UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1996 Commission File Number 333-5553
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DECOR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 Washington Street
Mt. Vernon, New York 10553
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (914) 665-5400
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 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 X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock. As of December 3, 1996 there were 1,637,500 shares of common stock
outstanding.
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DECOR GROUP, INC.
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INDEX
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Part I: Financial Information
Item 1. Financial Statements:
Balance Sheet as of September 30, 1996 [Unaudited]............... 1......2
Statements of Operations for the six and three months ended September 30,
1996 [Unaudited]...................................................... 3
Statement of Stockholders' Equity for the six and three months ended
September 30, 1996 [Unaudited]........................................ 4
Statements of Cash Flows for the six months ended September 30, 1996
[Unaudited]........................................................ 5......
Notes to Financial Statements..................................... 6......10
Item 2. Managements' Discussion and Analysis of the Financial Condition
and Results of Operations.................................. 11.....14
Signature............................................................... 15
. . . . . . . . . . . . . . . . . .
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Part I: Financial Information
Item 1: Financial Statements
DECOR GROUP, INC.
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BALANCE SHEET AS OF SEPTEMBER 30, 1996.
[UNAUDITED]
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<S> <C>
Assets:
Current Assets:
Cash $ 718,297
Note Receivable - Related Party 50,000
Accrued Interest Receivable - Related Party 432
Related Party Receivable 6,500
------------
Total Current Assets 775,229
Non-Current Assets:
Investment - Related Party 2,087,500
Investment in Artisan House, Inc. 235,000
Deferred Offering Costs 85,658
Other Assets 2,000
------------
Total Non-Current Assets 2,410,158
Total Assets $ 3,185,387
============
The Accompanying Notes are an Integral Part of These Financial Statements.
1
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DECOR GROUP, INC.
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BALANCE SHEET AS OF SEPTEMBER 30, 1996.
[UNAUDITED]
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<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Accrued Expenses $ 124,000
Accrued Interest - Related Party 1,500
Bridge Loan Payable [Net of Discount of $53,575] 196,425
------------
Total Current Liabilities 321,925
Long-Term:
Stockholders' Loans Payable 50,000
Deferred Taxes 91,500
Total Long-Term 141,500
Commitments and Contingencies --
Stockholders' Equity:
Preferred Stock, $.0001 Par Value Per Share, 35,000,000 Blank Check Shares
Authorized of which 6,000,000 are Convertible. Convertible Non-Voting Series A
- 5,000,000 Shares Authorized, 250,000 Shares Issued and Outstanding;
Non-Convertible Voting Series B - 20,000,000 Shares Authorized - 10,000,000
Shares Issued and Outstanding; Convertible Non-Voting Series C - 1,000,000
Shares
Authorized - 54,934 Issued and Outstanding 1,030
Additional Paid-in Capital - Preferred Stock 2,424,970
Common Stock - $.0001 Par Value, Authorized 20,000,000 Shares,
Issued and Outstanding, 1,312,500 Shares 131
Additional Paid-in Capital - Common Stock 319,169
Retained Earnings [Deficit] (419,338)
Unrealized Gain on Investment [Available for Sale] 396,000
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Total Stockholders' Equity 2,721,962
Total Liabilities and Stockholders' Equity $ 3,185,387
============
The Accompanying Notes are an Integral Part of These Financial Statements.
2
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DECOR GROUP, INC.
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STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months Six month
ended ended
September 30, September 30,
1 9 9 6 1 9 9 6
<S> <C> <C>
Revenues $ -- $ --
Cost of Revenues -- --
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Gross Profit -- --
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Selling, General and Administrative Expenses:
Acquisition Fees and Expenses -- 52,829
Professional Fees 1,000 74,000
Administrative Expenses 14,067 27,089
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Total Selling, General and Administrative Expenses 15,067 153,918
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[Loss] from Operations (15,067) (153,918)
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Other Expense [Income]:
Interest Income (1,123) (1,123)
Interest Income - Related Party (432) (432)
Interest - Cost of Bridge Warrants 53,575 160,725
Interest Expense - Bridge Loans 5,000 5,000
Interest Expense - Related Party 1,500 1,500
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Total Other Expense [Income] 58,520 165,670
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[Loss] Before Provision for Income Taxes (73,587) (319,588)
Provision for Income Taxes -- --
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Net [Loss] $ (73,587) $ (319,588)
============ ============
[Loss] Per Share $ (.03) $ (.11)
============ ============
The Accompanying Notes are an Integral Part of These Financial Statements.
