FORM 10-KSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ______________ TO ____________.
PALM DESERT ART, INC.
(formerly DATABASE TECHNOLOGIES, INC.)
(Exact name of registrant as specified in its charter)
Delaware 0-17623 02-0429620
(State of Jurisdiction) (Commission File Number) (IRS Employer ID No.)
74-350 Alessandro Drive, Suite A-2,
Palm Desert, California 92260
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code 760-346-1192
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock $.001 par value NASD OTC Electronic Bulletin Board
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 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
filing requirements for the past 90 days. Yes [ ] No [ ].
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10- K or any amendments to this form 10-K. [ ].
Based on the closing sales price of $.91 on July 30, 1999, the aggregate
market value of the voting stock held by non-affiliates of the registrant
was $322,611.
The number of shares outstanding of the registrant's common stock, $.001
par value was 3,828,526 on July 30,1999.
DOCUMENTS INCORPORATED BY REFERENCE
None
PALM DESERT ART, INC.
TABLE OF CONTENTS
Part I Page
- ------ ----
Item 1 Business................ ......................................
A. Historical Background
B. Certain Transactions During the
Reporting Period and Recent Developments
C. Current Business Operations
D. Risk Factors
Item 2 Properties ....................................................
Item 3 Legal Proceedings .............................................
Item 4 Submission of Matters to a Vote of Security Holders ...........
Part II
Item 5 Market for Registrant's Common Equity and
Related Stockholders Matters ..................................
Item 6 Management's Discussion and Analysis of
Financial Condition and Results of Operations .................
Item 7 Financial Statements ..........................................
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ........................
Part III
Item 9 Directors and Executive Officers of the
Registrant ....................................................
Item 10 Executive Compensation ........................................
Item 11 Security Ownership of Certain Beneficial Owners
and Management ................................................
a. Section 16(a) Beneficial Ownership
Reporting Compliance
Item 12 Certain Relationships and Related Transactions ................
Part IV
Item 13 Exhibits and Reports on Form 8-K ..............................
PALM DESERT ART, INC.
Part I
Forward Looking Statements
When used in this report, the words "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend" and similar expressions are
intended to identify forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 regarding events, conditions and financial trends that
may affect the Company's future plans of operations, business strategy,
operating results and financial position. Current stockholders and
prospective investors are cautioned that any forward-looking statements are
not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various
factors. Such factors are described under the headings "Business",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto.
Item 1 Business
Historical Background
The Registrant was incorporated under the laws of the State of Delaware on
November 4, 1988, under the name of Database Technologies, Inc. to engage
in, among other lawful activities, the business of owning and operating a
database which was transferred to it by Pathfinder Data Group Inc.
("Pathfinder"), a Colorado corporation. The database provided information
assisting insurance property adjusters in replacing insured's losses by
identifying discontinued products and the current like kind and quality
replacement models and replacement values.
Certain Transactions and Other Events During the Reporting Period
and Recent Developments
In April 1998, after several months of negotiations, the Registrant
concluded a transaction with Palm Desert Art Publishers, Ltd., LLC, whereby
the Registrant acquired substantially all of the assets of Palm Desert Art
Publishers in exchange for approximately 80.34% of Registrant's authorized
stock. On April 22, 1998, in consideration of 32,763,661 of its $.001 par
value common stock, the Registrant purchased all of the assets of Palm
Desert Art Publishers, Ltd. LLC ("Palm Desert") pursuant to an Asset
Purchase and Subscription Agreement dated February 5, 1998.
Of the total consideration, 20,083,918 shares of the Registrant's common
stock was delivered to Palm Desert at the closing. The remaining 12,679,743
shares were to be delivered to Palm Desert upon the Registrant's holding of
a shareholders' meeting to, among other things, authorize a reverse split
of Registrant's stock. At the close of the transaction, Palm Desert owned
approximately 80.34% of the 25,000,000 shares of common stock which had
been authorized and issued by Registrant.
Also on April 22, 1998, the Registrant, Palm Desert and Allan S. Wolfe (a
shareholder, officer, director and creditor of Registrant) concluded an
Asset Purchase Agreement dated February 5, 1998, pursuant to which
Registrant agreed to transfer to Wolfe certain software assets of
Registrant together with a promissory note from Registrant in favor of
Wolfe in the amount of $90,000 in exchange for Wolfe's agreement to
discharge Registrant's debt to Wolfe in the amount of $184,000. To induce
Wolfe to accept Registrant's promissory note, Palm Desert agreed to
guaranty payment of the note and to pledge to Wolfe all shares of the
capital stock of Registrant which Palm Desert acquired under the Asset
Purchase and Subscription Agreement as security for the guaranty.
Immediately prior to closing the aforementioned transactions, it was
discovered that Registrant's Certificate of Incorporation had lapsed by
proclamation of the State of Delaware. Registrant was able to renew and
revive its Certificate of Incorporation, however, it was required to do so
using a new corporate name inasmuch as another company had since registered
in Delaware under the name "Database Technologies." Accordingly (and in
contemplation of the aforementioned transactions), Registrant renewed and
revived its Certificate of Incorporation using the name "Palm Desert Art,
Inc." and is presently in good standing in the State of Delaware.
On April 24, 1998, the Registrant agreed to sell 2,450,000 shares of its
outstanding $.001 par value common stock (the "Shares") to Sencorp Ltd., a
private company located at National Westminster Bank Building, Gibraltar.
The shares were sold pursuant to Regulation S for $245,000 on April 24,
1998, the date both parties executed the Offshore Subscription and
Investment Representation Agreement. The proceeds were to be used for
Registrant's working capital needs over the following months.
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.
In August 1998 the Company purchased the stock of RM&M Framemakers, Inc.
(RM&M), a publisher, distributor and retailer of decorative art at a low
price point. RM&M also had an extensive frame making operation. The
acquisition was accounted for using the purchase method of accounting. The
operations of RM&M are included in the Registrant's financial statements
starting August 1, 1998 until January 16, 1999. On January 16, 1999, the
company transferred the assets and operations of RM&M to its previous
owners.
The consideration the Company gave the stockholders of RM&M Framemakers,
Inc. was as follows: $115,000 in cash; $40,000 note payable and 645,000
shares of Registrant unregistered stock.
The terms of the transfer of RM&M back to its previous owners was that the
Registrant receive back the consideration it gave in the purchase, as
described above, and the increase in net assets between the date of
acquisition in August 1998 and the transfer date in January 1999 plus
certain professional fees incurred in the purchase transaction. The result
of this transfer is that the Registrant is owed $308,315. See footnote 6
of the financial statements included herein.
Current Business Operations
Having acquired substantially all of the assets of Palm Desert Art
Publishers, Ltd., Registrant is now an integrated publisher and retailer of
limited-edition serigraphs, lithographs and other works of fine art created
by internationally recognized and innovative, contemporary artists and owns
and operates several art framing shops and galleries. The Registrant has
formally changed its corporate name from Database Technologies, Inc. to
Palm Desert Art, Inc. and has relocated its principal place of business
from Bedford, New Hampshire to Palm Desert, California.
