U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended October 31, 1999
----------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission file number 0-17623
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PALM DESERT ART, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 02-429620
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
74-350 Alessandro Drive, Suite A2, Palm Desert, CA 92260
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(Address of Principal Executive Offices)
(760) 346-1192
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(Issuer s Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the last practicable date.
Common Stock, $.001 par value per share, 7,377,120 shares outstanding
at October 31, 1999
Transitional Small Business Disclosure Format (check one)
Yes No X
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PALM DESERT ART, INC.
INDEX TO FORM 10-QSB
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of October 31, 1999 and April 30, 1999 3
Statements of Income for the three and six months
ended October 31, 1999 and October 31, 1998 5
Statement of Changes in Stockholders' as of
October 31, 1999 6
Statements of Cash Flows for the six months ended
October 31, 1999 and October 31, 1998 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submissions of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
PALM DESERT ART, INC.
Balance Sheet
<TABLE>
<CAPTION>
10/31/99 04/30/99
(Unaudited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 451 $ 201
Accounts receivable 1,085,762 624,899
Inventory 547,023 436,441
Prepaid expense 77,268 15,000
Direct response advertising - 194,342
--------------------------
Total current assets 1,710,504 1,270,883
--------------------------
Property and equipment
Leasehold improvements 48,074 48,074
Furniture and fixtures 11,500 11,500
Vehicles 33,544 4,552
Equipment 13,569 11,197
--------------------------
106,687 75,323
Less accumulated depreciation 15,732 9,859
--------------------------
Net property and equipment 90,955 65,464
--------------------------
Other assets
Prepaid Rent 137,167 119,792
Deposits 342,709 170,184
Note receivable 308,315 308,315
Direct response advertising 143,827 29,757
Other Receivables 64,150 -
Other Prepaid Assets 213,509 -
--------------------------
Total other assets 1,209,677 628,048
--------------------------
Total assets $3,011,136 $1,964,395
==========================
<CAPTION>
10/31/99 04/30/99
(Unaudited) (Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 369,147 $ 151,719
Loans payable 588,459 536,494
Accrued liabilities 319,201 162,377
Income taxes payable - 4,691
Deferred taxes- current - 15,474
--------------------------
Total current liabilities 1,276,807 870,755
Deferred taxes-long term - 22,531
Total liabilites 1,276,807 893,286
--------------------------
Stockholders' equity
Common stock - $.001 par value, 25,000,000 shares authorized, 7,377 3,829
7,377,120 shares outstanding October 31, 1999 and
3,828,526 shares outstanding October 31, 1998
(after deducting 2,500 shares in treasury)
Common stock subscribed 164,000 164,000
Common stock subscription receivable (164,000) (164,000)
Additional paid-in capital 1,928,776 871,210
Retained earnings (201,824) 196,715
Treasury Stock - (645)
--------------------------
Total stockholders' equity 1,734,329 1,071,109
--------------------------
Total liabilities and stockholders' equity $3,011,136 $1,964,395
==========================
</TABLE>
PALM DESERT ART, INC.
Statements of Income
Six Months Ended October 31, 1999 and 1998
<TABLE>
<CAPTION>
10/31/1999 10/31/1998 10/31/1999 10/31/1998
(3 Months) (3 Months) (6 Months) (6 Months)
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 816,689 924,823 1,101,466 1,156,758
Cost of sales $ 286,757 277,689 392,253 345,664
Gross profit $ 529,932 647,134 709,213 811,094
Selling, general, and administrative expenses $ 639,134 498,345 1,118,342 706,159
Operating income (loss) $(109,202) 148,789 (409,129) 104,935
Income tax benefit (expense) 4,691 - 42,696 -
Interest (expense) income $ (17,544) 306 (32,106) (2,378)
Net income (loss) $(122,055) 149,095 (398,539) 102,557
Income (loss) per share - Basic $ (0.02) (0.03) (0.05) 0.02
Income (loss) per share - Diluted (0.02) - (0.05) -
</TABLE>
PALM DESERT ART, INC.
Statement of Changes in Stockholders' Equity As of October 31, 1999
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
Common Common stock Subcription Paid-In Treasury (Accumulated
Stock Subscribed Receivable Capital Stock Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1999 3,829 164,000 (164,000) 871,210 (645) 196,715 1,071,109
Net loss (276,484) (276,484)
Issuance of common stock 1,397 126,832 128,229
Acquisition of treasury stock -
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Balance, July 31, 1999, 5,226 164,000 (164,000) 998,042 (645) (79,769) 922,854
Net loss (122,055) (122,055)
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Balance, October 31, 1999 $5,226 $164,000 $(164,000) $998,042 $(645) $(201,824) $ 800,799
==============================================================================================
</TABLE>
PALM DESERT ART, INC.