3
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DECOR GROUP, INC.
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STATEMENT OF STOCKHOLDERS' EQUITY
[UNAUDITED]
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Preferred Stock Common Stock
Additional Additional Retained Unrealized Total
Paid-in Paid-in Earnings Gain on Stockholders'
Shares Amount Capital Shares Amount Capital [Deficit]Investment Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1996 250,000 25 1,599,975 1,312,500 131 319,169 (99,750) 187,600 2,007,150
54,934 Shares of Series C
Convertible Non-Voting
Preferred Stock 54,934 5 823,995 -- -- -- -- -- 824,000
10,000,000 Shares of Series B
Non-Convertible Voting
Preferred Stock 10,000,000 1,000 1,000 -- -- -- -- -- 2,000
Unrealized Gain on Investment
[Available for Sale] -- -- -- -- -- -- -- 208,400 208,400
Net [Loss] for the six months
ended September 30, 1996 -- -- -- -- -- -- (319,588) -- (319,588)
--------- ------ --------- -------- ------- --------- -------- -------- ---------
Balance - September 30, 1996 10,304,934 $ 1,030 $2,424,970 1,312,500 131 $319,169 $(419,338)$ 396,000 $2,721,962
============ ======== ========== ========= ==== ======== ========= ========= =========
The Accompanying Notes are an Integral Part of These Financial Statements.
4
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DECOR GROUP, INC.
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STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996.
[UNAUDITED]
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<S> <C>
operating Activities:
Net [Loss] $ (319,588)
Adjustment to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Accrued Interest Receivable (182)
Interest - Cost of Bridge Warrants 160,725
Accrued Expenses 124,000
Accrued Interest - Related Party 1,500
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Net Cash - Operating Activities (33,545)
------------
Investing Activities:
Collection of Note Receivable 50,000
Partial Payment on Acquisition of Artisan House, Inc. (85,000)
Note Receivable (50,000)
Related Party Receivable (6,500)
Other Assets (2,000)
------------
Net Cash - Investing Activities (93,500)
------------
Financing Activities:
Proceeds from Sale of Preferred Stock 826,000
Proceeds from Sale of Common Stock 8,000
Proceeds from Stockholder Loan 50,000
Deferred Offering Costs (85,658)
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Net Cash - Financing Activities 798,342
------------
Net Increase in Cash 672,297
Cash - Beginning of Periods 47,000
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Cash - End of Periods $ 718,297
============
Supplemental Disclosures of Cash Flow Information:
Cash paid for the periods for:
Interest $ --
Income Taxes $ --
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the period ended March 31, 1996, the Company recorded a discount on
the bridge loan of $214,300 resulting from the issuance of warrants for the
$250,000 bridge loan. For the six months ended September 30, 1996, the Company
amortized $160,725 as interest expense.
The Accompanying Notes are an Integral Part of These Financial Statements.
5
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DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
[UNAUDITED]
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[1] Summary of Significant Accounting Policies
[A] Nature of Operations - Decor Group, Inc., a Delaware corporation [the
"Company" or "Decor"], was formed March 1, 1996.
[B] Earnings Per Share - The number of shares to be used for earnings per share
calculation purposes will be based on the 1,312,500 common shares issued in the
initial capitalization and on the 1,500,000 common shares assumed issued from
the warrants in connection with the bridge loan, as if they were outstanding
since inception. Convertible preferred stock is not included because the effect
would be anti-dilutive [See Note 5].
[C] Cash Equivalents - The Company's policy is to classify all highly liquid
debt instruments purchased with an initial maturity of three months or less to
be cash equivalents. There were no cash equivalents at September 30, 1996.
[D] 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.
