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 December 31, 1996 Commission File Number 333-5553
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
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock. As of February 13, 1997 there were 5,122,500 shares of common
stock outstanding.
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DECOR GROUP, INC.
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INDEX
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Page to Page
Part I: Financial Information
Item 1. Financial Statements:
Balance Sheet as of December 31, 1996 [Unaudited].................. 1.....
Statements of Operations for the nine and three months ended December 31,
1996 [Unaudited]................................................... 3.....
Statement of Stockholders' Equity for the nine months ended
December 31, 1996 [Unaudited]...................................... 4.....
Statement of Cash Flows for the nine months ended December 31, 1996
[Unaudited]........................................................ 5.....6
Notes to Financial Statements [Unaudited].......................... 7.....14
Item 2.Managements' Discussion and Analysis of the Financial Condition
and Results of Operations...................................... 15....17
Signature............................................................. 18....
. . . . . . . . . . . . . . . . . .
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Part I: Financial Information
Item 1: Financial Statements
DECOR GROUP, INC.
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BALANCE SHEET AS OF DECEMBER 31, 1996.
[UNAUDITED]
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<S> <C>
Assets:
Current Assets:
Cash $ 547,490
Accounts Receivable [Net of Allowance of $72,387] 1,122,309
Inventories 804,668
Prepaid Expenses and Other Current Assets 139,491
-----------
Total Current Assets 2,613,958
Property and Equipment - Net of Accumulated Depreciation of $2,114 123,522
-----------
Non-Current Assets:
Investment - Related Party 1,575,000
Goodwill - Net 1,501,180
Other Intangible Assets - Net 595,332
Other Assets 16,013
-----------
Total Non-Current Assets 3,687,525
Total Assets $ 6,425,005
===========
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 DECEMBER 31, 1996.
[UNAUDITED]
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<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 495,618
Accrued Costs of Acquisition 125,263
Accrued Interest - Related Party 4,060
Notes Payable 196,223
Due to Stockholder 156,785
-----------
Total Current Liabilities 977,949
Long-Term:
Stockholders' Loans Payable 43,500
Notes Payable 697,089
Total Long-Term 740,589
Commitments and Contingencies [9] --
Stockholders' Equity:
Preferred Stock, $.0001 Par Value Per Share, 35,000,000 Blank Check Shares
Authorized of which 5,000,000 are Convertible Non-Voting Series A - 250,000
Shares Issued and Outstanding; 20,000,000 Non-Convertible Voting Series B -
20,000,000 Shares Issued and Outstanding; 10,000,000 Non-Voting Series C -
54,934 Issued and Outstanding at December 31, 1996 2,030
Additional Paid-in Capital - Preferred Stock 2,423,970
Common Stock - $.0001 Par Value, Authorized 20,000,000 Shares,
Issued and Outstanding, 5,122,500 Shares at December 31, 1996 511
Additional Paid-in Capital - Common Stock 3,911,822
Accumulated Deficit (621,949)
Deferred Compensation (984,917)
Unrealized Loss on Investment (25,000)
Total Stockholders' Equity 4,706,467
Total Liabilities and Stockholders' Equity $ 6,425,005
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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 Nine months
ended ended
December 31, December 31,
1 9 9 6 1 9 9 6
<S> <C> <C>
Revenues $ 635,031 $ 635,031
Cost of Revenues 347,387 347,387
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Gross Profit 287,644 287,644
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Acquisition Fees, Selling and Administrative Expenses:
Acquisition Fees and Expenses -- 52,829
Selling Expenses 92,433 92,433
Administrative Expenses 321,204 422,293
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Total Acquisition Fees, Selling and Administrative
Expenses 413,637 567,555
Loss from Operations (125,993) (279,911)
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Other Expense [Income]:
Interest Income (1,453) (2,576)
Interest Income - Related Party (521) (953)
Interest Expense - Bridge Loans 71,214 236,939
Interest Expense - Related Party 2,560 4,060
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Total Other Expense [Income] 71,800 237,470
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Loss Before Provision for Income Taxes (197,793) (517,381)
Provision for Income Taxes 4,818 4,818
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Net Loss $ (202,611) $ (522,199)
========== ===========
Loss Per Share $ (.05) $ (.10)
========== ===========
Weighted Average Number of Common Shares Outstanding 4,490,500 5,621,833
========== ===========
The Accompanying Notes are an Integral Part of These Financial Statements.