Agreements with Artists
The Registrant has secured the exclusive rights to publish the artworks of
several contemporary artists who are well-recognized in the art community
such as:
Patricia Nix, a contemporary master, whose work has been acquired by
the Smithsonian Institution's National Museum of American Art in
Washington D.C. and has received international award.
Elyse Cohen, an American Watercolorist whose work has recently become
part of the collection at City Hall in New York City and has been
acquired by numerous collectors around the world.
Sandra Bierman, an American figurative painter, has earned
international recognition as one of today's leading contemporary
artists.
Barbara Cleary, whose impressionistic work has earned her a position
in "Who's Who in American Art".
Weilaing Zhao, a Chinese artist, whose artistic styles range from
photo-realistic portraiture to highly sophisticated, abstract
canvases.
Ali Golkar, a contemporary painter who combines the influences of
20th Century Expressionism, Cubism and Abstraction with his own
unique form of artistic impression.
Publishing Techniques
The Registrant uses various publishing techniques ranging from the classic,
hand-pulled serigraphy to innovative new printing techniques which
incorporate hand-painted details.
Operations
The Registrant maintains art galleries in Palm Desert and Tarzana,
California and in the SoHo district of New York City. The Registrant
intends to continue to obtain the exclusive rights to publish contemporary
artists while growing its gallery and publishing business and reputation
through the acquisition of art framing shops and galleries nationwide. The
company's business plan is to develop a national chain of galleries to sell
fine artwork and provide high-quality art framing services while taking
advantage of the economies of scale through regional framing centers. The
Registrant is developing a "cyber gallery". The gallery is scheduled to be
completed by August 20, 1999. The gallery will be named E-ArtNow.com. The
gallery will provide an opportunity for the Registrant to sell art work it
publishes as well as consigned art work.
Working Capital
The Company anticipates that in the fiscal year ending April 30, 2000,
its annual working capital requirements will be met through its operations.
The company is seeking working capital for its expansion plans. Its
expansion plans include the acquisition of art galleries, creation and
expansion of its "cyber gallery" web site and expansion of artists under
contract. However, there can be no assurances that working capital 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.
Competition
The primary markets that the company plans to enter into in 1999 and 2000
are the U.S. West Coast, the Northeast, the Midwest and the Mid-Atlantic.
The Registrant's plans to convert art framing retail outlets into fine art
gallery space and art framing sales offices with all art framing operations
to be performed in regional framing centers to be located throughout the
country. By moving all framing operations to regional framing centers, the
Registrant believes it will realize substantial economies of scale while
providing its customers with consistent high-quality framing services. The
Registrant further believes that by combining the art framing business with
the fine art gallery business, the Registrant will increase the exposure of
its individual artists while providing its customers with exceptional
artwork and consistent high-quality framing services at reasonable prices.
The marketplace is fragmented and is not dominated by any individual
competitor.
Employees
As of the filing of this Form 10-KSB, the Registrant has sixteen full-time
employees. Three of them are employed at the executive offices in Palm
Desert, the rest are employed at the registrant's art galleries in Palm
Desert and Tarzana CA. and the New York City gallery.
Operating Results
On April 22, 1998, the Registrant acquired substantially all of the assets
of Palm Desert Art Publishers, Ltd., LLC in exchange for approximately
80.34% of
Registrant's stock. Since then, the company has completely changed its line
of business and has undergone a substantial change in management.
Therefore, for reporting purposes, the revenues indicated in the Financial
Statements of Registrant herein (Item 7) represents the revenues resulting
from the operations of Palm Desert Art Publishers Ltd., LLC for the year
ended April 30, 1998. On that basis, the Registrant's revenues for its
first year of operations ended April 30, 1998 were $864,504.
The Registrant's selling, general and administrative expenses for the year
ended April 30, 1998 were $489,148 most of which related to the start-up of
the company's operations in the art publishing and exhibiting business.
Management is of the opinion that administrative expenses will continue to
rise as a result of its plans to acquire and consolidate art galleries and
art-framing operations. In August 1998, the registrant acquired the
business operations of RM&M Framemakers, Inc., located in Upstate New York.
In January, 1999 the Registrant transferred the business operations of this
acquisition to the control of the previous shareholders of RM&M
Framemakers, Inc. It became apparent to Registrants' management that an on-
going business relationship was not in the best interests of the
Registrant. The Registrant is exploring all legal options to recover assets
which it had expended on behalf of RM&M Framemakers, Inc.
Risk Factors
Limited Operating History. The Registrant has had limited operating history
in its current art publishing business. On April 22, 1998, the Registrant
purchased all of the assets of Palm Desert Art Publishers, Ltd. LLC, (PDAP)
in exchange for approximately 80.34% of the Company's authorized common
stock. PDAP was a privately-held limited liability company which published
on an exclusive basis the artwork of various artists. At the time of the
acquisition, PDAP had been in the art publishing business for one year.
Accordingly, the Company's operations are subject to the risks inherent in
the development of a new business enterprise; specifically, the
complications, delays and resulting expenses often encountered in marketing
artwork and related services, the uncertainties of developing and marketing
such artwork and services and the difficulties in recruiting and retaining
qualified personnel.
Limited Profitability. For reporting purposes, the Company's acquisition of
PDAP's assets in exchange for 80.34% of the Company's common stock were
accounted for as a reverse acquisition of PDAP by the Company under the
purchase method of accounting. Consequently, the financial statements for
the year ended April 30, 1998 consist of the operations formerly known as
Palm Desert Art Publishers Ltd., LLC, which recorded net income for its
first year of operation from May 1, 1997 through April 30, 1998 of $35,910.
There can be no assurance that the company will be able to generate
revenues or profits sufficient to pay its obligations in the ordinary
course of business or to acquire the operations of other galleries and art
framing shops, and the Company may incur losses if the Company increases
expenditures for marketing, advertising and acquisitions.
Uncertain Market Acceptance. Since the acquisition of PDAP's assets in
April, 1998, the Company has focused its efforts on obtaining the exclusive
rights to publish contemporary artists while growing its gallery and
publishing business and reputation through the acquisition of art framing
shops and galleries nationwide. It is the Company's business plan to
convert the newly-acquired art framing shops into galleries and to provide
off-site framing services through regional centers to take advantage of
economies of scale. Although there is an existing market for such artwork,
artwork is subject to the individual tastes of the consumer which cannot be
predicted with any degree of accuracy and there is a risk that the
Company's potential customers may not appreciate the quality of the
Company's publications. Market acceptance of the Company's products will
depend, in large part, upon the ability of the Company to demonstrate to
the art community that it can produce high-quality artwork and framing
services at affordable prices. Although management believes that the
artwork published and exhibited by the Company represents the significant
talents of various contemporary artists, there can be no assurance that the
Company's artwork will achieve market acceptance.