[E] Goodwill - Amounts paid in excess of the estimated value of net assets
acquired of Artisan House, Inc. will be charged to goodwill. Goodwill is related
to revenues the Company anticipates realizing in future years. The Company has
decided to amortize its goodwill over a period of up to ten years under the
straight-line method. The Company's policy is to evaluate the periods of
goodwill amortization to determine whether later events and circumstances
warrant revised estimates of useful lives. The Company also evaluates whether
the carrying value of goodwill has become impaired by comparing the carrying
value of goodwill to the value of projected undiscounted cash flows from
acquired assets or businesses. Impairment is recognized if the carrying value of
goodwill is less than the projected undiscounted cash flow from the acquired
assets or business.
[F] Stock Options and Similar Equity Instruments Issued to Employees - The
Company uses the intrinsic value method to recognize cost in accordance with APB
25 [Accounting for Stock Issued to Employees].
[G] Deferred Offering Costs - Offering costs in connection with the initial
public offering will be recorded as a reduction of the proceeds of the offering.
[H] Basis of Presentation - The accompanying interim financial statements are
unaudited and have been prepared in accordance with the requirements of
Regulation S-B and Form 10-QSB and, therefore, do not include all information
and footnotes required by generally accepted accounting principles; however, in
the opinion of the management of the Company, the interim financial statements
include all adjustments which are necessary in order to make the interim
financial statements not misleading. The results of operations for any interim
period are not necessarily indicative of the results for the full year. These
financial statements should be read in conjunction with the financial statements
and notes, thereto, contained in the Form SB-2 that was declared effective
November 12, 1996.
6
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DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[2] Business Combination - Artisan House
On March 25, 1996, the Company entered into an agreement to acquire certain
assets and assume certain liabilities of Artisan House, Inc. for $3,626,400,
subject to adjustment prior to closing of which $150,000 was paid in cash, and
an additional $2,250,000 will be paid in extension payments and at the closing
of the acquisition. A secured promissory note for $926,400 will be issued,
[subject to reduction by a cash balance of Artisan House at the closing date
estimated at $173,526 at September 30, 1996] of which $100,000 will be paid 90
days after the closing and the balance will be paid in 60 equal monthly
installments of $10,196 with final payment of $150,000 at maturity with interest
at 8%, and 50,000 shares of Decor common stock valued at $300,000 will be
issued. Artisan House, Inc. is engaged in the business of manufacturing,
marketing, selling and distributing wall hanging sculptures. The transaction
will be recorded under the purchase method.
Goodwill of approximately $1,400,000 will be amortized over 10 years under the
straight-line method. Operations of Artisan will be included with the Company
from the date of the close of the acquisition onward.
The Company, intends to enter into a three year employment agreement with the
Seller to be effective as of the closing of the acquisition of Artisan House,
Inc. The Seller will be employed on a part time basis with (i) an annual salary
of $75,000, (ii) a signing bonus of $70,000, $30,000 of which is to be paid at
closing and $40,000 of which is to be paid in equal monthly installments of
$3,333 during the first year of the employment agreement, (iii) reimbursement of
expenses incurred by the Seller for lease and insurance payments with respect to
an automobile, (iv) an annual performance bonus equal to 1% of the Company's
sales in excess of those achieved by Artisan House, Inc. for the twelve months
ended June 30, 1996, payable within 60 days after the end of the fiscal year,
with the first and last payments being calculated on a pro rated basis,(v) 2.5%
of the consideration paid by the Company in connection with an acquisition of an
unrelated third party introduced to the Company or its affiliates by the Seller
subject to certain restrictions as defined in the agreement, and (vi) the
issuance of options to purchase 50,000 shares of the Company's common stock on
each of the first and second anniversary of the agreement. The options are
exercisable at $.0001 per share commencing the date of issuance and expiring in
four years.
The following unaudited pro forma combined results of operations accounts for
the acquisition as if it had occurred at the beginning of the periods presented.
The pro forma results give effect to amortization of goodwill and other
intangible assets, interest expense, employment contracts and consulting
agreements.
<TABLE>
Six months Ended Year ended
September 30, March 31,
1 9 9 6 1 9 9 6
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<S> <C> <C>
Total Revenues $ 2,853,229 $ 4,809,422
============ =============
Net [Loss] $ (545,246) $ (520,054)
============ =============
Net [Loss] Per Common Share $ (.19) $ (.18)
============ =============
Weighted Average Number of Shares Outstanding 2,862,500 2,862,500
============ =============
These pro forma amounts may not be indicative of results that actually would
have occurred if the combination had been in effect on the date indicated or
which may be obtained in the future.