3
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DECOR GROUP, INC.
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STATEMENTS OF STOCKHOLDERS' EQUITY
[UNAUDITED]
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Preferred Stock Common Stock Unrealized
Additional Additional Gain [Loss] Total
Number of Paid-inNumber of Paid-inAccumulated Deferred on Stockholders'
Shares Amount Capital Shares Amount Capital Deficit CompensationInvestment Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1996 250,000 $ 25 $1,599,975 3,937,5OO $ 393 $318,907 $(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
20,000,000 Shares of Series B
Non-Convertible Voting
Preferred Stock 20,000,000 2,000 -- -- -- -- -- -- -- 2,000
Net Proceeds from Sale of
Common Stock from Initial
Public Offering -- -- -- 1,035,000 103 2,247,930 -- -- -- 2,248,033
Issuance of Stock in Connection
with Acquisition -- -- -- 150,000 15 299,985 -- -- -- 300,000
Change in Unrealized Gain on
Investment -- -- -- -- -- -- -- -- (212,600) (212,600)
Deferred Compensation in
Connection With Issuance of
Stock Options -- -- -- -- -- 1,045,000 -- (1,045,000) -- --
Amortization of Deferred
Compensation -- -- -- -- -- -- -- 60,083 -- 60,083
Net Loss for nine months ended
December 31, 1996 -- -- -- -- -- -- (522,199) -- -- 522,199)
-------- --------- -------- ------- ------ ------- -------- -------- ------- --------
Balance - December 31, 1996 20,304,934 2,030 2,423,970 5,122,500 511 $3,911,822 (621,949) $(984,917) $(25,000)$4,706,467
========== ====== ========== ========== === ========= ========= ========= ======== ==========
The Accompanying Notes are an Integral Part of These Financial Statements.
</TABLE>
4
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DECOR GROUP, INC.
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STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1996.
[UNAUDITED]
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<S> <C>
Operating Activities:
Net Loss $ (522,199)
Adjustment to Reconcile Net Loss to Net Cash
[Used for] Operating Activities:
Depreciation and Amortization 24,502
Amortization of Deferred Compensation 60,083
Amortization of Notes Payable Discount 2,058
Accrued Interest Receivable (953)
Interest - Cost of Bridge Warrants 214,300
Change in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (16,647)
Prepaid Expenses (35,600)
Accounts Payable and Accrued Expenses 130,816
Accrued Interest - Related Party 4,060
-----------
Net Cash - Operating Activities (139,580)
-----------
Investing Activities:
Cash Paid for Acquisition of Artisan House (2,250,000)
Advances to Related Party (50,000)
Collections from Related Party 100,250
Other Assets (2,251)
-----------
Net Cash - Investing Activities (2,202,001)
-----------
Financing Activities:
Proceeds from Sale of Preferred Stock 826,000
Proceeds from Sale of Common Stock 8,000
Proceeds from Sale of Common Stock in Connection
with Initial Public Offering 2,248,033
Proceeds from Bridge Loans --
Proceeds from Stockholder Loans 201,238
Repayment of Bridge Loans (250,000)
Repayment of Notes Payable (191,200)
-----------
Net Cash - Financing Activities 2,842,071
-----------
Net Increase in Cash 500,490
Cash - Beginning of Periods 47,000
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Cash - End of Periods $ 547,490
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The Accompanying Notes are an Integral Part of These Financial Statements.
5
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DECOR GROUP, INC.
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STATEMENTS OF CASH FLOW FOR THE NINE MONTHS ENDED DECEMBER 31, 1996.