Statements of Cash Flows
Six Months Ended October 31, 1999 and 1998
<TABLE>
<CAPTION>
10/31/1999 10/31/1998
(6 Months) (6 Months)
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income (398,539) 102,557
Adjustments to reconcile net income to net cash used
by operating activities
Depreciation Expense 5,874 1,911
Amortization Expense 182,962 -
Stock issued for payment of expenses -
(Increase) in
Accounts receivable (460,863) (443,042)
Inventory (16,082) (373,579)
Goodwill - (128,844)
Prepaid expenses 164,503 (21,783)
Notes Receivable - (68,561)
Direct acquisition costs - -
Deposits (63,025) (14,368)
Other Prepaid Assets (213,509) -
Direct response advertising 50,515 (8,074)
Increase (decrease) in
Accounts payable 217,428 142,542
Accrued liabilities 156,824 264,698
Accrued interest - 2,072
Income Tax Payable (4,691) -
Deferred taxes (38,005) -
------------------------
Net cash used by operating activities (416,608) (544,471)
------------------------
Cash flows from investing activities
Additions to property and equipment (31,364) (242,131)
------------------------
Cash flows from financing activities
Net short term borrowing - cash overdraft - (11,251)
Common stock deposits received - -
Net Proceeds from borrowings 51,965 142,643
Proceeds from sale of stock 396,257 655,210
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Net cash provided by financing activities 448,222 786,602
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Net increase in cash 250 -
Cash, beginning of quarter 201 -
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Cash, end of quarter 450 -
========================
</TABLE>
PALM DESERT ART, INC.
Notes to Financial Statements
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, 1999. 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, 1999 are not necessarily indicative of the results that
may be expected for the year ending April 30, 2000.
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 two years.
2. Loans Payable
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<TABLE>
<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 stock-
holder, and the guarantee is collateralized by all of the shares
the majority stockholder owns of the Company's stock. The
pledged stock is in the hands of the noteholder. The original
terms have been extended with no due date. $ 55,000
Unsecured notes payable to individuals, due on demand, with
interest rates ranging from 5% to 15%. $533,459
========
</TABLE>
4. Commitments and Contingencies
-----------------------------
The note receivable of $308,315 represents the amount management believes
the Company is owed from the transfer of the RM&M Framemakers, Inc.
business operations. The Company is reviewing its legal options for
collection. If management is not able to enforce its ability to collect
through legal action it will have to reserve or write off the receivable.
As of December 14, 1999, management does not believe the asset is impaired.
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
The statements which are not historical facts contained in this
Quarterly Report on Form 10-QSB are forward looking statements that involve
a number of known and unknown risks, uncertainties and other factors, all
of which are difficult or impossible to predict and many of which are
beyond the control of the Company, which may cause the actual results,
performance or achievements of the Company to be materially different from
any future results, performance or achievements expressed or implied by
such forward looking statements. Such factors include, but are not limited
to, uncertainty regarding market acceptance of current artwork and the
ability to successfully develop and market new artwork, the impact of
supply constraints, uncertainties relating to customer plans and
commitments, competition, uncertainties relating to economic conditions in
the markets in which the Company operates, the ability to hire and retain
key personnel and the ability to obtain additional capital if required. The
words "believe", "expect", "anticipate", and "seek" and similar expressions
identify forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of
the date the statement was made.
LIQUIDITY AND CAPITAL RESOURCES
The Company's ability to meet its financial needs depends upon funds
generated from operating activities, accounts receivable and inventories,
short-term borrowing capacity and the ability to obtain long-term capital
on satisfactory terms. Liquidity has been and will continue to be an
intermittent problem because revenues from operations do not generate
sufficient cash flow.
The Company will continue its efforts to increase sales, maintain
margins, reduce inventory levels and collect its accounts receivables.
The Company seeks 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, 2000. 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.
