c) RM&M does not own 10 percent or more of the outstanding stock of
any corporation except those that it owns all of the outstanding stock.
(d) The execution and delivery of this Agreement, the consummation of
the transactions contemplated hereby, and the fulfillment of, and
compliance with, the terms and provisions hereof do not and will not (i)
violate any provision of law or administrative regulation or any judicial
or administrative order, award, judgment or decree applicable to RM&M; (ii)
conflict with, result in a breach of or constitute a default under any of
the terms, conditions or provisions of RM&M's Certificate of Incorporation
or By-laws; (iii) conflict with, result in a breach of or constitute a
default under or accelerate or permit the acceleration of the performance
required by, any agreement or instrument to which RM&M is a party or by
which it is bound; (iv) result in the creation of any lien, charge, or
encumbrance upon any of RM&M's assets under any such agreement or
instrument; or (v) terminate or give any party thereto the right to
terminate any such agreement or instrument, except such breaches, defaults,
liens, charges, encumbrances, or rights of acceleration or termination as
have been consented to or waived by the other party or parties to such
agreement or instrument or by RAI.
2.2 Financial.
(a) RM&M has delivered true copies of the reviewed financial
statements of RM&M and each of its operating entities for the year ended
June 30, 1997 and compilations for the year ended June 30, 1998, consisting
of balance sheets (the "Balance Sheet") and the related consolidated
statements of income, changes in shareholders' equity and cash flow for
each of the fiscal years then ended together with the report thereon of its
independent certified public accountants. To the extent that such
statements are intended to do so, such financial statements fairly present
the financial condition and the results of operations, changes in
stockholders' equity, and cash flow of RM&M as at the respective dates of
and for the periods referred to in such financial statements, all in
accordance with generally accepted accounting principles consistently
applied, subject, in the case of interim financial statements, to normal
recurring year-end adjustments and both with regard to the interim
statements and the compilations, to the absence of notes.
(b) All accounts receivable (net of reasonable reserves for doubtful
accounts) of RM&M shown on the books of account as of June 30, 1998, and as
incurred in the normal course of
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business since that date, are collectible in the normal course of business.
(c) As of June 30, 1998, the inventories of RM&M included in the
balance sheet of that date had a commercial value at least equal to the
value shown in the balance sheet, all of which are usable and are valued at
cost or market, whichever is lower, and assure a normal margin for each
item when sold.
(d) RM&M has good and marketable title to all of its assets, business
and properties including, without limitation, all properties reflected in
the balance sheet as of June 30, 1998, except as disposed of in the normal
course of business, free and clear of any mortgage, lien, pledge, charge,
claim or encumbrance, except as shown on the balance sheet as of June 30,
1998, and in the case of real properties, except for rights-of-way and
easements which do not adversely affect the use of property.
(e) All currently used property and assets of RM&M or in which RM&M
has an interest or which it has in possession are substantially in good
operating condition and repair subject only to ordinary wear and tear.
(f) RM&M's Financial Statements shall be:
(i) True and correct in all material respects and present an accurate
and complete disclosure of its financial condition as of June 30, 1998 and
earnings for the year ended June 30, 1998, to the extent that such
compilations provide such disclosure;
(ii) Satisfy the representations and warranties made in Subparagraphs
(b), (c) and (d) of this sub-paragraph 2.2 as of the date the
representation and warranties were made with respect to the financial
statement;
2.3 Since June 30, 1998, there has not been:
(a) Any material adverse change in the financial condition of RM&M;
(b) Any loss, damage or destruction to the properties of RM&M (whether
or not covered by insurance) materially adversely affecting its business or
properties;
(c) Any change in the compensation pattern of RM&M as established in
preceding years, nor any material increase in the compensation payable or
to become payable to any of its
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officers, directors, employees or agents, except as disclosed to RAI in
writing;
(d) Any labor dispute or disturbance litigation or event or condition
of any character which materially adversely affects the business or future
prospects of RM&M.
(e) The issuance of additional shares of stock by RM&M.
(f) Any distribution of assets, by way of dividends or purchase of
shares by RM&M.
(g) Any borrowings from financial institutions except as set forth in
Schedule 2.4 hereto.
(h) Any mortgage, pledge, lien or encumbrance made on any of the
properties or assets of RM&M other than mechanics' and materialmen's liens
arising in the normal course of business.
(i) Any sale, transfer or other disposition of assets of RM&M, except
in the normal course of business.
2.4 Liabilities.
(a) There are no liabilities of RM&M whether accrued, absolute,
contingent or otherwise which arose or relate to any transaction of RM&M,
its agents or servants occurring prior to June 30, 1998 which are not
disclosed by or reflected in the financial statements except as set forth
in Schedule 2.4(a)(1) hereto. There are no liabilities of RM&M which have
arisen or relate to any transaction of RM&M, its agents or servants
occurring since June 30, 1998, other than normal liabilities incurred in
the normal conduct of RM&M's business, except as disclosed in Schedule
2.4(b)(2) hereto. As of this date there are no known circumstances,
conditions, happenings, events or arrangements, contractual or otherwise,
which may give rise to liabilities, except in the normal course of RM&M's
business, and except as disclosed in Schedule 2.4(c)(3) hereto.
(b) Except for federal and state income tax for the year ended June
30, 1998, all federal, state, county and local income, unemployment, ad
valorem, excise, sales, use, gross receipts and other taxes and assessments
which are due and payable have been duly reported, fully paid and
discharged as reported by RM&M and except as noted herein there are no
unpaid taxes which are or could become a lien on the properties and assets
of RM&M or have been incurred in the normal course of RM&M's business since
that date. All tax returns of any kind required to be filed have been filed
and except as noted herein the taxes paid or accrued. RM&M's federal income
tax returns have been reviewed through June 30,
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1998. RM&M has no knowledge of any possible deficiency assessments in
respect to federal income tax returns or other tax returns filed by it,
except as disclosed to RAI in writing.
(c) All parties with whom RM&M has contractual arrangements are in
substantial compliance. RM&M is not in default in any material respect
under any contracts to which it is a party. All leases and contracts to
which RM&M is a party are assignable or the other party has consented to
assignment.
(d) All corporate acts required of RM&M have been taken and all
reports and returns required to be filed by them with any governmental
agency have been filed. RM&M is in substantial compliance with all, and has
no notice of any claimed violation of any applicable federal, state, county
and local laws, ordinance or regulations, including those applicable to
discrimination in employment, pollution and safety, except as disclosed in
Schedule 2.4(d) hereto.
(e) There are no legal, administrative or other proceedings,
investigations or inquiries, product liability or other claims, judgments,
injunctions or restrictions, either threatened, pending or outstanding
against or involving RM&M or its assets, properties, or business nor does
RM&M know or have reasonable grounds to know of any basis for any
proceedings, investigations or inquiries, claims, judgments, injunctions or
restrictions, except as disclosed in Schedule 6.3 hereto.
(f) All of the tangible real and personal properties of RM&M are in
substantial compliance with applicable laws, ordinances, rules and
regulations of all public authorities having jurisdiction thereover.