[UNAUDITED]
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<S> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid for the periods for:
Interest $ 315
Income Taxes $ --
</TABLE>
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the period ended March 31, 1996, the Company recorded a discount of
$214,300 on the bridge loan resulting from the issuance of warrants for the
$250,000 bridge loan. For the nine months ended December 31, 1996, the Company
amortized $214,300 as interest expense.
On November 18, 1996, the Company purchased substantially all of the assets
and assumed certain liabilities of Artisan House, Inc. for approximately
$3,750,000, of which $2,400,000 was paid in cash, $300,000 in shares of common
stock and $1,050,000 in notes and liabilities. The Company primarily acquired
accounts receivable of approximately $1,100,000, inventory of approximately
$800,000 and assumed liabilities of approximately $578,000.
The Accompanying Notes are an Integral Part of These Financial Statements.
6
<PAGE>
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 incorporated on March 1, 1996. The Company was
organized for the purpose of acquiring the Artisan House, Inc. ["Artisan"] which
was completed on November 18, 1996. Artisan is engaged in the business of
manufacturing, marketing, selling and distributing wall hanging sculptures. The
transaction was recorded under the purchase method. The Company is a subsidiary
of Interiors, Inc. ["Interiors"] [See Note 7].
[B] Cash Equivalents - The Company's policy is to classify all highly liquid
investments purchased with an initial maturity of three months or less to be
cash equivalents. There were $547,490 cash equivalents at December 31, 1996.
[C] Inventory - Inventory is stated at the lower of cost or market, is comprised
of materials, labor and factory overhead, and is determined on the first-in,
first-out ["FIFO"] basis.
[D] Property and Equipment - Property and equipment is stated at cost and is net
of accumulated depreciation. The cost of additions and improvements are
capitalized and expenditures for repairs and maintenance are expensed in the
period incurred. Depreciation and amortization of property and equipment is
provided utilizing the straight-line method over the estimated useful lives of
the respective assets as follows:
Vehicles 3 Years
Machinery and Equipment 5 - 10 Years
Furniture and Fixtures 7 Years
Leasehold improvements are amortized utilizing the straight-line method over the
shorter of the remaining term of the lease or the useful life of the
improvement.
[E] Marketable Securities - The Company adopted Statement of Financial
Accounting Standards ["SFAS"] No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," on March 3, 1996. SFAS No. 115 addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and for all investments in debt securities. Those
investments are to be classified into the following three categories:
Held-to-maturity debt securities; trading securities; and available-for-sale
securities.
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale,
along with the Company's investment in equity securities. Securities available
for sale are carried at fair value, with any unrealized holding gains and
losses, net of tax, reported in a separate component of shareholders' equity
until realized. Trading securities are securities bought an held principally for
the purpose of selling them in the near term and are reported at fair value,
with unrealized gains and losses included in operations for the current year.
Held-to-maturity debt securities are reported at amortized cost.
[F] Goodwill - Amounts paid in excess of the estimated value of net assets
acquired of Artisan House, Inc. was charged to goodwill. Goodwill is related to
revenues the Company anticipates realizing in future years. The Company
amortizes its goodwill over a period of up to 10 years using the straight-line
method. The amount of amortization charged to operations for the period ended
December 31, 1996 was $17,720. 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.
7
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DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[1] Summary of Significant Accounting Policies [Continued]
[G] Other Intangible Assets - Other intangible assets include trademarks,
copyrights and artwork, customer lists, and covenants not-to-compete. These
costs are being amortized over a 15 year life using the straight-line method.
A summary is as follows:
Accumulated
Cost Amortization Net
Customer Lists $ 200,000 $ 1,556 $ 198,444
Covenants Not-to-Compete 100,000 778 99,222
Trademarks 150,000 1,167 148,833
Copyrights and Artworks 150,000 1,167 148,833
----------- ----------- -----------
Total $ 600,000 $ 4,668 $ 595,332
----- =========== =========== ===========
The amount of amortization charged to operations for the period ended December
31, 1996 was $4,668.
