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 July 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.)
39-725 Garand Lane, Suite J, Palm Desert, CA 92211
(Address of Principal Executive Office) (Zip Code)
760-360-5911
(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 July 31, 1998 was 2,500,070 shares. The substantial reduction
in shares issued and outstanding was attributable to a 10-for-1 reverse stock
split effective July 31, 1998.
<PAGE>
VISUAL CYBERNETICS CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Balance Sheet -- July 31, 1998
and April 30, 1998 F-1
Statement of Operations -- Three
Months Ended July 31, 1998 and
July 31, 1997 F-3
Statement of Stockholders' Equity
(Deficit) -- July 31, 1998 and
April 30, 1998 F-4
Statement of Cash Flows -- Three
Months Ended July 31, 1998 and
July 31, 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 3
Item 2. Changes In Securities 3
Item 3. Defaults Upon Senior Securities 3
Item 4. Submission of Matters to a Vote of
Security Holders 3
Item 5. Other Information 3
Item 6. Exhibits and Reports on Form 8-K 4
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Balance Sheet -- July 31, 1998
and April 30, 1998 F-1
Statement of Operations -- Three
Months Ended July 31, 1998 and
July 31, 1997 F-3
Statement of Stockholders' Equity
(Deficit) -- July 31, 1998 and
April 30, 1998 F-4
Statement of Cash Flows -- Three
Months Ended July 31, 1998 and
July 31, 1997 F-5
Notes to Financial Statements F-6
<PAGE>
PALM DESERT ART, INC.
FINANCIAL STATEMENTS
July 31, 1998 and 1997
<PAGE>
ACCOUNTANTS' COMPILATION REPORT
The Board of Directors
Palm Desert Art, Inc.
We have compiled the accompanying balance sheet of Palm Desert Art, Inc. as of
July 31, 1998, and the related statements of operations, changes in
stockholders' equity, and cash flows for the three months ended July 31, 1998,
and July 31, 1997, in accordance with Statements on Standards for Accounting and
Review Services issued by the American Institute of Certified Public
Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Palm Desert Art, Inc. as of April 30, 1998 and
in our report dated June 17, 1998, we expressed an unqualified opinion on those
financial statements.
Manchester, New Hampshire
September 21, 1998
<PAGE>
PALM DESERT ART, INC.
Balance Sheet
ASSETS
<TABLE>
<CAPTION>
7/31/98 4/30/98
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
Current assets
Cash $ 165,681 $ --
Accounts receivable 206,346 83,319
Inventory 314,361 273,043
Prepaid expense 3,600 3,600
Direct response advertising 171,876 158,462
----------- ----------
861,864 518,424
----------- ----------
Total current assets
Property and equipment
Leasehold improvements 48,074 38,661
Furniture and fixtures 6,500 6,500
Vehicles 4,552 4,552
Equipment 7,756 6,957
----------- ----------
66,882 56,670
Less accumulated depreciation 4,553 3,642
----------- ----------
Net property and equipment 62,329 53,028
----------- ----------
Other assets
Deposits 46,204 31,836
Direct acquisition costs 54,309 --
Direct response advertising 39,615 39,615
----------- ----------
Total other assets 140,128 71,451
----------- ----------
Total assets $ 1,064,321 $ 642,903
=========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accountants' compilation report. The accompanying notes are an integral part
of these financial statements.
F-1
<PAGE>
PALM DESERT ART, INC.
Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
7/31/98 4/30/98
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
Current liabilities
Accounts payable $ 87,633 $ --
Cash overdraft -- 13,270
Loans payable 237,151 90,000
Accrued liabilities 20,051 9,893
Accrued interest 2,072 --
---------- ----------
Total current liabilities 346,907 113,163
---------- ----------
Stockholders' equity
Commonstock - $.001 par value, 25,000,000 shares authorized,
2,500,070 shares outstanding (after deducting 2,500 shares
in treasury) 2,500 2,500
Common stock subscribed 245,000 245,000
Common stock subscription receivable (245,000) (245,000)
Additional paid-in capital 491,330 491,330
Common stock deposits received 233,600 --
Retained earnings (accumulated deficit) (10,016) 35,910
---------- ----------
Total stockholders' equity 717,414 529,740
---------- ----------
Total liabilities and stockholders' equity $1,064,321 $ 642,903
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
See accountants' compilation report. The accompanying notes are an integral part
of these financial statements.
F-2
<PAGE>
PALM DESERT ART, INC.
Statements of Operations
Three Months Ended July 31, 1998 and 1997
7/31/98 7/31/97
(Unaudited) (Unaudited)
----------- ----------
Sales $ 231,935 $ 122,697
Cost of sales 67,975 29,336
--------- ---------
Gross profit 163,960 93,361
Selling, general, and administrative expenses 207,814 73,176
--------- ---------
Operating income (loss) (43,854) 20,185
Interest expense 2,072 2,111
--------- ---------
Net income (loss) $ (45,926) $ 18,074
--------- ---------
Loss per share - primary $ (.02) $ N/A
--------- ---------
Loss per share - diluted $ (.01) $ N/A
========= =========
- --------------------------------------------------------------------------------
See accountants' compilation report. The accompanying notes are an integral part
of these financial statements.