(g) The past and anticipated future operations of RM&M do not infringe
or violate any patents, patent rights, trademarks, trade names, copyrights
and/or licenses of others.
(h) To the knowledge of the officers of RM&M, there is no event,
condition or trend of any character which might materially and adversely
affect the financial condition, business, properties or assets of RM&M.
(i) The assets of RM&M are adequately insured and all policies of
insurance carried by RM&M are in full force and all premiums are paid to
date.
(j) All negotiations relative to this Agreement and the transaction
contemplated have been carried on directly by RM&M with RAI without the
intervention of any broker or third
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party. RM&M has not engaged, consented to or authorized any broker,
investment banker, or third party to act on its behalf, directly or
indirectly, as a broker or finder in connection with the transaction
contemplated by this Agreement.
(k) There are no inquiries, investigations or pending claims or
litigation challenging or threatening to challenge RM&M's right, title and
interest with respect to its continued use and right to preclude others
from using any patent, patent application, invention, discovery, trademark,
trade name and copyright of RM&M.
(l) RM&M has not granted any license or made any assignment of any of
its patents, patent applications, invention discovery trademarks,
tradenames or copyrights, nor does it pay any royalties or other
consideration for the right to use any patents, patent rights, trademarks,
tradenames or copyrights of others.
(m) To the knowledge of the officers of RM&M, RM&M is not a party to
nor bound by any agreement, deed, lease or other instruments which is so
burdensome as to materially affect or impair the operation of RM&M.
2.5 Liabilities Not Assumed.
Anything to the contrary notwithstanding, RAI shall not assume or pay (i)
any United States, foreign, state or other taxes applicable to, imposed upon or
arising out of the transfer of assets to RAI contemplated by this Agreement,
including but not limited to any income, transfer, sales (except that RAI will
be responsible for sales tax, if any, payable on account of any assets
transferred as part of this transaction), use, gross receipts or documentary
stamp tax, (ii) any liability of RM&M insured against, to the extent that
liability is or will be payable to RM&M by an insurer; (iii) any liability cost
obligation or expense incurred in connection with this Agreement and the
transactions contemplated herein; (iv) liabilities of RM&M for failure to
perform any of its covenants contained in this Agreement, or (v) any obligations
or liabilities of RM&M to its shareholders as such.
2.6 Accuracy of All Statements Made by RM&M.
No representation or warranty by RM&M in this Agreement nor any statement,
certificate, schedule or exhibit furnished or to be furnished by or on behalf of
RM&M pursuant to this Agreement nor any document or certificate delivered to
Palm or RAI pursuant to this Agreement or in connection with actions
contemplated contains or shall contain any untrue statement of material fact or
omits or
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shall omit a material fact necessary to make the statement contained not
misleading.
3. Representations and Warranties by Shareholders of RM&M.
The Shareholders, as an inducement to cause Palm and RAI to enter into this
Agreement, severally represent and warrant that:
3.1 Ownership of Shares
He/she owns of record and beneficially the number of shares set forth
opposite his/her name as set forth in Schedule 3.1 hereto.
3.2 Cooperation
He/she will cooperate in all respects to the end that the transactions
contemplated by this Agreement will be consummated and he/she will vote all of
his/her shares in favor of consummating this Agreement.
3.3 Contracts with RM&M.
He/she has no contracts or agreements with RM&M, except as set forth in
Schedule 3.3 hereto.
3.4 Lack of Economic Interest in Competitor.
He/she does not have (nor does any person who would be his/her heir or
descendant if he/she were not living) any direct or indirect interest (except
through ownership of securities listed on a national securities exchange) in (i)
any entity which does business with RM&M or is competitive with its business; or
(ii) any property, asset or right which is used by RM&M in the conduct of its
business, except as set forth in Schedule 3.3.
3.5 Obligations to RM&M.
All obligations of any Shareholder (or any person who would be his/her heir
or descendant if he/she were not living or his/her spouse), or any entity in
which he or she has any interest (except through ownership of securities listed
on a national securities exchange) to RM&M are listed as to amount, payment
schedule and obligor on Schedule 3.5 hereto.
3.6 Truth of Representations and Warranties.
To the best of Shareholders' knowledge, all of the representations of RM&M
contained in Paragraph 2 of this Agreement are true and correct.
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4. Representations and Warranties of Palm and RAI.
Palm and RAI each represents and warrants as follows:
4.1 Organization and Good Standing.
It is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware.
4.2 Performance of This Agreement.
The execution and performance of this Agreement and the issuance of stock
contemplated have been authorized by its Board of Directors.
4.3 Legality of Shares to be Issued.
The shares of Palm's common stock to be delivered pursuant to this
Agreement, when delivered, shall be duly and validly authorized and issued by
Palm and will be fully paid and nonassessable. The shares of Palm's common stock
to be issued will have been listed for trading on the NASDAQ OTC Bulletin Board.
4.4 No Covenant as to Tax Consequences
The parties expressly agree that it is their intent that this transaction
shall be a reorganization pursuant to IRC ss.368(a)(1)(A), and shall take no
actions inconsistent with such intent; however, it is expressly understood and
agreed that neither Palm, RAI nor its respective officers or agents has made any
warranty, expressed or implied, as to the tax consequences of the transactions
contemplated by this Agreement or the tax consequences of any action pursuant to
or growing out of this Agreement. To this end, the parties agree to execute and
deliver such documents as may be required pursuant to the IRC and any
regulations or Revenue Rulings issued relating to such Section.
5. Covenants of RM&M, Palm and RAI
5.1 RM&M covenants and agrees as follows:
(a) Documents to be Furnished.
Within ten days from the date of this Agreement RM&M will furnish to
Palm and RAI the following documents, lists and schedules certificated by a
principal officer of RM&M as being accurate and complete:
(1) A list of the states of incorporation and states qualified to do
business of RM&M;
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(2) A list of the officers, directors and shareholders of RM&M.
(3) Copies of the Certificate of Incorporation and bylaws currently in
effect of RM&M.
(4) A list and description of all real property owned of record or
beneficially, or held under lease, or option, or similar agreements by RM&M
(5) Copies of all leases to which RM&M is a party;
(6) Copies of all contracts agreements or commitments of RM&M whether
involving purchases, sales or otherwise, which expire more than one year
from the date of this Agreement or which involve an amount or value in
excess of $10,000.