Limited Marketing Organization. Commercialization of the Company's artwork
and framing services will be substantially dependent on the Company's
ability to develop or acquire the network of galleries and framing shops
throughout the country as well as a marketing and sales organization. There
can be no assurance that the Company can develop or acquire this network of
galleries or the marketing organization.
Need for Additional Capital. The Company will require additional investment
to continue its growth plan, to hire additional personnel and for working
capital. Funds for these purposes may be obtained from a number of sources,
including, sales of equity and debt instruments, and bank financing.
However, the Company currently has no arrangements for such financing, and
there can be no assurance that any additional financing can be obtained or,
if obtained, that it will be of a sufficient quantity to meet the Company's
immediate needs or on reasonable terms.
Need for Qualified Personnel. In order to meet its business objectives, the
Company will need to hire additional marketing and managerial personnel.
The Company may be required to compete for such personnel with companies
having greater financial and other resources than the Company. Since the
future success of the Company will be dependent, in part, upon its ability
to attract and retain qualified personnel, its ability to do so could have
a material adverse effect upon the business of the Company.
Absence of Dividends. The Company has not paid any cash dividends and does
not anticipate paying any dividends in the foreseeable future. Earnings, if
any, will be retained to fund development and expansion. There is no
assurance that the Company will at any time pay cash dividends.
Item 2 Properties
The Registrant owns no real estate. The Registrant's corporate offices are
located at 74-350 Alessandro Drive, Palm Desert, CA. At that location the
Registrant occupies one suite of 3300 square feet of office and warehouse
space. In addition, the Registrant leases 3300 square feet of gallery space
at 73920 El Paseo Street, in Palm Desert, California.
As of the filing of this Form 10-KSB, the Registrant also occupies
approximately 3800 square feet of gallery space at 18727 Ventura Blvd., in
Tarzana, California, approximately 2000 square feet of gallery space in
New York City and approximately 1,900 square feet in Palm Beach, Florida.
Item 3 Legal Proceedings
Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
Not applicable.
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholders
Matters
Market Information
Effective July 31, 1998, the Registrant's common stock, $.001 par value, is
traded on the Over-the Counter Bulletin Board (OTC) operated by the
National Association of Securities Dealers under the ticker symbol "PDAP".
The cusip number of the company's $.001 par value common stock has also
been changed to 69661M-106. Prior to that date, the ticker symbol had been
"DBTC". The table presents its high and low market prices for each of the
four quarters in the fiscal years ending April 30, 1997, and April 30,
1998. The prices were determined from information obtained from NASDAQ
Trading & Market Services. The quotations reflect interdealer prices
without retail mark-up, mark-down or commissions and may not necessary
represent actual transactions. The Company's common stock began trading at
the beginning of June 1989. The Company has paid no cash dividends in the
year ended April 30, 1999 and does not expect to changes its dividend
policy in the foreseeable future.
<TABLE>
<CAPTION>
Month Low Bid High Bid
----- ------- --------
<S> <C> <C>
July 31, 1997 .0625 .0625
October 31, 1997 .0625 .0625
January 31, 1998 .0625 .0625
April 30, 1998 .0625 .0625
July 31, 1998 .0625 .92
October 31, 1998 .92 2.50
January 31, 1999 .50 2.50
April 30, 1999 .50 .87
</TABLE>
The number of shares of common stock issued and outstanding as of April 30,
1998 was 3,828,526.
On April 22, 1998, the Registrant issued to Palm Desert Art Publishers,
Ltd., LLC, ("PDAP") 20,083,918 shares of its common stock in exchange for
all of PDAP's assets. In addition, on April 24, 1998, the Registrant
entered into a subscription agreement to sell 2,450,000 shares of its
outstanding $.001 par value common stock to Sencorp Ltd., a private company
located and domiciled in Gibraltar. The shares were subscribed pursuant to
Regulation S for $245,000.
During August 1999, the Registrant was in the process of conducting a private
placement pursuant to Regulation S. The Registrant anticipates it will issue
700,000 shares and will receive approximately $258,000.
The approximate number of holders of record of the Common Stock of the
Registrant as of July 30, 1999 was 770.
Item 6 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Revenues
On April 22, 1998, the Registrant acquired substantially all of the assets
of Palm Desert Art Publishers, Ltd., LLC in exchange for approximately
80.34% of Registrant's stock. Therefore, for reporting purposes, the
revenues indicated in the attached Financial Statements of Registrant
represents the revenues resulting from the operations of Palm Desert Art
Publishers Ltd., LLC for the year ended April 30, 1998.(1) On that basis,
the Registrant's revenues for its first year of operations ended April 30,
1998 were $864,504. Revenues for its year ended April 30, 1999 were
$2,087,636, an increase of $1,223,132 or 141.48%. The reason for the
increase in growth is that the Registrant had one full year of operations,
opened 2 new galleries and made an acquisition of the business assets of
RM&M Framemakers, Inc.
- -------------------
(1) Although it did not become a registered limited liability company
until April 18, 1997, Palm Desert Art Publishers, Ltd. LLC, began its
operations in March 1997. Accordingly, the financial information
presented in Item 7 includes the first two months of operations which
were minimal and have an immaterial impact on the financial
information for the 12-month period ended April 30, 1998.
Operational Expenses
The Registrant's selling, general and administrative expenses for the year
ended April 30, 1999 and 1998 were $1,501,343 and 489,148, respectively. An
increase of $1,012,195 or 207%. The reason for the increase in growth is
that the Registrant had one full year of operations, opened 2 new galleries
and made an acquisition of the business assets of RM&M Framemakers, Inc.
Management is of the opinion that administrative expenses will continue to
rise as a result of its plans to acquire and consolidate art galleries and
art-framing operations. The future increase is expected to be no more than
the increase in revenue.
Liquidity and Capital Resources
Liquidity had been an intermittent problem for the Registrant during its
year ended April 30, 1999 because revenues from operations did not generate
sufficient cash flow.
The Registrant has been successful in obtaining capital from certain of its
stockholders. However, the capital has not been supplied in sufficient
quantity to avoid liquidity problems. As of August 6, 1999, the Registrant
received approximately $250,000.00 from a private placement of its stock.
Management is negotiating another private placement to allow the Registrant
to allow it to make acquisitions, develop its "cyber gallery" web site and
improve its working capital position.
The development of its "cyber gallery", under the name of E-ArtNow.com, is
scheduled to be completed by August 20, 1999. The Registrant may spin-off
E-ArtNow.com and raise the expansion capital needed to promote and expand
the site.
In addition to the development of E-ArtNow.com, the Registrant will pursue
the acquisition of existing galleries and the opening of new galleries in
the top 50 markets in the U.S. Management intends to expand its gallery
locations by 3 or 4 in each of the next five years.