F-3
<PAGE>
PALM DESERT ART, INC.
Statement of Changes in Stockholders' Equity
Three Months Ended July 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
========= ========= ========= ========= ========= ========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accountants' compilation report. The accompanying notes are an integral part
of these financial statements.
F-4
<PAGE>
Statements of Cash Flows
Three Months Ended July 31, 1998 and 1997
<TABLE>
<CAPTION>
7/31/98 7/31/97
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (45,926) $ 18,074
Adjustments to reconcile net income (loss) to net cash used
by operating activities
Depreciation and amortization 3,769 226
(Increase) in
Accounts receivable (123,027) (21,595)
Inventory (41,318) (483,780)
Direct acquisition costs (57,167) --
Deposits (14,368) (4,610)
Direct response advertising (13,414) --
Increase in
Accounts payable 87,633 228,074
Accrued liabilities 10,158 35,367
Accrued interest 2,072 --
--------- ---------
Net cash used by operating activities (191,588) (228,244)
--------- ---------
Cash flows from investing activities
Additions to property and equipment (10,212) (46,463)
--------- ---------
Cash flows from financing activities
Decrease in cash overdraft (13,270) --
Common stock deposits received 233,600 205,900
Proceeds from borrowings 147,151 68,927
--------- ---------
Net cash provided by financing activities 367,481 274,827
--------- ---------
Net increase in cash 165,681 120
Cash, beginning of quarter -- --
--------- ---------
Cash, end of quarter $ 165,681 $ 120
========= =========
</TABLE>
- --------------------------------------------------------------------------------
See accountants' compilation report. The accompanying notes are an integral part
of these financial statements.
F-5
<PAGE>
PALM DESERT ART, INC.
Notes to Financial Statements
Three Months Ended July 31, 1998
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 three months ended July 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 three months ended July 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 July 31, 1998, approximately $211,000 of advertising was reported as
assets, of which $39,615 was non-current and $171,876 was current.
Advertising expense was approximately $10,000 in 1998.
2. Direct Acquisition Costs
Direct acquisition costs represent capitalized costs incurred in the
acquisition described in Note 5. They are amortized on a straight-line
basis over 60 months. Amortization of these costs for the three months
ended July 31, 1998 was $2,858.
- --------------------------------------------------------------------------------
See accountants' compilation report.
F-6
<PAGE>
PALM DESERT ART, INC.
Notes to Financial Statements
Three Months Ended July 31, 1998
<TABLE>
<CAPTION>
3. Loans Payable
<S> <C>
Loans payable consist of:
Loan payable 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. $ 90,000
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 note payable to an individual due in monthly installments of
$3,375 until May 2000. 105,438
Unsecured note payable to an individual, no interest rate with no scheduled
repayment terms. 33,763
---------
$ 237,151
=========
</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 July 31, 1998.
5. Subsequent Events
Effective August 1, 1998, the Company acquired the business of RM&M
Framemakers, Inc. Information pertaining to this transaction is contained
in the Company's 8-K filing dated August 20, 1998.
In August 1998, the Company issued 800,000 shares of its stock in exchange
for $233,600. These shares are not included in the 2,500,070 outstanding as
of July 31, 1998. The Company received these monies as of July 31, 1998 and
has recorded as equity the deposits received because substantially all of
the requirements of the stock subscription were completed.
- --------------------------------------------------------------------------------
See accountants' compilation report.
F-7
<PAGE>
PART I - FINANCIAL INFORMATION (cont'd)
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 three months ended July 31, 1998, the company experienced
negative cash flow from operating activities of $191,588. This was due to the
Company's net operating loss for the quarter and 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 also incurred in June 1998 when the
Company opened a second gallery in Tarzana, California, in addition to its
gallery in Palm Desert, California. The new gallery consists of 3,800 square
feet located at 18727 Ventura Boulevard in Tarzana, California.
Overall, cash increased $165,681 in the first quarter ended July 31, 1998. The
principal reason for this increase is cash received on deposit from future
stockholders. In July 1998, the Company received $233,600 pursuant to a private
placement of 800,000 shares of its $.001 common stock. The proceeds were used in
part for the acquisition of R M & M Framemakers, Inc. in August 1998. In
addition, the Company received $147,151 in loans from individuals and a bank.
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,
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 bank 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
THREE MONTHS ENDED JULY 31, 1998
Sales for the three months ended July 31, 1998, were $231,935 an increase of
$109,238 or 89% compared with the same period in 1997. This increase was due to
its promotional activities coupled with sales of artwork and the opening of its
new gallery in Tarzana, California.
