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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
|X| Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 1997.
Commission File No. 0-28960
DECOR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911958
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
320 Washington Street
Mt. Vernon, New York 10553
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (914) 665-5400
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
Redeemable Class A Common Stock Purchase Warrants
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of the Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. / /
Issuer's revenues for its most recent fiscal year were $2,003,000.
The aggregate market value of the voting stock held by non- affiliates
of the Registrant, computed by reference to the closing price of such stock as
of June 23, 1997, was approximately $25,068,593.
Number of shares outstanding of the issuers Common Stock as of June 23, 1997,
was 5,122,500 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
None.
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PART I
Item 1. BUSINESS.
Decor Group, Inc., a Delaware corporation (the "Company" or "Decor"),
was incorporated in March 1996 and formed Artisan Acquisition Corporation as a
Delaware corporation wholly owned by the Company ("AAC"). AAC was incorporated
for the purpose of entering into that certain Asset Purchase Agreement dated
March 1996 with Artisan House, Inc. ("Artisan House") pursuant to which AAC
agreed to purchase substantially all of the operating assets, and to assume
certain liabilities, of Artisan House. In November 1996 immediately following
the closing of the initial public offering of the Company's securities, AAC and
Artisan House closed on the transactions contemplated by the Asset Purchase
Agreement (the "Artisan House Acquisition"). In January 1997, AAC changed its
name to Artisan House, Inc. ("AHI").
As a result of the Artisan House Acquisition, the Company through AHI
is engaged in designing, manufacturing and marketing of metal wall-mounted,
tabletop and freestanding sculptures. The primary goal of AHI is to supply a
broad spectrum of design driven sculpture and decorative accessories at moderate
prices. AHI markets its products through a network of independent commissioned
sales representatives, as well as through strategically located showrooms
servicing the home furnishing and decorative accessory industries. AHI maintains
showrooms located in High Point, North Carolina, San Francisco, California,
Atlanta, Georgia and Dallas, Texas.
Typical customers of AHI include fine furniture stores, interior
decorators and major department stores such as Sears and JC Penny, large
furniture chains such as Levitz and Wickes, and catalogue houses such as
Parke-Bell. For the fiscal year ended March 31, 1997, sales to JC Penny, Sears,
Parke-Bell, Levitz and Wickes represented 6.2%, 6.0%, 4.6%, 4.4% and 3.4%,
respectively of AHI's total sales.
The Company believes that the home furnishing and decorative accessory
supply industry will consolidate as major retailers attempt to increase their
"single-sourcing" in order to reduce distribution and related expenses. The
Company's objective is to capitalize on the fragmented nature of the supply side
of the home decorative accessory industry and the consolidation of such industry
by acquiring manufacturers and distributors of art-related decorative
accessories. Through such acquisitions, the Company intends to increase the
number and nature of products manufactured by the Company or its subsidiaries.
On November 18, 1996, the Company completed an initial public offering
(the "IPO") pursuant to which the Company sold 345,000 shares of Common Stock to
the public at $10 per share. The proceeds from the IPO were used primarily to
close on the Artisan House Acquisition and to repay certain indebtedness of the
Company. The Company's shares of Common Stock trade on the NASD OTC Bulletin
Board and on June 23, 1997 the closing bid price for the shares
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was $ 5.1875 per share.
In December 1996, the Company effected a 3-for-1 stock split by way of
a stock dividend. Each outstanding share of Common Stock as of December 16, 1996
was entitled to receive two (2) shares of Common Stock. All per share
information contained in this Annual Report gives effect to the stock dividend.
In April 1997, the Company entered into a letter of intent to acquire a
major decorative accessories manufacturer, based on the West Coast, with annual
sales in excess of $10,000,000. The Company is currently continuing negotiations
regarding the acquisition by the Company of such company.
On May 1, 1997, the Company filed an application with The Boston Stock
Exchange for the initial listing of the Company's Common Stock and Class A
Common Stock Purchase Warrants. On May 21, 1997, the Company was informed that
the Boston Stock Exchange rejected the Company's listing application.
On May 6, 1997 the Company filed an application with The Nasdaq Stock
Market, Inc. for initial listing of the Company's Common Stock and Class A
Common Stock Purchase Warrants. The Company's application is currently pending.
The Company's executive offices are located at 320 Washington Street,
Mt. Vernon, New York 10553, and the offices of AHI are located at 1755 Glendale
Boulevard, Los Angeles, California 90026.
Manufacturing
AHI manufactures substantially all of its sculptures and decorative
pieces at its facility in Los Angeles, California. Virtually all of the products
are made of assorted metals, such as brass, bronze, steel and aluminum which are
then formed and hand finished. Manufacturing operations include customized
proprietary metal fabrication equipment, using tools, jigs and dies especially
created for AHI. Production also includes finishing, which involves hand
painting and toning, and a finishing process which uses proprietary techniques
which AHI believes substantially improves the appearance of the product.
AHI maintains an inventory of various metal such as brass, bronze and
stainless steel and other materials for use in its manufacturing processes.
AHI's tool and die inventory allows for the manufacturing of a broad range of
designs. These tools can be used to produce hundreds of styles of decorative
wall sculptures.
No single outside manufacturer supplies 5% or more of AHI's raw
materials, and AHI's management is not aware at this time of any product or
manufacturer which AHI cannot replace
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with a comparable product from an alternative manufacturer.
Products
AHI's products include metal wall-mounted, tabletop and freestanding
sculpture. AHI's product styles range from contemporary to neoclassical, from
Americana to transitional. AHI also manufactures products based on popular
themes such as sports, music, and nostalgia. In addition, AHI has several
licensing programs pursuant to which AHI produces sculptures with designs
derived from Norman Rockwell images, the popular 1940's movie entitled,
"Casablanca", RCA's Little Nipper, and Warner Bros. Looney Tunes characters. In
total, AHI produces hundreds of different styles within its product line.
License Agreements
AHI currently manufacturers products pursuant to license agreements for
(i) the cartoon character, "Betty Boop", (ii) the movie classic, "Casablanca",
(iii) the "Nipper Dog" (the RCA dog), and (iv) up to ten (10) Norman Rockwell
illustrations. The "Betty Boop", "Nipper Dog" and Norman Rockwell licenses
terminate on December 31, 1997, April 30, 1999, and September 30, 1997,
respectively. The Company is currently negotiating a renewal of its existing
license agreement for "Casablanca".
On September 24, 1996, Artisan entered into a license agreement with
Warner Bros., a division of Time Warner Entertainment Company, L.P., pursuant to
which Artisan was granted the non-exclusive right to produce a number of Warner
Bros. "Looney Tunes" cartoon characters, including, but not limited to, Bugs
Bunny, Sylvester, Tweety, Porky Pig, Road Runner, Daffy Duck, Tasmanian Devil
and Yosemite Sam. The license terminates on December 31, 1998.
On December 3, 1996, AHI entered into a license agreement with Warner
Bros., a division of Time Warner Entertainment Company, L.P., pursuant to which
AHI was granted the non-exclusive right to produce a number of Warner Bros.
"Space Jam" cartoon characters including Nerdlucks, Monstars, Swackhammer and
Lola Bunny, as well as the following "Looney Tunes" characters: Bugs Bunny,
Daffy Duck, Sylvester, Tweety, Road Runner, Wile E. Coyote, Tasmanian Devil,
Elmer Fudd, Porky Pig, Yosemite Sam, Pepe Le Pew and Marvin the Martian. The
license terminates on December 31, 1997.
Generally, all of the license agreements are non-exclusive, permit
sales in the United States and require AHI to make periodic royalty payments
based upon revenues from the sale of licensed works.
Marketing
AHI markets its products through a network of independent commissioned
sales
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representatives. Domestically, AHI has, as of June 1, 1997, twenty one (21)
commissioned sales representatives. Internationally, AHI has distributors in
Taiwan, Australia, the United Kingdom, France, Belgium, and Holland. In
addition, AHI has non-exclusive representation in the Middle East, Japan and
parts of Europe. AHI has permanent showrooms located in High Point, NC and San
Francisco, CA, Atlanta, GA and Dallas, TX. These showrooms are strategically
located in an effort to efficiently service the home furnishing and decorative
accessory industries.
Suppliers
AHI purchases metal and other materials from a wide variety of sources,
and has at least two, and often more, suppliers for each item used in its
manufacturing process, and is not dependent upon any one supplier. AHI currently
purchases from a vendor base of more than 150 suppliers. While there are many
suppliers of most materials, AHI has chosen to limit the majority of its
purchases to the one or two vendors with whom it has developed long-term
relationships. Generally AHI does not need to enter into contracts with its
suppliers as most merchandise is readily available from multiple sources.
The suppliers for those decorative accessory products which are not
manufactured by AHI include items such as marble, glass, mirror, and wood. AHI
does not currently purchase 5% or more of any of these products from any one
outside supplier. Products purchased from suppliers are produced exclusively for
AHI and therefore are not commonly available.
Competition
The sculpture and decorative accessory industry in the United States is
highly fragmented and consists primarily of small, local manufacturers and
assemblers. Only a few companies are basic manufacturers of metal wall hangings
and sculptures. However, there can be no assurance that AHI's position in this
industry will continue in this manner.
Management believes that the sale of decorative accessories in the
wholesale market is also highly fragmented, with thousands of small, specialized
manufacturers and distributors and management is not aware of a manufacturer of
upscale decorative accessories similar to those distributed by the Company.
AHI believes that its competitive advantage lies in its ownership of a
substantial number of models, tools, jigs and dies and its continuing ability to
manufacture quality products. Management also believes that AHI is further
protected by what AHI considers to be its excellent reputation with its customer
base and management's estimation that the cost to build tools, jigs, dies and
molds, make the entry of meaningful competition extremely difficult. Management
also believes that it would be difficult to establish a trained work force of
skilled crafts people. However, there can be no assurance that such assets will
continue to afford AHI any competitive advantage.
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Trademark Protection
The trademarks "Artisan House", "C. Jere", "Sauteur", and "Glendale
Ironworks" have been registered with the United States Patent and Trademark
Office ("PTO"). AHI presently makes all appropriate filings and registrations
and takes all other actions necessary, to protect all of its intellectual
property rights. There can be no assurance, however, that AHI will be able to
effectively protect such property rights. The failure by AHI to protect such
rights from unlawful and improper appropriation may have a material adverse
effect on AHI. Although to date no claims have been brought against AHI alleging
that it infringes on the intellectual property rights of others, there can be no
assurance that such claims will not be brought against AHI in the future, or
that if made, such claims will not be successful. In addition to any potential
monetary liability for damage, AHI could be required to obtain a license in
order to continue to use the trademarks in question or could be enjoined from
using such trademarks if such license were not made available on acceptable
terms. If AHI becomes involved in such litigation, it may divert significant
Company resources, which could have a material adverse effect on AHI and its
results or operations, and, if such a claim were successful, AHI's business
could be materially adversely affected.
Copyright Protection
The Company has been granted and currently maintains over 270
copyrights on written and visual product designs for metal wall hangings and
free-standing sculptures, from the United States Copyright Office.
Research and Development
AHI continually seeks to develop additional product designs and product
concepts and their related tooling, through product design proposals submitted
by independent commissioned artists. So long as AHI generates sufficient cash
flow, AHI expects to continue to increase its expenditures for product
development as it expands its in-house manufacturing to expand its finishing and
fabrication capabilities. However, there can be no assurance that such product
development will yield profitable growth.
Government Regulation
AHI's operations are subject to numerous Federal, state and local laws
and regulations relating to the environment and health and safety and other
regulatory matters. Certain materials used in the manufacturing of the AHI's
products such as paints, solvents and other water-based related finishes may be
classified by Federal and certain state and local governments as "hazardous
materials." Control of those substances is regulated by the Environmental
Protection Agency ("EPA") and certain state and local environmental protection
agencies which require reports and inspect facilities to monitor compliance. In
addition, under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA"), any generator of hazardous waste sent
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to a hazardous waste disposal site is potentially responsible for the clean up
and remediation costs required for such site in the event that the site is not
properly closed by the owner or operator, irrespective of the amount of waste
sent to the site. AHI's manufacturing facilities have been and will continue to
be inspected by the Occupational Safety and Health Administration and by certain
state and local inspection agencies and departments. AHI has obtained all
permits and anticipates that its facilities and operations will be in
substantial compliance with all material applicable laws and regulations.
Nevertheless, no assurance can be given that AHI will be able to obtain such
permits in the future or that future events, such as changes in or modified
interpretations of existing laws or regulations or enforcement policies, may
give rise to additional compliance costs that could have a material adverse
effect on the Company.
Employees
As of June 15, 1997, the Company had a total of 78 full-time employees,
17 of whom are engaged in performing administrative functions, and 61 of whom
are engaged in manufacturing and shipping. The Company and its employees are not
parties to any collective bargaining agreements. The Company believes its
relationship with all of its personnel is good.
Item 2. PROPERTIES.
The Company has its principal offices at 320 Washington Street, Mt.
Vernon, New York, where the Company has sub-leased approximately 3,500 square
feet of administrative offices from Interiors, Inc., a stockholder of the
Company. AHI's principal offices, manufacturing and warehousing facilities and
factory showroom are located at 1755 Glendale Boulevard, Los Angeles, California
(the "Los Angeles Facility"). On November 18, 1996, AHI entered into a five (5)
year lease with Henry Goldman, President and Chief Executive Officer of AHI, for
the Los Angeles facility. The lease is for approximately 33,000 square feet and
requires a monthly rent payment of $14,000. AHI has determined that there is
substantial manufacturing and warehousing space available in the vicinity if AHI
were it required to expand or relocate some or all of its current facilities.
AHI also operates four (4) leased showrooms, in San Francisco,
California, High Point, North Carolina, Dallas, Texas and Atlanta, Georgia.
Item 3. LEGAL PROCEEDINGS.
In March 1997, CIDCOA International, Inc. ("CIDCOA") f/k/a Artisan
House, Inc., brought an arbitration proceeding against AHI before JAMS/Endispute
in Los Angeles, California. CIDCOA alleges that AHI has failed to pay CIDCOA
additional sums owed to it in connection with the AHI's purchase of all of the
assets and assumption of substantially all of the liabilities of Artisan House,
Inc., pursuant to a purchase price adjustment contemplated in that certain Asset
Purchase Agreement entered into between the Company, AHI, Henry Goldman and
Artisan House, Inc. CIDCOA alleges
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that it is owed a purchase price adjustment of $458,882 and that AHI assume a
liability of $351,000. AHI denied the allegations, and brought counterclaims
against CIDCOA alleging breach of contract, breach of warranty,
misrepresentation and fraud by CIDCOA, and has asserted a counterclaim in the
amount $142,672. AHI intends to vigorously defend the claims brought by CIDCOA
against it.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the holders of the Company's
Common Stock during the last quarter of its fiscal year ended March 31, 1997.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's shares of Common Stock commenced trading on the NASD OTC
Bulletin Board on the effectiveness of the Company's initial public offering on
November 12, 1996, under the symbol "DECG,"
The following table indicates the high and low bid prices for the
Company's Common Stock for the period from November 12, 1996 to March 31, 1997
based upon information supplied by the Nasdaq system. Prices represent
quotations between dealers without adjustments for retail markups, markdowns or
commissions, and may not represent actual transactions. The trading volume of
the Company's securities fluctuates and may be limited during certain periods.
Common Stock*
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High Low
---- ---
November 12, 1996 through $18.00 $5.375
December 31, 1996
First Quarter, 1997 $6.5625 $4.688
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* Prices for the period after December 16, 1996 reflect the Company's
3- for- 1 stock split.
On June 23, 1997, the final quoted price as reported by The NASD OTC
Bulletin Board was $5.1875 for the Common Stock. As of June 23, 1997, there were
5,122,500 shares of Common Stock outstanding, held of record by approximately 47
record holders and approximately 1,400 beneficial owners.
In December 1996, the Company effected a 3-for-1 stock split by way of
a stock dividend. Each outstanding share of Common Stock as of December 16, 1996
was entitled to receive two (2) shares of Common Stock.
Item 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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OVERVIEW
Decor Group, Inc. [the "Company" or "Decor"] was formed in March of 1996. The
primary activities of Decor prior to the acquisition of Artisan House, Inc.
["Artisan"] 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 5B]. 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. The Company has classified its
investment as available for sale. As of March 31, 1996, the per share market
value of Interiors, Inc.'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 March 31, 1997, the per share
market value of Interiors, Inc.'s common stock and Series A Convertible
Preferred Stock was $1.06 and $3.00, respectively. Therefore, the carrying value
at March 31, 1997 was $812,600. Accordingly, gross unrealized holding losses of
$387,400 and $400,000 existed at March 31, 1997 on the common stock and Series A
Convertible Preferred Stock, respectively. As of March 31, 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. The Company is
currently continuing negotiations regarding the acquisition by the Company.
RESULTS OF OPERATIONS
Decor had revenues and cost of revenues for the period April 1, 1996 through
March 31, 1997 of $2,003,084 and $990,514, respectively. This represents
Artisan's sales and cost of sales transactions
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for the period November 19, 1996 through March 31, 1997.
Decor had acquisition fees, selling and administrative expenses for the period
April 1, 1996 through March 31, 1997 of $1,625,324 of which $945,305
represented Artisan's expenses for the period November 19, 1996 through March
31, 1997.
The Company incurred a net loss of $855,796 for the year ended March 31, 1997.
This includes net income generated by Artisan House of approximately $55,000 for
the period November 19, 1996 through March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, Decor had working capital of $1,422,042. For the year ended
March 31, 1997, the Company used $410,159 for operating activities. For the year
ended March 31, 1997, investing activities utilized cash of $2,204,589 primarily
comprising $2,250,000 utilized for the acquisition of Artisan House, Inc. For
year ended March 31, 1997, financing activities generated $2,737,256 primarily
from the sale of common stock in connection with the initial public offering
with net proceeds of $2,236,123. The cash balance at March 31, 1997 was
$169,508.
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.
In March 1996, the Company issued to Interiors 250,000 shares of Class A
Non-Voting Convertible Preferred Stock and an option to purchase 20,000,000
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 March 31, 1997, the per
share market value of Interior's common stock and Series A Convertible Preferred
Stock was $1.06 and $3.00, respectively. Therefore, the carrying value at March
31, 1997 was $812,600. Accordingly, gross unrealized holding losses of $387,400
and $400,000 existed at March 31, 1997 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
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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
of $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. Interiors advanced on
December 15, 1996 an additional $60,000 and on February 25, 1997 $184,000 to the
Company. The Company paid $140,000 in January and $43,000 in February of 1997 to
Interiors.