Year 2000 Issue
General. The Year 2000 issue arises because many computer programs use two
digits rather than four to define the applicable year. Using two digits
could result in system failure or miscalculations that cause disruptions of
operations. In addition to computer systems, any equipment with embedded
technology that involves date sensitive functions is at risk if two digits
have been used rather than four. Management is in process with its Year
2000 readiness program. The program is composed of the following stages:
1) assessment of the problem, 2) developing a plan of action,
3) remediation activities and 4) compliance testing.
State of Readiness. The Company is in the process of inventorying and
making an assessment of its information and non-information technology
systems (such as telephone and alarm systems), and expects to complete such
assessment by the end of September 1999. A plan of corrective action using
both internal and external resources to enhance or replace the systems for
Year 2000 compliance will be implemented during the Fall of 1999. Internal
resources consist of permanent employees of the Company, where as external
resources will be composed of contract programming personnel that are
directed by the Company's management. The Company is in the process of
contacting the appropriate customers, vendors, banks and service providers
to determine their Year 2000 compliance.
Costs. The Company has not incurred any material costs associated with its
Year 2000 compliance program. Its general ledger software was purchased in
the priori year and is Year 2000 compliant..
Risks. The Company does not anticipate that the costs of its Year 2000
issues or the risks to the Company which might arise from the Year 2000
problem are likely to be material. If the Company's customers are not Year
2000 compliant, the Company risks not being paid on time, and if its
suppliers, vendors, banks, service providers and internal voice and data
systems are not compliant, the Company risks not being able to timely
service its customers. However, the Company does not have control over
third parties, and as a result, cannot currently estimate to what extent
future operating results may be adversely affected by the failure of third
parties to successfully address their Year 2000 issues. If the Company's
plans to address the Year 2000 issue are not successfully or timely
implemented, the Company may need to devote more resources to the process
and additional costs may be incurred, which could have a material adverse
effect on the Company's financial condition, liquidity and results of
operations. There can be no assurance that the Company's assessment of the
impact of Year 2000 is complete and that further analysis and study, as
well as the testing and implementation of planned solutions, will not
reveal the need for additional remedial work. The Company is potentially
vulnerable to mistakes made by key suppliers of products and services in
their advice to the Company with respect to their Year 2000 readiness. The
Company is also potentially vulnerable to operational difficulties in the
Company's corporate offices, including the risk of power outages, banking
delays and the potential failure of credit card and check authorization
systems. The financial magnitude of these risks cannot currently be
estimated.
Worst Case Scenario. The Y2K problem may result in the Company's own or
other third-party computers shutting down or performing incorrect
computations. If uncorrected, the Year 2000 problem could adversely impact:
(a) the reliability of the company's internal information management
systems, such as accounting systems, e-mail and desktop computers, (b) the
physical operation of systems used by the Company which have embedded
technology, such as telephone systems, utility services, security systems
and other physical office infrastructure, (c) the Company's ability to
interface with third parties, such as delivering products to or receiving
payments from customers or obtaining products from vendors on a timely
basis. It is not presently possible to describe a reasonably likely "worst
case Year 2000 scenario" without making numerous assumptions. The Company
presently believes that a most likely worst case scenario would make it
necessary for the Company to replace some suppliers or contractors,
rearrange some work plans, and delay routinely performed management,
administrative, operational and financial activities. Assuming this worst
case scenario is correct, the Company believes that such circumstances
could have a materially adverse effect on its financial condition or
results of operations.
Contingency Plans. The Company currently does not have contingency plans
in place in the event that it does not complete all of its Year 2000
remediation, some of its systems are not Year 2000 compliant or some of its
major customers, vendors, banks or service providers are not Year 2000
compliant. However, it expects to have completed sufficient compliance
work by the end of the Fall 1999 and to have sufficient time to identify
those areas for which contingency plans will be necessary, and it will
create those contingency plans as necessary at that time. Contingency plans
may include backup manual bookkeeping and accounting procedures, shifting
production to Y2K compliant vendors and inventory buildup by the Company
prior to December 31, 1999. Any additional inventory buildup by the
Company could generate unfavorable cash flows and inventory valuation
exposures of uncertain amount and duration. Any future contingency plan
will be based on its best estimates of numerous factors, which, in turn,
will be derived by relying on numerous assumptions about future events.
However, there can be no assurance that these assumptions or estimates will
have been correctly made, that the Company will have anticipated all
relevant factors or that there will not be increased costs associated with
the Company's Year 2000 problems. Additionally, there can be no assurance
that any contingency plans implemented by the Company would be adequate to
meet the Company's needs without materially impacting its operations, that
any such plan would be successful or that the Company's results of
operations would not be materially and adversely affected by the delays and
inefficiencies inherent in conducting operations in an alternative manner.
The foregoing statements as to the Company's Year 2000 efforts are forward
looking and, along with all other forward-looking statements herein, are
made in reliance on the safe harbor provisions discussed under the caption
"Forward Looking Statements", above Item 1.
Item 7 Financial Statements
Index to Consolidated Financial Statements
Page
----
Reports of Independent Certified Public Accountants F-1
Financial Statements:
Balance Sheet, April 30, 1999 and 1998 F-2
Statement of Income Year Ended
April 30, 1999 and 1998 F-4
Statement of Changes in Stockholders' Equity
Year Ended April 30, 1999 and 1998 F-5
Statement of Cash Flows, Year Ended
April 30, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
PALM DESERT ART, INC.
FINANCIAL STATEMENTS
April 30, 1999 and 1998
With Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Palm Desert Art, Inc.
We have audited the accompanying balance sheet of Palm Desert Art, Inc.
(the Company) as of April 30, 1999, and the related statements of income,
changes in stockholders' equity and cash flows for the year ended April 30,
1999. These financial statements are the responsibility of the Company. Our
responsibility is to express an opinion on these financial statements based
on our audit. The financial statements as of and for the year ended April
30, 1998 were audited by other auditors, whose report dated June 17, 1998
expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of April
30, 1999, and the results of its operations and its cash flows for the year
then ended, in conformity with generally accepted accounting principles.
/s/ J.M. Rose
Woodland Hills, California
August 12, 1999
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Palm Desert Art, Inc.
We have audited the accompanying balance sheet oof Palm Desert Art, Inc. as
of April 30, 1998, and the related statements of income, changes in
stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Palm Desert Art, Inc.
as of April 30, 1998, and the results of its operations and its cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
/s/ Berry, Dunn, McNeil & Parker
Manchester, New Hampshire
June 17, 1998
<PAGE> F-1
PALM DESERT ART, INC.
