UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the three months ended June 30, 1997 Commission File Number 0-28960
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 August 14, 1997 there were 5,122,500 shares of common stock
outstanding.
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DECOR GROUP, INC. AND SUBSIDIARY
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INDEX
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Page to Page
Part I: Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet as of June 30, 1997 [Unaudited]........ 1....... 2
Consolidated Statements of Operations for the three months ended
June 30, 1997 and 1996 [Unaudited].................................. 3.......
Consolidated Statements of Stockholders' Equity for the three months
ended June 30, 1997 [Unaudited].................................... 4.......
Consolidated Statements of Cash Flows for the three months ended
June 30, 1997 and 1996 [Unaudited]................................ 5....... 6
Notes to Consolidated Financial Statements [Unaudited]............ 7.......12
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................13.......16
Signature..............................................................17.......
. . . . . . . . . . . . . . . . . .
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Item 1:
DECOR GROUP, INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997.
[UNAUDITED]
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<S> <C>
Assets:
Current Assets:
Cash $ 48,805
Accounts Receivable [Net of Allowance of $206,417] 961,195
Inventories 945,017
Prepaid Expenses and Other Current Assets 152,519
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Total Current Assets 2,107,536
Property and Equipment [Net of Accumulated Depreciation of $411,801] 104,390
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Other Assets:
Investment - Related Party 993,800
Goodwill [Net of Accumulated Amortization of $87,288] 1,431,611
Other Intangible Assets [Net of Accumulated Amortization of $35,639] 564,361
Other Assets 22,488
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Total Other Assets 3,012,260
Total Assets $ 5,224,186
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</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated
Financial Statements.
1
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DECOR GROUP, INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997.
[UNAUDITED]
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<S> <C>
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 413,689
Accrued Costs of Acquisition 25,263
Accrued Interest - Related Party 12,609
Due to Stockholders 251,285
Current Portion of Long-Term Debt 87,211
-----------
Total Current Liabilities 790,057
Long-Term Debt 666,724
Total Liabilities 1,456,781
Commitments and Contingencies [7] --
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 2,030
Additional Paid-in Capital - Preferred Stock 2,423,970
Common Stock - $.0001 Par Value, Authorized 20,000,000 Shares,
5,122,500 Issued and Outstanding 512
Additional Paid-in Capital - Common Stock 4,034,911
Accumulated Deficit (1,225,401)
Deferred Compensation (862,417)
Unrealized Holding Loss on Investment (606,200)
Total Stockholders' Equity 3,767,405
Total Liabilities and Stockholders' Equity $ 5,224,186
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</TABLE>
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
2
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DECOR GROUP, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months ended
June 30,
1 9 9 7 1 9 9 6
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<S> <C> <C>
Revenues $1,448,694 $ --
Cost of Revenues 750,279 --
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Gross Profit 698,415 --
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Selling, General and Administrative Expenses:
Acquisition Fees and Expenses -- 52,829
Administrative Expenses 644,324 86,022
Selling Expense 231,575 --
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Total Selling, General and Administrative Expenses 875,899 138,851
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[Loss] from Operations (177,484) (138,851)
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Other Income [Expense]:
Net Miscellaneous Expense (71,709) --
Interest Expense - Related Party (5,162) --
Interest Expense (15,500) (107,150)
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Other [Expense] - Net (92,371) (107,150)
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[Loss] Before Provision for Income Taxes (269,855) (246,001)
Provision for Income Taxes -- --
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Net [Loss] $ (269,855) $ (246,001)
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[Loss] Per Share $ (.05) $ (.06)
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Number of Common Shares 5,122,500 3,937,500
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The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
</TABLE>
3
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<TABLE>
DECOR GROUP, INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
[UNAUDITED]
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Preferred Stock Common Stock Unrealized
Additional Additional Holding Total
Paid-in Paid-inAccumulated Deferred Loss onStockholders'
Shares Amount Capital Shares Amount Capital Deficit CompensationInvestment Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1997 20,304,934 2,030 $2,423,970 5,122,500 512 $4,034,911(955,546) $(991,167) $(787,400) $3,727,310
Unrealized Gain on Investment -- -- -- -- -- -- -- -- 181,200 181,200
Amortization of Deferred
Compensation -- -- -- -- -- -- -- 128,750 -- 128,750
Net [Loss] for the three months
ended June 30, 1997 -- -- -- -- -- -- (269,855) -- -- (269,855)
-------- --------- -------- ------- ------ ------- -------- -------- ------- --------
Balance - June 30, 1997 20,304,934 2,030 $2,423,970 5,122,500 512 $4,034,911$(1,225,401)$(862,417) $(606,200) $3,767,405
============ ====== ========== ========= ==== ========== ============ ======= ========== ========
</TABLE>
The Accompanying Notes are an
Integral Part of These Consolidated
Financial Statements.