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.
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
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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 December 31, 1996, the Artisan entered into a three year employment agreement
with the Artisan's Chief Operating Officer and Treasurer 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.
NEW AUTHORITATIVE PRONOUNCEMENTS
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["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 SFAS No. 125, which are not expected to be relevant to the
Company.
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
13
<PAGE>
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.
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.
Item 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Financial statements following Item 13 of this Annual Report on
form 10-KSB.
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
14
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
Directors and Executive Officers
The names and ages of the directors and executive officers of the Company are
set forth below:
Name Age Position
- ---- --- --------
Dennis D'Amore 47 President and Chief Financial Officer of the
Company, and Chairman of the Board, Chief
Operating Officer, and Treasurer of AHI.
Max Munn 51 Chairman of the Board and Secretary
Donald Graves 52 Vice President of Sales and Marketing of AHI.
Matthew L. Harriton 32 Director
Michael Lulkin 41 Director
Henry Goldman 60 President and Chief Executive Officer of AHI.
Donald Feldman(1) 58 President and Chief Financial Officer of the
Company.
- ------------
(1) Mr. Feldman's employment as President and Chief Financial Officer of the
Company was terminated in March, 1997.
Dennis D'Amore, has been President and Chief Financial Officer of the
Company since March 1997 and Chairman of the Board, Chief Operating Officer, and
Treasurer of AHI since January 6, 1997. From 1991 through 1996, Mr. D'Amore was
a consultant to various private and public companies. From 1989 to 1991, Mr.
D'Amore served as Vice President of Sales and Marketing for Lasco Bathware, a
division of Tomkins Industries, Inc. From 1988 to 1989, Mr. D'Amore served as
President of Colford-D'Amore, Inc., a management consulting firm. From 1981 to
1988, Mr. D'Amore served as Executive Vice President and General Manager of
Water Jet Corporation. Mr. D'Amore holds a Bachelor of Engineering-Mechanical
Degree from New York University and subsequently received a Masters of Business
Administration in Finance from Fairleigh Dickinson University.
Max Munn, has been the Chairman of the Board of Directors since the
Company's inception and was the President of the Company from inception until
May 9, 1996. Mr. Munn
15
<PAGE>
became Secretary of the Company on March 21, 1997. Mr. Munn is currently
President, Chief Executive, Financial and Accounting Officer, Treasurer and a
Director of Interiors, Inc., a majority stockholder of the Company. Mr. Munn has
also been the Executive Vice President-Operations and Secretary of Interiors,
Inc., a principal stockholder of, and consultant to Interiors since February
1994 and a Director thereof since March 1994. He served as Vice President of
Interiors from May 1993 until September, 1995. From November 1990 to May 11,
1993, Mr. Munn served as a consultant to Interiors, Inc., as well as a
consultant directly and indirectly to Imperial Enterprises, Inc., a catalog
company in Japan, and the IEI Corporation, a direct marketer, in Princeton, NJ.
From 1981 to February 1990 he was Chairman, President and Chief Executive
Officer and from February 1990 to June 1990 he served as a consultant to
Collector's Guild International, Inc.. In June 1990 Collector's Guild filed a
petition for relief under the U.S. Bankruptcy Code and was subsequently
liquidated. Mr Munn is subject to a Consent Order entered by the Federal Trade
Commission in September 1991. See "Consent Order" below. Mr. Munn holds a
Bachelor of Architecture from Massachusetts Institute of Technology and
subsequently did graduate level study in Art History at Columbia University.
Donald Graves, has served as Vice-President of Sales and Marketing of
AHI since March 1997. From 1995 through 1996, Mr. Graves was Vice President of
Sales and Marketing for Knape & Vogt a $170 million manufacturer of hardware
products. From 1991 to 1995, Mr. Graves served as Vice President of Sales and
Marketing for Lasco Bathware, a division of Tomkins Industries, Inc. From 1990
to 1991, Mr. Graves served as National Sales Manager for Lasco Bathware. From
1975 to 1990, Mr. Graves served as Vice President of Sales and Marketing for the
Filon Division of Standard Oil. Mr. Graves holds a Bachelor Arts Degree from
Dartmouth College and subsequently received a Masters of Business Administration
from the Columbia University School of Business.
Matthew L. Harriton, has served on the Company's Board of Directors
since March 1996 and as interim President of the Company from May 9, 1996 to May
31, 1996. Mr. Harriton became a consultant to the Company on January 1, 1997.
Mr. Harriton has been a Director and Secretary of Superior Supplements, Inc.
since March 1996. Superior Supplements, Inc. is a public company which
specializes in developing, manufacturing, and distributing dietary supplements.
Mr. Harriton has been the President and Chief Financial Officer of Embryo
Development Corporation since January 1996. Embryo Development Corporation is a
public company which specializes in developing and distributing medical devices.
Mr. Harriton has been President and Chief Financial Officer of Hydrogel Design
Systems, Inc., a private company and a subsidiary of Embryo Development
Corporation since October 1996. Hydrogel Design Systems, Inc. specializes in
developing and distributing medical devices. Prior to joining Embryo
Development Corporation and Superior Supplements, Inc., Mr. Harriton's
professional experience included positions at CIBC Wood Gundy Securities
Corporation as an associate (from June 1994 to December 1995), Coopers & Lybrand
as a senior associate (from December 1990 to May 1994), and The First Boston
Corporation as a senior accountant (from June 1986 to May 1988). Mr. Harriton
has also served as a director of Perry's Majestic Beer, Inc. since January 1996,
a company involved in the microbrewery industry. He is a graduate of Lehigh
University and
16
<PAGE>
received his M.B.A. from Duke University's Fuqua School of Business.
Michael Lulkin, has served on the Company's Board of Directors of the
Company since March 1996, and as Secretary of the Company from March 1996 to
March 1997. Since May 1995, Mr. Lulkin has served as the general counsel for PDK
Labs, Inc., a manufacture of over-the-counter pharmaceuticals which trades on
The Nasdaq SmallCap Market. Prior to joining PDK Labs, Mr. Lulkin was engaged in
the private practice of law as a sole practitioner for over 13 years. Mr. Lulkin
also serves as a director and Chairman of the Board of Directors of Embryo
Development Corporation. Embryo Development corporation is a public company
which trades on The Nasdaq SmallCap Market and which specializes in developing
and distributing medical devices. He graduated from State University of New York
at Buffalo and received his J.D. from Emory University School of Law.
Henry Goldman serves on a part-time basis as the President and Chief
Executive Officer of Artisan House, Inc., a wholly owned subsidiary of the
Company. Mr. Goldman was the President and Chief Executive Officer of Artisan
House since 1982.
Donald Feldman served as President and Chief Financial Officer of the
Company from May 31, 1996 to March 10, 1997. From June 1, 1995 until November
1996 he served as Vice President of Sales and Marketing for Interiors, Inc., and
was a consultant for Interiors from December 1995. Mr. Feldman also served as a
director of Interiors. From April 1990 to May 1995, he served as Vice President
of Sales and Marketing of Toyo Trading Co. in Los Angeles, CA, a major importer
and marketer of decorative accessories. Previously, Mr. Feldman also served as
Corporate Merchandise Manager for Decorative Accessories for Sears Roebuck & Co.
Consent Order
In September 1991, Max Munn, the Company's Chairman of the Board and
Secretary, without admitting or denying the allegations, agreed with the FTC to
the entry of a Consent Order for Permanent Injunction for Defendant Max Munn
(previously defined as the "Consent Order") in an action brought in the U.S.
District Court for the Southern District of New York (90 CIV. 2554 (LMM))
against Collectors' Guild Ltd, Inc., Collectors' Guild, Mr. Munn and J. Robert
Leshufy which action arose out of the sale of certain lithographs of original
works of art. The Consent Order arose out of a complaint alleging that
Collectors Guild, and its officer, Mr. Munn, had made advertising
representations implying that the artist had played a substantial role in the
creation and production of the lithographs. Collectors Guild and Mr. Munn denied
the allegations. The case was settled before trial or discovery, solely with
entry of the above Consent Order. The Consent Order permanently enjoins Mr. Munn
from making certain false representations in connection with the promotion, sale
or offering for sale of any art works, from removing certain mandated
disclosures on certain art, and, for a period of five years, from destroying,
mutilating, altering, or disposing of any books, records, tapes, checks, and
other business records enumerated in the Consent Order in his possession or the
possession of any business entities directly or indirectly under Mr. Munn's
control for a period of three years after creation or receipt of such documents.
Mr. Munn is also required for a period of five years to notify the FTC of any
change in his residence or employment within 30 days of any change and
17
<PAGE>
must permit FTC officials access to his office upon five days notice for
inspection purposes. The Consent Order extends to Mr. Munn, his successors,
assigns, agents, servants and employees, and all persons or entities in active
concert or participation with him who receive actual notice of the Consent Order
and, in part, to any business entities directly or indirectly under his control
or in which he owns a controlling interest, directly or indirectly.
There are no family relationships between the officers and directors of
the Company.
Compliance with Section 16(a) of
The Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Except as provided below, to the Company's knowledge, based solely on
its review of the copies of such reports furnished to the Company during the
year ended March 31, 1997, all Section 16(a) filing requirements applicable to
its officers, directors and greater than ten percent beneficial owners were
satisfied.
18
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid to the executive
officers of the Company and its' subsidiary for the Company's fiscal year ending
March 31, 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Awards Long-Term Compensation
-------------------------- -----------------------
Other Annual Restricted Stock Option
Name and Principal Position Year Salary Bonus Compensation Stock ($) Grants
- --------------------------- ---- ------ ----- ------------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Donald Feldman (1)................. 1997 $33,893
President and Chief Financial
Officer, Decor Group, Inc.
Henry Goldman...................... 1997 $38,481
President and Chief Executive
Officer, Artisan House, Inc.
Dennis D'Amore...................... 1997 $23,244 30,000
President and Chief Financial
Officer, Decor Group, Inc., and
Chairman of the Board,
Chief Operating Officer, and
Treasurer of AHI.
Donald Graves....................... 1997 $ 6,923
Vice President of Sales and
Marketing, Artisan House, Inc.
</TABLE>
- --------------------------
(1) Mr. Feldman left the employ as President and Chief Financial Officer of
the Company in March, 1997.
The following table sets forth certain information with respect to
options granted during the last fiscal year to the Company's Chief Financial
Officer and the other executive officers named in the above Summary Compensation
Table.
Option/SAR Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Number of Securities
Underlying Percent of Total Exercise or
Options/SARS Options/SARS Granted to Base Price
Name Granted (#) Employees in Fiscal Year ($/Sh) Expiration Date
- ---- ----------- ------------------------ -------- ---------------
<S> <C> <C> <C> <C>
Dennis D'Amore 30,000 100% $.0001 January 1, 2003
</TABLE>
19
<PAGE>
The following table sets forth certain information with respect to
options exercised during the last fiscal year by the Company's Chief Financial
Officer and the executive officers named in the Summary Compensation Table, and
with respect to unexercised options held by such persons at the end of the last
fiscal year:
Aggregate Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End
Option/SAR Values
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised in the
Acquired on Value Realized Underlying Unexercised Money Options/SARS at
Name Exercise (#) $ Options/SARS at FY-End (#) FY-End ($) (1)
- ---- ------------ -------------- --------------------------- -----------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Dennis D'Amore 30,000
------
</TABLE>
- ---------------------
Employment Agreements
AHI entered into a three (3) year employment agreement with Henry
Goldman on November 18, 1996. Mr. Goldman is employed as the President and Chief
Executive Officer of AHI 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 the
closing of the Company's acquisition of Artisan House, Inc. and $40,000 of which
is paid in equal monthly installments of $3,333.33 during the first year of the
employment agreement, (iii) reimbursement of expenses incurred by Mr. Goldman
for lease and insurance payments with respect to his automobile, (iv) an annual
performance bonus equal to 1% of AHI's sales in excess of those achieved by
Artisan for the twelve months ended June 30, 1996, payable within 60 days after
the end of AHI's fiscal year, with the first and last payments being calculated
on a pro rated basis, (v) 2.5% of the consideration paid by the Company in
connection with an acquisition of an unrelated third party introduced to the
Purchaser, the Company, Interiors, or any affiliate of them by Goldman, and (vi)
an annual performance bonus equal to 5% of the increase in AHI's export sales in
excess of those export sales achieved by Artisan for the twelve months ended
June 30, 1996. The Employment Agreement also contains provisions protecting the
confidential information of the Company and restricting Goldman from competing
with the Company. The Agreement further provides for the Company to lease
facilities from Goldman and his wife for a five year term, with an initial
monthly rent of approximately $14,000.
On December 31, 1996, AHI entered into a three (3) year employment
agreement (the "Employment Agreement") with Dennis D'Amore pursuant to which
Mr. D'Amore will serve as AHI's Chief Operating Officer and Treasurer. AHI
agreed to pay Mr. D'Amore (i) an annual salary of $100,000, (ii) a cash bonus
equal to ten percent (10%) of Mr. D'Amore's annual salary based upon AHI's
net profit before taxes ("NPBT"), and (iii)
20
<PAGE>
a cash bonus equal to five percent (5%) of AHI's increases in NPBT over the
fiscal year, not to exceed forty percent (40%) of Mr. D'Amore's annual base
salary. The agreement further provides that Mr. D'Amore's total bonus
compensation shall not exceed an aggregate of (50%) of his base salary earned
during that fiscal year. The agreement provides that Mr. D'Amore is entitled to
receive options to purchase 30,000 shares of AHI's Common Stock at an exercise
price of equal to $.0001 per share exercisable for a period of six years, upon
entering into the Employment Agreement. Additionally, by January 2, 1998 and
1999, Mr. D'Amore will be entitled to receive additional options to purchase
30,000 shares of the Company's Common Stock at an exercise price equal to $.0001
per share exercisable for a period of six years so long as Mr. D'Amore
continues to be employed by the Company and the Company meets or exceeds its
current NPBT. Mr. D'Amore is also entitled to receive a performance bonus in the
form of stock options based upon the Company's financial performance during each
of the Company's fiscal years ending March 31, 1998, 1999 and 2000 provided the
Company's NPBT exceeds one hundred fifteen percent (115%) of the Company's NPBT
for the preceding fiscal year. So long as D'Amore is employed by the Company,
Mr. D'Amore shall receive options to purchase thirty thousand (30,000) shares of
the Company's Common Stock under the terms of the Company's 1996 Stock Plan (the
"Performance Options"). The Performance Options are exercisable for a period of
one (1) year following the date of grant at an exercise price equal to the
average closing price of the Company's Common Stock as reported on the NASD OTC
Bulletin Board for the twenty (20) trading days ending two (2) trading days
prior to the date the Performance Options are granted to Employee. Mr. D'Amore's
Employment Agreement also contains other customary provisions.
On January 14, 1997, the Company entered into an employment agreement
with Donald Graves pursuant to which Mr. Graves will serve as the Company's Vice
President of Sales and Marketing. The Company agreed to pay Mr. Graves (1) an
annual salary of $90,000, (2) a cash bonus equal to two percent (2%) of Net
Sales growth of the Company, in excess of 10% growth over the Company's previous
fiscal year, and (3) a cash bonus equal to one percent (1%) of AHI's Gross
Margin less Selling Expenses increased over AHI's prior fiscal year, provided
that AHI's net sales increase a minimum of ten percent (10%) over that same
period.
Consulting Agreements
On January 1, 1997 the Company entered into a Consulting Agreement with
Matthew Harriton, a Director of the Company, pursuant to which Mr. Harriton
agreed to provide the Company with such consulting services as requested by the
Company in connection with strategic planning, marketing and management issues.
As payment for the services provided by Mr. Harriton, the Company has agreed to
pay an aggregate of $150,000 to be paid over the period of three (3) years from
the date of the agreement.
On March 1, 1997, AHI entered into a Consulting Agreement with The
Colford Company, pursuant to which The Colford Company agreed to provide AHI
with such consulting services as requested by AHI in connection with the
stabilization, updating and transition of AHI's accounting
21
<PAGE>
systems. As payment for the services provided by The Colford Company, AHI has
agreed to pay an aggregate of $11,500 per month for the term of the Consulting
Agreement. The initial term of the Consulting Agreement is three (3) months. On
May 28, 1997, AHI extended the term of its Consulting Agreement with The Colford
Company for an additional two (2) month period.
Stock Option Plans and Agreements
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1996 Stock Plan
(hereinafter called the "1996 Plan"). The purpose of the 1996 Plan is to provide
an incentive and reward for those executive officers and other key employees in
a position to contribute substantially to the progress and success of the
Company, to closely align employees with the interests of stockholders of the
Company by linking benefits to stock performance and to retain the services of
such employees, as well as to attract new key employees. In furtherance of that
purpose, the 1996 Plan authorizes the grant to executives and other key
employees of the Company stock options, restricted stock, deferred stock, bonus
shares, performance awards, dividend equivalent rights, limited stock
appreciation rights and other stock-based awards, or any combination thereof.
The 1996 Plan is expected to provide flexibility to the Company's compensation
methods, after giving due consideration to competitive conditions and the impact
of federal tax laws.
The maximum number of shares of Common Stock with respect to which
awards may be granted pursuant to the 1996 Plan is initially 250,000 shares.
Shares issuable under the 1996 Plan may be either treasury shares or authorized
but unissued shares. The number of shares available for issuance will be subject
to adjustment to prevent dilution in the event of stock splits, stock dividends
or other changes in the capitalization of the Company.
The 1996 Plan will be administered by a committee consisting of not
less than two (2) members of the Board of Directors who are "disinterested"
within the meaning of Rule 16b-3 promulgated under the Exchange Act and "outside
directors" within the meaning of Section 162(m) of the Code (including persons
who may be deemed outside directors by virtue of any transitional rule which may
be adopted by the Internal Revenue Service implementing such Section). The Board
will determine the persons to whom awards will be granted, the type of award
and, if applicable, the number of shares to be covered by the award. During any
calendar year no person may be granted under the 1996 Plan awards aggregating
more than 100,000 shares (which number shall be subject to adjustment to prevent
dilution in the event of stock splits, stock dividends or capitalization of the
Company).