Balance Sheet
ASSETS
<TABLE>
<CAPTION>
4/30/99 4/30/98
------- -------
<S> <C> <C>
Current assets
Cash $ 201 $ 0
Accounts receivable 624,899 83,319
Inventory 436,441 273,043
Prepaid expense 15,000 3,600
Direct response advertising 194,342 158,462
--------------------------
Total current assets 1,270,883 518,424
--------------------------
Property and equipment
Leasehold improvements 48,074 38,661
Furniture and fixtures 11,500 6,500
Vehicles 4,552 4,552
Equipment 11,197 6,957
--------------------------
75,323 56,670
Less accumulated depreciation (9,859) (3,642)
--------------------------
Net property and equipment 65,464 53,028
--------------------------
Other assets
Prepaid Rent 119,792 0
Deposits 170,184 31,836
Note Receivable 308,315 0
Direct response advertising 29,757 39,615
--------------------------
Total other assets 628,048 71,451
--------------------------
Total assets $1,964,395 $ 642,903
==========================
</TABLE>
<PAGE> F-2
PALM DESERT ART, INC.
Balance Sheets
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
4/30/99 4/30/98
------- -------
<S> <C> <C>
Current liabilities
Cash Overdraft $ 0 $ 13,270
Accounts payable 151,719 0
Loans payable 536,494 90,000
Accrued liabilities 162,377 9,893
Income Taxes Payable 4,691 0
Deferred taxes - Current 15,474 0
--------------------------
Total current liabilities 870,755 113,163
--------------------------
Deferred Taxes - Long Term 22,531 0
--------------------------
Total Liabilities 893,286 113,163
--------------------------
Stockholders' equity
Common stock - $.001 par value, 25,000,000
shares authorized, 3,828,526 shares
outstanding as of April 30,1999, 22,575,000
shares outstanding as of April 30, 1998 3,829 225,750
Common stock subscribed 164,000 245,000
Common stock subscription receivable (164,000) (245,000)
Additional paid-in capital 871,210 268,080
Retained earnings 196,715 35,910
Treasury Stock (645) 0
--------------------------
Total stockholders' equity 1,071,109 529,740
--------------------------
Total liabilities and stockholders'
equity $1,964,395 $ 642,903
==========================
</TABLE>
<PAGE> F-3
PALM DESERT ART, INC.
Statement of Income
Year Ended April 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Sales $ 2,087,636 $ 864,504
Cost of sales 567,356 328,426
--------------------------
Gross profit 1,520,280 536,078
Selling, general, and administrative expenses (1,501,343) (489,148)
--------------------------
Operating Income 18,937 46,930
Gain on Sale of Operations 216,744 0
Interest expense (32,181) (11,020)
--------------------------
Income before income taxes 203,500 35,910
Provision for income taxes (42,695) 0
--------------------------
Net income $ 160,805 $ 35,910
==========================
Income per share - Basic $ 0.04 $ nil
==========================
Income per share - Diluted $ 0.03 $ nil
==========================
</TABLE>
<PAGE> F-4
PALM DESERT ART, INC.
Statement of Changes in Stockholder's Equity
<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, 1998, as
previously reported (audited) $ 225,750 $245,000 $(245,000) $268,080 $ - $ 35,910 $ 529,740
Reclassification of equity accounts (223,250) 223,250 160,805 160,805
Issuance of Common Stock 1,329 (81,000) 379,880 379,233 679,442
Acquisition of Treasury Stock (645) (645)
--------------------------------------------------------------------------------------
Balance, April 30, 1999 $ 3,829 $164,000 $ 134,880 $870,563 $(645) $196,715 $1,369,342
======================================================================================
</TABLE>
<PAGE> F-5
PALM DESERT ART, INC.
Statement of Cash Flows
Year Ended April 30, 1999
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 160,805 $ 35,910
Adjustments to reconcile net income to net
cash used by operating activities
Depreciation and amortization 6,217 3,642
(Increase) in
Gain on sale of Operations (190,315) 0
Accounts receivable (541,580) (83,319)
Inventory (163,398) (68,593)
Prepaid Expenses (131,192) (3,600)
Deposits (138,347) (31,836)
Direct response advertising (26,022) (198,077)
Increase (decrease) in
Accounts Payable 151,719 0
Accrued liabilities 152,483 9,893
Income Taxes Payable 4,691 0
Deferred Taxes - Current 15,474 0
Deferred Taxes - Long Term 22,531 0
------------------------
Net cash used by operating activities (676,934) (371,890)
========================
Cash flows from investing activities
Purchase of RMM Acquisition (118,000) 0
Additions to property and equipment (18,653) (51,670)
------------------------
(136,653) (51,670)
========================
Cash flows from financing activities
Net short term borrowing - cash overdraft (13,270) 13,270
Net short term borrowing - loans payable 446,494 0
Stockholders' contributions 380,564 374,380
------------------------
Net cash provided by financing activities 813,788 387,650
========================
Net increase in cash 201 (35,910)
Cash and cash equivalents, beginning of year 0 0
------------------------
Cash and cash equivalents, end of year $ 201 $ 0
========================
Supplemental disclosures of cash flow
information
Cash paid for interest $ 11,955 $ 11,020
Supplemental schedule of noncash investing
and financing activities
Contributed artwork 0 204,450
Contributed equipment 0 5,000
Loan payable 0 90,000
Note receivable 308,315 0
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> F-6
Nature of Business, Organization, and Basis of Presentation
On March 19, 1998, the Company changed its name from Database Technologies,
Inc. to Palm Desert Art, Inc. (the Company). On April 22, 1998, the Company
executed two transactions, which changed the operations of the Company.
One transaction involved a sale of all of the assets and liabilities of its
database business to the Company's then-majority stockholder in exchange
for reducing its stockholder obligations to $90,000. Consequently, the
Company is no longer in the database business.
The other transaction resulted in the acquisition of substantially all of
the outstanding assets of Palm Desert Art Publishers, Ltd., L.L.C. ("PDAP,
Ltd., LLC") in exchange for common stock of the Company. This
reorganization was accounted for as a reverse acquisition of PDAP, Ltd.,
LLC by the Company under the purchase method of accounting, as the
shareholders of PDAP, Ltd., LLC controlled the entity immediately following
the reorganization. Consequently, the reporting entity consists of the
operations formerly known as PDAP, Ltd., LLC.
The Company is now in the business of publishing artwork and distributing
its artwork to independent art galleries throughout the country. In
addition to the publishing business, the Company owns an art gallery in
Palm Desert, California, which sells the Company's published artwork and
other pieces of art. During the year ended April 30, 1999, the Company
opened two additional galleries. The first gallery was opened in June 1998
in Tarzana, CA. The second gallery was opened in New York City in March
1999.
For reporting purposes, PDAP, Ltd., LLC's first year of operations
commenced May 1, 1997.