4
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<TABLE>
DECOR GROUP, INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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Three months ended
June 30,
1 9 9 7 1 9 9 6
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<S> <C> <C>
Operating Activities:
Net Loss $ (269,855) $ (246,001)
Adjustment to Reconcile Net Loss to Net Cash
[Used for] Operating Activities:
Amortization of Deferred Compensation 128,750 --
Accrued Interest Receivable -- 250
Interest - Cost of Bridge Warrants -- 107,150
Amortization of Intangibles 30,180 --
Depreciation 11,753 --
Bad Debt Expense 14,099 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 142,281 --
Inventory 15,001 --
Other Assets (67,880) --
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (117,301) 108,000
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Net Cash - Operating Activities (112,972) (30,601)
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Investing Activities:
Cash Paid for Acquisition of Artisan House -- (15,000)
Collections on Note Receivable -- 50,000
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Net Cash - Investing Activities -- 35,000
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Financing Activities:
Proceeds from Stockholder Loans 22,500 35,500
Proceeds from Sale of Common Stock -- 8,000
Repayment of Notes Payable (30,231) --
Deferred Offering Costs -- (74,658)
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Net Cash - Financing Activities (7,731) (31,158)
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Net Increase in Cash (120,703) (26,759)
Cash - Beginning of Periods 169,508 47,000
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Cash - End of Periods $ 48,805 $ 20,241
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for the periods for:
Interest $ 15,500 $ --
Income Taxes $ -- $ --
The Accompanying Notes are an Integral Part of These
Consolidated Financial Statements.
5
</TABLE>
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DECOR GROUP, INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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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 period ended March 31, 1997, the Company amortized
$214,300 as interest expense.
On March 3, 1996, the Company issued to Interiors, Inc. 250,000 shares of
Class A Convertible Preferred Stock and an option to purchase 20,000,000 shares
of Class B Non-Convertible 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 and
a guarantee with respect to certain indebtedness.
In March 1996, the Company issued 3,937,500 shares of common stock to seven
parties for $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 and was collected on May 21, 1996.
On November 18, 1996, the Company's wholly owned subsidiary Artisan
Acquisition Corp., Inc. purchased substantially all of the assets and assumed
certain liabilities of Artisan House, Inc. for approximately $3,700,000, of
which $2,400,000 was paid in cash, $300,000 in shares of common stock and
$1,050,000 in notes. 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 Consolidated Financial
Statements.
6
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED 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 Artisan House, Inc. ["Artisan"]. The
acquisition was completed on November 18, 1996. Artisan is engaged in the
business of designing, manufacturing, marketing, selling and distributing metal
wall-mounted , tabletop and freestanding sculptures. Artisan manufactures its
products at one location in southern California and sells through sales
representatives and from its regional showrooms to furniture retailers and
department stores throughout the United States and internationally. The
transaction was recorded under the purchase method. The Company is a subsidiary
of Interiors, Inc. [See Notes 2 and 8].
[B] Basis of Reporting - The accompanying unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Item
310(b)of Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, such statements include all
adjustments which are considered necessary in order to make the interim
financial statements not misleading.
[C] Cash Equivalents - The Company's policy is to classify all highly liquid
investments with maturity of three months or less when purchased to be cash
equivalents. There were no cash equivalents at June 30, 1997.
[D] 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.
[E] 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 of property and equipment is provided utilizing
the straight-line method over the estimated useful lives of the respective
assets as follows:
Vehicles 2 Years
Machinery and Equipment 1 - 5 Years
Furniture and Fixtures 5 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.
[F] Marketable Securities - Statement of Financial Accounting Standards ["SFAS"]
No. 115, "Accounting for Certain Investments in Debt and Equity Securities",
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 and 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.
7
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[1] Summary of Significant Accounting Policies [Continued]
[G] Goodwill - Amounts paid in excess of the estimated value of net assets
acquired of Artisan House, Inc. were 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 10 years using the
straight-line method. Effective April 1, 1997 based upon operating management's
experienced understanding of the expected useful lives of the tangible and
intangible assets, the Company changed its period of amortization of goodwill to
20 years. The effect of this change will be to reduce future annual amortization
of goodwill by $75,000. 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.
[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 for June 30, 1996 was based on the 3,937,500 common shares
issued since the initial capitalization and, pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, 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, for June 30, 1997, the 5,122,500 shares outstanding from April
1, 1997. Convertible preferred stock options and warrants are not included
because the effect would be anti-dilutive.