(7) Copies of all employment contracts to which RM&M is a party;
(8) Copies of all pension, retirement and profit sharing plans to
which RM&M is a party;
(9) A list of all fringe benefit plans and programs applying to
employees of RM&M, including but not limited to, pension, profit share,
life insurance, medical, bonus, incentive and similar plans and the
approximate annual cost of each;
(10) A list of all current employees of RM&M
(11) A list of all letters patent, patent applications, inventions
upon which patent applications have not yet been filed, tradenames,
trademarks, trademark registrations and applications, copyrights, copyright
registrations, presently owned by RM&M;
(12) Any agreements to which RM&M is a party with respect to any
letters patent, patent applications, invention upon which patent
applications have not yet been filed, trade names, trademarks, trademark
registrations and applications, copyrights and copyright registrations;
(13) Copies of all financing or loan agreements, mortgages or similar
agreements to which RM&M is a party;
(14) A list of all RM&M's bank accounts, brokerage accounts, safety
deposit boxes, with the authorized signatures indicated;
(15) Copies of all powers of attorney granted by RM&M;
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(16) A list of each insurance policy owned by RM&M with the name of
the insurance carrier, the policy number a brief description of the
coverage, the annual premium, and any claims pending;
(17) Sales for the last two (2) fiscal years made to the five largest
customers of RM&M;
(18) Purchases from any vendor during the last two (2) fiscal years
who accounted for over ten (10) percent of the purchases made by RM&M;
(19) All sales commissions paid any individual or entity of more than
$600 during the last two years and a description of the present basis of
paying sales commissions.
(b) Actions Prior to Closing.
From and after the date of this Agreement and until the Closing Date:
(1) Palm, RAI and their authorized representatives shall have full
access during normal business hours to all properties, books, records,
contracts and documents of RM&M and its operating entities, and RM&M and
each entity shall furnish or cause to be furnished to Palm and RAI and
their authorized representatives all information with respect to its
affairs and business of RM&M as Palm and RAI may reasonably request.
(2) Except with the prior written consent of Palm and RAI, RM&M shall
carry on its business diligently and substantially in the same manner as
before.
(3) Without the prior written consent of Palm/RAI, RM&M will not grant
any general or uniform increase in the rates of pay of its employees, nor
grant any general or uniform increase in the benefits under any pension
plan or other contract or commitment, nor increase the compensation payable
or to become payable to officers or key salaried employees, insurance,
pension or other benefit plan, payment or arrangement made to, for or with
any of the officers, key salaried employees or agents.
(4) RM&M shall not enter into any contract or commitment or engage in
any transaction not in the usual and ordinary course of business and
consistent with RM&M's business practices without the prior written consent
of Palm/RAI.
(5) RM&M shall not create any indebtedness other than that incurred in
the usual and ordinary course of business that incurred pursuant to
existing contracts disclosed in
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Schedules 3.3 hereto and that reasonably incurred in doing the acts and
things contemplated by this Agreement.
(6) RM&M shall not declare or pay any dividend or make any
distribution in respect of its capital stock and shall not issue or in any
way dispose of any shares of its own stock.
(7) RM&M shall maintain current insurance and any additional insurance
in effect as may be reasonably required by increased business and risks;
and all property shall be used, operated, maintained and repaired in a
normal business manner.
(8) RM&M shall use its best efforts (without making any commitments on
behalf of RAI) to preserve their business organization intact, to keep
available to RAI the present key officers and employees of RM&M and to
preserve for RAI the present relationships of RM&M with their suppliers and
customers and other having business relations with it.
(9) RM&M shall not do any act or omit to do any act, or permit any act
or omission to act, which will cause a material breach of any material
contract, commitment or obligation of RM&M.
(10) RM&M shall comply with all applicable laws as may be required for
the valid and effective transfer of property, assets and business
contemplated by this Agreement.
(11) RM&M shall not sell or dispose of any property or assets except
products sold in the ordinary course of business.
(12) RM&M shall promptly notify RAI of any lawsuits, claims,
proceedings, or investigations that may be threatened, brought, asserted or
commenced against, them, their officers or directors involving in any way
the business, properties or assets of RM&M;
(13) RM&M shall not sell, assign, or otherwise transfer any trademark,
trade name, patent or other intangible asset;
(14) RM&M shall not waive any right of any substantial value; or
(15) Purchase or otherwise acquire any equity or debt security of
another corporation except to realize on an otherwise worthless debt.
(16) RM&M shall use its best efforts to obtain at the earliest
practicable date and prior to the Closing all consents necessary to the
consummation of the transactions
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contemplated hereby and shall deliver each such consent to RAI promptly
after it is obtained.
5.2 Palm and RAI each covenants and agrees as follows:
(a) Documents to be Furnished.
Within ten days from the date of this Agreement Palm and RAI will
furnish to RM&M the following documents, lists and schedules certificated
by a principal officer of Palm and RAI, respectively, as being accurate and
complete:
(1) A list of the officers, directors and shareholders of Palm and
RAI;
(2) Copies of the Certificate of Incorporation and bylaws currently in
effect of Palm and RAI;
(3) A copy of the proxy materials prepared for the meeting of
shareholders of Palm called and noticed for July 14, 1998;
(4) A copy of Palm's annual report for the period ended April 30,
1998.
(5) Any and all filings by Palm with the SEC within the last two
years;
(6) A copy of the most recent balance sheet, proforma, profit and loss
statements and all other financial statements prepared by Palm's
accountant's in the last year;
(7) All presentations, financial projections, financial statements,
consultants' reports, business plans and analyses, which have been provided
by Palm to any banks, shareholders, potential shareholders, investors, and
potential investors within the last year;
(8) All corporate minutes and resolutions of Palm and RAI for the last
year or from its inception, whichever is shorter.
(9) Certificates of Good Standing from the State of Delaware for Palm
and RAI.
(10) Certificates from all States in which Palm and RAI do business
that all taxes due and owing have been paid.
(b) Actions Prior to Closing.
From and after the date of this Agreement and until the Closing Date:
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(1) RM&M and its authorized representatives shall have access during
normal business hours to all properties, books, records, and documents of
Purchaser Palm and RAI and Palm and RAI shall furnish or cause to be
furnished to RM&M and its authorized representatives all information with
respect to the affairs and business of Palm and RAI as RM&M may reasonably
request.
(2) With respect to the shops/galleries identified in subparagraphs
(a), (d), and (f)-(i) of Schedule 1 attached hereto, RAI shall execute new
leases for such locations at fair market rates. With respect to all other
locations, RAI shall deliver on the Closing Date all necessary third party
consents and/or releases in favor of Mohr and Susan Mohr, personally, for
any and all liability arising out of the existing leases for such
locations.
(3) RAI shall not do any act or omit to do any act, or permit any act
or omission to act, which will cause a material breach of any material
contract, commitment or obligation of RAI.
(4) Palm and RAI shall promptly notify RM&M of any lawsuits, claims,
proceedings, or investigations that may be threatened, brought, asserted or
commenced against, them, their officers or directors involving in any way
the business, properties or assets of Palm or RAI.
(5) RAI shall use its best efforts to obtain at the earliest
practicable date and prior to the Closing all consents necessary to the
consummation of the transactions contemplated hereby and shall deliver each
such consent to RM&M promptly after it is obtained.
(6) RAI agrees to offer employment to all existing employees of RM&M.
RAI further agrees to apply all payments for accrued wages, salaries and
employee benefits which it may receive from RAI at the Closing to the
payment of the obligations represented by such payments.