1. Summary of Significant Accounting Policies
Revenue Recognition Policy
The Company records revenue on sales after the approval period, if any, has
expired. Approval periods do not typically extend beyond 30 days.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
<PAGE> F-7
1. Summary of Significant Accounting Policies (Continued)
Cash and Cash Equivalents
For purposes of reporting the statement of cash flows, the Company
considers all cash accounts, which are not subject to withdrawal
restrictions or penalties, and all highly liquid investments with a
maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts
The Company's policy for allowance for doubtful accounts is evolving as it
establishes relationships with its gallery customers. As of April 30, 1999,
management deems the accounts receivable as fully collectible.
Inventory
Inventory includes cost of publishing and reproducing giclee and serigraph
reproductions of original works of art of artists under agreement with the
Company. All inventory items are stated at the lower of cost (specific
identification by print) or market value. All inventory costs are expensed
as cost of sales when the inventory item is sold.
Advertising
The Company expenses the costs of advertising the first time the
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 products. The capitalized
costs of the advertising are amortized as sales are recognized over a
period, not to exceed three years.
At April 30, 1999, approximately $224,100 of advertising was reported as
assets, of which $29,757 was non-current and $194,342 was current.
Advertising expense was approximately $41,000 in 1999.
At April 30, 1998, approximately $198,000 of advertising was reported as
assets, of which $39,615 was non-current and $158,462 was current.
Advertising expense was approximately $89,000 in 1998.
<PAGE> F-8
1. Summary of Significant Accounting Policies (Concluded)
Property and Equipment
Furniture and fixtures, equipment, vehicles and leasehold improvements
purchased are depreciated and amortized by the straight-line method over
the estimated useful lives of the respective assets.
Income Taxes
Deferred income taxes are provided for the expected tax effects of
differences between the financial statement and tax basis of assets and
liabilities.
Due to the change in control and the change in continuity of business,
there are no net operating loss carryforwards.
For the period May 1, 1997 to April 22, 1998, the Company was taxed under
sections of the federal income tax law, which provide that, in lieu of
corporation federal income taxes, the owners separately account for their
prorata shares of the Company's items of income, deduction, losses, and
credits. Therefore, these statements do not include any provision for
corporation federal and state income taxes for the period May 1, 1997 to
April 22, 1998. During the period from April 23, 1998 to April 30, 1998,
the Company was subject to corporate income taxes. However, the corporate
income tax effect for this period is immaterial to the financial statements
and no provision for income taxes is deemed necessary. Income taxes have
been provided for in the year ended April 30, 1999.
Comprehensive Income
The Company has no components of comprehensive income. Consequently, a
statement of comprehensive income is not required.
2. Cash Overdraft
The Company did not experience a cash overdraft as of April 30, 1999;
however, the Company did experience a cash overdraft as of April 30, 1998.
<PAGE> F-9
3. Loans Payable - Stockholders
Loans payable consist of unsecured, demand loans from three separate
shareholders. The interest rates range between 5% and 15%. The notes
payable as of April 30, 1999 were $536,494.
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. There are terms of the subscription agreement that require the
escrow agent to remit the funds to the Company upon the occurrence of
certain events. As of April 30, 1999 not all of the terms of the agreement
have been satisfied. Management believes the all of the terms of the
agreement will be satisfied in the fiscal year ending April 30, 2000. As
of April 30, 1999, $164,000 of the subscription has not been remitted to
the Company.
5. Business acquisition:
In August 1998 the Company purchased the stock of RM&M Framemakers, Inc.
(RM&M), a publisher, distributor and retailer of decorative art at a low
price point. RM&M also had an extensive frame making operation. The
acquisition was accounted for using the purchase method of accounting. The
operations of RM&M are included in the Company's financial statements
starting August 1, 1998 until January 16, 1999. On January 16, 1999, the
company transferred the assets and operations of RM&M to its previous
owners.
The consideration the Company gave the stockholders of RM&M Framemakers,
Inc. was as follows: $115,000 in cash; $40,000 note payable and 645,000
shares of Company stock.
The terms of the transfer of RM&M back to its previous owners was that the
Company receive back the consideration it gave in the purchase, as
described above, and the increase in net assets between the date of
acquisition in August 1998 and the transfer date in January 1999 plus
certain professional fees incurred in the purchase transaction. The result
of this transfer is that the Company is owed $308,315. Note 6 discusses
management's position regarding the realization of the amount.
6. Commitments and Contingencies
Substantially all of the Company's inventory is located at locations that
are not owned by the Company. The Company does not have insurance coverage
on the inventory at these locations. The Company has not made a complete
assessment of the Year 2000 issue that may affect the computer applications of
its operations and those of its vendors and customers. The Company plans to
finalize its assessment of the impact of the Year 2000 issue in fiscal year
year end 2000. The operations of the Company are not expected to be
materially affected by this issue.
As part of the acquisition described in the Nature of Business,
Organization, and Basis of Presentation footnote, the Company is required
to issue approximately 1,268,000 additional shares to PDAP, Ltd., LLC. It
is expected that those shares will be issued by October 31, 1999.
<PAGE> F-10
In March 1999, the Company acquired the rights to lease space in its New
York City gallery. The Company paid $125,000 for that right. That amount
is being amortized over the remaining term of the lease, on a straight
line basis. The lease expires in March 2003. The payment of the
obligation is being paid monthly until March 2000.
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 terms of the payment of the receivable have not
been finalized and the payor has not acknowledged the full amount of the
receivable. Accordingly, management is taking steps to perfect its
interest and collect the entire amount of the receivable. It is possible
management will not be able to perfect its interest in the note receivable.
Should that event become a reality, management will assess the amount of
write down or allowance needed. As of August 12,1999, management does not
believe the asset is impaired and has not reserved against it.
7. Operating Leases
The Company leases certain retail and storage facilities under operating
leases that expire from 1999 through 2002. Future minimum lease payments
under noncancelable operating leases are:
<TABLE>
<C> <C>
1999 $124,408
2000 124,408
2001 124,408
2002 15,125
--------
$388,349
</TABLE>
Total rental expense for operating leases approximated $51,000 in 1998.
8. Income Per Share
As of April 30, 1999, the basic earnings per share and the fully diluted
earnings per share are $0.04 and $0.03 respectively. As of April 30, 1998,
the basic earnings per share and the fully diluted earnings per share are
$.00 and $.00, respectively. As of April 30, 1999, the shares outstanding
for the basic earnings per share calculation was 3,828,526. 5,096,500
shares were used for the diluted earnings per share calculation as of April
30, 1999.
9. Disclosure About Fair Value of Financial Instruments
The Company's financial instruments consist of cash, short-term trade
receivables and payables, and short-term debt. The carrying value of all
instruments approximates their fair value.
<PAGE> F-11
10. Income taxes
The Company's income tax provision consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current:
Federal $ 2,969 $ -
State 1,721 -
Deferred:
Federal 24,058 -
State 13,946 -
-----------------
Total $42,694 $ -
=================
</TABLE>
The difference between the Company's effective rate and statutory rate is
comprised of the Federal benefit of state income taxes and a lower Federal
tax rate based on lower Federal taxable income .