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7
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DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[3] Related Party Transactions
On March 5, 1996, the Company advanced $50,000 with 8% interest to a firm that
renders management services to the Company. The Company was repaid on April 16,
1996.
On June 21, 1996, the Company received commitments from its stockholders for an
additional $50,000 in loan proceeds. The Company received $35,500 in June 1996
and $8,000 in July 1996. The remaining balance of $6,500 is to be received in
November 1996. The notes have interest of 12% per annum and matured on November
18, 1996.
On August 29, 1996 and September 13, 1996, the Company advanced an aggregate
$50,000 with 10% interest to a firm that renders management services to the
Company. Interest income of $432 has been accrued through September 30, 1996.
[4] 1996 Stock Option Plan
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of the 1996 Stock Option Plan.
The maximum number of shares of common stock with respect to which awards may be
granted pursuant to the 1996 Plan is initially 250,000 shares.
[5] Bridge Loan
On March 31, 1996, the Company borrowed an aggregate of $250,000 from nine [9]
lenders [the "Bridge Lenders"]. In exchange for making loans to the Company,
each Bridge Lender received a promissory note [the "Bridge Note"]. Each of the
Bridge Notes bears interest at the rate of eight percent [8%] per annum. The
Bridge Notes are due and payable upon the earlier of (i) March 18, 1997 or (ii)
the closing of an initial underwritten public offering of the Company's
securities. The Company intends to use a portion of the proceeds of this
offering to repay the Bridge Lenders. The Bridge Lenders have the right to
receive a total of 1,500,000 Class A Warrants for 1,500,000 shares of common
stock which will be registered in the Company's first registration statement.
The Class A Warrants are exercisable at a price of $5.25 per warrant commencing
two years from the effective date of the initial public offering and expire six
years from the effective date of the offering. The Company recorded a discount
on the bridge notes at June 30, 1996 of $214,300, which will be amortized
through November 18, 1996, the date on which the notes were repaid. For the six
months ended September 30, 1996, the Company amortized $160,725 of the discount
as interest expense.
8
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DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
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[6] Investment - Related Party
On March 3, 1996, the Company issued to Interiors, Inc. 250,000 shares of Series
A Non-Voting Convertible Preferred Stock and an option to purchase 10,000,000
shares of Series B Non-Convertible Voting Preferred Stock at an exercise price
of $.0002 in exchange for Interiors, Inc. issuing to the Company 200,000 shares
of Common Stock valued at $600,000 and 200,000 shares of Series A Convertible
Preferred Stock valued at $1,000,000. The aggregate estimated fair value of the
investment approximates carrying value. On May 28, 1996, the Company entered
into a management agreement with Interiors, Inc. which specializes in the home
furnishings and decorative accessories industries. The agreement calls for a
management fee of $75,000 or 1.5% of gross sales, whichever is greater, per
annum. The management fee will be accrued quarterly and paid quarterly to the
extent that there is excess cash flow available to the Company as defined in the
agreement. No payment in any quarter will exceed 50% of excess cash flow as
defined. The agreement has a term of two years with renewal options at the
mutual consent of both parties. The exchange of shares between the Company and
Interiors, Inc. is pursuant to the Company's intentions to secure the ongoing
and long-term availability of these services. Accordingly, the Company's
intention is to maintain a long-term position in its investment in Interiors,
Inc. As of September 30, 1996, the per share market value of Interiors, Inc.'s
common stock and Series A Convertible Preferred Stock was $2.438 and $8.00,
respectively. Accordingly, a gross unrealized holding loss and gain of $45,834
and $533,334 existed at September 30, 1996 on the common stock and Series A
Convertible Preferred Stock, respectively, which is reflected net of income tax
effects in the accompanying balance sheet. As of September 30, 1996, Interiors,
Inc. owns approximately 16% of the Company assuming the 250,000 shares of Series
A Convertible Preferred Stock were converted into common stock. Following the
public offering Interiors, Inc. owns approximately 86.0% of the total voting
stock outstanding after the exercise of the options to purchase 10,000,000
shares of Class B Preferred Stock on September 3, 1996 for $2,000. Such
ownership is consistent with the Company's intentions stated above as well as
the provision by Interiors, Inc. of additional equity contributions.