Types of Awards
Stock Options. Options granted under the 1996 Plan may be "incentive
stock options" ("Incentive Options") within the meaning of Section 422 of the
Code or stock options which are not incentive stock options ("Non-Incentive
Options" and, collectively with Incentive Options, hereinafter referred to as
"options"). The persons to whom Options will be granted, the number
22
<PAGE>
of shares subject to each Option grant, the prices at which Options may be
exercised (which shall not be less than the fair market value of shares of
common Stock on the date of grant), whether an Option will be an Incentive
Option or a Non-Incentive Option, time or times and the extent to which Options
may be exercised and all other terms and conditions of options will be
determined by the Committee.
Each Incentive Option shall terminate no later than ten (10) years from
the date of grant, except as provided below with respect to Incentive Options
granted to 10% Stockholders (as hereinafter defined No Incentive Option may be
granted at any time after October 2005. Each Non-Incentive Option shall
terminate no later than ten (10) years from the date of grant. The exercise
price at which the shares may be purchased may not be less than the Fair Market
Value of shares of Common Stock at the time the Option is granted, except as
provided below with respect to Incentive Options granted to 10% Stockholders.
Options granted to executive officers may not be exercised at any time prior to
six (6) months after the date of grant.
The exercise price of an Incentive Option granted to a person
possessing more than 10% of the total combined voting power of all shares of
stock of the Company or a parent or subsidiary of the Company ("10%
Stockholder") shall in no event be less than 110% of the Fair Market Value of
the shares of the Common Stock at the time the Incentive Option is granted. The
term of an Incentive Option granted to a 10% Stockholder shall not exceed five
(5) years from the date of grant.
The exercise price of the shares to be purchased pursuant to each
Option shall be paid (i) in full in cash, (ii) by delivery (i.e., surrender) of
shares of the Company's Common Stock owned by the option at the time of the
exercise of the Option (iii) in installments, payable in cash, if permitted by
the Committee or for any combination of the foregoing. The stock-for-stock
payment method permits an optionee to deliver one (1) or more shares of
previously owned Common Stock of the Company in satisfaction of the exercise
price of subsequent Options. The optionee may use the shares obtained on each
exercise to purchase a larger number of shares on the next exercise. (The
foregoing assumes an appreciation in value of previously acquired shares). The
result of the stock-for-stock payment method is that the optionee can generally
avoid immediate tax liability with respect to any appreciation in the value of
the stock utilized to exercise the Option.
Shares received by an optionee upon exercise of a Non-Incentive Option
may not be sold or otherwise disposed of for a period determined by the Board
upon grant of the Option, which period shall be not less than six (6) months nor
more than three (3) years from the date of acquisition of the shares (the
"Restricted Period"), except that, during the Restricted Period (i) the optionee
may offer the shares to the Company and the Company may, in its discretion,
purchase up to all the shares offered at the exercise price and (ii) if the
optionee's employment terminates during the Restricted Period (except in limited
instances), the optionee upon written request of the Company, must offer to sell
the shares to the Company at the exercise price within seven (7) business days.
The Restricted Period shall terminate in the event of a Change in Control of the
Company (as defined), or at the discretion of the Board. After the Restricted
Period, an optionee wishing to sell must first offer such shares to the Company
at the Fair Market Value.
23
<PAGE>
Limited Stock Appreciation Rights. The Committee is authorized, in
connection with any Option granted under the 1996 Plan, to grant the holder of
such Option a limited stock appreciation right ("LSAR"), entitling the holder to
receive, within sixty (60) days following a Change in Control, an amount in cash
equal to the difference between the exercise price of the Option and the market
value of the Common Stock on the effective date of the Change in Control. The
LSAR may be granted in tandem with an Option or subsequent to grant of the
Option. The LSAR will only be exercisable to the extent the related Option is
exercisable and will terminate if and when the Option is exercised.
Restricted and Deferred Stock. An award of restricted stock or deferred
stock may be granted under the 1996 Plan. Restricted stock is subject to
restrictions on transferability and other restrictions by the Committee at the
time of grant. In the event that the holder of restricted stock cease to be
employed by the Company during the applicable restrictive period, restricted
stock that is at the time subject to restrictions shall be forfeited and
reacquired by the Company. Except as otherwise provided by the Committee at the
time of the grant, a holder of restricted stock shall have all the rights of a
stockholder including, without limitation, the right to vote restricted stock
and the right to recover dividends thereon. An award of deferred stock is an
award that provides for the issuance of stock upon expiration of a deferral
period established by the Committee. Except as otherwise determined by the
Committee, upon termination of employment of the recipient of the award during
the applicable deferral period, all stock that is at the time subject to
deferral shall be forfeited until such time as the stock which is the subject of
the award is issued, the recipient of the award has no rights as a stockholder.
Dividend Equivalent Awards. A dividend equivalent gives the recipient
the right to receive cash or other property equal in value to the dividends that
would be paid if the recipient held a specified number of shares of Common
Stock. A dividend equivalent right may be granted as a component of another
award or as a freestanding award.
Bonus Shares and other Share Based Awards. The 1996 Plan authorizes the
Committee to grant shares as a bonus, or to grant shares or other awards in lieu
of obligations of the Company to pay cash under other plans or compensatory
arrangements, upon such terms as shall be determined by the Committee. The 1996
Plan also authorizes the Committee to grant other forms of awards based upon,
payable in, or otherwise related in whole or in part to, Common Stock,
including, without limitation, convertible or exchangeable debentures, or other
debt securities, other rights convertible or exchangeable into shares, purchase
rights for shares, awards contingent upon performance of the Company, and awards
valued by reference to the book value of shares of Common Stock or awards
determined by reference to the value of securities of, or the performance of,
specified subsidiaries.
Other Options
On January 1, 1997, the Company issued pursuant to the terms of its
Employment Agreement with Dennis D'Amore options to purchase 30,000 shares of
the Company's Common Stock at an exercise price of $.0001, exercisable for a
period of six (6) years following the date of issuance.
24
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth as of June 10, 1997, certain information
with respect to the beneficial ownership of the Company's Common Stock and
Series B Preferred Stock by each person or entity known by the Company to be the
beneficial owner of 5% or more of such shares, each officer and director of the
Company, and all officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Shares of Shares of Series Percentage (%)
Common B Preferred of Series B
Stock Percentage (%) Stock Preferred Stock
Name and Address of Beneficially of Common Beneficially Beneficially
Beneficial Owner(1) Owned(2) Stock Owned Owned(2) Owned
<S> <C> <C> <C> <C>
Matthew Harriton(3) 73,000 1.4% 20,000,000(10) 100%
Dennis D'Amore(4) 30,000 * ---- ----
Interiors, Inc. --- --- 20,000,000(10) 100%
320 Washington St.
Mt. Vernon, NY
Max Munn(5) 67,000(6) 1.3% 20,000,000(10) 100%
Interiors, Inc.
320 Washington St.
Mt. Vernon, NY
Michael Lulkin(7) ---- ---- 20,000,000(10) 100%
Henry Goldman(8) 150,000 2.8% ---- ----
Donald Feldman(9) ---- ---- ---- ----
All officers and 320,000 6.3% 20,000,000(10) 100%
directors as a group
(6 persons)
</TABLE>
- --------------------
* indicates ownership of less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is c/o
Decor Group, Inc., 320 Washington Street, Mt. Vernon, New York 10553.
(2) Beneficial ownership as reported in the table above has been determined
in accordance with Item 403 of Regulation S-B of the Securities Act of
1933 and Rule 13(d)-3 of the Securities Exchange Act.
(3) Mr. Harriton is a Director of the Company.
(4) Mr. D'Amore is President and Chief Financial Officer of the Company and
Chairman of the Board, Chief Operating Officer and Treasurer of AHI.
Mr. D'Amore holds options to purchase 30,000 shares of Common Stock for
a period of six (6) years at an exercise price of $.0001 per share.
(5) Mr. Munn is Chairman of the Board and Secretary of the Company.
25
<PAGE>
(6) Includes 67,000 shares of Common Stock held by Laurie Munn, Mr. Munn's
wife. Mr. Munn disclaims beneficial ownership over such shares.
(7) Mr. Lulkin is a Director of the Company.
(8) Mr. Goldman is President and Chief Executive Officer of AHI.
(9) Mr. Feldman was no longer employed as President and Chief Financial
Officer of AHI as of March 1997.
(10) Includes 20,000,000 shares of Series B Preferred Stock covered by
that certain Voting Agreement by Interiors, Inc., Max Munn, Matt
Harriton, Michael Lulkin and the Company pursuant to which Messrs.
Munn, Harriton and Lulkin may vote the shares of Series B Preferred
Stock held by Interiors, Inc. on all matters presented to the
vote of stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In March, 1996, the Company issued to certain investors (i) 913,750
shares of Common Stock to M.D. Funding, Inc. for cash consideration of $73,100,
(ii) 100,000 shares of Common Stock to Laurie Munn, the wife of Max Munn, the
Chairman of the Board of the Company, for cash consideration of $8,000, (iii)
61,250 shares of Common Stock to Judy Pace for cash consideration of $4,900,
(iv) 125,000 shares of Common Stock to First National Funding, Inc. for cash
consideration of $10,000, (v) 62,500 shares of Common Stock to Ulster
Investments, Ltd. for cash consideration of $5,000, and (vi) 25,000 shares of
Common Stock to Matthew Harriton, a director and formerly the President of the
Company, for cash consideration of $2,000. In addition, the Company also issued
in March 1996 25,000 shares of Common Stock and 12,500 Class A Warrants to
Gordon Brothers Capital Corporation ("GBCC") for services rendered valued at an
aggregate of $2,000. Neither GBCC nor any of its affiliates are affiliated with
the Company, the Representative, the Underwriters or any of their respective
affiliates. GBCC assisted the Company in identifying and negotiating with
potential acquisition candidates.
In March 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 Voting Preferred Stock (the "Series B Option") in
exchange for Interiors, Inc. issuing to the Company 200,000 shares of Common
Stock valued at $600,000 and 200,000 shares of Series A Convertible Preferred
Stock valued at $1,000,000. The Series B Option was exercised by Interiors in
September 1996 at an exercise price of $.0001 per share. Immediately following
the exercise of the Series B Option, Interiors entered into a Voting Agreement
with the Company and Messrs. Max Munn, Matt Harriton and Michael Lulkin
(collectively, the "Voting Trustees") each of whom is a director of the Company.
Under the terms of the Voting Agreement, the Voting Trustees have the right to
vote the shares of Series B Preferred Stock held by Interiors on all matters
presented to the stockholders prior to December 31, 1997. A majority of the
Voting Trustees shall determine the manner in which the shares of Series B
Preferred Stock are to be voted. A unanimous vote of the Voting Trustees is
required in order for the Company to enter into certain transactions, including
any mergers, consolidations, significant acquisitions, recapitalizations,
reorganizations or any transaction which would result in Interiors' ownership of
less than 51% of the outstanding voting stock of the Company (so long as
Interiors does not sell or transfer any of the Series B Preferred Stock held
thereby).
26
<PAGE>
In May 1996, the Company entered into a two year Management Services
Agreement with Interiors, Inc. ("Interiors"). Interiors has, pursuant to such
agreement, agreed to advise the Company on the manufacturing, sale, marketing
and distribution of the Company's products as well as providing the Company
accounting and administrative services and strategic planning with regard to
joint ventures, acquisitions, and other long term business initiatives. In
exchange for such services, the Company has agreed to pay to Interiors an annual
amount equal to the greater of (i) $75,000 or (ii) 1 1/2% of Excess Cashflow (as
defined in the agreement). The Management Services Agreement is automatically
renewable for an additional one (1) year term unless terminated by either party
not less than sixty (60) days prior to the end of the term may be terminated by
the Company or Interiors upon sixty (60) days prior written notice. In the event
that the Management Services Agreement is terminated for any reason, the
Company's business may be negatively effected. In such an event, the Company may
be required to hire additional personnel or engage one or more independent
contractors at an added cost to the Company. In February 1997, the Company and
Interiors amended the Management Services Agreement pursuant to which Interiors
agreed to advise the Company on the manufacturing, sale, marketing and
distribution of the Company's products as well as providing the Company with
accounting and administrative services and strategic planning with regard to
joint ventures, acquisitions, and other long term business initiatives. In
exchange for such services, the Company has agreed to pay to Interiors an annual
amount equal to the greater of (i) $90,000 or (ii) 1 1/2% of Excess Cashflow (as
defined in the agreement). Additionally, the amendment provides that the
Management Services Agreement may not be modified in any manner without the
unanimous consent of the Board of Directors of the Company.
In June 1996, the Company borrowed an aggregate of $50,000 from the
Company's stockholders, other than Gordon Brothers Capital Corporation, on a pro
rata basis based upon ownership of the Company's shares of Common Stock. Each
lender received a promissory note obligating the Company to repay the loan on
the earlier of (i) fifteen (15) months following the Effective Date or (ii) June
21, 1997. The Company utilized the proceeds from the loan for working capital
purposes.
In August 1996, the Company agreed to issue 47,084 shares of Series C
Preferred Stock to Interiors, Inc. in exchange for the payment of $706,250. In
September 1996, the Company agreed to issue 7,850 shares of Series C Preferred
Stock to Interiors in exchange for the payment of $117,750.
In October 1996, the Company effected a recapitalization with respect
to its outstanding shares of capital stock (the "Recapitalization"). Pursuant to
the Recapitalization, the Company effected a 1-for-2 reverse stock split with
respect to its shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Common Stock.
In November and December 1996, Interiors loaned the Company $50,238 and
$60,000, respectively. Both of these loans are demand loans, callable at any
time by Interiors and bear interest at the rate of eight percent (8%) per annum.
27
<PAGE>
On November 18, 1996, AHI entered into a five (5) year lease with Henry
Goldman, President and Chief Executive Officer of AHI. The lease is for
approximately 33,000 square feet and requires a monthly rent payment of $14,000.
On December 31, 1996, the Company entered into an Incentive Stock
Option Agreement with Dennis D'Amore, the Company's President and Chief
Financial Officer, to purchase an aggregate of 30,000 shares of Common Stock at
an exercise price of $.0001 per share, for a period of six (6) years, in
accordance with the terms of the Employment Agreement entered into between the
Company and Dennis D'Amore. Mr. D'Amore is also entitled to receive options to
purchase thirty thousand (30,000) shares of the Company's Common Stock under the
terms of the Company's 1996 Stock Plan (the "Performance Options"). The
Performance Options are exercisable for a period of one (1) year following the
date of grant at an exercise price equal to the average closing price as
reported on the NASD OTC Bulletin Board for the twenty (20) trading days ending
two (2) trading days prior to the date the Performance Options are granted to
Employee See "Employment Agreements".
On January 1, 1997, the Company entered into a Consulting Agreement
with Matthew Harriton, a Director of the Company, whereby Mr. Harriton agreed to
provide the Company with such consulting services as requested by the Company in
connection with strategic planning, marketing and management issues. As
consideration for the services provided by Mr. Harriton, the Company has agreed
to pay to Mr. Harriton an aggregate of $150,000 to be paid over the period of
three (3) years from the date of the agreement.
On January 15, 1997, January 30, 1997, and February 3, 1997 the Company
loaned to Interiors $100,000, $40,000, and $43,000, respectively. The loans are
demand loans, callable at any time by the Company.
On February 25, 1997, Interiors repaid, in full, loans from the Company
in the aggregate amount of $183,000.
28
<PAGE>
ITEM 13. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<S> <C>
1.01* Form of Underwriting Agreement.
1.02* Form of Selected Dealers Agreement.
1.03* Agreement Among Underwriters
1.04* Warrant Exercise Fee Agreement
3.01* Certificate of Incorporation of the Company dated March 1, 1996.
3.02* By-Laws of the Company.
3.03* Certificate of Designation for the Series C Convertible Preferred Stock.
4.01* Specimen Certificate for shares of Common Stock.
4.02* Specimen Certificate for shares of Series A Convertible Preferred Stock.
4.03* Specimen Certificate for shares of Series B Non-Convertible Preferred Stock.
4.04* Specimen Certificate for Class A Redeemable Common Stock Purchase
Warrant.
4.05* Form of Warrant Agreement by and among the Company and American Stock
Transfer & Trust Company.
4.06* Form of Representative's Share Purchase Warrant.
4.07* Option Agreement between the Company and Interiors, Inc.
4.08* Voting Agreement between Interiors, Inc., Max Munn, Matt Harriton, Michael
Lulkin and the Company.
4.09* Specimen Certificate for shares of Series C Preferred Stock.
5.01* Opinion of Bernstein & Wasserman, LLP, counsel to the Company.
10.01* Asset Purchase Agreement among the Company, Artisan Acquisition Co., Artisan
House, Inc. and Henry Goldman dated as of March 25, 1996.
</TABLE>
29
<PAGE>
<TABLE>
<S> <C>
10.02* Management Services Agreement between the Company and Interiors, Inc.
10.03* Employment Agreement between the Company and Donald Feldman.
10.04* Form of Bridge Loan Agreements.
10.05* Form of Subscription Agreements.
10.06* 1996 Stock Plan.
10.07* Commitment Letter from United Credit Corporation.
10.08* Financial Advisory Agreement with the Representative.
10.09* Amendment No. 1 to Asset Purchase Agreement with Artisan House, Inc.
10.10* Trademark License Agreement between Artisan House, Inc. and General Electric
Company.
10.11* Licensing Agreement between Artisan House, Inc. and The Hearst Corporation,
King Features Syndicate Division.
10.12* Licensing Agreement between Artisan House, Inc. and The Curtis Publishing
Company, Licensing Division.
10.13* License Agreement between Artisan House, Inc. and the Family of Ingrid Bergman.
10.14* Merchandising License Agreement between Artisan House, Inc. and Turner Home
Entertainment, Inc.
10.15* Retail License Agreement between Artisan House, Inc. and Warner Bros., a
division of Time Warner Entertainment Company, L.P.
10.16* Employment Agreement with Henry Goldman.
10.17 Employment Agreement with Dennis D'Amore.
10.18 Retail License Agreement between Artisan House, Inc. and Wagner Bros., a
division of Time Wagner Entertainment Company, L.P.
10.19 Amendment No. 1 to Management Services Agreement between the Company and
Interiors, Inc.