11. Subsequent Events
In May 1999, the Company began operating a gallery on Worth Avenue in West
Palm Beach.
In August 1999, the Company received approximately $250,000 from a private
placement offering.
<PAGE> F-12
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On August 4, 1999, Palm Desert Art, Inc. engaged JM Rose, an accountancy
corporation. Prior to the engagement of JM Rose, an accountancy
corporation, Palm Desert Art, Inc. did not consult with or obtain oral or
written advise from JM Rose, an accountancy corporation on any accounting,
auditing or reporting matters. The decision to change auditors was
influenced by cost and the proximity of the accountant to the corporate
offices of Palm Desert Art, Inc.
Simultaneous with the engagement of the new accountant, Palm Desert Art,
Inc. dismissed the firm of Berry, Dunn, McNeil & Parker. The report which
Berry, Dunn, McNeil & Parker issued in the past on the financial statement
of Palm Desert Art, Inc. was a standard audit opinion. The change in
accountants was approved by the board of directors. No disagreements
occurred between Palm Desert Art, Inc. and Berry, Dunn, McNeil & Parker on
any accounting, auditing or reporting issue prior to their dismissal.
Part III
Item 9 Directors and Executive Officers of the Registrant
The following provides certain information concerning the directors and
executive officers of the Company as of the filing of this Form 10-KSB.
<TABLE>
<CAPTION>
Age Position
--- --------
<S> <C> <C>
Hugh G. Pike 61 Chairman of the Board
President and Treasurer
Allan S. Wolfe 67 Director
Jurg Mullhaupt 51 Director
John Anderholt 56 Secretary
</TABLE>
HUGH G. PIKE, age 61, is the President, Treasurer, and Chairman of the
Board of Directors. He has served in these capacities since April 22, 1998,
the date upon which the Company purchased the assets of Palm Desert Art
Publishers, Ltd., LLC, which owned and operated an art gallery and owned
the exclusive right to publish the artwork of several contemporary artists
and which is now the Company's majority shareholder. Mr. Pike had been the
President of Palm Desert Art Publishers, Ltd. LLC since April 1997. For
approximately ten years prior to that time, Mr. Pike provided consulting
services to the real estate industry. Mr. Pike is the father-in-law to Mr.
Mullhaupt who is also a Director of the Company.
ALLAN S. WOLFE, age 67, is the President of Dataware Technologies, LLC, a
New Hampshire limited liability company which provides software data to the
insurance industry. From November 1988 to April 22, 1998, Mr. Wolfe served
as President, Treasurer and Chairman of the Board and was a majority
shareholder of the Company. Prior to that time, Mr. Wolfe had been Chief
Executive Officer of Pathfinder Data Group, Inc., a company which provided
insurance replacement and software data. From 1980 to 1984, Mr. Wolfe was
Vice President of Audio of New England, Inc., a corporation engaged in the
same business as Pathfinder, as well as the retailing of hi-fi equipment to
the public.
JURG MULLHAUPT, age 51, has been a Director of the Company since April 22,
1998. Mr. Mullhaupt is President and Chief Executive Officer of First
National Environmental Technologies Inc., a privately-held company which
provides equipment and consulting services to municipalities in connection
with their underground infrastructure for the delivery of water. Mr.
Mullhaupt is the son-in-law of Mr. Pike, the Company's President and
Chairman of the Board.
JOHN ANDERHOLT, age 56, has been Secretary of the Company since June 12,
1998. Mr. Anderholt is an attorney in private practice with the firm
Anderholt & Bonnheim in Indian Wells, California. Mr. Anderholt has been a
general civil attorney for 30 years practicing primarily in the areas of
corporate and real estate law. He is admitted to practice before the United
States Supreme Court, and the California Bar, and he is a member of the Los
Angeles County, Riverside County, and Desert Bar Associations.
Item 10 Executive Compensation
No chief executive officer has received any compensation and no other
executive officer has received any cash or stock based compensation in excess
of $100,000 in the last three years.
Director Compensation
The Directors of the Company are elected annually and serve until the
next annual meeting of stockholders and until a successor shall have been
duly elected and qualified. Directors of the Company who are not employees
or consultants do not receive any compensation for their services as
members of the Board of Directors, but are reimbursed for expenses incurred
in connection with their attendance at meetings of the Board of Directors.
Directors may be removed with or without cause by a vote of the majority of
the stockholders then entitled to vote.
Stock Compensation Plan
The 1999 Stock Compensation Plan. The Company's 1999 Stock Option
Plan (the "Plan") adopted by the Company's Board of Directors in February
1999 and by the stockholders in July 1995, provides for the issuance of
shares and/or options ("Options") to employees, officers and, under certain
circumstances, directors of and consultants to the Company ("Eligible
Participants"). Options granted under the plan may be either "incentive
stock options" ("ISOs") as defined in Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") or "nonqualified stock options"
("NQSOs"). The Plan does not provide for the issuance of stock
appreciation rights but does permit the granting of restricted and non-
restricted stock and deferred stock awards. A total of 450,000 shares of
Common Stock were originally reserved for issuance under the Plan; however,
in August 1999, the Board of Directors voted to amend the Plan and reserve
for issuance under the Plan an additional 700,000 shares. The Plan, as
amended, will be submitted for ratification by the stockholders of the
Company at the next Annual Meeting of Stockholders. The Plan is
administered by the Board of Directors. The Board has sole discretion and
authority, consistent with the provisions of the Plan, to select the
Eligible Participants to whom Options will be granted under the Plan, the
number of shares which will be covered by each Option and the form and
terms of the agreement to be used. All employees and officers of the
Company are eligible to participate in the Plan. Directors are eligible to
participate only if they have been declared to be "eligible directors" by
resolution of the Board of Directors. At April 30, 1999, approximately 20
persons were eligible to receive shares and/or options under the Plan.
The Board is empowered to determine the exercise price of Options
granted under the Plan, but the exercise price of ISOs must be equal to or
greater than the fair market value of a share of Common Stock on the date
the Option is granted (110% with respect to optionees who own at least 10%
of the outstanding Common Stock). The exercise price of NQSOs granted
under the Plan must not be less than 85% of the fair market value of the
Common Stock on the date the Option is granted. The Board has the
authority to determine the time or times at which Options granted under the
Plan become exercisable, but the Options expire no later than ten years
from the date of grant (five years with respect to Optionees who own at
least 10% of the outstanding Common Stock of the Company). The Options are
nontransferable, other than by will and the laws of descent, and generally
may be exercised only by an employee while employed by the Company or
within 90 days after termination of employment (one year from termination
resulting from death or disability).
During fiscal 1999, the Company issued no Options under the Plan.