5.3 Third Party Consents. To the extent that RM&M's rights under any asset
or leasehold to be assigned to RAI hereunder may not be assigned without the
consent of another person which has not been obtained, RM&M and RAI shall
cooperate and use best efforts to obtain any such required consent(s) as
promptly as possible prior to the Closing. If any such consent shall not be
obtained or if any attempted assignment would be ineffective or would impair
RAI's rights under the leasehold in question so that RAI would not in effect
acquire the benefit of all such rights and notwithstanding the foregoing, RAI
agrees to proceed with the Closing, RM&M or Shareholders, to the maximum extent
permitted by law shall act after the Closing Date as RAI's agent in order to
obtain for it the
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benefits thereunder and shall cooperate with RAI, to the maximum extent
permitted by law in any other reasonable arrangement designed to provide such
benefits to RAI.
6. Conditions Precedent to Purchaser RAI's Obligations.
6.1 Truth of Representations and Warranties.
The representations and warranties made by RM&M and Shareholders in this
Agreement, in the Merger Agreement or given on its behalf shall be substantially
accurate in all material respects on and as of the Closing Date with the same
effect as though the representations and warranties had been made or given on
and as of the Closing Date.
6.2 Compliance with Covenants
RM&M shall have performed and complied with all its obligations under this
Agreement, the Merger Agreement or which are to be performed or complied with by
it prior to or on the Closing Date including the delivery of its documents
specified in Subparagraph 5.1(a) and the closing documents specified in
Subparagraph 13.2 hereof.
6.3 Absence of Suit.
No suit, action, investigation, inquiry or other proceeding by any
governmental body or other person or legal or administrative proceeding shall
have been instituted or threatened in which it will be or it is sought, by
anyone, to restrain, prohibit, challenge or obtain damages or other relief in
connection with this Agreement or the consummation of the transactions
contemplated, or in connection with any material claim against RM&M not
disclosed in Schedule 6.3 hereto.
6.4 Shareholder Authorization.
The merger of RM&M into RAI shall have been duly and validly authorized by
the holders of RM&M's stock issued and out-standing in accordance with the laws
of the State of New York.
6.5 No Material Adverse Change
As of the Closing Date there shall not have occurred any material adverse
change which materially impairs the ability of RM&M to conduct its business or
the earning power on the same basis as in the past.
6.6 Accuracy of Financial Statement.
Palm, RAI and its their representatives shall be reasonably satisfied as to
the substantial accuracy of all balance sheets,
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statements of income and other financial statements of RM&M furnished to Palm
and RAI.
6.7 Approval of Palm's and RAI's Boards of Directors.
This Agreement has been approved by the Board of Directors of each of Palm
and RAI.
6.8 Accountant's Comfort Letter.
RAI shall receive on or before the Closing Date the accountants' comfort
letter referred to in Subparagraph 13.4(a) and substantially in the form of
Exhibit E hereto.
6.9 Employment Contracts.
Employment contracts referred to in Subparagraph 13.2(e) shall have been
executed.
6.10 Legal Opinion
Palm and RAI shall have received an opinion of counsel for RM&M referred to
in Subparagraph 13.2(c) with respect to the matters addressed in, and in
substantially the form of, paragraphs 1 - 4 and 7 of Exhibit D hereto, but
subject to such qualifications and limitations as are reasonably acceptable to
Palm and RAI.
7. Conditions Precedent to RM&M's Obligations.
Each and every obligation of RM&M to be performed on the Closing Date shall
be subject to the prior satisfaction of the following conditions:
7.1 Truth of Representations and Warranties.
The representations and warranties made by Palm and RAI in this Agreement
or given on their behalf shall be substantially accurate in all material
respects on and as of the Closing Date with the same effect as though the
representations and warranties had been made or given on and as of the Closing
Date.
7.2 Compliance with Covenants
Palm and RAI shall have performed and complied with all its obligations
under this Agreement which are to be performed or complied with by it prior to
or on the Closing Date including:
(a) the delivery of its documents specified in Subparagraph 5.2(a); and
(b) the delivery of the closing documents specified in Subparagraph 13.3
hereof.
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7.3 RM&M's Shareholder Authorization.
The merger of RM&M into RAI in the manner contemplated by this Agreement
shall have been duly and validly authorized by the holders of RM&M's stock
issued and outstanding in accordance with the laws of the State of New York.
7.4 Palm's Shareholder Approval of Reverse Stock Split.
The Shareholders of Palm have approved the amendment of Palm's Certificate
of Incorporation to provide for a 10-for-1 reverse stock split decreasing the
number of Palm's issued and outstanding shares from 25,000,000 to 2,500,000 of
$.001 par value common stock.
7.5 Legal Opinion
RM&M shall have received an opinion of counsel for Palm and RAI referred to
in Subparagraph 13.3 with respect to the matters addressed in, and in
substantially the form of, paragraphs 1 - 7 of Exhibit D hereto, but subject to
such qualifications and limitations as are reasonably acceptable to RM&M.
8. Limitation on Survival and Effect of Certain Warranties,
Representations and Covenants.
All statements contained in any certificate instrument, or document
delivered by or on behalf of any of the parties pursuant to this Agreement and
the transactions contemplated shall be deemed representations and warranties by
the respective parties.
8.1 RM&M's and Shareholders' Obligations.
The representations and warranties and covenants of RM&M and Shareholders
contained in this Agreement shall survive the Closing Date pursuant to the terms
of ss.9.5 of this Agreement and any investigation made by Palm, RAI or their
agents and all representations, warranties and covenants surviving shall be
deemed joint and several.
8.2 Palm's and RAI's Obligations.
The representations, warranties and covenants of Palm and RAI contained in
this Agreement shall survive the Closing Date.
9. Indemnification.
9.1 Requirement of Indemnification.
Shareholders shall indemnify Palm and RAI for any loss, cost, expense or
other damages suffered by Palm or RAI resulting from arising out of, or incurred
with respect to the falsity or the
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breach of any representation, warranty or covenant made by RM&M or shareholders
which survive the closing as provided in Paragraph 8.
9.2 Notice.
Palm or RAI shall assert any right to indemnification by furnishing Robert
Mohr or any other person as may be designated in writing by the Shareholders,
with a written notice pursuant to Section 19 hereof which notice shall list the
charges detailed by item showing the nature of any breach of any representation,
warranty or covenant, date of payment or assertion of claim, summary of
settlement or litigation procedures, and the amount of the loss, cost or
expense. If the right to indemnification is based on a claim of a third party,
Palm or RAI, whichever applies, shall give the notice within 60 days after it
has notice of any claim and shareholders shall have the right to contest any
such claim by a third party but all expenses of the contest shall be borne by
shareholders. Palm or RAI, whichever applies, shall take all necessary steps to
preserve such right of contest.