</TABLE>
30
<PAGE>
<TABLE>
<S> <C>
10.20 Consulting Agreement with Matthew Harriton.
10.21 Consulting Agreement with Walter Colford.
10.22 Incentive Stock Option Agreement between the Company and Dennis D'Amore.
11.1 Computation of Per Share Earnings.
21.01 Subsidiaries of the Registrant.
23.02 Consent of Moore Stephens, P.C.
</TABLE>
- -----------------
* Incorporated by reference to the Company's Registration Statement on
Form SB-2, and amendments thereto, Registration No. 333-5533 declared
effective on November 12, 1996.
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Page to
-------
Page
- ----
Item 7. Consolidated Financial Statements:
Independent Auditor's Report..................................... F-1
Consolidated Balance Sheet as of March 31, 1997.................. F-2 - F-3
Consolidated Statements of Operations for the year ended March 31,
1997 and for the period from inception March 1, 1996 through
March 31, 1996................................................... F-4
Consolidated Statements of Stockholders' Equity for the year
ended March 31, 1997 and for the period from inception March 1,
1996 through March 31, 1996....................................... F-5
Consolidated Statements of Cash Flows for the year ended March 31,
1997 and for the period from inception March 1, 1996 through
March 31, 1996.................................................... F-6-F-7
Notes to Consolidated Financial Statements......................... F-8-F-20
. . . . . . . . . . . . . . . . . .
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders of
Decor Group, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of
Decor Group, Inc. and its subsidiary as of March 31, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year ended March 31, 1997 and for the period from inception, March 1, 1996,
through March 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Decor Group, Inc. and its subsidiary as of March 31, 1997, and the
results of their operations, and their cash flows for the year ended March 31,
1997 and for the period from inception, March 1, 1996, through March 31, 1996,
in conformity with generally accepted accounting principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
June 6, 1997
F-1
<PAGE>
Item 7:
DECOR GROUP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997.
- --------------------------------------------------------------------------------
Assets:
Current Assets:
Cash $ 169,508
Accounts Receivable [Net of Allowance of $192,318] 1,117,575
Inventories 960,018
Prepaid Expenses and Other Current Assets 105,673
-------
Total Current Assets 2,352,774
Property and Equipment - Net 116,143
-------
Other Assets:
Investment - Related Party [8] 812,600
Goodwill [Net of Accumulated Amortization of $68,815] 1,450,084
Other Intangible Assets - Net 576,068
Other Assets 1,454
-----
Total Other Assets 2,840,206
Total Assets $ 5,309,123
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-2
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997.
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 606,158
Accrued Costs of Acquisition 25,263
Accrued Interest - Related Party 7,447
Due to Stockholders 228,785
Current Portion of Long-Term Debt 133,085
------------
Total Current Liabilities 930,732
------------
Long-Term Debt - Net 651,081
------------
Commitments and Contingencies [11] [13] --
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 [Notes 8, 10 and 15] 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 [10] 512
Additional Paid-in Capital - Common Stock 4,034,911
Accumulated Deficit (955,546)
Deferred Compensation [11B][11C] (991,167)
Unrealized Holding Loss on Investment [8] (787,400)
-----------
Total Stockholders' Equity 3,727,310
-----------
Total Liabilities and Stockholders' Equity $ 5,309,123
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-3
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period From
Inception
For the March 1, 1996
Year ended through
March 31, March 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Revenues $ 2,003,084 $ --
Cost of Revenues 990,514 --
----------- -----------
Gross Profit 1,012,570 --
----------- -----------
Acquisition Fees, Selling and
Administrative Expenses:
Acquisition Fees and Expenses 52,829 98,000
General and Administrative Expenses 861,988 2,000
Selling Expenses 521,674 --
Amortization of Deferred Compensation 188,833 --
----------- -----------
Total Acquisition Fees, Selling and
Administrative Expenses 1,625,324 100,000
----------- ----------
Loss from Operations (612,754) (100,000)
----------- ----------
Other Expense [Income]:
Interest Income (3,426) --
Interest Income - Related Party (953) (250)
Interest Expense - Bridge Loans 239,974 --
Interest Expense - Related Party 7,447 --
----------- ----------
Total Other Expense [Income] 243,042 (250)
----------- ----------
Net Loss $ (855,796) $ (99,750)
=========== ===========
Loss Per Share $ (.16) $ (.01)
=========== ===========
Weighted Average Number of Common
Shares Outstanding 5,497,000 8,437,500
========= =========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-4
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Additional Additional
Paid-in Paid-in
Shares Amount Capital Shares Amount Capital
------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Common Stock Issued to Founders -- $ -- $ -- 3,937,500 $ 393 $ 104,607
Bridge Financing Warrants -- -- -- -- -- 214,300
250,000 Shares of Series A Convertible Preferred
Stock and Option to Purchase 10,000,000
Shares of Series B Non-Convertible
Preferred Stock 250,000 25 1,599,975 -- -- --
Unrealized Gain on Investment -- -- -- -- -- --
Net Loss for the period ended March 31, 1996 -- -- -- -- -- --
---------- --------- ----------- --------- ------ ----------
Balance - March 31, 1996 250,000 25 1,599,975 3,937,500 393 318,907
54,934 Shares of Series C Convertible Non-Voting
Preferred Stock 54,934 5 823,995 -- -- --
20,000,000 Shares of Series B Non-Convertible
Voting Preferred Stock 20,000,000 2,000 -- -- -- --
Net Proceeds from Sale of Common Stock from
Initial Public Offering -- -- -- 1,035,000 104 2,236,019
Issuance of Stock in Connection with Acquisition -- -- -- 150,000 15 299,985
Unrealized Loss on Investment [Net of Income
Taxes] -- -- -- -- -- --
Deferred Compensation in Connection
With Issuance of Stock Options -- -- -- -- -- 1,180,000
Amortization of Deferred Compensation -- -- -- -- -- --
Net Loss for the year ended March 31, 1997 -- -- -- -- -- --
---------- --------- ----------- --------- ------ ----------
Balance - March 31, 1997 20,304,934 $ 2,030 $ 2,423,970 5,122,500 $ 512 $4,034,911
========== ========= =========== ========= ====== ==========
<CAPTION>
Unrealized
Holding Total
Accumulated Deferred Loss on Stockholders'
Deficit Compensation Investment Equity
<S> <C> <C> <C> <C>
Common Stock Issued to Founders $ -- $ -- $ -- $ 105,000
Bridge Financing Warrants -- -- -- 214,300
250,000 Shares of Series A Convertible Preferred
Stock and Option to Purchase 10,000,000
Shares of Series B Non-Convertible
Preferred Stock -- -- -- 1,600,000
Unrealized Gain on Investment -- -- 187,600 187,600
Net Loss for the period ended March 31, 1996 (99,750) -- -- (99,750)
----------- ------------ ----------- ----------
Balance - March 31, 1996 (99,750) -- 187,600 2,007,150
54,934 Shares of Series C Convertible Non-Voting
Preferred Stock -- -- -- 824,000
20,000,000 Shares of Series B Non-Convertible
Voting Preferred Stock -- -- -- 2,000
Net Proceeds from Sale of Common Stock from
Initial Public Offering -- -- -- 2,236,123
Issuance of Stock in Connection with Acquisition -- -- -- 300,000
Unrealized Loss on Investment [Net of Income
Taxes] -- -- (975,000) (975,000)
Deferred Compensation in Connection
With Issuance of Stock Options -- (1,180,000) -- --
Amortization of Deferred Compensation -- 188,833 -- 188,833
Net Loss for the year ended March 31, 1997 (855,796) -- -- (855,796)
----------- ------------ ---------- -----------
Balance - March 31, 1997 $ (955,546) $ (991,167) $ (787,400) $ 3,727,310
=========== ============ =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-5
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period From
Inception
For the March 1, 1996
Year ended through
March 31, March 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Operating Activities:
Net Loss $ (855,796) $ (99,750)
Adjustment to Reconcile Net Loss to Net Cash
[Used for] Operating Activities:
Amortization of Deferred Compensation 188,833 --
Stock Issued for Services -- 2,000
Interest - Cost of Bridge Warrants 214,300 --
Amortization of Intangibles 98,293 --
Depreciation 14,082 --
Bad Debt Expense 19,900 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (131,823) --
Inventory (155,350) --
Other Assets 18,528 (250)
Prepaid Expenses 250 --
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 178,624 --
------- --
Net Cash - Operating Activities (410,159) (98,000)
-------- -------
Investing Activities:
Cash Paid for Acquisition of Artisan House (2,250,000) (150,000)
Advances to Related Party 50,000 (50,000)
Cash Acquisition of Equipment (4,589) --
------ --
Net Cash - Investing Activities (2,204,589) (200,000)
---------- --------
Financing Activities:
Proceeds from Stockholder Loans 411,785 --
Payments on Stockholder's Loans and Bridge Loans (183,000) --
Proceeds from Sale of Common Stock -- 95,000
Repayment of Notes Payable (553,652) --
Proceeds from Sale of Preferred Stock 826,000
Proceeds from Sale of Common Stock in Connection
with Initial Public Offering 2,236,123 --
Proceeds from Bridge Loans -- 250,000
-- -------
Net Cash - Financing Activities 2,737,256 345,000
--------- -------
Net Increase in Cash 122,508 47,000
Cash - Beginning of Periods 47,000 --
------ --
Cash - End of Periods $ 169,508 $ 47,000
=============== ================
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-6
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period From
Inception
For the March 1, 1996
Year ended through
March 31, March 31,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid for the periods for:
Interest $ 26,218 $ --
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 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 10,000,000 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 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. 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.
F-7
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
[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] 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 March 31, 1997.
[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 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.
[E] 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.
F-8
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[F] 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. Accumulated amortization at March 31, 1997 is $68,815 which
equals expense for the year.
[G] Other Intangible Assets - Other intangible assets include trademarks,
copyrights, customer lists, and covenants not-to-compete. These costs are being
amortized over lives between 5-15 years using the straight-line method.
A summary is as follows:
<TABLE>
<CAPTION>
Accumulated
Cost Amortization Net
<S> <C> <C>
Customer Lists $ 200,000 $ 7,978 $ 192,022
Covenants Not-to-Compete 100,000 3,988 96,012
Trademarks 150,000 5,983 144,017
Copyrights 150,000 5,983 144,017
---------------- ---------------- --------------
Totals $ 600,000 $ 23,932 $ 576,068
------ ================ ================= ================
</TABLE>
[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, 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 b) for after the IPO: the 3,937,500 shares outstanding from July
1, 1996 through November 18, 1996 and the 5,122,500 shares outstanding from
November 18, 1996 to March 31, 1997. Convertible preferred stock options and
warrants are not included because the effect would be anti-dilutive [See Notes 8
and 10].
F-9
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- --------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[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 March 31, 1997, $121,400 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 $192,318 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.
[M] License Agreements - The Company currently manufactures 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] Advertising Costs - Advertising costs are expensed as incurred. Advertising
expense was $25,000 and $-0-, respectively, for the year ended March 31, 1997
and the period ended March 31, 1996.
[O] 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 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 [See Note 10I] 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. Accumulated amortization of goodwill at March
31, 1997 was $68,815.
F-10
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- --------------------------------------------------------------------------------
[2] Acquisition - Artisan [Continued]
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.
<TABLE>
<CAPTION>
Years ended
March 31,
---------
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Total Revenues $ 5,575,105 $ 4,809,422
= ========= = =========
Net Loss $ (1,566,743) $ (520,054)
= ========== = ========
Net Loss Per Common Share $ (.28) $ (.06)
============== =============
Weighted Average Number of Common Shares
Outstanding 5,590,750 8,587,500
========= =========
</TABLE>
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.
[3] Inventories
The components of inventory were as follows:
Raw Materials $ 381,864
Work-in Process 216,036
Finished Goods 362,118
--------------
Totals $ 960,018
------ ==============
[4] Property and Equipment
Property and equipment consisted of the following:
Machinery and Equipment $ 171,088
Leasehold Improvements 136,910
Furniture and Fixtures 122,344
Office and Computer Equipment 66,058
Vehicles 20,824
--------------
Total - At Cost 517,224
Less: Accumulated Depreciation 401,081
Net $ 116,143
--- ==============
Depreciation expense was approximately $14,000 and $-0-, respectively for the
year ended March 31, 1997 and the period ended March 31, 1996.
F-11
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- --------------------------------------------------------------------------------
[5] 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 [See Note 8].
[C] Due to Stockholder - Interiors - During the period ended March 31, 1997, the
Company was charged $75,000 in management fees. On November 15, 1996, the
Company was advanced $50,238 from Interiors, Inc. Interiors, Inc. advanced an
additional $60,000 on December 15, 1996 and $184,000 on February 25, 1997. The
Company paid $140,000 in January and $43,000 in February of 1997 to Interiors,
Inc. Interest at 8% of approximately $3,400 has been accrued on the outstanding
balance of $185,285 for the year ended March 31, 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 period ended
March 31, 1997 was $4,047.
[E] Leases - Commencing November 19, 1996, the Company leases manufacturing and
office space in California from the seller of Artisan and is used by the Company
in Artisan's continuing operation under an operating lease which expires
November 20, 2001. The lease provides for additional rent based on increases in
the Consumer Price Index. The monthly rental is $14,000 [See Note 11].
[6] Long-Term Debt
<TABLE>
<CAPTION>
March 31,
---------
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Bridge Loans [A] $ -- $ 250,000
Acquisition Loans [B] 814,330 --
Assumed Notes [C] 18,007 --
-------------- -----------
Totals 832,337 250,000
Less: Discount [B] 48,171 214,300
-------------- ------------
Totals 784,166 35,700
Less: Current Portion of Long-Term Debt 133,085 35,700
------------- -------------
Long-Term Portion $ 651,081 $ --
----------------- ============== ==============
</TABLE>
The prime rate at March 31, 1997 was 8.50%.
F-12
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- --------------------------------------------------------------------------------
[6] Debt [Continued]
Annual maturities of notes payable long-term debt are as follows:
March 31,
1998 $ 133,085
1999 124,413
2000 134,739
2001 145,924
2002 246,005
Thereafter --
---------------
Total $ 784,166
----- ===============
[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 10A]. 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 March 31, 1997, the Company amortized the
entire discount of $214,300 as interest expense.
[B] Acquisition Loans - 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 due in February of 1997 and the balance will be paid in 60
equal monthly installments of $13,656 bearing interest at 8% with a final
payment of $150,000 at maturity. The note is collateralized by a second interest
on all assets of the Company. The non-interest bearing portions of the note were
discounted at 8% which gives rise to a discount of $48,171.
[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 $18,000 bear interest
ranging from 9.5% to 13.4% maturing through 2001. Such notes are collateralized
by various equipment of the Company.
[7] 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.
F-13
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- --------------------------------------------------------------------------------
[7] Commitment Letter - Secured Loan Agreement [Continued]
At March 31, 1997, the Company was in negotiations with an asset based lender to
obtain a line of credit of 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.
Upon consummation of this agreement, the commitment letter mentioned above will
be canceled.
[8] 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 5B]. 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
March 31, 1996, the per share market value of Interiors, Inc.'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 March 31, 1997, the per share market value of Interiors,
Inc.'s common stock and Series A Convertible Preferred Stock was $1.06 and
$3.00, respectively. Therefore, the carrying value at March 31, 1997 was
$812,600. Accordingly, gross unrealized holding losses of $387,400 and $400,000
existed at March 31, 1997 on the Common Stock and Series A Convertible Preferred
Stock, respectively. As of March 31, 1997, Interiors, Inc. owned approximately
79% of the total voting stock outstanding assuming no conversion of the Series A
and Series C Preferred Stock.
[9] Income Taxes
The Company and its consolidated subsidiary apply the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
The major components of deferred income tax assets and liability are as follows:
Deferred Tax Liability
Depreciation and Amortization $ 39,000
===============
Deferred Tax Asset
Marketable Securities $ 314,000
Reserves and allowances 8,000
Stock based compensation 71,000
Net operating loss carry forwards 298,000
---------------
Total Deferred Tax Assets $ 691,000
===============
Net Deferred Tax Asset Before
Valuation Allowance $ 652,000
Valuation Allowance (652,000)
-------------
Net $ --
===============
F-14
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- --------------------------------------------------------------------------------
[9] Income Taxes [Continued]
The Company recorded an increase in its valuation allowance of $469,000 over the
allowance at March 31, 1996.
The Company has a net operating loss carry forward of approximately $745,000 of
which approximately $100,000 will expire in 2010 and $645,000 in 2011.
[10] Capital Stock Transactions
[A] Public Offering - On November 18, 1996, the Company successfully completed
its initial public offering and sold 1,035,000 [giving effect to stock dividend
See Note 10I] shares of Common Stock at $3.33 per share. As a result of this
offering, the Company received net proceeds of $2,236,123 [net of $1,240,204
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] Preferred Stock - Series C Non-Voting Convertible - In August and September
of 1996, the Company issued to Interiors, Inc. a total of 54,934 shares of
Series C Non-Voting, Convertible, Preferred Stock for total cash of $824,000.
[D] Exercise of Options - On September 3, 1996, the option to purchase
20,000,000 shares of Series B Non-Convertible Voting Preferred Stock was
exercised for $2,000.
[E] Reverse Stock Split - On October 16, 1996, the Company effected a
one-for-two reverse split of the Company's Preferred and Common Stock. All share
and per share information has 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.
[F] Warrants - The Company issued representative stock warrants with rights to
purchase up to 30,000 shares of common stock at a purchase price of $5.50 per
share exercisable commencing November 12, 1998 and expiring November 12, 2001.
[G] Stock Options - In March 1996, the Board of Directors of the Company
adopted, and the stockholders of the Company approved the adoption of, the 1996
Stock Plan [hereinafter called the "1996 Plan"]. The purpose of the 1996 Plan is
to provide an incentive and reward for those executive officers and other key
employees in a position to contribute substantially to the progress and success
of the Company, to closely align employees with the interests of stockholders of
the Company by linking benefits to stock performance and to retain the services
of such employees, as well as to attract new key employees. In furtherance of
that purpose, the 1996 Plan authorizes the grant to executives and other key
employees of the Company stock options, restricted stock, deferred stock, bonus
shares, performance awards, dividend equivalents rights, limited stock
appreciation rights and other stock-based awards, or any combination thereof.
The maximum number of shares of common stock with respect to which awards may be
granted pursuant to the 1996 Plan is initially 250,000 shares. No options were
granted under the 1996 Plan.