During Fiscal 1999, the Company issued an aggregate 337,000 shares of
Common Stock under the Plan.
Item 11 Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to each person
known to the management of the Company who are the beneficial owners of
more than five percent of the common stock of the Company, that which is
owned by each director and officer of the Company and that which is owned
by all directors and officers of the Company as a group, 3persons, as of
July 30, 1999.
<TABLE>
<CAPTION>
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership of Class
- ------------------- ----------------------- --------
<S> <C> <C>
Non-Management
Beneficial Owners:
Palm Desert Art 2,008,392 52,46%
Publishers, Ltd.(1)
74-350 Alessandro Drive
Suite A-2
Palm Desert, CA
Directors/Officers:
Hugh G. Pike(2) 2,008,392 52.46%
Allan S. Wolfe(3) 138,766 3.63%
Jurg Mullhaupt 0 0.00%
<FN>
<F1> As reported in Schedule 13-D relating to events as of April 22, 1998,
filed with the Securities and Exchange Commission, 2,008,392 shares
of the company are held by Palm Desert Art Publishers, Ltd., LLC,
("PDAP") of which Elaine Mullhaupt is a member. Ms. Mullhaupt is the
daughter of Hugh G. Pike and is the wife of Jurg Mullhaupt. Mr. Pike
is the President and Director of the Company and is President of
PDAP. Mr. Mullhaupt is a director of the Company. Mr. Pike, as CEO of
PDAP, has sole voting and dispositive power wit respect to all shares
held by PDAP.
<F2> Includes shares held by PDAP.
<F3> Allan S. Wolfe holds 1,312,658 shares of the Company's Common Stock.
His wife, Betty L. Wolfe, a former director and officer of the
company, holds 1,000 shares. In the aggregate, they have voting and
dispositive power over 1,313,658 shares held by them, respectively.
<F4> For the above percentage of ownership calculation, the Registrant had
3,828,526 shares outstanding. All shares reflect the 10 for one
reverse stock split effective in July 1998.
</FN>
</TABLE>
Item 12 Certain Relationships and Related Transactions
On April 22, 1998, the Company sold to Allan S. Wolfe (a shareholder,
director, former officer and creditor of the Company) certain software
assets of the Company together with a promissory note from the Company in
favor of Mr. Wolfe in the amount of $90,000 in exchange for which Mr. Wolfe
agreed to discharge the Company's debt to him in the amount of $184,000. To
induce Mr. Wolfe to accept the Company's promissory note, the Company's
majority shareholder, Palm Desert Art Publishers, Ltd., LLC, agreed to
guaranty payment of the note and pledged to Mr. Wolfe as security for the
guaranty all shares of the capital stock of the Company which Palm Desert
Art Publishers, Ltd., LLC had acquired under the Asset Purchase and
Subscription Agreement between itself and the Company.
Part IV
Item 13 Exhibits and Reports on Form 8-K
(a) (1) The following financial statements and supplementary data are
included in Part II, Item 7:
Page
----
Reports of Independent Certified Public Accountants F-1
Financial Statements:
Balance Sheet, April 30, 1999 and 1998 F-2
Statement of Income Year Ended
April 30, 1999 and 1998 F-4
Statement of Changes in Stockholders' Equity
Year Ended April 30, 1999 and 1998 F-5
Statement of Cash Flows, Year Ended
April 30, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7
(2) Schedules included herein:
None. All other schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
(3) Exhibits:
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. Incorporated by reference with the 10KSB filed August 14,
1998
3.2 Certificate for Renewal and Revival of Charter as filed with the
Secretary of State of Delaware on March 19, 1998. Incorporated by
reference with the 10KSB filed August 14, 1998
3.3 Amendment to Certificate of Incorporation as filed with the
Secretary of State of Delaware on March 19, 1998. Incorporated by
reference with the 10KSB filed August 14, 1998
3.4 Amendment to Certificate of Incorporation as filed with the
Secretary of State of Delaware on July 17, 1998. Incorporated by
reference with the 10KSB filed August 14, 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 (filed herewith)
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.
24.1 Consent of J.M. Rose (filed herewith)
24.2 Consent of Berry, Dunn, McNeil & Parker (filed herewith)
27. Financial Data Schedule
99. Additional Exhibits. (Incorporated by reference with the 10KSB
filed August 14, 1998).
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:
None.
(c) Not applicable.
(d) Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Palm Desert Art, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PALM DESERT ART, INC.
August 13, 1999 By: /s/ Hugh G. Pike
-----------------------------
Hugh G. Pike
President
(Duly Authorized Officer)
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
August 13, 1999 By: /s/ Hugh G. Pike
-----------------------------
Hugh G. Pike, President,
Treasurer and Director
August 13, 1999 By: /s/ Jurg Mullhaupt
-----------------------------
Jurg Mullhaupt, Director
August 13, 1999 By: /s/ Allan S. Wolfe
-----------------------------
Allan S. Wolfe, Director
Exhibit 21
SUBSIDIARIES OF REGISTRANT
The following is a list of the subsidiaries of Registrant and their status
as of the filing of this report:
R. M. & M. Acquisitions, Inc., a Delaware corporation was formed in July
1998. The subsidiary was formed for the purpose of merging with R M & M
Framemakers, Inc., a New York corporation, and is the surviving corporation
of that merger.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in the Registration Statements of Palm Desert Art, Inc. (the
"Company") on Form S-8 of our report dated August 12, 1999 relating to the
audit of the Company's financial statements appearing in the Form 10-KSB of
the Company at and for the year ended April 30, 1999
/S/ J.M. Rose
Woodland Hills, CA
August 13,1999
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in the Registration Statements of Palm Desert Art, Inc. (the
"Company") on Form S-8 of our report dated June 17, 1998 relating to the
audit of the Company's financial statements appearing in the Form 10-KSB of
the Company at and for the year ended April 30, 1999
/S/ Berry, Dunn, McNeil & Parker
Manchester, NH
August 13,1999
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-END> APR-30-1999
<CASH> 201
<SECURITIES> 0
<RECEIVABLES> 624,899
<ALLOWANCES> 0
<INVENTORY> 436,441
<CURRENT-ASSETS> 1,270,883
<PP&E> 75,323
<DEPRECIATION> 9,859
<TOTAL-ASSETS> 1,964,395
<CURRENT-LIABILITIES> 870,755
<BONDS> 0
0
0
<COMMON> 3,829
<OTHER-SE> 1,067,280
<TOTAL-LIABILITY-AND-EQUITY> 1,964,395
<SALES> 2,087,636
<TOTAL-REVENUES> 2,087,636
<CGS> 567,356
<TOTAL-COSTS> 567,356
<OTHER-EXPENSES> 1,501,343
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<INTEREST-EXPENSE> 32,181
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<INCOME-TAX> 42,695
<INCOME-CONTINUING> 160,805
<DISCONTINUED> 0
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