1
<PAGE>
Cost of sales as a percentage of sales was 29% and 24% for the three months
ended July 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 sales
mix.
Selling, general and administrative expenses increased $134,638 in the first
three months ended July 31, 1998, compared with the same period the previous
year. Stated as a percentage of sales, these expenses were 89% and 60% for the
first three months ended July 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.
The increase in selling expenses is 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. Depreciation, amortization and other
expenses increased as compared with the same period last year.
Overall, the Company's net loss is due to higher cost of sales and higher
selling and general and administrative expenses associated with increased sales
volume and with establishing the additional gallery.
Through July 31, 1998, the Company's sales have been generated primarily by the
works of approximately six of the Company's published artists. 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 continue 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 intends 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
framing operations to regional framing centers, the Company believes it will
realize substantial economies of scale in the foreseeable future.
2
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes In Securities
On July 14, 1998, a shareholders meeting was held at the corporate offices
of the Registrant in Palm Desert, California. At that meeting, the shareholders
approved a 10-for-1 reverse stock split and authorized the board of directors to
take any and all action necessary to effect a 10-for-1 reverse stock split of
the Company's $.001 par value Common Stock from 25,000,000 issued and
outstanding shares to 2,500,000. On July 17, 1998, the Registrant filed an
Amended Certificate of Incorporation with the Secretary of State of Delaware to
reflect the reverse stock split.
On July 31, 1998, the 10-for-1 reverse stock split became effective on the
NASDAQ OTC Bulletin Board and Registrant announced that effective as of that
date, the new trading symbol for the Registrant is "PDAP" and the new cusip
number for the shares of common stock is 69661M-106.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On July 14, 1998, a shareholders meeting was held at the corporate offices
of the Registrant in Palm Desert, California. At that meeting, the shareholders
approved a 10-for-1 reverse stock split and authorized the board of directors to
take any and all action necessary to effect a 10-for-1 reverse stock split of
the Company's $.001 par value Common Stock from 25,000,000 issued and
outstanding shares to 2,500,000. At the same meeting, the shareholders
re-elected Hugh G. Pike, Jurg Mullhaupt and Allan S. Wolfe as directors of the
Registrant.
Item 5. Other Information
None.
3
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are incorporated herein by reference to the
Company's annual report on Form 10-KSB filed with the Securities and Exchange
Commission for the year ended April 30, 1998:
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation as filed with the
Secretary of State of Delaware on November 4, 1988
filed with the Registrant's Registration Statement Form
10 on April 17, 1989, (File No. 0-17623) and by this
reference incorporated herein and made a part hereof.
3.2 Certificate for Renewal and Revival of Charter as filed
with the Secretary of State of Delaware on February 19,
1998.
3.3 Amendment to Certificate of Incorporation as filed with
the Secretary of State of Delaware on February 19,
1998.
3.4 Amendment to Certificate of Incorporation as filed with
the Secretary of State of Delaware on July 17, 1998.
3.5 By-Laws of the Registrant as filed with the
Registrant's Registration Statement Form 10 on April
17, 1989, (File No. 0-17623) and by this reference
incorporated herein and made a part hereof.
21. Subsidiaries of Registrant
22. Notice of and Proxy Materials relating to Annual
Meeting of Shareholders held July 14, 1998, filed with
Form 14A on June 24, 1998 (File No. 0-172623) and by
this reference incorporated herein and made a part
hereof.
27. Financial Data Schedule
99. Additional Exhibits
99.1 Asset Purchase and Subscription Agreement
dated February 5, 1998
99.2 Asset Purchase Agreement dated February 5,
1998
99.3 Promissory Note dated April 22, 1998
99.4 Guaranty dated April 22, 1998
99.5 Stock Pledge Agreement dated April 22, 1998
99.6 Offshore Subscription Agreement
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the quarter ended July
31, 1998:
May 7, 1998 Acquisition of Assets of Palm Desert Art Publishers,
Ltd., LLC and Sale of Software to Allan Wolfe
July 7, 1998 Amendment to above Form 8-K to
include financial information of Palm Desert
Art Publishers, Ltd., LLC
4
<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: September 18, 1998
5
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1998
<PERIOD-END> JUL-31-1998
<CASH> 165,681
<SECURITIES> 0
<RECEIVABLES> 206,346
<ALLOWANCES> 0
<INVENTORY> 314,361
<CURRENT-ASSETS> 861,864
<PP&E> 66,882
<DEPRECIATION> 4,553
<TOTAL-ASSETS> 1,064,321
<CURRENT-LIABILITIES> 346,907
<BONDS> 0
0
0
<COMMON> 2,500
<OTHER-SE> 714,914
<TOTAL-LIABILITY-AND-EQUITY> 1,064,321
<SALES> 231,935
<TOTAL-REVENUES> 231,935
<CGS> 67,975
<TOTAL-COSTS> 207,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,072
<INCOME-PRETAX> (45,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (45,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (45,926)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.01)
</TABLE>