F-15
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- --------------------------------------------------------------------------------
[10] Capital Stock Transactions [Continued]
[G] Stock Options [Continued] - During the year ended March 31, 1997, the
Company issued 375,000 options pursuant to employment agreements of which
330,000 were outstanding at March 31, 1997.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations, for stock options
issued to employees in accounting for its stock option plans. Compensation
expense has been recognized for the Company's stock-based compensation in the
amount of $188,833 for the year ended March 31, 1997. The exercise price for all
stock options issued to employees during fiscal year 1997 was below the market
price of the Company's stock at the date of grant.
A summary of the activity under the plan is as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average
Average Remaining
Exercise Contractual
Shares Price Life
------ ----- ----
<S> <C> <C> <C>
Outstanding - April 1, 1996 -- $ --
---------------------------
Granted 375,000 .20
Exercised (45,000) 1.67
Forfeited/Expired -- --
--------- --------
Outstanding - March 31, 1997 330,000 $ .0001 4 Years
---------------------------- ========= ======== =======
Exercisable - March 31, 1997 -- -- --
---------------------------- ========= ======== =======
</TABLE>
Had compensation cost for the Company's stock options issued to employees been
determined based upon the fair value at the grant date for stock options issued
under these plans pursuant to the methodology prescribed under SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net loss and loss per
share would not have changed on a proforma basis. The weighted average fair
value of stock options granted to employees used in determining the pro forma
amounts is estimated at $3.58 for the year ended March 31, 1997 using the
Black-Scholes option-pricing model for the pro forma amounts with the following
weighted average assumptions:
March 31,
1 9 9 7
-------
Risk-free Interest Rate 6%
Expected Life 4 Years
Expected Volatility 109%
Expected Dividends None
Net income and net earnings per share as reported, and on a pro forma basis as
if compensation cost had been determined on the basis of fair value pursuant to
SFAS No. 123 is as follows:
March 31,
1 9 9 7
-------
Net [Loss]:
As Reported $ (856,000)
=============
Pro Forma $ (856,000)
=============
Net [Loss] Per Share:
As Reported $ (.16)
=============
Pro Forma $ (.16)
=============
F-16
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- --------------------------------------------------------------------------------
[10] Capital Stock Transactions [Continued]
[H] 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.
[I] 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.
[J] 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.
[11] Commitments and Contingencies
[A] Leases - The Company leases manufacturing and office space in California
from the seller of Artisan and is used by the Company in Artisan's continuing
operation under an operating lease which expires November 20, 2001. The lease
provides for additional rent based on increases in the Consumer Price Index.
Future minimum lease payments under all operating leases are as follows at March
31, 1997:
March 31,
---------
1998 $ 247,000
1999 226,000
2000 188,000
2001 174,000
2002 107,000
-------------
Total $ 942,333
----- =============
Artisan also rents showroom space in Georgia and Texas on a month-by-month
basis.
Rental expense was $92,766 and $-0-, respectively for the year ended March 31,
1997 and the period ended March 31, 1996.
F-17
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- --------------------------------------------------------------------------------
[11] Commitments and Contingencies [Continued]
[B] Employment Agreement - Seller - Artisan, 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 Artisan's export
sales in excess of those achieved by Artisan 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 $178,233 as compensation expense for the year ended March 31, 1997.
[C] Employment Agreement - Chief Operating Officer/Treasurer - On December 31,
1996, Artisan entered into a three year employment agreement with Artisan's
Chief Operating Officer and Treasurer 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. It also provides
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 for each of the three years ending March 31, 1998, 1999 and 2000.
Continued employment by the Company is required and the
Company 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.
[D] Employment Agreement - Vice President - Sales/Marketing - On January 14,
1997, Artisan entered into a two year employment agreement with Artisan's Vice
President of Sales and Marketing for (i) an annual salary of $90,000; (ii) plus
a cash bonus equal to two percent [2%] of Net Sales growth of Artisan, in excess
of 10% growth over Artisan's previous fiscal year; and (iii) a cash bonus equal
to one percent [1%] of the growth of "gross profit less selling expense" over
the previous fiscal year, if net sales have grown over 10% compared to the
previous fiscal year.
[E] Consulting Agreements - On January 1, 1997, the Company entered into a
consulting agreement with a Director of the Company to provide the Company with
such consulting services as requested by the Company in connection with
strategic planning, marketing and management issues. The Company has agreed to
pay $150,000 over three [3] years.
F-18
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- --------------------------------------------------------------------------------
[11] Commitments and Contingencies [Continued]
[E] Consulting Agreements [Continued] - 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. The expiration date has since been amended to
expire July 31, 1997.
[F] 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 [See Note 15C].
[12] Fair Value of Financial Instruments
The carrying amount of notes payable, net of discount, included in current
liabilities approximates fair value because of their short maturities. The
carrying amount of notes payable, net of discount, 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.
[13] 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 [See Note 2]. The Company denied the allegations, and has brought
counterclaims against CIDCOA alleging breach of contract, breach of warranty,
misrepresentation and fraud by CIDCOA.
[14] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["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 SFAS No. 125, which are not expected to be relevant to the
Company.
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.
F-19
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- --------------------------------------------------------------------------------
[14] New Authoritative Pronouncements [Continued]
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
[15] Subsequent Events
[A] In April 1997, the Company entered into a letter of intent to acquire a
decorative accessories manufacturer, based on the west coast. The Company is
currently continuing negotiations regarding the acquisition.
[B] On May 6, 1997, the Company filed an application with The Nasdaq Stock
Market, Inc. for initial listing of the Company's Common Stock and Class A
Common Stock Purchase Warrants. The Company's application is currently pending.
[C] 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
[See Note 11F].
. . . . . . . . . . .
F-20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
executed on this 27 day of June, 1997.
DECOR GROUP, INC.
By:/s/Max Munn
---------------
Max Munn
Chairman of the Board, and
Secretary
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities and on the dates
indicated
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Max Munn Chairman of the June 27, 1997
- ------------------------ Board and Secretary
Max Munn
/s/ Dennis D'Amore President and Chief June 27, 1997
- ------------------------ Financial Officer
Dennis D'Amore
/s/ Matthew L. Harriton Director June 27, 1997
- ------------------------
Matthew L. Harriton
/s/ Michael Lulkin Director June 27, 1997
- ------------------------
Michael Lulkin
</TABLE>
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT made and entered into as of the 31st day of
December, 1996 by and among Artisan Acquisition Corporation, a Delaware
corporation with an office for the transaction of business in California,
located at 1755 Glendale Boulevard, Los Angeles, CA 90026 (the "Employer"),
Decor Group, Inc., a Delaware corporation with an office for the transaction of
business at 320 Washington Street, Mount Vernon, NY 10553 ("Employer's Parent"
or "Decor"), and Dennis D. D'Amore, residing at 732 Panorama Road, Fullerton, CA
92831 (the "Employee").
WHEREAS, Employee has substantial experience in the performance of
executive, administrative, sales, marketing, accounting, manufacturing and other
duties related to all aspects of the Employer's business, which consists
primarily of manufacturing and distribution of decorative furnishings and
accessories; and
WHEREAS, the parties hereto wish to enter into an agreement for the
employment of the Employee by the Employer upon the terms and conditions herein
set forth;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein set forth, the parties hereto agree as follows:
1. Employment. Employer hereby employs Employee, commencing on
or before January 6, 1997 ("Commencement") for the Employment Period,
as hereinafter defined, as its President and Chief Operating Officer,
reporting to the Employer's Board of Directors, which is presently
composed of Max Munn, Michael Lulkin and Matthew Harriton, through its
liaison, the Chairman of the Board of Directors, Max Munn. Employee
hereby accepts such employment upon the terms and conditions, and for
the compensation hereinafter set
1
<PAGE>
forth, and agrees to serve the Employer well and faithfully and to
devote his best efforts to such employment during the Employment
Period. During the Employment Period, Employee shall devote his full,
complete and entire business efforts, time, attention and energies to
the business activities of the Employer, to the exclusion of all other
commercial activity, more specifically to increase Employer's sales and
profits via internal growth, efficiency improvements and acquisitions.
2. Term; Termination. The term of this Agreement shall be from
Commencement through June 30, 2000 and the granting of relevant
Performance Options to Employee pursuant to Section 4.b. hereunder,
subject to Employer's Right to Earlier Termination ("ERET"). For the
purpose of this document, and notwithstanding any other provision of
this Agreement, ERET provides that Employer may terminate Employee's
employment, in Employer's sole and absolute discretion, prior to the
completion of Employee's sixth (6th) full month of employment. If
Employer exercises its rights to early termination under this
provision, Employee shall be entitled solely to a lump sum payment of
Twenty Five Thousand Dollars ($25,000.00) together with any unpaid
balances due Employee through the date of termination pursuant to the
Base Salary provisions of his Compensation, as hereinafter defined, and
the reimbursement of any bona fide business expenses incurred by
Employee on behalf of Employer in performing his duties hereunder and
other pro rata benefits and reimbursements such as, but not limited to,
automobile allowances due Employee through the date of termination,
which will be paid to Employee concurrent with said termination.
Employer may, at any time, terminate this Agreement immediately with
"cause" upon written notice to Employee. "Cause" shall include one or
more of the following: (i) the commission
2
<PAGE>
in the course of his employment by Employer of embezzlement, theft or other
dishonest or fraudulent acts; (ii) conviction of a felony, whether or not
committed in the course of his employment by Employer; (iii) immoral or
reprehensible conduct which would make Employee's continued employment by
Employer prejudicial to the interests of Employer or its affiliates; (iv)
willful malfeasance or
gross negligence which would tend to have a material adverse effect on Employer
or its business; (v) persistent inattention or failure by Employee to discharge
his duties and responsibilities; and (vi) the material breach by Employee of
this Agreement which breach remains uncured for ten (10) days after written
notice of such breach.
Should Employer elect to terminate employment of Employee, other than
for "cause" as herein above defined, and after ERET, Employee shall be entitled
to a lump sum payment equal to fifty percent (50%) of the unpaid value of all
Compensation for the full Term of this Agreement as defined in Section 3, but in
no event shall this lump sum amount be less than twenty five thousand dollars
($25,000). In addition Employee shall be entitled to a pro rata portion of the
Additional Compensation, as defined in Section 4. of this Agreement, for the
remainder of the then current employment year of this Agreement. Such pro rata
portion shall be calculated by multiplying thirty thousand (30,000) shares of
Decor Group, Inc.'s common stock and thirty thousand (30,000) options to
purchase shares of Decor Group, Inc.'s common stock, respectively, by the
quotient derived when the number of days expired in the then current employment
year is divided by three hundred sixty five (365). In addition the Employee
shall be entitled to reimbursement of any bona fide business expenses incurred
by Employee on behalf of Employer in performing his duties hereunder and other
pro rata benefits and reimbursements such as, but not limited to, automobile
allowances due
3
<PAGE>
Employee through the date of termination, which will be paid to Employee
concurrent with said termination. However, with respect to Annual Bonus #1 and
Annual Bonus #2 of Section 3. ("Compensation"), Employee will only be entitled
to a pro rata portion calculated based on the Fiscal year-to-date performance of
Employer.
3. Compensation. As compensation for the performance by
Employee of his obligations and duties under this Agreement, in any
capacity including, without limitation, services as an executive,
officer, director or member of any committee of Employer or any
subsidiary, parent, affiliate or division of Employer, Employer shall
pay to Employee during the Employment Period:
a. Base Salary. An amount equal to One Hundred Thousand Dollars
($100,000.00) per annum in twenty four (24) equal payments, paid
twice per month after Commencement. Employer's Board of Directors
will review Employee's Base Salary annually in order to determine
whether to increase Base Salary. Any such increase will be
effective on, and retroactive to, the respective anniversary of
Commencement.
b. Annual Bonus #1. An amount equal to ten percent (10%) of
Employee's Base Salary earned in the Base Measurement Period, which
is defined for the purpose of this Agreement as the twelve (12)
months preceding the last day of March, which is the end of
Employer's Fiscal Year, provided Employer's Net Profit Before
Taxes, excluding all costs recorded by the Employer as a result of
its issuance of the Signing Bonus pursuant to Section 4(a) hereof
("NPBT"), in the Base Measurement Period equals or exceeds the NPBT
of Employer in the twelve (12) months preceding the
4
<PAGE>
Base Measurement Period.
c. Annual Bonus #2. An amount equal to Five Percent (5%) of
Employer's increases in NPBT in the Base Measurement Period
over the twelve (12) months preceding the Base Measurement
Period. However, said Bonus #2 will in no event exceed Forty
Percent (40%) of Employee's Base Salary earned in the Base
Measurement Period.
NPBT shall be determined by Employer's regularly retained
certified public accountants, whose calculations and determination
shall be binding on the parties hereto. Bonuses #1 & 2 shall be paid to
Employee within thirty (30) days of said accountants' calculations and
determinations.
4. Additional Compensation. Provided that this Agreement has
not been terminated in accordance with ERET, Decor will issue Employee
shares of the common stock of Decor ("Common Stock") and options to
purchase shares of Common Stock as later defined herein.
a. Signing Bonus. On the date of Commencement and on each of
January 2, 1998 and January 2, 1999 (the "Grant Dates"), the
Employee shall receive, so long as Employee continues to be
employed by the Employer and NPBT in the Base Measurement Period
equals or exceeds the NPBT of the Employer in the twelve (12)
months preceding the Base Measurement Period, options (the "Initial
Options") to purchase thirty thousand (30,000) shares of Common
Stock at an exercise price equal to one hundredth of one cent
($.0001) per share for a period of six (6) years following relevant
Grant Date which Initial Options to be substantially in the form of
the Option Agreement to be delivered to Employee by no later than
January 15, 1997. The shares
5
<PAGE>
of Common Stock issuable upon exercise of the Initial Options shall
be registered by Decor with the Securities and Exchange Commission
for sale to the public and twenty percent (20%) of the Initial
Options shall vest on each annual anniversary following the
relevant Grant Date.
b. Performance Options. Employee shall be entitled to
receive a performance bonus in the form of stock options based upon
the Employer's financial performance during each of the Employer's
fiscal years ending March 31, 1998, 1999 and 2000. So long as
Employee is employed by the Employer, Employee shall receive
options to purchase thirty thousand (30,000) shares of Decor's
Common Stock under the terms of Decor's 1996 Stock Plan (the
"Performance Options"), immediately following the completion of the
calculation of the Employer's financial results for the relevant
fiscal year; provided however, Employee shall not be entitled to
receive Performance Options for the relevant fiscal year in the
event that the Employer's NPBT (as reflected on the Employer's
financial statements) do not exceed one hundred fifteen percent
(115%) of the Employer's NPBT for the preceding fiscal year. The
Performance Options shall be exercisable for a period of one (1)
year following the date of grant at an exercise price equal to the
average closing price as reported on the NASD OTC Bulletin Board or
any other public exchange which may then be the primary market for
the shares of Common Stock for the twenty (20) trading days ending
two (2) trading days prior to the date the Performance Options are
granted to Employee. In the event that an active market in the
stock does not exist, then the Board of Directors of Decor shall
set the exercise price of the Performance Options
6
<PAGE>
equal to the fair value of the shares of Common Stock as determined
in the Board's discretion.
5. Expense Reimbursement.
a. Travel & Entertainment. Employer shall reimburse
Employee for all authorized reasonable and necessary expenses
incurred by him in performing his duties for the Employer,
including without limitation, travel and entertainment expenses
within approved budgetary amounts. Travel reimbursement will
include an automobile allowance of Three Hundred Fifty Dollars
($350.00) per month, payable on the fifteenth (15th) day of each
month or the first (1st) business day following the fifteenth
(15th) of the month in the event the fifteenth (15th) day of the
month does not fall on a business day.
b. Relocation. Provided that Employer has not
exercised its rights to terminate Employee's employment pursuant to
ERET as provided herein, Employer will reimburse Employee for
moving expenses Employee may incur pursuant to Employee's
relocation of his residence closer to Employer's place of business,
in an amount not to exceed Five Thousand Dollars ($5,000.00), upon
submittal by Employee of evidence of such moving expenditures.
6. Benefits. Employee and Employee's family shall be entitled
to receive or participate in all fringe benefits which are provided or
made available by Employer, on the same terms and conditions as they
are furnished to other of Employer's senior executive personnel and
their families so long as such benefits do not result in prohibitive or
excessive costs to the Employer. By way of example, and neither
indicative nor inclusive, such benefits may
7
<PAGE>
include medical, dental, optical, life and/or long term disability
insurances, retirement plans, etc.
7. Vacation. Employee shall be entitled to two (2) weeks paid
vacation each year of the Employment Period. The vacation is to be
taken at such time or times, and for such duration, as Employee and
Employer shall determine, provided, however, that such vacation shall
not unduly interfere with the performance by Employee of his duties and
responsibilities hereunder.
8. Confidentiality. Employee will not disclose to third parties
any information or documents which are confidential and proprietary
to Employer except in furtherance of the Employer's business.
9. Covenant Not to Compete. Employee will not compete with
Employer during the term of this agreement, and in the even that
Employee is terminated for "cause" , for an additional one (1) year
period following the date of termination. Competition shall include
ownership, directly or indirectly, by Employee or any member of his
family of shares of stock or any equity or loan interest in a business
which competes directly or indirectly with Employer. The terms of this
Section (Section 9.-"Covenant Not to Compete") shall also apply to
entities which are or which may become affiliated with Employer only in
the event that Employee becomes operationally involved in any such
affiliate.
10. Enforcement. Any provision of this Agreement which is
finally determined by competent authority to be prohibited or
unenforceable in any jurisdiction shall, as to such provision and
jurisdiction only, be deemed severed to the extent of such prohibition
on unenforceability, and, subject to such severance, this Agreement
shall continue in force and
8
<PAGE>
effect in accordance with its other terms and conditions.
11. Entire Understanding. This Agreement constitutes the complete
understanding between the parties with respect to the subject matter
hereof, supersedes all prior oral or written understandings and
agreements relating thereto and shall not be modified, amended or
terminated except as provided herein or by written instrument signed by
both parties hereto. No party is acting in reliance upon any
representations or guarantee of the other, aside from those explicitly
provided for in this Agreement.
The failure by any party hereto to object to any breach of
this Agreement, or to enforce at any time or for any period any provision of
this Agreement, shall not constitute a waiver of such provision or of such
party's rights or remedies, or a consent to the modification of the Agreement.