9.3 Resolution of the Claim.
Except in the event that the claim for indemnification is based upon a
claim of a third party and shareholders shall have notified Palm or RAI that it
will contest the claim, unless shareholders object to the determination or
computation of the total amount of the indemnification shows on the written
notice specified in Subparagraph 9.2 within 60 days after receipt, the total
amount of indemnification shown by notice shall be paid by shareholders to Palm
or RAI. If shareholders object to the determination contained in the written
notice specified in Subparagraph 9.2 within 60 days after receipt, they shall
have the right to submit any claim for indemnification not brought by a third
party to the American Arbitration Association for binding arbitration in
accordance with its rules and the expenses of the American Arbitration
Association shall be borne equally by the parties.
9.4 Effect of Taxes.
The determination of any loss, cost or expense shall take into account any
tax benefit derived by RAI or any affiliated companies. To the extent that any
deficiency for federal income taxes which may be established against RM&M for
any year ended on or prior to June 30, 1998 is occasioned by a determination by
the Internal Revenue Service that any increase in income for the year gives rise
to a deduction or deductions from ordinary income in the aggregate amount of
RM&M for a subsequent taxable year or years, this deficiency shall be assumed by
RAI and shall not be a breach of any of RM&M or Shareholders' warranties,
representations and covenants in this Agreement.
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9.5 Time Limit on Indemnification.
No claim for indemnification may be asserted by Palm, RAI, their successors
or assigns, after the second anniversary of the Closing Date hereof, except for
(i) any and all taxes for any period ending prior to June 30, 1998, which may be
asserted at any time the Internal Revenue Service or any state tax authority may
still assert a deficiency and (ii) claims arising out of a representation,
warranty or covenant that a shareholder knew at the date of this Agreement was
false or which arises out of a claim later known to a shareholder which
shareholder failed to disclose to an officer of Palm or RAI prior to the Closing
Date.
10. Covenant Not To Compete.
Each shareholder agrees that for a period of three (3) years from the
Closing Date, he or she will not either directly or indirectly own, have a
proprietary interest (except for less than five percent (5%) of any listed
company or company traded in the over-the-counter market) of any kind in, be
employed by, or serve as a consultant to or in any other capacity for any firm,
other than Palm, RAI or any of their affiliates, engage in the art publishing,
art framing and art gallery business within a 25-mile radius of Palm, RAI or any
of their affiliated locations in existence during such period of time without
the express written consent of Palm. Each shareholder agrees that compliance
with the agreement contained in this paragraph is necessary to protect the
goodwill and other proprietary interest of RM&M and that a breach of this
Agreement will result in irreparable and continuing damage to Palm, RAI and its
affiliates for which there will be no adequate remedy at law and in the event of
any breach RAI, its successors and assigns shall be entitled to injunctive and
other and further relief including damages as may be proper. This covenant not
to compete shall terminate if any of the following occurs: (i) Mohr's employment
with RAI, its successors or assigns, is terminated Without Cause by RAI, its
successors and assigns, or for Good Cause by Mohr (as those terms are defined in
Exhibit C hereto or (ii) RM&M exercises its rights under the UCC and resumes
operations of its locations or (iii) Palm, RAI or their affiliates cease to
operate all locations in Upstate New York.
11. Securities Act Provisions.
11.1 Restriction on Disposition of Shares.
Shareholders covenant and warrant that the shares to be received by them
pursuant to the merger of RM&M into RAI shall be acquired for their own account
and not with the present view towards distribution and that they shall not
dispose of these shares except (i) pursuant to an effective registration
statement under the Securities Act of 1933, as amended; or (ii) in any other
transaction which in the opinion of counsel acceptable to Palm is
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exempt from registration under the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder. In
order to effectuate the covenants of this Subparagraph 11.1, each Shareholder
shall be required to execute a letter substantially in the form of Appendix B
hereto evidencing his or her agreement to the provisions of this paragraph, and
an appropriate endorsement will be placed on the certificates of common stock of
Purchaser Palm at the time these shares are issued to the Shareholders pursuant
to this Agreement, and stop transfer instructions shall be placed with the
transfer agent for the securities.
11.2 Evidence of Compliance with Private Offering Exemption.
RM&M and Shareholders agree to supply Palm and RAI with evidence of the
financial sophistication of the Shareholders or evidence of appointment of a
sophisticated investment representative and any other items as counsel for Palm
and RAI may require in order to evidence the private offering character of the
distribution of shares made pursuant to this Agreement.
11.3 Notice of Limitation Upon Disposition.
Each Shareholder is aware that the shares distributed will not have been
registered pursuant to the Securities Act of 1933 as amended; and therefore,
under current interpretations and applicable rules, he or she will probably have
to retain the shares for a period of at least one year and at the expiration of
the one year period sales may be confined to brokerage transactions of limited
amounts requiring certain notification filings with the Securities and Exchange
Commission and the disposition may be available only if Palm is current in its
filings with the Securities and Exchange Commission and the Shareholders are
aware of Rule 144 issued by the Securities and Exchange commission under the
Securities Act of 1933, as amended, and the other limitations imposed on their
disposition of Palm's shares.
11.4 Piggyback Rights
In the event Palm files a registration statement under the Securities Act
of 1933, as amended, with respect to shares of its common stock prior to the
first anniversary of the Closing Date hereof on a form appropriate for
registering shareholders' common stock, Palm shall give written notice to
shareholders prior to filing, and the shareholders shall have the right to
request to have included such shares of Palm's common stock as shall be
specified in the request, provided, however, that the inclusion of the shares
shall not interfere with Palm's registration of its shares and that in no event
shall Palm be obligated (i) to file a registration statement at any time or (ii)
to keep the prospectus with respect to the stock current for more than 30 days
after the effective date of the registration statement; and provided,
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further, that all shares sold pursuant to the registration statement are
effected within a 30 day period. If shareholders do not make a request for
registration within 20 days after receipt of notice from Palm, Palm shall have
no obligation to include any shares of Palm's common stock owned by those
shareholders in the registration statement.
11.5 Payment of Expenses.
In the event of a registration under this Paragraph 11, shareholders shall
pay and bear the direct selling fees, disbursements and expenses, including
without limitation all underwriters' discounts, commission and expenses, but no
other cost of registration.
12. Employee Benefit Plans
All employee benefit plans which have been in effect for RM&M's employees
for six months or more prior to the date of this Agreement, including but not
limited to health and accident insurance, major medical insurance, sick pay
plans, noninsured maternity benefits, group life insurance, and other employee
fringe benefits shall be continued by RAI subject to the same rights of
termination available to RM&M.
13. Closing.
13.1 Time and Place
The closing of this transaction shall take place as of August 1, 1998 or at
any other time and place as the parties shall agree upon. This date is referred
to in this Agreement as the "Closing Date".
13.2 Documents to Be Delivered by RM&M
At the closing, RM&M shall deliver to RAI the following documents:
(a) A list, by location, of all assets of RM&M indicating the book
value as well as fair market value of such assets.
(b) A certificate signed by the officers of RM&M that the
representations and warranties made by RM&M in this Agreement are
substantially accurate in all material respects on and as of the Closing
Date with the same effect as though the representations and warranties had
been made on or given on and as of the Closing Date and that RM&M has
performed and complied with all its obligations under this Agreement which
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are to be performed or complied with by or prior to or on the Closing Date.