The proceeds from the raising of capital will be used for expansion,
providing liquidity and the promotion and enhancement of its e-commerce
site, E-ArtNow.com
RESULTS OF OPERATIONS
SIX MONTHS ENDED October 31, 1999
Sales for the six months ended October 31, 1999 were $1,101,466 a
decrease of $55,292 or 5% compared with the same period in 1998. This
decrease was due to the company not having the benefit of sales from RM&M
Acquisition, Inc. due to its sale of this company in January 1999. Those
sales approximated $500,000. The company's sales from gallery operations
grew approximately $270,000 and its publishing sales grew approximately
$175,000. Cost of sales as a percentage of sales was 36% and 29% for the
six months ended October 31, 1999 and 1998, respectively. The increase in
the cost of sales percentage from 1998 to 1999 was primarily the result of
the changes in sales mix. Selling, general and administrative expenses
increased $412,183, or 58% in the first six months ended October 31, 1999,
compared with the same period the previous year. 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. Sales location occupancy costs also increased over the same
period last year due to the opening of the Company's new galleries in New
York City and West Palm Beach, FL.
Overall, the net loss for the first six months ended October 31,
1999, is reflective of the seasonality of the Registrants business in its
Palm Desert, CA and West Palm Beach, FL. Galleries. These galleries are
not expected to contribute to sales significantly until the third and
fourth quarters.
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 intends to
continue to seek out acquisition candidates for privately-owned art
galleries throughout 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, the Company believes it will
realize economies of scale and increase its margins when it sells the
artwork it publishes in newly acquired galleries.
During the second quarter ended October 31, 1999, management effected
a soft launch of its e-commerce site, E-ArtNow.com. During the quarter,
management was seeking investment capital to provide cash to promote its
site. The investment capital has not been raised as of the date of this
filing. Despite the lack of cash available to promote its site, the site
has generated activity in the nature of sales, inquiries from customers and
artists. Management believes the limited marketing activities undertaken
will benefit the site and the physical galleries. Management has
maintained a database of the potential customer registrations to the site.
Management believes this database will be the source of future sales for
its art.
Management, in accordance with GAAP, has expensed all of the
development and maintenance costs associated with its e-commerce site.
Management believes that the off-balance value of the site has not been
adequately reflected in the market value of its stock. Management has come
to this conclusion based on the market valuations of e-commerce sites in
general and based on the valuations of certain of its competitors.
Management's plan to increase the value of its e-commerce site will be
focused on raising equity to further promote its site and exploring the
feasibility of spinning-off the site to a corporation, which will be
publicly traded.
Management has completed its Year 2000 readiness review and it has
concluded that no material, adverse is likely to impact the company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
N/A
Item 2. Changes in Securities and Use of Proceeds.
In August 1999, the Registrant completed an offering of
1,000,000 shares of its $.001 par value Common Stock for a total
gross offering price of $410,000. All of the shares were sold
to non-US persons in reliance on the exemption from registration
under Regulation S of the Rules and General Rules and
Regulations promulgated under the Securities Act of 1933. The
offer and sale of the securities were made in an offshore
transaction, and no directed selling efforts were made in the
United States by the issuer, a distributor, any of their
respective affiliates, or any person acting on behalf of any of
them. Appropriate offering restrictions were implemented, and
the certificates issued bore appropriate restrictive legends.
The Placement Agent for the offering was Aptek Communications,
Inc. who received a sales commission of ten percent (10%) of the
gross offering price.
Item 3. Defaults Upon Senior Securities
N/A
Item 4. Submissions of Matters to a Vote of Security Holders
N/A
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits None
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended July
31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PALM DESERT ART, INC.
By: /s/ Hugh G. Pike
-----------------------------
Hugh G. Pike, President
(Duly Authorized Officer)
(Principal Financial Officer)
Date: December 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-END> OCT-31-1999
<CASH> 451
<SECURITIES> 0
<RECEIVABLES> 1,085,762
<ALLOWANCES> 0
<INVENTORY> 547,023
<CURRENT-ASSETS> 1,710,504
<PP&E> 1,106,687
<DEPRECIATION> 15,732
<TOTAL-ASSETS> 3,011,136
<CURRENT-LIABILITIES> 1,276,807
<BONDS> 0
0
0
<COMMON> 7,377
<OTHER-SE> 1,726,952
<TOTAL-LIABILITY-AND-EQUITY> 3,011,136
<SALES> 1,101,466
<TOTAL-REVENUES> 1,101,466
<CGS> 392,253
<TOTAL-COSTS> 392,253
<OTHER-EXPENSES> 1,118,342
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,106
<INCOME-PRETAX> (409,129)
<INCOME-TAX> (42,696)
<INCOME-CONTINUING> (398,539)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (398,539)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