[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 June 30, 1997, the Company did
not maintain cash in excess of 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 $206,417 and as a consequence,
believes that its accounts receivable credit risk exposure beyond this allowance
is limited. The Company does not require collateral on its accounts receivable.
[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.
8
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[1] Summary of Significant Accounting Policies [Continued]
[M] License Agreements - The Company currently manufactures a small segment of
its products pursuant to license agreements. Generally, all of the license
agreements are non-exclusive, permit sales in the United States and require the
Company to make periodic royalty payments based upon revenues from the sale of
licensed works.
[N] Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiary. All material intercompany
accounts and transactions are eliminated.
[2] Acquisition - Artisan
On November 18, 1996, the Company's wholly owned subsidiary Artisan Acquisition
Corp., Inc. purchased substantially all of the assets and assumed certain
liabilities of Artisan 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 150,000 shares, giving effect to stock
dividend, of Decor common stock, valued at $300,000. The Company recorded
additional accrued costs of the acquisition of approximately $125,263, which
represented the excess fair value over the prescribed contract amounts. This
liability has been adjusted by $100,000 at March 31, 1997 to $25,263 and could
be subject to further adjustment. The transaction was recorded under the
purchase method. Goodwill and other intangibles totaling approximately
$2,119,000 will be amortized between 5-20 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 are combined with those of the
Company as of November 18, 1996.
The following unaudited pro forma combined results of operations account 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.
Three months ended
June 30,
1 9 9 6
Total Revenues $1,386,976
Net Loss $ (300,765)
==========
Net Loss Per Common Share $ (.10)
==========
Weighted Average Number of Common Shares
Outstanding 3,162,500
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. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
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[3] Inventories
The components of inventory were as follows:
Raw Materials $ 375,864
Work-in Process 212,586
Finished Goods 356,567
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Totals $ 945,017
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[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.
[B] Management Agreements - On May 28, 1996, the Company entered into a two year
management agreement with Interiors, Inc. which specializes in the home
furnishings and decorative accessories industries. The agreement calls for a
management fee of $90,000 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 - Interest at 8% of approximately $3,850 has
been accrued on the outstanding balance due to Interiors of $207,785 for the
three months ended June 30, 1997.
[D] Stockholders' Loans Payable - The Company received $35,500 in June 1996 and
$8,000 in July 1996 in loan proceeds. The notes bear interest at 12% per annum
and have a maturity date in April 1998.
Interest expense for the three months ended June 30, 1997 was $1,305.
[5] 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 personal guaranty by the Company's Chairman of the Board, and a
prepayment fee of $25,000. In the event that the Company is unable to satisfy
such conditions, the Company will not receive the proceeds from such loan. Due
to the consummation of a new agreement in July 1997, the Company anticipates
canceling this commitment letter.
On July 1, 1997, Artisan obtained an accounts receivable based line of credit
for up to $600,000 with interest at prime plus 5.5% secured by all of Artisan's
assets and guaranteed by Decor and Interiors, Inc.
10
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
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[6] Investment in Interiors, Inc. - 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 20,000,000
shares of Series B Non-Convertible Voting Preferred Stock for $2,000 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. This option was exercised in September of 1996. On May 28, 1996, the
Company entered into a management agreement with Interiors, Inc. whereby
Interiors, Inc. will provide the Company certain marketing and management
services [See Note 4B]. 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. The Company has classified its investment as available for sale. As of June
30, 1996, the per share market value of Interiors, Inc.'s Common Stock and
Series A Convertible Preferred Stock was $4.25 and $7.25, respectively.
Accordingly, gross unrealized holding gains of $250,000 and $450,000 existed at
June 30, 1996 on the Common Stock and Series A Convertible Preferred Stock,
respectively. As of June 30, 1997, the per share market value of Interiors,
Inc.'s common stock and Series A Convertible Preferred Stock was $1.219 and
$3.7500, respectively. Therefore, the carrying value at June 30, 1997 was
$993,800. Accordingly, gross unrealized holding losses of $250,000 and $356,200
existed at June 30, 1997 on the Common Stock and Series A Convertible Preferred
Stock, respectively. As of June 30, 1997, Interiors, Inc. owned approximately
79% of the Company's total voting stock outstanding assuming no conversion of
the Series A and Series C Preferred Stock.
[7] Commitments and Contingencies
[A] Employment Agreement - Seller - Artisan's employment agreement with the
seller was terminated effective July 8, 1997. Financial payments of amounts due
under the contract are expected to be paid by September 1997.