[H] Stock Options and Similar Equity Instruments Issued to Employees - 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 adopted SFAS No. 123 on April 1, 1996 for financial note disclosure
purposes and will continue to apply APB Opinion No. 25 for financial reporting
purposes.
[I] Offering Costs - Such costs were recorded as a reduction of the net proceeds
of the offering.
[J] Earnings Per Share - The number of shares to be used for earnings per share
calculation purposes was based on a) the 3,937,500 common shares issued since
the initial capitalization and on the 4,500,000 common shares assumed issued
from the warrants in connection with the bridge loan, as if they were
outstanding since inception to June 30, 1996 [the last period in the IPO
Prospectus] and b) after the IPO: the 3,937,500 shares outstanding from July 1,
1996 through December 31, 1996 and the 1,035,000 shares issued in connection
with the initial public offering and the 150,000 shares issued in connection
with the acquisition of the Artisan House. Convertible preferred stock options
and warrants are not included because the effect would be anti-dilutive [See
Note 8].
[K] Risk Concentrations - Financial instruments that potentially subject the
Company to concentrations of credit risk include cash and accounts receivable
arising from its normal business activities. The Company places its cash with a
high credit quality financial institution and periodically has cash balances
subject to credit risk beyond insured amounts. At December 31, 1996, $357,489 of
cash exceeds insured amounts.
The Company routinely assesses the financial strength of its customers, and
based upon factors surrounding the credit risk of its customers, has established
an allowance for uncollectible accounts of $72,387 and as a consequence,
believes that its accounts receivable credit risk exposure beyond this allowance
is limited. The Company does not obtain collateral on its accounts receivable.
8
<PAGE>
DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[1] Summary of Significant Accounting Policies [Continued]
[L] 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.
[M] 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.
[2] Acquisition - Artisan House
On November 18, 1996, the Company purchased substantially all of the assets and
assumed certain liabilities of Artisan House, Inc. for $3,694,826, of which a
total of $2,400,000 was paid in cash. A secured promissory note for $923,496 was
issued to the seller. The note provides for the payment to the seller of the
following: a) $100,000 within 90 days after the closing, b) beginning 120 days
after the closing, 60 equal monthly payments of $13,656 bearing an interest rate
of 8%, and c) a balloon payment of $150,000 concurrent with the 60th
installment. The required payments under (a) and (c) did not provide for
interest and were discounted at 8% giving rise to a discount of $53,933 which
will be amortized to interest expense. Separately, the seller was issued 50,000
shares of Decor common stock, valued at $300,000. The Company recorded
additional accrued costs of the acquisition of approximately $125,263, which
represents the excess fair value as presently estimated over the prescribed
contract amounts. This liability could be subject to further adjustment.
Goodwill and other intangibles totaling approximately $2,119,000 will be
amortized between 10 - 15 years using the straight-line method. Operations of
Artisan are included with the Company from November 19, 1996 onward. The assets
and liabilities of Artisan House, Inc. were combined with those of the Company
as of November 18, 1996.
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, consulting
agreements, and options issued.
For the period April 1, Year ended
through December 31, March 31,
1 9 9 6 1 9 9 5 1 9 9 6
------- ------- -------
Total Revenues $4,207,052 $3,674,319 $ 4,809,422
========== ========== ===========
Net Loss $(718,614) $ (895,810) $ (520,054)
========= ========== ===========
Net Loss Per Common Share $ (.12) $ (.15) $ (.06)
========= ========== ===========
Weighted Average Number of
Shares Outstanding 5,887,500 5,887,500 8,587,500
========= ========== ===========
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.
9
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DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
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[2] Acquisition - Artisan House [Continued]
Employment Agreement - Seller - The Company, entered 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 was paid at closing and $40,000 of which is to be paid in
twelve 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 and 5% of the Company's
export 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,
and (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
employment agreement.