On August 9, 1996, the Company agreed to issue to Interiors, Inc. 28,334 shares
of Series C NonVoting, Convertible, Preferred Stock for cash of $425,000. On
August 23, 1996, the Company agreed to issue to Interiors, Inc. an additional
18,750 shares of Series C Non-Voting, Convertible, Preferred Stock for cash of
$281,250. On September 6 and 13, 1996, the Company agreed to issue to Interiors,
Inc. an additional aggregate 7,850 shares of Series C Non-Voting, Convertible,
Preferred Stock for cash of $117,750.
[7] Employment Agreement - President
In June 1996, the Company entered into an employment contract with the President
of the Company for which an initial base salary of $117,500 will take effect
upon the close of the acquisition of Artisan House. In addition, the agreement
calls for the granting of options to purchase 5,000 shares of common stock of
the Company at an exercise price of $5.00 per share for each full year of
employment under the agreement and an annual bonus equal to 2% of the amount by
which the Company's net sales exceed the Company's net sales for the year ended
June 30, 1997.
9
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DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
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[8] Commitment Letter - Secured Loan Agreement
On May 31, 1996, the Company received a commitment letter for a revolving credit
agreement for a maximum loan amount of $1,100,000. The agreement requires the
satisfaction of a number of conditions prior to funding including the completion
of a due diligence review. The terms of the loan include an annual interest rate
of prime plus 4%, a management fee of 3% of sales, a security interest in all of
the Company's accounts receivable, inventory, and equipment, and any proceeds
therefrom, a guaranty of the Company's Chairman of the Board, and a prepayment
fee of $25,000 in the event of a prepayment. In the event that the Company is
unable to satisfy such conditions, the Company will not receive the proceeds
from such loan. The Company does not anticipate the utilization of this line of
credit.
Prime rate at September 30, 1996 was approximately 8%.
[9] Common Stock
In March 1996, the Company issued 1,312,500 shares of common stock to seven
parties for a total of $105,000 of which $103,000 was in cash and $2,000 was for
the fair value of services.
[10] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
accounting for stock options and similar equity instruments as contrasted to the
intrinsic valued based method of accounting prescribed by Accounting Principles
Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has not decided if it will adopt SFAS No. 123 or continue to apply APB
Opinion No. 25 for financial reporting purposes. SFAS No. 123 will have to be
adopted for financial note disclosure purposes in any event. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years that begin after December 15, 1995; the disclosure requirements of
SFAS No. 123 are effective for financial statements for fiscal years beginning
after December 15, 1995.
The FASB has also issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company.
[11] Subsequent Events
[A] Reverse Stock Split - On October 16, 1996, the Company effected a
one-for-two reverse split of the Company's preferred and common stock. The
financial statements have been restated to give effect to the reverse stock
split. The reverse stock split did not change the number of shares authorized or
the par value of any class of capital stock.
[B] Initial Public Offering - On November 18, 1996, the Company closed its
initial public offering of 325,000 shares of common stock at $10 per share of
which 25,000 shares of common stock were owned and offered by a stockholder. The
net proceeds from this offering were approximately $2,500,000.
. . . . . . . . . . .
10
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Item 2.
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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Overview
Decor Group, Inc. [the "Company" or "Decor"] was formed in March of 1996.
The primary activities of Decor prior to the acquisition of Artisan House, Inc.
["Artisan"] in November of 1996 for approximately $3,626,400 have
been investing and financing activities [See "Liquidity and Capital
Resources"]. Artisan is engaged in the manufacture, marketing, selling and
distribution of wall hanging sculptures.
As a result of negotiations between the Company and Interiors, Inc.