(c) A written opinion from counsel for RM&M dated as of the Closing
Date addressed to RAI as referred to in Subparagraph 6.10 hereof.
(d) Employment agreements between Robert Mohr and RAI in satisfactory
form to RAI.
(e) A certified copy of the duly adopted resolutions of shareholders
and board of directors authorizing the transactions contemplated by this
Agreement.
(f) A copy of the bylaws of RM&M certified by its secretary and a copy
of the certificate of incorporation of seller certified by the Secretary of
State
(g) Incumbency certificate relating to all parties executing documents
relating to any of the transactions contemplated.
(h) Certificates or letters from Shareholders evidencing the taking of
the shares in accordance with the provisions of Paragraph 11 and their
understanding of the restrictions.
(i) General release in form and substance satisfactory to RAI and its
counsel of all claims that any officer or director of RM&M may have to the
date of closing against RM&M, RAI and/or the directors, officers, agents
and employees of RM&M except as may be described in written contracts
expressly described and excepted from the releases.
(j) All consents from third parties and government agencies required
to consummate the transactions contemplated hereby shall have been
obtained. In the event that RM&M, after having used its best efforts to do
so, is unable to obtain prior to the Closing Date all required consents,
RM&M shall, if acceptable to RAI continue to use its best efforts to obtain
such consents and shall indemnify RAI for the loss of any economic benefit
which RAI may suffer as a result of RM&M's inability to obtain any required
consent.
(k) Any other documents of transfer, certificates of authority and
other documents as Palm and RAI may reasonably request.
13.3 Documents to Be Delivered by Palm and RAI
At the closing Palm or RAI shall deliver to RM&M the following documents:
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(a) Certificates for the number of shares of Palm's common stock as
determined in paragraph 1.2(a). The shares are to be registered in the
names of the shareholders in accordance with their interest in RM&M or in
such other names and denominations as RM&M may specify;
(b) Guaranty and related UCC statements;
(c) Employment Agreement;
(d) Leases with respect to the shops/galleries identified in
subparagraphs (a), (d), and (f)-(i) of Schedule 1 attached hereto and third
party consents and/or releases in favor of Shareholders with respect to all
other shops/galleries set forth on such Schedule.
(e) All consents from third parties and government agencies required
to consummate the transactions contemplated hereby shall have been
obtained.
(f) A written opinion of counsel for Palm and RAI dated as of the
Closing Date addressed to RM&M as referred to in Subparagraph 7.5 hereof.
(g) A certified copy of the duly adopted resolution of the board of
directors authorizing the merger of RM&M into Palm and RAI, the adoption of
the agreement of merger and the transactions contemplated by this
Agreement.
13.4 Other documents to be delivered at the Closing
The following additional documents shall be delivered:
(a) A letter from Barry Poppell dated the Closing Date in form and
substance substantially in the form of Exhibit E and satisfactory to Palm
and RAI.
(b) Certificates for shares of RM&M's stock now held by the
shareholders.
14. Meeting of Shareholders.
RM&M will duly call, give notice of and hold a meeting of the holders of
its common stock for the purpose of authorizing the merger of RM&M into
Purchaser RAI all in accordance with the agreement of merger and this Agreement.
15. Governing Law.
This Agreement and the legal relations among the parties hereto shall be
governed by and construed in accordance with the
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laws of the State of Delaware, without regard to its conflicts of law doctrine.
16. Assignment.
This Agreement and all of the provisions hereof shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns, but neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto without
the prior written consent of the other parties.
17. Amendment, Modification or Waiver
No supplement, modification, waiver, or termination of this Agreement shall
be binding unless executed in writing by the party to be bound thereby.
18. Termination and Abandonment.
To the extent provided in (1), (2), (3) and (4) below, the merger may be
abandoned:
(1) By the mutual consent of the respective boards of directors of each of
the constituent corporations;
(2) At the election of the board of directors of Palm or RAI, if (i)
demands by shareholders for appraisal of their shares of RM&M common stock have
been received from the holders of 20% percent or more of the outstanding shares
or (ii) in the judgment of board any judgment is rendered relating to any legal
proceeding not commenced and the existence of the judgment will or may
materially affect the rights of either constituent corporation to sell, convey,
transfer or assign any of its assets or materially interfere with the operation
of its business, renders the merger impracticable, undesirable or not in the
best interests of its shareholders; or
(3) At the election of the board of directors of either constituent
corporation if-
(a) The warranties and representations of the other constituent
corporation contained in this Agreement shall not be substantially accurate
in all material respects on and as of the date of election; or the
covenants contained of the other constituent corporation shall not have
been performed or satisfied in all material respects; or
(b) It shall not have received an opinion of counsel for the other
constituent corporation to the effect that: (i) any other constituent
corporation is a corporation duly organized, validly existing and in good
standing under the laws of their
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<PAGE>
respective states of incorporation; (ii) all outstanding shares of stock of
the constituent corporation have been duly and validly authorized, are
validly issued and outstanding, and are fully paid and nonassessable; and
(iii) all corporate action (other than the filing and recording of this
Agreement) required for the consummation of the merger contemplated hereby
has been taken by the constituent corporation; or
(c) The taking of any steps necessary to effect the merger by either
of the constituent corporations shall be permanently or temporarily
enjoined by a court having jurisdiction; or
(d) It shall not have received an opinion of counsel selected by Palm
and RAI to the effect that the shares of stock of the surviving corporation
to be issued, as provided, upon conversion of shares of stock of RM&M will
be legally and validly authorized and, when issued, will be validly issued,
fully paid and nonassessable shares of stock of the surviving corporation.
(4) If the Merger Date shall not have occurred by 5:00 p.m. August 22,
1998, then, at the option of the board of directors of either constituent
corporation the merger may be abandoned.
In the event of termination and abandonment by any party as provided above
in this paragraph 18, written notice shall be given to the other party, and each
party shall pay its own expenses incident to the preparation for the
consummation of this Agreement and the transactions contemplated.
19. Notices.
All notices, requests, demands and other communications shall be deemed to
have been duly given, if delivered by hand or mailed, certified, or registered
mail with postage prepaid:
(a) If to RM&M or Shareholders to:
R M & M Framemakers, Inc.
Attn: Robert Mohr
162 Sickle Hill Road
Berne, New York 12023
copy to:
Ganz & Wolkenbreit, LLP
One Columbia Circle
Albany, New York 12203
Attn: Jed B. Wolkenbreit, Esq.
25
<PAGE>
or to any other person and place as RM&M shall furnish to
Purchaser RAI in writing; or
(b) If to Palm or RAI to:
Palm Desert Art, Inc.
39-725 Garand Lane, Suite J
Palm Desert, CA 92211
Attn: Mr. Hugh G. Pike
and
R. M. & M. Acquisition, Inc.
39-725 Garand Lane, Suite J
Palm Desert, CA 92211
Attn: Mr. Hugh G. Pike
copy to:
Dowe & Dowe
67 Wall Street, Suite 2411
New York, New York 10005
Attn: Janet L. Dowe, Esq.
or to any other person and place as Palm or RAI shall
furnish to RM&M in writing.