For the purposes of this Agreement, "breach" by the Employer s
hall also be defined to include the Employer's parent corporation's (Decor
Group, Inc.) failure to comply with it's obligations under the terms of this
Agreement which relate to Additional Compensation (Section 4. hereof) and common
stock and option to purchase common stock compensation as defined in Term;
Termination (Section 2. hereof).
12. Successors and Assigns. This Agreement shall not be
assignable by the Employee but it is binding upon and shall inure to
the benefit of the parties hereto and Employee's heirs and personal
representative, and upon and to the benefit of Employer's successors
and assigns.
13. Notices. All notices hereunder must be given by certified
mail or overnight courier if to the Employer addressed to it c/o
Interiors, Inc. 320 Washington Street, Mount Vernon, NY 10553,
Attention: Max Munn; and if to the Employee addressed to him at 732
Panorama
9
<PAGE>
Road, Fullerton, CA 92831.
14. Governing Law. Any and all disputes, controversies and
claims arising out of or relating to this Agreement or concerning the
respective rights or obligations of the parties hereto shall be settled
and determined in the State of New York before a court of competent
jurisdiction.
The validity, construction and performance of this Agreements
shall be governed by and interpreted in accordance with the laws of the State
of New York.
15. Headings. The headings herein are for convenience only and
shall not control or affect the meaning or construction of any
provision of this Agreement.
16. Counterparts. This Agreement may be signed in counterparts,
all of which when taken together as a whole shall constitute a valid
and binding agreement of the parties.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
DECOR GROUP, INC. ARTISAN ACQUISITION CORPORATION
By: /s/ Max Munn By: /s/ Max Munn
---------------------- -------------------------
Max Munn, President Max Munn, President
Dennis D. D'Amore
-------------------------
DENNIS D. D'AMORE
11
<PAGE>
EXHIBIT 10.18
RETAIL LICENSE
WARNER BROS. CONSUMER PRODUCTS
#7633-SPJ
LICENSE AGREEMENT made 12/03/96, by and between WARNER BROS., A DIVISION OF TIME
WARNER ENTERTAINMENT COMPANY, L.P., c/o WARNER Bros. Consumer Products, a Time
Warner Entertainment Company, 4000 Warner Blvd. Burbank, CA 91522 (hereinafter
referred to as "LICENSOR") and ARTISAN HOUSE, whose address is 1755 Glendale
Blvd., Los Angeles, CA 90026 Attn.: Henry Goldman (hereinafter referred to as
"LICENSEE").
WITNESSETH:
The parties hereto mutually agree as follows:
1. DEFINITIONS: As used in this Agreement, the following terms shall have
the following respective meanings:
(a) "Channels of Distribution": Licensee may sell the Licensed
Products only through the following channels of distribution:
mid-tier, furniture stores and specialty catalogs (direct
mail to consumer).
(b) "Guaranteed Consideration": The sum of $15,000.00 payable as
follows:
$3,000.00 payable simultaneously with the execution of this
Agreement; and
$4,000.00 payable on or before January 31, 1997; and
$4,000.00 payable on or before April 30, 1997; and
$4,000.00 payable on or before July 31, 1997.
(c) "Licensed Product(s)": Metal Wall Sculptures and tabletop
sculpture
(d) "Licensed Property": Those certain elements depicted in the
theatrical motion picture entitled "SPACE JAM" (the "Motion
Picture"), including all trademarks, copyrights, related
logos, indicia, set and costume designs, and other elements
depicted therein. In addition, the Licensed Property shall
also include the representations, names, logos, movements,
personalities, artwork, photographs and other material in
connection with the animated characters NERDLUCKS, MONSTARS,
SWACKHAMMER, and LOLA BUNNY as well as the following "Looney
Tunes" animated characters as depicted in the Motion Picture:
BUGS BUNNY, DAFFY DUCK, SYLVESTER, TWEETY, ROAD RUNNER, WILE
E. COYOTE, TASMANIAN DEVIL, ELMER FUDD, PORKY PIG, YOSEMITE
SAM, PEPE LE PEW and MARVIN THE MARTIAN only. Specifically
excluded herein, however, is the right to reproduce the
likenesses of the performers except to the extent specifically
permitted otherwise in writing by Licensor and then only to
the extent such performers have granted merchandising rights
to Licensor. Notwithstanding the foregoing, all uses of any
of the elements set forth above, including the names and
likenesses of any of the performers afforded hereunder must be
specifically approved in writing by Licensor, pursuant to
Paragraph 9 herein.
Licensee acknowledges that the rights granted herein are
limited only to the elements contained in the Motion Picture
and that any and all rights in, to or associated with any
subsequently produced motion picture, as well as with any
sequels thereto, as well as with any subsequently produced
television series are specifically excluded herefrom.
<PAGE>
Further, Licensee specifically understands and agrees that
no rights are granted herein with respect to the Warner Bros.
"LOONEY TUNES" characters not associated with the Motion
Picture, it being understood that all rights in and to said
characters are reserved exclusively to Licensor for use and/or
licensing as it deems appropriate to third party(s) of its
choice.
Licensee understands and agrees that Licensee has no rights in
and to Michael Jordan and his name, likeness and voice and
uniform (including, without limitation, the number 23) and
that Michael Jordan's name, likeness and voice (including,
without limitation, the number 23) and shall not be utilized
or reproduced under any circumstances.
(e) "Marketing Date": February 1, 1997
(f) "Royalty Rate": Licensee shall pay to Licensor the sum equal
to Twelve Percent (12%) of all net sales by Licensee of the
Licensed Product(s).
(g) "Term": December 1, 1996 through December 31, 1997
(h) "Territory": United States (fifty states)
2. GRANT OF LICENSE:
(a) Subject to the restrictions, limitations, reservations and
conditions and Licensor's approval rights set forth in this
Agreement, Licensor hereby grants to Licensee and Licensee
hereby accepts for the Term of this Agreement, a license to
utilize the Licensed Property solely on or in connection with
the manufacture, distribution and sale of the Licensed
Products as specified above for the ultimate retail sale to
the public throughout the Territory on a non-exclusive basis.
(b) Without limiting any other approval rights of Licensor as
contained herein, no television commercials may be utilized
under this Agreement without the specific prior written
approval of Licensor.
3. RESERVATION OF RIGHTS; PREMIUMS:
(a) Licensor reserves all rights not expressly conveyed to
Licensee hereunder, and Licensor may grant licenses to others
to use the Licensed Property, artwork and textual matter in
connection with other uses, services and products without
limitation.
(b) Notwithstanding anything to the contrary stated herein,
Licensor specifically reserves the right, without limitation
throughout the world, to itself use, or license any third
party(s) of its choice to use the Licensed Property for the
manufacture, distribution and sale of products, subjecto
Licensee's proprietary rights, similar to those licensed
herein in Paragraph 1(c) above for sale through any
catalogue(s) produced or distributed by or on behalf of
Licensor or its affiliated companies, or for sale or
distribution in any theaters or arena or for sale or
distribution in any retail stores operated by or on behalf of
Licensor, its affiliated companies or franchises or for sale
or distribution in any theme/amusement parks operated by or on
behalf of Licensor and its affiliated companies, including
without limitation, the Six Flags and Movie World parks. In
addition, Licensor reserves the right to allow Six Flags
Corporation and Movie World to manufacture (or have
#7633-SPJ - Page 2
<PAGE>
manufactured by a third party) products similar, subject to
Licensee's proprietary rights, to those licensed herein for
distribution or sale in theme and/or amusement parks owned or
operated by both Six Flags Corporation and Movie World.
Further, Licensor reserves the right to use, or license others
to use, and/or manufacture products similar or identical to
those licensed herein for use as premiums.
(c) Licensee specifically understands and agrees that no rights
are granted herein with respect to the Warner Bros. "shield"
logo or trademark, or any other trademark(s), logo(s) or
copyrights owned by Licensor other than those specifically set
forth above in the Licensed Property, it being understood that
all rights in and to said properties are reserved exclusively
to Licensor for use and/or licensing as it deems appropriate
to third party(s) of its choice.
(d) Licensee agrees that it will not use, or knowingly permit the
use of, and will exercise due care that its customers likewise
will refrain from the use of, the Licensed Products as a
premium, except with the prior written consent of Licensor.
Subject to Licensor's prior written approval as aforesaid,
Licensee shall pay to Licensor a sum equal to TWELVE PERCENT
(12%) of all premium sales. For purposes of this paragraph,
the term "premium" shall be defined as including, but not
necessarily limited to, combination sales, free or
self-liquidating items offered to the public in conjunction
with the sale or promotion of a product or service, including
traffic building or continuity visits by the
consumer/customer, or any similar scheme or device, the prime
intent of which is to use the Licensed Products in such a way
as to promote, publicize and or sell the products, services or
business image of the user of such item.
4. CONSIDERATION:
(a) The Guaranteed Consideration paid by Licensee as set forth
above shall be applied against such royalties as are, or have
become, due to Licensor. No part of such Guaranteed
Consideration shall be repayable to Licensee. Royalties earned
in excess of the Guaranteed Consideration applicable to the
Term hereof shall not offset any Guaranteed Consideration
required in respect of the succeeding renewal term (if any);
likewise, royalties earned in excess of the Guaranteed
Consideration applicable to the renewal term (if any) shall
not offset any Guaranteed Consideration applicable to any
prior term.
(b) Royalty Payments: Licensee shall pay to Licensor a sum equal
to the Royalty Rate as set forth above of all net sales by
Licensee of the Licensed Products covered by this Agreement.
The term "net sales" herein shall mean the gross invoice price
billed customers, less actual quantity discounts and actual
returns, but no deductions shall be made for uncollectible
accounts and deductions for actual returns may not exceed 5%
of total sales. No costs incurred in the manufacture, sale,
distribution, advertisement, or exploitation of the Licensed
Products shall be deducted from any royalties payable by
Licensee.
(c) Royalties shall be payable concurrently with the periodic
statements required in Paragraph 5 hereof, except to the
extent offset by Guaranteed Consideration theretofore
remitted.
#7633-SPJ - Page 3
<PAGE>
5. PERIODIC STATEMENTS.
(a) Within THIRTY (30) days after the initial shipment of the
Licensed Product(s) and promptly on the thirtieth (30th) day
after every month thereafter, Licensee shall furnish to
Licensor complete and accurate statements certified to be
accurate by Licensee, or if a corporation, by an officer of
Licensee, showing with respect to all Licensed Product(s)
distributed and sold by Licensee during the preceding calendar
month the number of units, description of items sold
(specifying the components of the Licensed Property utilized
and specifying the nature of the Licensed Product(s), gross
sales price and itemized deductions from gross sales price,
and net sales price together with any returns made during the
preceding calendar month. Such statements shall be furnished
to Licensor whether or not any of the Licensed Product(s) have
been sold during calendar months to which such statements
refer. Receipt or acceptance by Licensor of any of the
statements furnished pursuant to this Agreement or of any sums
paid hereunder shall not preclude Licensor from questioning
the correctness thereof at any time, and in the event that any
inconsistencies or mistakes are discovered in such statements
or payments, they shall immediately be rectified and the
appropriate payments made by Licensee. Upon demand of
Licensor, Licensee shall at its own expense, but not more than
once in any TWELVE (12) month period, furnish to Licensor a
detailed statement by an independent certified public
accountant showing the number, description of items sold
specifying the components of the Licensed Property utilized
and nature of Licensed Product(s), gross sales price itemized
deductions from gross sales price and net sales price of the
Licensed Product(s) covered by this Agreement distributed
and/or sold by Licensee up to and including the date upon
which Licensor has made such demand.
(b) The statements and payments required hereunder shall be
delivered to:
Warner Bros. Consumer Products
4000 Warner Boulevard
Bridge Building, 4th Floor
Burbank, California 91522
Attn.: Asst. Controller, Domestic Accounting
(c) Licensee agrees to provide, in the event of a material default
in payment, at Licensor's request: (i) a letter of credit
issued in favor of Licensor from a financial institution as
approved by Licensor in an amount up to the Guaranteed
Consideration; and/or (ii) such other form of security
acceptable to Licensor. Licensee agrees to execute all
documentation as Licensor may require in connection with
perfecting such security interests.
(d) Any payments which are made to Licensor hereunder after the
due date required therefor, shall bear interest at the then
current prime rate (or the maximum rate permissible by law, if
less than the current prime rate) from the date such payments
are due to the date of payment. Licensor's right hereunder to
interest on late payments shall not preclude Licensor from
exercising any of its other rights or remedies pursuant to
this Agreement or otherwise with regard to Licensee's failure
to make timely remittances.
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<PAGE>
6. BOOKS AND RECORDS.
(a) Licensee shall keep, maintain and preserve (in Licensee's
principal place of business) for at least two (2) years
following termination or expiration of the term of this
Agreement or any renewal(s) hereof, complete and accurate
records of accounts including, without limitation, purchase
orders, inventory records, invoices, correspondence, banking
and financial and other records pertaining to the various
items required to be submitted by Licensee. Such records and
accounts shall be available for inspection and audit at any
time or times during or after the term of this Agreement or
any renewal(s) hereof during reasonable business hours and
upon reasonable notice by Licensor or its nominees. Licensee
agrees not to cause or permit any interference with Licensor
or nominees of Licensor in the performance of their duties.
During such inspections and audits, Licensor shall have the
right to take extracts and/or make copies of Licensee's
records as it deems necessary.
(b) The exercise by Licensor in whole or in part, at any time of
the right to audit records and accounts or of any other right
herein granted, or the acceptance by Licensor of any statement
or statements or the receipt and/or deposit by Licensor, of
any payment tendered by or on behalf of Licensee shall be
without prejudice to any rights or remedies of Licensor and
such acceptance, receipt and/or deposit shall not preclude or
prevent Licensor from thereafter disputing the accuracy of any
such statement or payment.
(c) If pursuant to its rights hereunder Licensor causes an audit
and inspection to be instituted which thereafter discloses a
deficiency between the amount found to be due to Licensor and
the amount actually received or credited to Licensor, then
Licensee shall be responsible for payment of the deficiency,
together with interest thereon at the then current prime rate
from the date such amount became due until the date of
payment, and, if the deficiency is more than 3%, then Licensee
shall pay the reasonable costs and expenses of such audit and
inspection.
7. INDEMNIFICATIONS.
(a) During the Term, and continuing after the expiration or
termination of this Agreement, Licensor shall indemnify
Licensee and shall hold it harmless from any loss, liability,
damage, cost or expense arising out of any claims or suits
which may be brought or made against Licensee by reason of the
breach by Licensor of the warranties or representations as set
forth in Paragraph 12 hereof, provided that Licensee shall
give prompt written notice, and full cooperation and
assistance to Licensor relative to any such claim or suit and
provided, further, that Licensor shall have the option to
undertake and conduct the defense of any suit so brought.
Licensee shall not, however, be entitled to recover for lost
profits. Licensee shall cooperate fully in all respects with
Licensor in the conduct and defense of said suit and/or
proceedings related thereto.
(b) During the Term, and continuing after the expiration or
termination of this Agreement, Licensee shall indemnify
Licensor and shall hold it harmless from any loss, liability,
damage, cost or expense arising out of any claims or suits
which may be brought or made against Licensor by reason of:
(i) any breach of Licensee's covenants and undertakings
hereunder, including those set
#7633-SPJ - Page 5
<PAGE>
forth in Paragraph 13 hereof; (ii) any unauthorized use of the
Licensed Property; (iii) any use of any trademark, copyright,
design, patent, process, method or device, except for those
uses of the Licensed Property that are specifically approved
by Licensor pursuant to the terms of this Agreement; (iv)
Licensee's non-compliance with any applicable federal, state
or local laws or with any other applicable regulations; and
(v) any alleged defects and/or inherent dangers (whether
obvious or hidden) in the Licensed Product(s) or the use
thereof.
(c) With regard to 7(b) above, Licensee agrees to obtain, at its
own expense, product liability insurance providing adequate
protection for Licensor and Licensee against any such claims
or suits in amounts no less than two million dollars
($2,000,000) per occurrence, combined single limits.
Simultaneously with the execution of this Agreement, Licensee
undertakes to submit to Licensor a fully paid policy or
certificate of insurance naming Licensor as an additional
insured party and, requiring that the insurer shall not
terminate or materially modify such without written notice to
Licensor at least twenty (20) days in advance thereof.
8. ARTWORK; COPYRIGHT AND TRADEMARK NOTICES.
(a) The Licensed Property shall be displayed or used only in such
form and in such manner as has been specifically approved in
writing by Licensor in advance and Licensee undertakes to
assure usage of the Trademark(s) and the License Property
solely as approved hereunder. Licensee further agrees and
acknowledges that any and all artwork authorized for use
hereunder by Licensor in connection with the Licensed
Product(s) or which otherwise features or includes the
Licensed Property shall be owned in its entirety exclusively
by Licensor. Licensor reserves for itself or its designees all
rights to use any and all artwork created, utilized and/or
approved hereunder without limitation.
(b) Licensee acknowledges that, as between Licensor and Licensee,
the Licensed Property and all copyrights, trademarks and other
proprietary rights in and to the Licensed Property are owned
exclusively by Licensor. Licensee acknowledges that Licensor
shall have the right to terminate this Agreement in the event
Licensee asserts any rights (other than those granted pursuant
to the Agreement) in or to the Licensed Property. Licensee
further agrees and acknowledges that Licensor shall own the
copyright and other proprietary rights in any and all artwork
authorized for use hereunder that incorporates the Licensed
Property. At the request of Licensor, Licensee shall execute
such form(s) of assignment of copyright in any amendments or
derivative works based in whole or part on the Licensed
Property as Licensor may reasonably request. If any third
party makes or has made any contribution to the creation of
artwork authorized for use hereunder, Licensee agrees to
obtain from such party a full assignment of rights so that the
foregoing assignment by Licensee shall vest full rights in
Licensor.
(c) Licensee shall, within thirty (30) days of receiving an
invoice, pay Licensor. for artwork executed by Licensor (or by
third parties under contract to Licensor) for use in the
development of the Licensed Product(s) and any related
packaging, display and promotional materials at Licensor's
prevailing commercial art rates. The foregoing shall include
any artwork that, in Licensor's opinion, is necessary to
modify artwork initially
#7633-SPJ - Page 6
<PAGE>
prepared by Licensee and submitted for approval. Estimates of
artwork charges are available upon request.