On October 30, 1996, the Seller's employment agreement was amended to provide
for the issuance of options to purchase 150,000 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 Company recorded deferred compensation cost for the fair
value of options in the amount of $1,000,000 as of November 18, 1996 and
amortized $58,333 on a proforma basis as compensation expense for the period
ended December 31, 1996.
[3] Inventories
The components of inventory were as follows at December 31, 1996:
Raw Materials $ 286,279
Work-in Process 186,970
Finished Goods 331,419
----------
Totals $ 804,668
------ ==========
[4] Related Party Transactions
[A] Note Receivable - Interiors - 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. Interest income of $250 was recorded as of
March 31, 1996. On August 29, 1996 and September 13, 1996, the Company advanced
an additional $50,000 with 10% interest. The Company was repaid on November 15,
1996 [See Note 6].
[B] Management Agreements - On May 28, 1996, the Company entered into a two year
management agreement with Interiors 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.
[C] Due to Stockholder - Interiors - During the nine months ended December 31,
1996, the Company was charged $56,250 in management fees in accordance with its
agreement with Interiors. On November 15, 1996, the Company was advanced $50,238
from Interiors. On December 15, 1996, Interiors loaned an additional $60,000 to
the Company.
10
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DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
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[4] Related Party Transactions [Continued]
[D] Employment Agreement - President - In June 1996, the Company entered into a
three year employment contract with the President of the Company for which an
initial base salary of $117,500 per annum will take effect upon the acquisition
of Artisan House, Inc. In addition, the agreement calls for the granting of
options to purchase 15,000 shares of common stock of the Company at an exercise
price of $1.67 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 net sales for the year ended June 30, 1997. On November 18, 1996, the
Company recorded deferred compensation of $45,000 and amortized $1,750 as
compensation expense for the period ended December 31, 1996.
[E] Stockholders' Loans Payable - On June 21, 1996, the Company received
commitments from stockholders for a total of $50,000 in loan proceeds. However,
the Company received $35,500 in June 1996 and $8,000 in July 1996. The remaining
commitment for $6,500 was not required. The notes bear interest at 12% per annum
and have a maturity date in April 1998. Interest expense for the period ended
December 31, 1996 was $2,909.
[F] Leases - Commencing November 19, 1996, the Company leases manufacturing and
office space in California from the seller of Artisan House and is used by the
Company in Artisan Houses' continuing operation under an operating lease which
expires November 20, 2001. The lease provides for additional rent based on
increases in operating costs. The monthly rental is $14,000.
[5] Notes Payable
As of
December 31,
1 9 9 6
Bridge Loans [A] $ --
Acquisition Loans [B] 923,496
Assumed Notes [C] 21,691
----------
Total 945,187
Less: Discount [B] 51,875
Total 893,312
Less: Current Portion 196,223
Long-Term Portion $ 697,089
----------------- ==========
The prime rate at December 31, 1996 was approximately 8%.
[A] Bridge Loans - 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"]. The Bridge Notes were 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 with interest of 8% per annum. The Company used a portion
of the proceeds of the initial public offering to repay the Bridge Lenders. The
Bridge Lenders received a total of 1,500,000 Class A Warrants for 4,500,000
shares of common stock, which were registered in the Company's registration
statement that was declared effective by the Securities and Exchange Commission
on November 12, 1996 [See Note 8]. 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 March 31, 1996
of $214,300, which was amortized over the life of the bridge loans. For the
period ended December 31, 1996, the Company amortized the entire discount of
$214,300 as interest expense.
11
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DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- ------------------------------------------------------------------------------
[5] Notes Payable [Continued]
[B] Acquisition Loans - On November 18, 1996, the Company issued a secured
promissory note in the amount of $923,496 to the seller of which $100,000 will
be due in February of 1997 and the balance will be paid in 60 equal monthly
installments of $13,656 with a final payment of $150,000 at maturity bearing
interest at 8%. The note is secured by a second interest on furniture, fixtures
and equipment and inventory of the Company. The non-interest bearing portion of
the note was discounted at 8% which gives rise to a discount of $51,875.