20. Announcements.
Announcements concerning the transactions provided for in this Agreement by
either RM&M or Palm or RAI shall be subject to the approval of the other in all
essential respects, except that RM&M's approval of form shall not be required as
to any statements and other information which Palm may submitted to the
Securities and Exchange Commission, NASDAQ OTC Bulletin Board or Palm's
shareholders or be required to make pursuant to any rule or regulation of the
Securities and Exchange Commission or NASDAQ OTC Bulletin Board.
21. Entire Agreement.
This Agreement constitutes the entire Agreement between the parties hereto
pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements, understandings, negotiations, and discussions,
whether oral or written, of the parties, and there are no warranties,
representations, or other agreements between the parties in connection with the
subject matter hereof except as specifically set forth herein.
26
<PAGE>
22. Survival of Warranties.
The respective representations and warranties of Palm, RAI, the
Shareholders and RM&M contained herein or in any certificate or other document
delivered pursuant hereto shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby.
23. Waiver of Compliance.
Any failure of Palm or RAI, on the one hand, or RM&M, on the other, to
comply with any obligation, covenant, agreement or condition herein may be
expressly waived in writing by RM&M or Palm or RAI, respectively, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.
24. Counterparts.
This Agreement may be executed simultaneously in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
25. Headings.
The headings of the sections and articles of this Agreement are inserted
for convenience only and shall not constitute a part hereof or affect in any way
the meaning or interpretation of this Agreement.
26. Third Parties.
Except as specifically set forth or referred to herein, nothing herein
expressed or implied is intended or shall be construed to confer upon or give to
any person other than the parties hereto and their successors or assigns, any
rights or remedies under or by reason of this Agreement.
27. Further Documents.
Palm, RAI, the Shareholders and RM&M agree to execute any and all other
documents and to take any other action or corporate proceedings as may be
necessary or desirable to carry out the terms hereof.
28. Confidentiality.
Unless and until the Closing has been consummated, the parties will hold,
and shall cause their counsel and agents to hold in confidence any confidential
information made available by one party to another party in connection with this
Agreement with respect to
27
<PAGE>
their respective businesses using the same standard of care to protect such
confidential information as is used by each party to protect its confidential
information. If the transaction contemplated by this Agreement is not
consummated, the parties agree that they shall return or cause to be returned to
the other party all written materials and all copies thereof that were supplied
to them by the other party and that contain any such confidential information.
29. Legality.
From the date hereof through the earlier of (a) the Closing of the
transaction contemplated hereby or (b) the good faith cessation of negotiations
by the parties, Palm, RAI or RM&M will not directly or indirectly, through any
of its officers, directors, employees, agents or otherwise (x) solicit, initiate
or encourage the submission of any inquiries, proposals or offers from any
corporation, partnership, person or other entity or group relating to any
acquisition or purchase of any material assets of Palm, RAI or RM&M, or of any
interest (including any equity interest) therein, or (y) participate in any
discussions or negotiations regarding the foregoing or furnish any information
concerning Palm, RAI or RM&M or any of the foregoing or (z) otherwise cooperate
in any way, or assist or participate in, or facilitate or encourage, any effort
or attempt by any other person to do or seek to do any of the foregoing. Palm,
RAI and RM&M shall immediately communicate to each other the existence of any
such inquiry, proposal, contact or offer that either has received from another
person.
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<PAGE>
In witness whereof, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first written above.
WITNESS: PALM DESERT ART, INC.
By: /s/ Hugh G. Pike
- ----------------------- ---------------------------
Hugh G. Pike, President
WITNESS: R. M. & M. ACQUISITION, INC.
By: /s/ Hugh G. Pike
- ----------------------- ---------------------------
Hugh G. Pike, President
WITNESS: R. M. & M. FRAMEMAKERS, INC.
By: /s/ Robert Mohr
- ----------------------- ---------------------------
Robert Mohr, President
WITNESS:
/s/ Robert Mohr
- ----------------------- ---------------------------
Robert Mohr, Shareholder
WITNESS:
/s/ Susan Mohr
- ----------------------- ---------------------------
Susan Mohr, Shareholder
29
Exhibit 99.3
<PAGE>
GUARANTY
THIS GUARANTY executed this 5th day of August, 1998, by PALM DESERT ART,
INC., a Delaware corporation, (the "Palm"), in favor of and Robert G. Mohr and
Susan Mohr ("Shareholders").
WHEREAS Palm and Shareholders, among others, have entered into an Agreement
and Plan of Reorganization of even date herewith (the "Agreement"),
WHEREAS, the parties acknowledge that Shareholders shall be restricted from
transferring their shares for a period of one year pursuant to Rule 144 of the
securities regulations and that even after the one year holding period,
Shareholders may be subject to certain volume restrictions until Shareholders
have held the share for a period of two years or more.
WHEREAS to ensure that Shareholders receive at least $645,000 for the sale
of their stock when and as the Shares become available for transfer, Palm has
agreed to guarantee to Shareholders that the Stock delivered to Shareholders
pursuant to that Agreement shall have a value of no less than $1.00 per share
for the two year period from the date hereof.
WHEREAS Palm has agreed that such guarantee shall be secured by a
first-priority perfected security interest in all of the assets of R M & M
Framemakers, Inc. ("RM&M") that become assets of its wholly-owned subsidiary, R.
M. & M. Acquisition, Inc. ("RAI") as a result of the reorganization which assets
are set forth in Schedule A attached hereto (the "Collateral").
NOW WHEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the receipt and
sufficiency of which are hereby acknowledged, there parties hereto agree as
follows:
On or about August 5, 1999, the parties shall calculate the difference
between U.S. One Dollar (US $1.00) and the Current Per Share Value (as that term
is defined herein) multiplied by the number of shares of Palm's common stock
which Shareholders received pursuant to the Agreement (the "Differential #1").
The Current Per Share Value shall be calculated as the average per share trading
price of Palm's $.001 par value common stock for the five trading days
immediately prior to and the five trading days immediately following August 5,
1999.
At that time, if the Differential is a positive amount, Palm shall execute
a Promissory Note ("Note #1) in favor of Mohr in the amount of the Differential
#1 which Note #1 shall be amortized over a period of twelve (12) months and
which shall provide for twelve (12) equal monthly installments to be made on or
about the 5th of each month commencing on September 5, 1999.
<PAGE>
Thereafter on November 5, 1999, February 5, 2000 and May 5, 2000 the
parties will execute a note to replace any note then in existence in an amount
to be calculated as follows:
$645,000 less (i) any monies received from sales of any stock received
under the Agreement (ii) any monies that could have been received, if any, from
an offer to purchase at a price of $1 or more (iii) the current market value of
the remaining stock, and (iv) less any amounts paid under all previous notes.