["Interiors"], on March 3, 1996, the Company issued to Interiors, Inc., 250,000
shares of Series A Non-Voting Convertible Preferred Stock and an option to
purchase 10,000,000 shares of Series B Non-Convertible Voting Preferred Stock at
an exercise price of $.0002 in exchange for the issuance by Interiors to the
Company of 200,000 shares of Common Stock with a market closing price of
$600,000 and 200,000 shares of Series A Convertible Preferred Stock with a
market closing price of $1,200,000. The issuance of options instead of stock was
done at the request of Interiors, Inc. On May 28, 1996, the Company entered into
a management agreement with Interiors, Inc. whereby Interiors, Inc. will provide
to the Company certain marketing and management services. The exchange of shares
between the Company and Interiors is pursuant to the Company's intentions to
ensure the ongoing and long-term availability of these services. It is the
Company's intention to maintain a long-term position in its investment in
Interiors. As of September 30, 1996, the per share closing market price of
Interior's Common Stock and Series A Convertible Preferred Stock was $2.438 and
$8.00, respectively. Accordingly, gross unrealized holding loss and gain of
$45,834 and $533,334 existed at September 30, 1996 for the Common Stock and
Series A Convertible Preferred Stock, respectively, which is reflected net of
income tax effects in the accompanying balance sheet. As of September 30, 1996,
Interiors will own approximately 86.0% if the total voting stock outstanding
assuming the exercise of the options to purchase 10,000,000 shares of Class B
Preferred Stock and conversion of 250,000 shares of the Series A Preferred
Stock. Such ownership is consistent with the Company's intentions stated above
as well as the provision by Interiors, Inc. of additional equity contributions.
Artisan House, Inc.
Results of Operations for the eight months ended September 30, 1996
Artisan had income before taxes for the eight months ended September 30, 1996 of
$335,882 and had net income of 201,882 after giving effect to pro forma income
taxes of $134,000.
The net sales for Artisan House, Inc. for the eight months ended September 30,
1996 and 1995 were $3,777,229 and $3,157,109, respectively, an increase of
approximately $620,000 or 20%. Sales increased because of the general acceptance
by the marketplace of new products such as "Casablanca", Norman Rockwell scenes,
and musical scenes. In addition, sales to large catalog houses increased during
the current period.
11
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Artisan House, Inc. [Continued]
Results of Operations for the eight months ended September 30, 1996
Artisan's selling, general and administrative expenses for the eight months
ended September 30, 1996 were $1,309,589 and $1,101,662, respectively, an
increase of approximately $208,000 or 19%. Increases in selling, general and
administrative expenses were largely due to increased expenditures for
advertising, to support new product introductions, and increased commissions
resulting from sales increases.
Artisan's interest expense for the eight months ended September 30, 1996 and
1995 was approximately $42,000 and $56,000, respectively.
Liquidity and Capital Resources
Artisan House, Inc. at September 30, 1996 had working capital of approximately
$1,003,000. During the eight month periods ended September 30, 1996 and 1995,
Artisan generated cash of approximately $365,000 and $24,000, respectively, from
operations. During the eight months ended September 30, 1996 and 1995, Artisan
made repayments on stockholder loans of $501,093 and $22,142, respectively, and
repaid notes payable of $69,906 and $35,477, respectively. At September 30,
1996, Artisan House's cash balance was $173,526.
Decor Group, Inc.
Results of Operations for the six months ended September 30, 1996
The Company generated a loss before income taxes of $319,588 for the six months
ended September 30, 1996.
Liquidity and Capital Resources
At September 30, 1996, Decor had a working capital of $453,304. For the six
months ended September 30, 1996, the Company used $33,545 for operating
activities. For the six months ended September 30, 1996, investing activities
utilized cash of $93,500 primarily comprising $85,000 utilized for the
acquisition of Artisan House, Inc. For six months ended September 30, 1996,
financing activities generated $798,342 primarily from the sale of preferred
stock for $826,000. The cash balance at September 30,1 996 was $718,297.
The Company anticipates that the net proceeds from the public offering of
approximately $2,500,000 will be utilized to finance the purchase of Artisan
House, Inc. and for working capital needs.
In March 1996, the Company issued to Interiors, Inc. 250,000 shares of Class A
Non-Voting Convertible Preferred Stock and an option to purchase 10,000,000
shares of Class B Non-Convertible Voting Preferred Stock in exchange for
Interiors, Inc. issuing to the Company 200,000 shares of Common Stock valued at
$600,000 and 200,000 shares of Series A Convertible Preferred Stock valued at
$1,000,000.