[C] Assumed Notes of Artisan House, Inc. - In connection with the acquisition,
the Company assumed notes payable in the aggregate amount of $212,891 of which
approximately $190,000 was paid off in connection with the closing of the
acquisition and the remaining notes of approximately $23,000 bear interest
ranging from 9.5% to 13.4% maturing through 2001. Such notes are collateralized
by various equipment of the Company.
[6] Investment in Interiors, Inc. - Related Party
On March 3, 1996, the Company issued to Interiors 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 for $2,000 in exchange
for Interiors 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. This option was exercised in September of 1996. On May 28, 1996, the
Company entered into a management agreement with Interiors whereby Interiors
will provide the Company certain marketing and management services [See Note
4B]. The exchange of shares between the Company and Interiors 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. The Company has classified its
investment as available for sale. As of March 31, 1996, the per share market
value of Interior's common stock and Series A Convertible Preferred Stock was
$3.063 and $5.875, respectively. Accordingly, gross unrealized holding gains of
$12,600 and $175,000 existed at March 31, 1996 on the common stock and Series A
Convertible Preferred Stock, respectively. As of December 31, 1996, the per
share market value of Interior's common stock and Series A Convertible Preferred
Stock was $1.938 and $5.938, respectively. Therefore, the carrying value at
December 31, 1996 was $1,575,000. Accordingly, a gross unrealized holding loss
and gain of $212,500 and $187,500 existed at December 31, 1996 on the common
stock and Series A Convertible Preferred Stock, respectively. As of December 31,
1996, Interiors owned approximately 80% of the total voting stock outstanding
assuming no conversion of the Series A and Series C Preferred Stock.
[7] Deferred Taxes
Deferred income taxes reflect the net tax effect of (i) temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and (ii) tax operating
loss carryforwards. The Company had a deferred tax asset of $141,700 arising
from loss carryforwards and the net unrealized loss on marketable securities
which is offset by a 100% valuation allowance.
The Company has tax loss carryforwards at December 31, 1996 of approximately
$304,000 which will expire in 2012.
12
<PAGE>
DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
- ------------------------------------------------------------------------------
[8] Capital Stock Transactions
[A] Public Offering - On November 12, 1996, the Company successfully completed
its initial public offering and sold 370,000 shares of common stock at $10 per
share of which 25,000 shares of common stock are owned and offered by the
stockholders. As a result of this offering, the Company received net proceeds of
$2,248,033 [net of $1,228,294 offering expenses].
[B] Common Stock - In March 1996, the Company issued 3,937,500 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. At March 31, 1996, $8,000 was
reflected as a stock subscription receivable, which was received May 21, 1996.
[C] 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.
[D] Warrants - The Company issued representative stock warrants with rights to
purchase up to 30,000 shares at a purchase price of $15.75 per share exercisable
commencing November 12, 1998 and expiring November 12, 2001.
[E] Stock Options - A summary of the status of the Company's options as of
December 31, 1996 and changes during the period April 1, 1996 through December
31, 1996 is presented below:
Shares Price
Outstanding at Beginning of Period -- $ --
Granted During the Period 345,000 .0001-1.67
Exercised During the Period -- --
Forfeited During the Period -- --
Expired During the Period -- --
----------- ----------
Outstanding at End of Period 345,000 $.0001-1.67
=========== ===========
Exercisable at End of Period -- $ --
---------------------------- =========== ==========
[F] Preferred Stock - Series A Convertible - Each share shall not have the right
to vote nor to receive dividends and the liquidation rate is $.0001 per share.
Each share is convertible into one share of common stock, subject to certain
anti-dilution provisions. Series B Non-Convertible - Each share shall not
receive dividends, but will have the right to vote and the liquidation rate is
$.0001 per share. Series C Convertible - Each share shall not have the right to
vote nor receive dividends. The liquidation rate is $.0001 per share. Each share
is convertible commencing September 1, 1997, subject to adjustment, into one
share of common stock, subject to certain anti-dilution provisions.