[B] Consulting Agreement - On March 1, 1997, Artisan entered into a consulting
agreement to provide Artisan with such consulting services as requested in
connection with the stabilization, updating and transition of Artisan's
accounting systems. The Company has agreed to pay $11,500 per month for the term
of the Consulting Agreement. The initial term of the Consulting Agreement is
three [3] months with two, one month extensions. This agreement expired in July
1997.
[C] Termination Agreement - Under a termination agreement with a former
employee, the Company is required to pay severance in the amount of $3,889 per
month for 18 months beginning April 1997. In addition, the Company is required
to provide various other minimal benefits to the former employee. The Company
recorded a liability for the total compensation payments of $70,000 at March 31,
1997.
In June 1997, the Company ceased paying the severance pay required under this
termination agreement. The Company is currently negotiating a revised
termination agreement with the former employee.
[D] Acquisitions - In April 1997, the Company entered into a letter of intent to
acquire a decorative accessories manufacturer, based on the west coast.
Although, the Company has not entered into a definitive agreement with respect
to the acquisition of such manufacturer, the Company is continuing negotiations
regarding the acquisition.
11
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- ------------------------------------------------------------------------------
[8] Legal Proceedings
In March 1997, CIDCOA International, Inc. ["CIDCOA"] formerly know as Artisan
House, Inc. brought an arbitration proceeding against the Company, alleging that
it has failed to pay CIDCOA additional sums owed to it in connection with the
Company's purchase of all of the assets and assumption of substantially all of
the liabilities of Artisan. CIDCOA alleges that it is owed a purchase price
adjustment. The Company denied the allegations, and has brought counterclaims
against CIDCOA alleging breach of contract, breach of warranty,
misrepresentation and fraud by CIDCOA. In August 1997, CIDCOA filed a motion
seeking to enforce an alleged settlement agreement made by the parties. The
Company denies that any settlement was reached by the parties. CIDCOA's motion
is currently pending before JAMS/Endispute.
[9] Capital Stock
[A] 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.
[B] 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.
[10] New Authoritative Pronouncements
The FASB issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure" in February 1997. SFAS No.
128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS No. 130
is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements
in the initial year of its application. SFAS No. 131 is not expected to have
a material impact on the Company.
. . . . . . . . . . .
12
<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-mounted, tabletop and freestanding sculptures.
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 20,000,000
shares of Series B Non-Convertible Voting Preferred Stock for $2,000 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. This option was exercised in September of 1996. On May 28, 1996, the
Company entered into a management agreement with Interiors, Inc. whereby
Interiors, Inc. will provide the Company certain marketing and management
services [See Note 4B]. 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. The Company has classified its investment as available for sale. As of June
30, 1996, the per share market value of Interiors, Inc.'s Common Stock and
Series A Convertible Preferred Stock was $4.25 and $7.25, respectively.
Accordingly, gross unrealized holding gains of $250,000 and $450,000 existed at
June 30, 1996 on the Common Stock and Series A Convertible Preferred Stock,
respectively. As of June 30, 1997, the per share market value of Interiors,
Inc.'s common stock and Series A Convertible Preferred Stock was $1.219 and
$3.7500, respectively. Therefore, the carrying value at June 30, 1997 was
$993,800. Accordingly, gross unrealized holding losses of $250,000 and $356,200
existed at June 30, 1997 on the Common Stock and Series A Convertible Preferred
Stock, respectively. As of June 30, 1997, Interiors, Inc. owned approximately
79% 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.
In April 1997, the Company entered into a letter of intent to acquire a
decorative accessories manufacturer, based on the west coast. Although, the
Company has not entered into a definitive agreement with respect to the
acquisition of such manufacturer, the Company is continuing negotiations
regarding the acquisition.
RESULTS OF OPERATIONS
The Company had revenues and cost of revenues for the three months ended June
30, 1997 of $1,448,694 and $750,279, respectively. This represents Artisan's
sales and cost of sales transactions for three months ended June 30, 1997.
The Company had selling and administrative expenses for the three months ended
June 30, 1997 of $875,899 of which $599,721 represented Artisan's expenses for
the three months ended June 30, 1997.
For the three months ended June 30, 1997, Artisan had earnings before interest,
taxes, depreciation and amortization of $63,979.
13
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS [CONTINUED]
The Company incurred a net loss of $269,855 for the three months ended June 30,
1997. This includes net income generated by Artisan House of approximately
$11,364 for the three months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, Decor had working capital of $1,317,479. For the three months
ended June 30, 1997, the Company used $112,972 for operating activities and
$7,731 for financing activities. The cash balance at June 30, 1997 was $48,805.