In May 1996, the Company entered into a management agreement with Interiors,
Inc. which specializes in the home furnishings and decorative accessories
industries. The agreement calls for a management fee of $75,000 or 1.5% of gross
sales, whichever is greater, per annum. The management fee will be accrued
quarterly and paid quarterly to the extent that there is excess cash flow
available to the Company. Excess cash flow is defined in the agreement to mean
cash flow from operations adjusted to reflect changes in working capital,
interest payments, principal repayments and capital expenditures. No payment in
any quarter will exceed 50% of excess cash flow as defined. The agreement has a
term of two years with renewal options at the mutual consent of both parties.
12
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
Decor Group, Inc.
Results of Operations for the six months ended September 30, 1996
Liquidity and Capital Resources [Continued]
In June 1996, the Company entered into an employment contract with the President
of the Company for which an initial base salary of $117,500 will take effect
upon the close of the acquisition of Artisan House. In addition, the agreement
calls for the granting of options to purchase 5,000 shares of common stock of
the Company at an exercise price of $5.00 per share for each full year of
employment under the agreement and an annual bonus equal to 2% of the amount by
which the Company's net sales exceed the Company's net sales for the year ended
June 30, 1997.
On June 21, 1996, the Company received commitments from its stockholders for an
additional $50,000 in loan proceeds. The Company received $35,500 in June 1996
and $8,000 in July 1996. The remaining balance of $6,500 was received in
November 1996. The notes have interest of 12% per annum and a maturity date
which is the earlier of 15 months following the close of the proposed public
offering or June 21, 1998.
On August 9, 1996, the Company agreed to issue to Interiors, Inc. 28,334 shares
of Series C NonVoting, Convertible, Preferred Stock for cash of $425,000. On
August 23, 1996, the Company agreed to issue to Interiors, Inc. an additional
18,750 shares of Series C Non-Voting, Convertible, Preferred Stock for cash of
$281,250. On September 6 and 13, 1996, the Company agreed to issue to Interiors,
Inc. an additional aggregate 7,850 shares of Series C Non-Voting, Convertible,
Preferred Stock for cash of $117,750.
On August 29, 1996 and September 13, 1996, the Company advanced an aggregate
$50,000 with 10% interest to a firm that renders management services to the
Company. Interest income of $432 has been accrued through September 30, 1996.
Management believes that the proceeds of the offering and the cash generated
from operating activities of Artisan House, Inc. will provide the Company with
sufficient capital to fund ongoing operations for at least 12 months. Management
believes that capital requirements relating to research and development and
capital expenditures will be met by funds derived from operations.
New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
accounting for stock options and similar equity instruments as contrasted to the
intrinsic valued based method of accounting prescribed by Accounting Principles
Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company has not decided if it will adopt SFAS No. 123 or continue to apply APB
Opinion No. 25 for financial reporting purposes. SFAS No. 123 will have to be
adopted for financial note disclosure purposes in any event. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years that begin after December 15, 1995; the disclosure requirements of
SFAS No. 123 are effective for financial statements for fiscal years beginning
after December 15, 1995.
The FASB has also issued SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities." SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996. Earlier application is not
allowed. The provisions of SFAS No. 125 must be applied prospectively;
retroactive application is prohibited. Adoption on January 1, 1997 is not
expected to have a material impact on the Company.
13
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Impact of Inflation
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past periods. Increases in supplies or other
operating costs could adversely affect the Company's operations; however, the
Company believes it could increase prices to offset increases in costs of goods
sold or other operating costs.
14
<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.
Decor Group, Inc.
Date: December 6, 1996 By:/s/ Donald Feldman
------------------
Donald Feldman,
Chief Executive and Financial Officer
15
<PAGE>
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<ARTICLE> 5
<LEGEND>
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> mar-31-1997
<PERIOD-END> sep-30-1996
<CASH> 718,297
<SECURITIES> 0
<RECEIVABLES> 50,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 775,229
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,185,387
<CURRENT-LIABILITIES> 321,925
<BONDS> 0
0
1,030
<COMMON> 131
<OTHER-SE> 2,720,801
<TOTAL-LIABILITY-AND-EQUITY> 3,185,387
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 15,067
<OTHER-EXPENSES> 52,020
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6500
<INCOME-PRETAX> (73,587)
<INCOME-TAX> 0
<INCOME-CONTINUING> (73,587)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (73,587)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
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