[G] Common Stock Dividends - On December 3, 1996, the Board of Directors
declared a dividend on its shares of common stock, distributable to stockholders
of record of the Company as of December 16, 1996 on the basis of two additional
shares of common stock for each one share of common stock previously
outstanding. All share data in the financial statements have been adjusted for
this dividend.
13
<PAGE>
DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #8
[UNAUDITED]
- ------------------------------------------------------------------------------
[8] Capital Stock Transactions [Continued]
[H] Series B Preferred Stock Dividend - In January of 1997, the Company issued a
dividend on its Series B Preferred Stock payable to the stockholder of record as
of December 16, 1996 on the basis of 1 share of Series B Preferred Stock for
each 1 share of Series B Preferred Stock outstanding. All share data have been
adjusted for this dividend. In addition, the resolution was made that if at any
time the Company's Board of Directors and stockholders approve an increase in
the number of authorized shares of Series B Preferred Stock to not less than
30,000,000 shares, then the Series B Preferred stockholder shall be issued an
additional 10,000,000 shares of Series B Preferred.
[9] Commitments and Contingencies
Leases - The Company leases manufacturing and office space in California from
the seller of Artisan House and is used by the Company in Artisan Houses'
continuing operation under an operating lease which expires November 20, 2001.
The lease provides for additional rent based on increases in operating costs.
The monthly rental is $14,000.
[10] Fair Value of Financial Instruments
The carrying amount of cash, notes receivable and notes payable included in
current liabilities approximates fair value because of their short maturities.
The carrying amount of notes payable and loans payable - stockholders included
in non-current liabilities approximates their fair value because they bear
interest at a rate that approximates the Company's cost of capital.
[11] New Authoritative Pronouncements
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. The FASB deferred some
provisions of 125, which are not expected to be relevant to the Company.
. . . . . . . . . . .
14
<PAGE>
Item 2.
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
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"] on November 18, 1996 for approximately $3,750,000 have been
investing and financing activities [See "Liquidity and Capital Resources"].
Artisan is engaged in the design, manufacturing and marketing of metal wall,
table and freestanding sculptures.
On March 3, 1996, the Company issued to Interiors, Inc. ["Interiors"] 250,000
shares of Series A NonVoting Convertible Preferred Stock and an option to
purchase 10,000,000 shares of Series B NonConvertible Voting Preferred Stock for
$2,000 in exchange for Interiors 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. This option was exercised in September of 1996. On
May 28, 1996, the Company entered into a management agreement with Interiors
whereby Interiors will provide the Company certain marketing and management
services. The exchange of shares between the Company and Interiors 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. The Company has classified its
investment as available for sale. As of March 31, 1996, the per share market
value of Interior's common stock and Series A Convertible Preferred Stock was
$3.063 and $5.875, respectively. Accordingly, gross unrealized holding gains of
$12,600 and $175,000 existed at March 31, 1996 on the common stock and Series A
Convertible Preferred Stock, respectively. As of December 31, 1996, the per
share market value of Interior's common stock and Series A Convertible Preferred
Stock was $1.938 and $5.938, respectively. Therefore, the carrying value at
December 31, 1996 was $1,575,000. Accordingly, a gross unrealized holding loss
and gain of $212,500 and $187,500 existed at December 31, 1996 on the common
stock and Series A Convertible Preferred Stock, respectively. As of December 31,
1996, Interiors owned approximately 80% of the total voting stock outstanding
assuming no conversion of the Series A and Series C Preferred Stock.
On November 12, 1996, the Company realized net proceeds of $2,248,033 from the
initial public offering of the Company's common stock. The financial statements
included with this filing include the transactions pursuant to the acquisition
of Artisan House and the Company's public offering of securities. The financial
statements consolidate the results of Artisan House with the Company commencing
November 18, 1996, the date of acquisition.