(d) Licensee shall cause to be imprinted, irremovably and legibly
on each Licensed Product(s) manufactured, distributed or sold
under this Agreement, and all advertising, promotional,
packaging and wrapping material wherein the Licensed Property
appears, the following as directed by Licensor:
(i) The appropriate Copyright Notices, as directed and in
each instance specified by Licensor, including an
encircled c, the name of Licensor, year date of first
publication of the art and/or textual material
generally in the following form:
TM & (c) l996 Warner Bros.
(ii) The appropriate Trademark Notices with respect to the
Trademark(s) and Character(s) (and any component
thereof) as specified in each instance by Licensor,
including the initials "TM", or the letter "R"
encircled or "* "(asterisk), and/or such legend(s) as
may be required by Licensor, including but not
limited to a legend indicating that the Licensed
Property (and any component thereof) are trademarks
of Licensor used under license by Licensee.
(e) In no event shall Licensee use, in respect to the Licensed
Product(s) and/or in relation to any advertising, promotional,
packaging or wrapping material, any copyright or trademark
notices which shall conflict with, be confusing with, or
negate, any notices required hereunder by Licensor in respect
to the Licensed Property.
(f) Licensee agrees to deliver to Licensor free of cost three (3)
of each of the Licensed Product(s) together with their
packaging and wrapping material for trademark registration
purposes in compliance with applicable laws, simultaneously
upon distribution to the public. Any copyrights or trademarks
with respect to the Licensed Property shall be procured by and
for the benefit of Licensor and at Licensor's expense.
Licensee further agrees to provide Licensor with the date of
the first use of the Licensed Product(s) in interstate and
intrastate commerce.
(g) Licensee shall assist Licensor, at Licensor's expense, in the
procurement, protection, and maintenance of Licensor's rights
to the Licensed Property. Licensor may, in its sole
discretion, commence or prosecute and effect the disposition
of any claims or suits relative to the imitation, infringement
and/or unauthorized use of the Licensed Property either in its
own name, or in the name of Licensee, or join Licensee as a
party in the prosecution of such claims or suits. Licensee
agrees to cooperate fully with Licensor in connection with any
such claims or suits and undertakes to furnish full assistance
to Licensor in the conduct of all proceedings in regard
thereto. Licensee shall promptly notify Licensor in writing of
any infringements or imitations or unauthorized uses by others
of the Licensed Property, on or in relation to products
identical or similar to or related to the Licensed Product(s).
Licensor shall in its sole discretion have the right to settle
or effect compromises in respect thereof. Licensee shall not
institute any suit or take any action on account of such
infringements, imitaions or unauthorized uses.
#7633-SPJ - Page 7
<PAGE>
9. APPROVALS AND QUALITY CONTROLS.
(a) Licensee agrees to comply and maintain compliance with the
quality standards and specifications of Licensor in respect to
all usage of the Licensed Property on or in relation to the
Licensed Product(s) throughout the Term of this Agreement and
any renewals or extensions thereof. Licensee agrees to furnish
to Licensor free of cost for its written approval as to
quality and style, samples of each of the Licensed Product(s)
together with their packaging, hangtags, and wrapping
material, as follows in the successive stages indicated (a)
rough sketches/layout concepts; (b) finished artwork or final
proofs; (c) preproduction samples or strike-offs; (d) finished
products, including packaged samples.
(b) No Licensed Product(s) and no material whatever utilizing the
Licensed Property shall be manufactured, sold, distributed or
promoted by Licensee without prior written approval. Licensee
may, subject to Licensor's prior written approval, use textual
and/or pictorial matter pertaining to the Licensed Property on
such promotional, display and advertising material as may, in
its reasonable judgment, promote the sale of the Licensed
Product(s). All advertising and promotional material relating
to the Licensed Product(s) must be submitted to the Licensor
for its written approval at the following stages appropriate
to the medium used: (a) rough concepts (b) layout, storyboard,
script; and (c) finished materials.
(c) Approval or disappoval shall lie in Licensor's sole
discretion. Any Licensed Product(s) not approved in writing
shall be deemed unlicensed and shall not be manufactured or
sold. If any unapproved Licensed Product(s) are being sold,
Licensor may, together with other remedies available to it
including, but not limited to, immediate termination of this
Agreement, require such Licensed Product(s) to be immediately
withdrawn from the market and to be destroyed, such
destruction to be attested to in a certificate signed by an
officer of Licensee.
(d) Any modification of a Licensed Product must be submitted in
advance for Licensor's written approval as if it were a new
Licensed Product. Approval of a Licensed Product which uses
particular artwork does not imply approval of such artwork for
use with a different Licensed Product.
(e) Licensed Product(s) must conform in all material respects to
the final production samples approved by Licensor. If in
Licensor's reasonable judgement, the quality of a Licensed
Product originally approved has deteriorated in later
production runs, or if a Licensed Product has otherwise been
altered, Licensor may, in addition to other remedies available
to it, require that such Licensed Product be immediately
withdrawn from the market.
(f) Licensee shall permit Licensor, upon reasonable notice, to
inspect Licensee's manufacturing operations and testing
records (including those operations and records of any
supplier or manufacturer approved pursuant to Paragraph 10
below) with respect to the Licensed Product(s).
(g) If any changes or modifications are required to be made to any
material submitted to Licensor for its written approval in
order to ensure compliance with Licensor's specifications or
standards of quality, Licensee agrees
#7633-SPJ - Page 8
<PAGE>
promptly to make such changes or modifications. Subsequent to
final approval, fewer than three (3) production samples of
Licensed Product(s) will be sent to Licensor, to ensure
quality control simultaneously upon distribution to the
public. In addition, Licensor shall have the right to purchase
any and all Licensed Product(s) in any quantity at the price
Licensee charges its best customer at the maximum discount
price.
(h) To avoid confusion of the public, Licensee agrees not to
associate other characters or licensed properties with the
Licensed Property on the Licensed Product(s) or in any
packaging, promotional or display materials unless Licensee
receives Licensor's prior written approval. Furthermore,
Licensee agrees not to use the Licensed Property (or any
component thereof) on any business sign, business cards,
stationery or forms, nor to use the Licensed Property as part
of the name of Licensee's business or any division thereof.
(i) Licensee shall use its best efforts to notify its customers of
the requirement that Licensor has the right to approve all
promotional, display and advertising material pursuant to this
Agreement.
(j) It is understood and agreed that any animation used in
electronic media, including but not limited to animation for
television commercials and character voices for radio
commercials, shall be produced by Warner Bros. Animation
pursuant to a separate agreement between Licensee and Warner
Bros. Animation, subject to Warner Bros. Animation customary
rates. Any payment made to Warner Bros. Animation for such
animation shall be in addition to and shall not offset the
Consideration set forth in Paragraph 4.
(k) Licensor's approval of Licensed Product(s) (including without
limitation, the Licensed Product(s) themselves as well as
promotional, display and advertising materials) shall in no
way constitute or be construed as an approval by Licensor of
Licensee's use of any trademark, copyright and/or other
proprietary materials not owned by Licensor.
10. DISTRIBUTION: SUB-LICENSE MANUFACTURE.
(a) Within the Channels of Distribution as set forth in Paragraph
1(a) hereof, Licensee shall sell the Licensed Product(s)
either to jobbers, wholesalers, distributors or retailers for
sale or resale and distribution directly to the public. Unless
explicitly set forth in Paragraph 1(a) hereof, Licensee shall
not sell the Licensed Product(s) through any cable home
shopping service without the prior written consent of
Licensor, it being expressly understood that Licensor will
consent to the sale of individual Licensed Products, but will
not consent to a "full show" dedicated to the sale of a line
of the Licensed Products. If Licensee sells or distributes the
Licensed Product(s) at a special price, directly or
indirectly, to itself, including without limitation, any
subsidiary of Licensee or to any other person, firm, or
corporation affiliated with Licensee or its officers,
directors or major stockholders, for ultimate sale to
unrelated third parties, Licensee shall pay royalties with
respect to such sales or distribution, based upon the price
generally charged to the trade by Licensee.
(b) Licensee shall not be entitled to sub-license any of its
rights under this Agreement. In the event Licensee is not the
manufacturer of the Licensed Product(s), Licensee
#7633-SPJ - Page 9
<PAGE>
shall be, subject to the prior written approval of Licensor
(which approval shall not be unreasonably withheld), be
entitled to utilize a third party manufacturer in connection
with the manufacture and production of the Licensed Product(s)
provided that such manufacturer shall execute a letter in the
form of Exhibit 1 attached hereto and by this reference made a
part hereof. In such event, Licensee shall remain primarily
obligated under all of the provisions of this Agreement. In no
event shall any such sublicense agreement include the right to
grant any further sublicenses.
11. GOODWILL.
Licensee recognizes the great value of the publicity and
goodwill associated with the Licensed Property and, acknowledges (i)
such goodwill is exclusively that of Licensor and (ii) that the
Licensed Property have acquired a secondary meaning as Licensor's
trademarks and/or identifications in the mind of the purchasing public.
Licensee further recognizes and acknowledges that a breach by Licensee
of any of its covenants, agreements or undertakings hereunder will
cause Licensor irreparable damage, which cannot be readily remedied in
damages in an action at law, and may, in addition thereto, constitute
an infringement of Licensor's copyrights, trademarks and/other
proprietary rights in, and to the Licensed Property, thereby entitling
Licensor to seek equitable remedies and costs.
12. LICENSOR'S WARRANTIES AND REPRESENTATIONS.
Licensor represents and warrants to Licensee that:
(a) It has, and will have throughout the Term of this Agreement,
the right to license the Licensed Property to Licensee in
accordance with the terms and provisions of this Agreement;
and
(b) The making of this Agreement by Licensor does not violate any
agreements, rights or obligations existing between Licensor
and any other person, firm or corporation.
13. LICENSEE'S WARRANTIES AND REPRESENTATIONS.
Licensee represents and warrants to Licensor that, during the Term and
thereafter:
(a) It will not attack the title of Licensor or its Grantors in
and to the Licensed Property or any copyright or trademark
pertaining thereto, nor will it attack the validity of the
license granted hereunder;
(b) It will not harm, misuse or bring into disrepute the Licensed
Property, but on the contrary, will maintain the value and
reputation thereof to the best of its ability;
(c) It will manufacture, sell, promote and distribute the Licensed
Product(s) in an ethical manner and in accordance with the
terms and intent of this Agreement, and in compliance with all
applicable government regulations and industry standards;
(d) It will not create any expenses chargeable to Licensor without
the prior written approval of Licensor;
(e) It will protect to the best of its ability its right to
manufacture, sell, promote, and distribute the Licensed
Product(s) hereunder;
#7633-SPJ - Page 10
<PAGE>
(f) It will at all times comply with all government laws and
regulations, including but not limited to product safety,
food, health, drug, cosmetic, sanitary or other similar laws,
and all voluntary industry standards relating or pertaining to
the manufacture, sale, advertising or use of the Licensed
Product(s), and shall maintain its appropriate customary high
quality standards. It shall comply with any regulatory
agencies which shall have jurisdiction over the Licensed
Product(s) and shall procure and maintain in force any and all
permissions certifications and /or other authorizations from
governmental and/or other official authorities that may be
required in relation thereto. Each Licensed Product and
component thereof distributed hereunder shall comply with all
applicable laws, regulations and voluntary industry standards.
Licensee shall follow reasonable and proper procedures for
testing that all Licensed Product(s) comply with such laws,
regulations and standards. Upon reasonable notice, Licensee
shall permit Licensor or its designees to inspect testing
records and procedures with respect to the Licensed Product(s)
for compliance. Licensed Product(s) that do not comply with
all applicable laws, regulations and standards shall
automatically be deemed unapproved;
(g) It shall, upon Licensor's request, provide credit information
to Licensor including, but not limited to, fiscal year-end
financial statements (profit-and-loss statement and balance
sheet) and operating statements;
(h) It will provide Licensor with the date(s) of first use of the
Licensed Product(s) in interstate and intrastate commerce,
where appropriate;
(i) It will, pursuant to Licensor's instructions, duly take any
and all necessary steps to secure execution of all necessary
documentation for the recordation of itself as user of the
Licensed Property in any jurisdiction where this is required
or where Licensor reasonably requests that such recordation
shall be effected. Licensee further agrees that it will at its
own expense cooperate with Licensor in cancellation of any
such recordation at the expiration of this Agreement or upon
termination of Licensee's right to use the Licensed Property.
Licensee hereby appoints Licensor its Attorney-in-fact for
such purpose; and
(j) It will not deliver or sell Licensed Products outside the
Territory or knowingly sell Licensed Products to a third party
for delivery outside the Territory.
14. TERMINATION BY LICENSOR.
(a) Licensor shall have the right to terminate this Agreement
without prejudice to any rights which it may have in the
premises, whether pursuant to the provisions of this
Agreement, in law, or in equity, or otherwise, upon the
occurrence of any one or more of the following events (herein
called "defaults"):
(i) If Licensee defaults in the performance of any of its
obligations provided for in this Agreement; or
(ii) Licensee shall have failed to deliver to Licensor or
to maintain in full force and effect the insurance
referred to in Paragraph 7(c) hereof; or
(iii) If Licensee shall fail to make any payments due
hereunder on the date due; or
#7633-SPJ - Page 11
<PAGE>
(iv) If Licensee shall fail to deliver any of the
statements hereinabove referred to or to give access
to the premises and/or license records pursuant to
the provisions hereof to Licensor's authorized
representatives for the purposes permitted hereunder;
or
(v) If Licensee shall fail to comply with any laws,
regulations or voluntary industry standards as
provided in Paragraph 13(f) or if any governmental
agency or other body, office or official vested with
appropriate authority finds that the Licensed
Product(s) are harmful or defective in any way,
manner or form, or are being manufactured, sold or
distributed in contravention of applicable laws,
regulations or standards, or in a manner likely to
cause harm; or
(vi) If Licensee shall be unable to pay its debts when
due, or shall make any assignment for the benefit of
creditors, or shall file any petition under the
bankruptcy or insolvency laws of any jurisdiction,
county or place, or shall have or suffer a receiver
or trustee to be appointed for its business or
property, or be adjudicated a bankrupt or an
insolvent; or
(vii) In the event that Licensee does not commence in good
faith to manufacture, distribute and sell the
Licensed Product(s) and utilize the Characters set
forth in the Licensed Property within the Territory
on or before the Marketing Date and thereafter fails
to diligently and continuously manufacture,
distribute and sell the Licensed Products and utilize
the Characters within the Territory. Such default and
Licensor's resultant right of termination (or
recapture) shall only apply to the specific
Character(s) and/or the specific Licensed Product(s),
which or wherein Licensee fails to meet said
Marketing Date requirement; or
(viii) If Licensee shall manufacture, sell or distribute,
whichever first occurs, any of the Licensed
Products(s) without the prior written approval of
Licensor as provided in Paragraph 9 hereof; or
(ix) If Licensee undergoes a substantial change of
management; or
(x) If a manufacturer approved pursuant to Paragraph
10(b) hereof shall engage in conduct, which conduct
if engaged in by Licensee would entitle Licensor to
terminate this Agreement; or
(xi) If Licensee delivers or sells Licensed Product(s)
outside the Territory or knowingly sells Licensed
Products(s) to a third party for delivery outside the
Territory; or
(xii) If Licensee has made a material misrepresentation or
has omitted to state a material fact necessary to
make the statements not misleading; or
(xiii) If Licensee shall breach any other agreement in
effect between Licensee and Licensor.
(b) In the event any of these defaults occur, Licensor shall give
notice of termination in writing to Licensee by certified
mail. Licensee shall have ten (10) days from the date of
receiving notice in which to correct any of
#7633-SPJ - Page 12
<PAGE>
these defaults (except subdivisions (vii), (viii), (xi) and
(xii) above which are not curable), and failing such, this
Agreement shall thereupon immediately terminate, and any and
all payments then or later due from Licensee hereunder
(including Guaranteed Consideration) shall then be promptly
due and payable and no portion of prior payments shall be
repayable to Licensee.
15. FINAL STATEMENT UPON TERMINATION OR EXPIRATION.
Licensee shall deliver, as soon as practicable, but not later
than thirty (30) days following expiration or termination, a statement
indicating the number and description of Licensed Product(s) on hand
together with a description of all advertising and promotional
materials relating thereto. Following expiration or termination,
Licensee shall not continue to manufacture the Licensed Product(s).
However, if Licensee has complied with all the terms of this Agreement,
including, but not limited to, complete and timely payment of the
Guaranteed Consideration then, Licensee may continue to distribute and
sell its remaining inventory on a non-exclusive basis for a period not
to exceed SIXTY (60) days following such termination or expiration,
subject to payment of applicable royalties thereto. In no event,
however, may Licensee distribute and sell during such period an amount
of Licensed Product(s) that exceeds the average amount of Licensed
Product(s) sold during a consecutive SIXTY (60) day period during the
Term. If Licensee has any remaining inventory of the Licensed
Product(s) following such SIXTY (60) day period, Licensee shall, at
Licensor's option, make available such inventory to Licensor for
purchase at cost, deliver up to Licensor for destruction said remaining
inventory or furnish to Licensor an affidavit attesting to the
destruction of said remaining inventory. Licensor shall have the right
to conduct a physical inventory in order to ascertain or verify such
inventory and/or physical inventory. In the event this Agreement is
terminated by Licensor for cause, Licensee shall be deemed to have
forfeited its sell-off rights hereunder. In addition to the forfeiture,
Licensor shall have recourse to all other legal remedies available to
it.
16. NOTICES.
Except as otherwise specifically provided herein, all notices
which either party hereto is required or may desire to give to the
other shall be given by addressing the same to the other at the address
set forth above, or at such other address as may be designated in
writing by any such party in a notice to the other given in the manner
prescribed in this paragraph. All such notices shall be sufficiently
given when the same shall be deposited so addressed, postage prepaid,
in the United States mail and/or when the same shall have been
delivered, so addressed, to a facsimile or over-night delivery service
and the date of said mailing shall be the date of the giving of such
notice and/or transmitted via facsimile with receipt of a confirming
copy.
17. NO PARTNERSHIP, ETC.
This Agreement does not constitute and shall not be construed
as constitution of a partnership or joint venture between Licensor and
Licensee. Neither party shall have any right to obligate or bind the
other party in any manner whatsoever, and nothing contained herein
shall give, or is intended to give, any rights of any kind to any third
persons.