On August 5, 2000, the parties will perform the above calculation and any
amount that would be due to the Shareholders based on such calculation shall be
paid in cash to the Shareholders on or before August 20, 2000.
Prior to Shareholders' sale or transfer of the Shares as such may become
unrestricted and available for transfer in compliance with U.S. securities laws,
Palm shall have the right of first refusal to purchase such shares for cash at
the then current market price but in no event shall such purchase price be less
than $1 per share. If Palm elects not to exercise its right of first refusal,
Shareholders may sell such shares in such quantities as is permissible under the
securities laws and as Shareholders deem advisable. Such right of first refusal
shall apply to all shares which Shareholders shall receive pursuant to the
Agreement, and shall survive the duration of this Guaranty.
All payments under any of the promissory notes shall be made or notes
executed and delivered to Shareholders at the address for Shareholders specified
herein or to any other address as Shareholders shall furnish to Palm in writing.
Palm's obligations under this Guaranty shall be secured by a first-priority
perfected security interest in all of the "Heart of America" assets and
inventory of RM&M that become assets or inventory of RAI as a result of the
merger which assets and inventory are set forth in Schedule A hereto, as well as
any inventory hereafter acquired by RAI. Palm agrees that it will execute, and
cause RAI to execute, any and all necessary documents, including UCC-1 financing
statements, to enable Shareholders to have a properly perfected security
interest in such assets as collateral for this Guaranty or any resulting
promissory note resulting hereunder. Palm further agrees that it will maintain
or cause RAI to maintain an aggregate of at least $400,000 worth of assets and
inventory based on book value.
This instrument incorporates all discussions and negotiations between Palm
and Shareholders concerning the guaranty provided by Palm hereunder. No such
discussions or negotiations shall limit, modify or otherwise affect the
provisions hereof. No provision hereof may be altered, amended, waived, canceled
or modified, except by Shareholders.
Palm will pay on demand all Costs of Collection incurred by
2
<PAGE>
Shareholders' attorneys and all costs incurred by Shareholders which are
directly or indirectly related to Shareholders' efforts to collect or to enforce
any of the obligations of Palm hereunder or to enforce any of Shareholders
rights, remedies or powers against or in respect of Palm (whether or not suit is
instituted by or against Shareholder).
"Costs of Collection" include, without limitation, all reasonable
attorneys' fees and out-of-pocket expenses incurred by Shareholders' attorneys
and all costs incurred by Shareholder including, without limitation, costs and
expenses associated with travel on behalf of Shareholder, which costs and
expenses are directly or indirectly related to or incurred in respect of
Shareholders' efforts to collect or enforce the Obligation, or to enforce any of
Shareholders' rights, remedies or powers against or in respect of the Company or
any other guarantor or person liable in respect of the Obligation (whether or
not suit is instituted in connection with such efforts). The Costs of Collection
shall be added to the Obligation of the Company to Shareholder, as if such had
been lent, advanced and credited by Seller to, or for the benefit of, the
Company.
The rights, remedies, powers, privileges and discretions of Shareholders
hereunder (hereinafter, the "Shareholders' Rights and Remedies") shall be
cumulative and not exclusive of any rights or remedies which he would otherwise
have. No delay or omission by Shareholders in exercising or enforcing any of
Shareholders' Rights and Remedies shall operate as, or constitute, a waiver
thereof. No waiver by Shareholder of any of Shareholders' Rights and Remedies,
of any default, of any remedies under any other agreement with Palm shall
operate as a waiver of any other of Shareholders' Rights and Remedies or of any
default or remedy hereunder or thereunder. No exercise of any of Shareholders'
Rights and Remedies, and no other agreement or transaction of whatever nature
entered into between Shareholder and Palm, shall preclude any other exercise of
Shareholders' Rights and Remedies. No waiver by Seller of any of Shareholders'
Rights and Remedies on any one occasion shall be deemed a waiver on any
subsequent occasion, nor shall it be deemed a continuing waiver. All of
Shareholders' Rights and Remedies and all of Shareholders' rights, remedies,
powers, privileges and discretion under any other agreement or transaction with
Palm shall be cumulative and not alternative or exclusive, and may be exercised
by Shareholders at such time or times and in such order of preference as
Shareholders in their sole discretion may determine.
All payments, notices, requests, demands and other communications shall be
deemed to have been duly given, if delivered by hand or mailed, certified, or
registered mail with postage prepaid:
(a) If to Shareholders to:
Robert Mohr and Susan Mohr
3
<PAGE>
162 Sickle Hill Road
Berne, New York 12023
copy to:
Ganz & Wolkenbreit, LLP
One Columbia Circle
Albany, New York 12203
Attn: Jed Wolkenbreit, Esq.
or to any other person and place as Shareholders shall furnish to Palm in
writing; or
(b) If to Palm to:
Palm Desert Art, Inc.
39-725 Garand Lane, Suite J
Palm Desert, CA 92211
Attn: Mr. Hugh G. Pike
or to any other person and place as Palm shall furnish to Shareholders in
writing.
This instrument shall inure to the benefit of Shareholders, and his heirs,
successors and assigns, shall be binding upon the heirs, successors and assigns
of Palm.
This instrument shall take effect and shall be governed, construed and
interpreted in accordance with the laws of the State of New York. Palm submits
to the jurisdiction of the courts of the State of New York for all matters in
connection herewith as well as for all purposes in connection with any other
relationship between Palm and Shareholders. It is the intention of Palm that the
provisions of the within guaranty be liberally construed to the end that
Shareholders may be put in as good a position as if Palm had promptly,
punctually and faithfully performed all Obligations hereunder.
Any determination that any provision hereof is invalid, illegal or
unenforceable in any respect in any instance shall not affect the validity,
legality or enforceability of such provision in any other instance and shall not
affect the validity, legality or enforceability of any other provision contained
herein.
So long as Palm is not in default under the terms of this Guaranty, this
instrument shall terminate on the earlier of (a) September 5, 2000; (b) the date
upon which Shareholders receipt of $645,000 or more from the sale of its stock
either to Palm or some third party; (c) the date upon which Shareholders refuse
to sell their shares notwithstanding an offer from a third party to purchase
such shares for a price which would achieve the $645,000 threshhold; or (d) the
delivery of written notice of termination of this Guaranty dated and signed by
Shareholders.
4
<PAGE>
IN WITNESS WHEREOF, Palm has executed this Guaranty made to be effective as
of the ___ day of ________, 1998.
PALM DESERT ART, INC.
By: /s/ Hugh G. Pike
---------------------------
Name: Hugh G. Pike
Title: President
/s/ Robert Mohr
---------------------------
Robert Mohr
/s/ Susan Mohr
---------------------------
Susan Mohr
5
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 5th day of August, 1998 before me personally came Hugh G. Pike, to
me known, who, being by me duly sworn, did depose and say that he is the
President of R. M. & M. Acquisition, Inc., a Delaware corporation, being the
corporation described in, and which executed the foregoing instrument, and that
he executed same in his capacity as President by order of the Board of Directors
of such corporation.
---------------------------
Notary Public
6