RESULTS OF OPERATIONS
Decor had revenues and cost of revenues for the period April 1, 1996 through
December 31, 1996 of $635,031 and $347,387, respectively. This represents
Artisan's sales and cost of sales transactions for the period November 19, 1996
through December 31, 1996 based primarily with Looney Toons characters under
license with Warner Brothers.
Decor had acquisition fees, selling and administrative expenses for the period
April 1, 1996 through December 31, 1996 of $567,555 of which $233,464
represented Artisan's expenses for the period November 19, 1996 through December
31, 1996.
The Company incurred a net loss of $522,199 for the nine months ended December
31, 1996. This includes net income generated by Artisan House of approximately
$42,000 for the period November 19, 1996 through December 31, 1996.
15
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, Decor had a working capital of $1,636,009. For the nine
months ended December 31, 1996, the Company used $139,580 for operating
activities. For the nine months ended December 31, 1996, investing activities
utilized cash of $2,202,001 primarily comprising $2,250,000 utilized for the
acquisition of Artisan House, Inc. For nine months ended December 31, 1996,
financing activities generated $2,842,071 primarily from the sale of common
stock in connection with the initial public offering for $2,248,033. The cash
balance at December 31, 1996 was $547,490.
On November 18, 1996, the Company issued a secured promissory note in the amount
of $923,496 to the seller of Artisan House of which $100,000 will be due in
February of 1997 and the balance will be paid in 60 equal monthly installments
of $13,656 with a final payment of $150,000 at maturity bearing interest at 8%.
The note is secured by a second interest on furniture, fixtures and equipment
and inventory of the Company. The non-interest bearing portion of the note was
discounted at 8% which gives rise to a discount of $51,875.
In connection with the acquisition, the Company assumed notes payable in the
aggregate amount of $212,891 of which approximately $190,000 was paid off in
connection with the closing of the acquisition and the remaining notes of
approximately $23,000 bear interest ranging from 9.5% to 13.4% maturing through
2001. Such notes are collateralized by various equipment of the Company.
In March 1996, the Company issued to Interiors 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 issuing to the Company 200,000 shares of Common Stock valued at
$600,000 at March 31, 1996 and 200,000 shares of Series A Convertible Preferred
Stock valued at $1,000,000 at March 31, 1996. As of December 31, 1996, the per
share market value of Interior's common stock and Series A Convertible Preferred
Stock was $1.938 and $5.938, respectively. Therefore, the carrying value at
December 31, 1996 was $1,575,000. Accordingly, a gross unrealized holding loss
and gain of $212,500 and $187,500 existed at December 31, 1996 on the common
stock and Series A Convertible Preferred Stock, respectively.
In May 1996, the Company entered into a management agreement with Interiors
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.
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. However, the Company received $35,500 in
June 1996 and $8,000 in July 1996. The remaining balance for $6,500 was not
required. The notes bear interest at 12% per annum.
16
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES [CONTINUED]
On August 9, 1996, the Company agreed to issue to Interiors 28,334 shares of
Series C Non-Voting, Convertible, Preferred Stock for cash of $425,000. On
August 23, 1996, the Company agreed to issue to Interiors 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
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. The Company was repaid on November 16, 1996.
During the nine months ended December 31, 1996, the Company was charged $56,250
in management fees in accordance with its agreement with Interiors. On November
15, 1996, the Company was advanced $50,238 from Interiors. On December 15, 1996,
Interiors loaned an additional $60,000 to the Company.
Management believes that the net proceeds of the offering of approximately
$2,200,000 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 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. The FASB deferred some
provisions of 125, which are not expected to be relevant to the Company.
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.
17
<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: February 17, 1997 By:/s/ Donald Feldman
Donald Feldman,
Chief Executive and Financial Officer
18
<PAGE>
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</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> DEC-31-1996
<CASH> 547,490
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<RECEIVABLES> 1,194,696
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<COMMON> 511
<OTHER-SE> 4,703,926
<TOTAL-LIABILITY-AND-EQUITY> 6,425,005
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