Management believes that in the next twelve months cash requirements will be met
by cash provided from operations and the asset based line of credit. Management
believes that its long-term cash needs will be provided by operations and
additional debt and/or equity financing.
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 $90,000 or 1.5% of excess cash
flows, 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.
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.
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.
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 was paid 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 all of Artisan's assets. The
non-interest bearing portion of the note was discounted at 8% which gave 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.
14
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES [CONTINUED]
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 Artisan's sales
and 5% of the Artisan'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. The agreement was terminated effective
July 8, 1997 and the final payment is expected to be paid by September 1997.
On December 31, 1996, the Artisan entered into a three year employment agreement
with the Artisan's Chief Operating Officer and President for (i) an annual
salary of $100,000; (ii) a cash bonus equal to ten percent [10%] of the annual
salary, based upon the Artisan's net profit before taxes ["NPBT"]; and (iii) a
cash bonus equal to five percent [5%] of the increase in NPBT over the previous
fiscal year, not to exceed 40% of the base salary. The agreement also provides
options to purchase 30,000 shares of the Company's Common Stock at an exercise
price of equal to $.0001 per share exercisable for a period of six years for
each of the next three years. For each of the three years ended March 31, 1998,
1999 and 2000 additional options to purchase 30,000 shares of the Company's
Common Stock exercisable for a period of one year at an exercise price equal to
the average closing price of the Company's stock for the 20 days ending two days
prior to date of grant. Continued employment by Artisan is required and Artisan
must meet or exceed 115% of the prior year's NPBT. In March 1997, the officer
was elected to the offices of President and Chief Financial Officer of the
Company.
In March 1997, CIDCOA International, Inc. ["CIDCOA"] formerly know as Artisan
House, Inc. brought an arbitration proceeding against the Company, alleging that
it has failed to pay CIDCOA additional sums owed to it in connection with the
Company's purchase of all of the assets and assumption of substantially all of
the liabilities of Artisan. CIDCOA alleges that it is owed a purchase price
adjustment. The Company denied the allegations, and has brought counterclaims
against CIDCOA alleging breach of contract, breach of warranty,
misrepresentation and fraud by CIDCOA. In August 1997, CIDCOA filed a motion
seeking to enforce an alleged settlement agreement made by the parties. The
Company denies that any settlement was reached by the parties. CIDCOA's motion
is currently pending before JAMS/Endispute.
Under a termination agreement with a former employee, the Company is required to
pay severance in the amount of $3,889 per month for 18 months beginning April
1997. In addition, the Company is required to provide various other minimal
benefits to the former employee. The Company recorded a liability for the total
compensation payments of $70,000 at March 31, 1997.
In June 1997, the Company ceased paying the severance pay required under a
termination agreement to a former employee of the Company. The Company is
currently negotiating a revised termination agreement with the former employee.
On July 1, 1997, Artisan obtained a line of credit for up to $600,000 with
interest at prime plus 5.5% secured by all of Artisan's assets and guaranteed by
Decor and Interiors, Inc.
15
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
NEW AUTHORITATIVE PRONOUNCEMENTS
The FASB issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure" in February 1997. SFAS No.
128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS No. 130
is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of
selected information about operating segments in interim financial reports
issued to shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements
in the initial year of its application. SFAS No. 131 is not expected to have
a material impact on 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.
16
<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: August 14, 1997 By:/s/ Dennis D'Amore
------------------
Dennis D'Amore
Chief Executive and Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations filed
as part of the quarterly report on Form 10-Q and is qualified in its entirety
by reference to such quarterly report on Form 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> mar-31-1997
<PERIOD-END> jun-30-1997
<CASH> 48,805
<SECURITIES> 0
<RECEIVABLES> 1,167,612
<ALLOWANCES> 206,417
<INVENTORY> 945,017
<CURRENT-ASSETS> 2,107,536
<PP&E> 516,191
<DEPRECIATION> 411,801
<TOTAL-ASSETS> 5,224,186
<CURRENT-LIABILITIES> 790,057
<BONDS> 0
0
2030
<COMMON> 512
<OTHER-SE> 3,764,863
<TOTAL-LIABILITY-AND-EQUITY> 5,224,186
<SALES> 1,448,694
<TOTAL-REVENUES> 1,448,694
<CGS> 750,279
<TOTAL-COSTS> 875,899
<OTHER-EXPENSES> 71,709
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,662
<INCOME-PRETAX> (269,855)
<INCOME-TAX> 0
<INCOME-CONTINUING> (269,855)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (269,855)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