#7633-SPJ - Page 13
<PAGE>
18. NON-ASSIGNABILITY.
This Agreement shall bind and inure to the benefit of
Licensor, its successors and assigns. This Agreement is personal to
Licensee, and Licensee shall not sub-license nor franchise its rights
hereunder, and neither this Agreement nor any of the rights of Licensee
hereunder shall be sold, transferred or assigned by Licensee and no
rights hereunder shall devolve by operation of law or otherwise upon
any receiver, liquidator, trustee or other party.
19. CONSTRUCTION.
This Agreement shall be construed in accordance with the laws
of the State of California of the United States of America.
20. WAIVER, MODIFICATION ETC.
No waiver, modification or cancellation of any term or
condition of this Agreement shall be effective unless executed in
writing by the party charged therewith. No written waiver shall excuse
the performance of any acts other than those specifically referred to
therein. The fact that the Licensor has not previously insisted upon
Licensee expressly complying with any provision of this Agreement shall
not be deemed to be a waiver of Licensor's future right to require
compliance in respect thereof and Licensee specifically acknowledges
and agrees that the prior forbearance in respect of any act, term or
condition shall not prevent Licensor from subsequently requiring full
and complete compliance thereafter. If any term or provision of this
Agreement is held to be invalid or unenforceable by any court of
competent jurisdiction or any other authority vested with jurisdiction,
such holding shall not affect the validity or enforceability of any
other term or provision hereto and this Agreement shall be interpreted
and construed as if such term or provision, to the extent the same
shall have been held to be invalid, illegal or unenforceable, had never
been contained herein. Headings of paragraphs herein are for
convenience only and are without substantive significance.
21. ACCEPTANCE BY LICENSOR;
This instrument, when signed by Licensee shall be deemed an
application for license and not a binding agreement unless and until
accepted by Warner Bros. Consumer Products by signature of a duly
authorized officer and the delivery of such a signed copy to Licensee.
The receipt and/or deposit by Warner Bros. Consumer Products of any
check or other consideration given by Licensee and/or delivery of any
material by Warner Bros. Consumer Products to Licensee shall not be
deemed an acceptance by Warner Bros. Consumer Products of this
application. The foregoing shall apply to any documents relating to
renewals or modifications hereof.
#7633-SPJ - Page 14
<PAGE>
This Agreement shall be of no force or effect unless and until it is signed by
all of the parties listed below:
AGREED AND ACCEPTED: AGREED AND ACCEPTED:
LICENSOR: LICENSEE:
WARNER BROS. CONSUMER PRODUCTS, A ARTISAN HOUSE
TIME WARNER ENTERTAINMENT COMPANY
as Agent for Warner Bros., a division of Time
Warner Entertainment Company, L.P.
By: /s/ Gary R. Simon By: /s/ Henry Goldman
-------------------------------- ---------------------------
Gary R. Simon
Vice President, Legal Affairs
Date: 12/3/96 Date: 11/22/96
#7633-SPJ - Page 15
<PAGE>
EXHIBIT 1 #7633-SPJ
Dated
Warner Bros. Consumer Products
4000 Warner Boulevard
Burbank, CA 91522
RE: Approval for Third Party Manufacturer
Gentlemen:
This letter will serve as notice to you that pursuant to Paragraph
10(b) of the License Agreement dated _____________, 199_ between your client
WARNER BROS. and ARTISAN HOUSE ("Licensee"), we have been engaged as the
manufacturer for LICENSEE in connection with the manufacture of the Licensed
Product(s) as defined in the aforesaid License Agreement. We hereby acknowledge
that we may not manufacture Licensed Product(s) for, or sell or distribute
Licensed Product(s) to, anyone other than Licensee. We hereby further
acknowledge that we have received a copy and are cognizant of the terms and
conditions set forth in said License Agreement and hereby agree to observe those
provisions of said License Agreement which are applicable to our function as
manufacturer of the Licensed Product(s). It is understood that this engagement
is on a royalty free basis.
We understand that our engagement as the manufacturer for LICENSEE is
subject to your written approval. We request, therefore, that you sign in the
space below, thereby showing your acceptance of our engagement as aforesaid.
Sincerely,
/s/ Artisan House, Inc.
-----------------------------------
MANUFACTURER/COMPANY NAME
By: /s/ Henry Goldman
--------------------------------
signature
Henry Goldman
--------------------------------
printed name
1755 Glendale Blvd.
--------------------------------
address
Los Angeles, CA 90026
--------------------------------
11/22/96
--------------------------------
dated
AGREED TO AND ACCEPTED:
WARNER BROS. CONSUMER PRODUCTS
By:
------------------------------
Gary R. Simon
Vice President, Legal Affairs
Date:
----------------------------
#7633-SPJ - Page 16
<PAGE>
EXHIBIT 10.19
AMENDMENT NO. 1 TO MANAGEMENT SERVICES AGREEMENT
This Amendment No.1 to that certain Management Services Agreement (this
"Amendment"), dated as of February 3, 1997, by and among Decor Group, Inc., a
Delaware corporation ("Decor"), and Interiors, Inc., a Delaware corporation
("Interiors").
W I T N E S E T H :
WHEREAS, Decor and Interiors are parties to that certain Management
Services Agreement dated as of April 23, 1996 (the "Existing Agreement"); and
WHEREAS, Decor and Interiors desire to amend the Existing Agreement to
effect the changes provided for herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the receipt and sufficiency of which is hereby acknowledged,
the parties hereto agree as follows:
1. Effective as of the date hereof, the Existing Agreement is
hereby amended as follows:
(A) The first sentence of Section 3 shall be deleted in its
entirety and in lieu thereof the following sentence shall be inserted:
As compensation to Interiors for its management and advisory
services to Decor under this Agreement, Decor agrees to pay to
Interiors an annual fee (the "Management Fee") equal to the
greater of (i) $90,000 or (ii) 1 1/2% of the Excess Cashflow
of Artisan Acquisition Corporation.
(B) Section 18 shall be deleted in its entirety and in lieu
thereof the following shall be inserted:
This Management Services Agreement may not be amended,
changed, supplemented, or modified in any manner, without the
unanimous consent of the Board of Directors of Decor.
(C) A new section, Section 21, shall be added as follows:
21. Voting of Interior's Shares; Certain Restrictions.
Interiors agrees to vote all shares of capital stock of Decor
held by it or its affiliates in favor of Matthew Harriton, or
his nominee, as a director of Decor, at any and all meetings
of stockholders called for the purpose of electing directors,
or any written consent of
1
<PAGE>
stockholders in lieu thereof, during the period commencing on
the date hereof and ending on December 31, 1999.
Notwithstanding the foregoing, in the event that Mr. Harriton
notifies Interiors in writing that he declines to stand for
election to the Board of Directors, and declines to identify a
nominee, Interiors shall not be bound by its obligations under
the preceding sentence.
So long as Decor fails to have Excess Cashflow of not less
than four million dollars ($4,000,000) as of December 31
during any given fiscal year prior to December 31, 1999,
Interiors will not cause Decor to make, nor shall Decor make,
any payments, of any kind, to Interiors, its subsidiaries or
affiliates, or to any third party on behalf of or for the
account of Interiors, without first receiving the approval of
the Board of Directors of Decor.
3. Paragraphs (B) and (C) of this Amendment shall survive the
termination of the Existing Agreement.
4. This Amendment shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of law.
5. Except as otherwise specifically set forth herein, all of the
terms and provisions of the Existing Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the day first above written.
DECOR GROUP, INC.
By: /s/ Donald Feldman
-------------------------
Name: Donald Feldman
Title: President
INTERIORS, INC.
By: /s/ Max Munn
-------------------------
Name: Max Munn
Title: President
2
<PAGE>
EXHIBIT 10.20
DECOR GROUP, INC.
320 WASHINGTON STREET
MT. VERNON, NY 10553
January 1, 1997
Matthew Harriton
750 Lexington Avenue,
27th Floor
New York, NY 10022
Re: Consulting Agreement
--------------------
Dear Mr. Harriton:
This Agreement is to confirm our understanding with respect to the
rendering by you (the "Consultant") of certain consulting services to Decor
Group, Inc. ("Decor"), upon the terms and conditions set forth below.
1. Payment by Decor. As full and total consideration for the services
provided by you to Decor, Decor shall pay to you an aggregate of $150,000 to be
paid over the period of three (3) years as follows: $50,000 on the date hereof,
$50,000 on the first anniversary of the date hereof, and $50,000 on the second
anniversary of the date hereof, for services rendered hereunder.
2. Consultant's Obligations.
(a) Consultant agrees to provide Decor with such consulting services as
requested by Decor in connection with strategic planning, marketing and
management issues. Consultant agrees to provide consulting services to Decor
during the term of this agreement, and to utilize the best of his ability and
experience at all times and to loyally and conscientiously perform all the
duties and obligations required of him expressly or implicitly by the terms of
this Agreement.
(b) Consultant acknowledges that all information, documents, customer
lists, patents, trademarks, copyrights, materials, specifications, business
strategies or any other ideas which directly relate to the business of Decor
(referred to herein as "Confidential Information") whether prepared or generated
by Consultant, or Decor pursuant to this Agreement or otherwise in the
possession or knowledge of Consultant prior to the date hereof or coming into
possession or knowledge of Consultant during the term of this Agreement shall be
the exclusive, confidential property of Decor, except to the extent expressly
authorized in writing by Decor for dissemination. From the effective date of
this Agreement through and including the twenty-fourth months following the
termination of this Agreement or any extension thereof (the
1
<PAGE>
"Restricted Period"),
Consultant shall not disclose any of such Confidential Information to any third
party without the prior written consent of Decor and shall take all reasonable
steps and actions necessary to maintain the confidentiality of such Confidential
Information.
(c) Consultant recognizes that the services to be performed by him
hereunder are special, unique and extraordinary. The parties confirm that it is
reasonably necessary for the protection of Decor that Consultant agree, and
accordingly, Consultant does hereby agree, that he shall not, directly or
indirectly, at any time during the Restricted Period engage in any way or be
related to the business of creating, manufacturing, distributing or selling
products that are competitive to those offered by Decor and its subsidiaries,
either on his own behalf or as an affiliate, consultant, employee, owner, agent,
independent contractor, or co-venturer of any third party;
(d) Consultant agrees that he shall not, directly or indirectly, at any
time during the Restricted Period:
(i) employ or engage, or cause or authorize, directly or indirectly, to
be employed or engaged, for or on behalf of himself or any third party, any
employee or agent of Decor; or
(ii) solicit any customers or suppliers of Decor.
3. Term of Agreement. Decor hereby agrees to retain Consultant to act in a
consulting capacity to Decor and Consultant hereby agrees to provide personal
consulting services to Decor, commencing on the date hereof and ending on the
third anniversary of the date hereof (the "Termination Date"), unless mutually
consented to in writing.
4. Status as Independent Contractor. Consultant's engagement pursuant to
this Agreement shall be as independent contractor and not as an employee,
officer or other agent of Decor. Neither party to this Agreement shall represent
or hold itself out to be the employer or employee of the other.
5. Miscellaneous. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without regard to
principles of conflicts of law, and the parties irrevocably agree to submit any
controversy or claim arising out of or relating to this Agreement to binding
arbitration conducted in the State of New York, City of New York, in accordance
with the rules of the American Arbitration Association in New York City. This
Agreement may be executed simultaneously in counterparts, each of which will be
deemed to be an original but all of which together will constitute one and the
same instrument. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect. This Agreement
contains the entire understanding of the parties hereto with respect to its
subject matter. This Agreement may be amended only by a written instrument duly
executed by the parties.
2
<PAGE>
If this Agreement accurately reflects your understanding of our agreement,
kindly sign the enclosed copy of this letter on the space provided below and
return it to me at your earliest convenience.
Very truly yours,
Decor Group, Inc.
/s/ Max Munn
---------------------------
Max Munn
Chairman of the Board
Agreed to and Accepted as of
the Date First Written Above:
/s/ Matthew Harriton
- --------------------------
Matthew Harriton
3
<PAGE>
[LETTERHEAD OF THE COLFORD COMPANY]
March 1, 1997
Mr. Dennis D'Amore
President
Artisan House, Inc.
1755 Glendale Boulevard
Los Angeles, CA 90026
Dear Dennis:
This document will serve as a formal contract and agreement in
connection with my new consulting assignment on behalf of Artisan House
effective March 1, 1997.
Term of Contract: Three months beginning March 1, 1997 and ending May 31,
1997
Rate for Services: $11,500 per month
Billing/retainer: Invoices will be presented on the 1st and 15th of each
month in the amount of $5,750.00. The first payment of
$5,750.00 is payable in advance upon signing of this
contract. Future invoices are payable upon receipt.
Expenses: There are no out of pocket expenses, lodging, food or
mileage charges.
This contract may be extended for an additional period of time based
upon mutual written consent. This contract can not be modified without mutual
written consent.
This contract can not be cancelled without written mutual consent.
Artisan House may cancel the contract at the end of the second month (April 30,
1997) with the payment of a cancellation penalty in the amount of $4,000.00. The
cancellation fee has been calculated as the difference between a month to month
fee ($13,500) and a reduced three month fixed fee.
Effective March 1, 1997 I will, as an independent contractor, join
Artisan House, Inc. as its Chief Financial Officer. In this capacity I will have
full responsibility and authority for financial and administrative matters for
the company. I will report directly to you, and only to you, and I will be the
senior company executive during any absence by yourself.
<PAGE>
Page Two
My most immediate objectives are to take charge of the overall
accounting function and to stabilize the accounting and systems areas and to
quickly implement procedures designed to rejuvenate a floundering cash flow.
Simultaneously I will work to improve the timeliness and accuracy of all
accounting functions, statements and routine statistical reports. In short, I
will perform all the duties and responsibilities normally associated with a
Chief Financial Officer. I will make appropriate recommendations and implement
proper and prudent business policies and procedures within my areas of
responsibility as required.
While the primary objective of my assignment is to stabilize the
internal affairs of the company, a secondary and simultaneous objective is to
prepare for a smooth and orderly transfer of the accounting functions to your
New York operation.
In my capacity as CFO I will work full time for the period of my
contract. This is interpreted to mean a five day work week. This contract and
the services provided relate only to me. In the event that any other Colford
Company personnel are utilized, a separate contract and fee arrangement will be
required.
I look forward to working with you and providing a service sufficient
to achieve all objectives.
Cordially yours,
THE COLFORD COMPANY
Walter Colford
President
Accepted and agreed to on behalf of Artisan House, Inc. on this 1st day of March
1997 by:
/s/ Dennis D'Amore
-------------------------
Dennis D'Amore, President
<PAGE>
[LETTERHEAD OF THE COLFORD COMPANY]
May 28, 1997
Mr. Dennis D'Amore
Chief Operating Officer
Artisan House, Inc.
1755 Glendale Blvd.
Los Angeles, CA 90026
Re: Consulting Contract Dated March 1, 1997, Amended April 28, 1997
Dear Mr. D'Amore:
This letter will confirm our recent conversation regarding the above
referenced contract. We have agreed that The Contract is extended to expire on
July 31, 1997. Therefore The Contract is modified and amended as follows:
Term of Contract:
The term of contract as contained in the March 1, 1997 document is
deleted and is replaced as follows:
Term of Contract: Five months beginning March 1, 1997
and ending July 31, 1997
This is now a non-cancellable contract and can not be cancelled or
modified without written mutual consent. The previous cancellation clause with
payment of a cancellation penalty is deleted and no longer petains.
All other terms and conditions as contained in the original contract
dated March 1, 1997 remain in force.
Cordially yours,
THE COLFORD COMPANY
/s/ Walter Colford
- -----------------------------
Walter Colford
President
WC/ab
Accepted and agreed to on behalf of Artisan House, Inc. on this 28th day of May
1997 by:
/s/ Dennis D'Amore
---------------------------------------
Dennis D'Amore, Chief Operating Officer
<PAGE>
EXHIBIT 10.22
INCENTIVE STOCK OPTION AGREEMENT
THIS AGREEMENT dated as of the 31st day of December, 1996, (the "Grant
Date") is made and entered into by and between DECOR GROUP, INC., a Delaware
corporation with its principal offices located at 320 Washington Street, Mount
Vernon, NY 10553 (the "Company") and DENNIS D'AMORE whose address is 732
Panorama Road, Fullerton, CA 92831 (the "Optionee").
W I T N E S S E T H:
WHEREAS, Artisan Acquisition Corporation, a wholly owned subsidiary of the
Company ("Artisan House"), and the Optionee have entered into that certain
Employment Agreement dated as of the date hereof (the "Employment Agreement")
and certain options are issuable to the Optionee pursuant to Section 4(a) of the
Employment Agreement; and
WHEREAS, the Optionee desires to accept the grant of such option, subject
to the terms and conditions of this Agreement.
NOW, THEREFORE, the Company and the Optionee hereby agree as follows:
Section 1. Grant of Option. Subject to the provisions of this Agreement
and the Employment Agreement, the Company hereby grants to the Optionee an
option (the "Option") to purchase from the Company Thirty Thousand (30,000)
shares of the Company's Common Stock (the "Option Shares") at an exercise price
of $.0001 per share (the "Exercise Price"). This Option is intended to be and
shall be treated as an incentive stock option under Section 422 of the Internal
Revenue Code.
2. Vesting/Schedule/Restrictions on Resale. All of the Options shall vest
immediately and be available for exercise in accordance with the terms of this
Agreement. Optionee may not
1
<PAGE>
sell, transfer, pledge or hypothecate (a "Transfer") any Option Shares until
January 2, 1998, and thereafter, Optionee may not Transfer more than twenty
percent (20%) of the Option Shares (or 6,000 shares of Common Stock) during any
calendar year during the term of this Agreement.
3. Term . This Option shall expire and terminate on January 1, 2003 (the
"Termination Date"), subject to the provisions for termination and acceleration
herein.
4. Termination Provisions. If the Optionee's employment by the Company is
terminated, this Option may be exercised for a period of three months after the
date of such termination or until the Termination Date, whichever date is
earlier.
5. Adjustments and Corporate Reorganizations. If the outstanding shares of
stock of the class then subject to this Option are changed into or exchanged for
a different number or kind of shares or securities or other forms of property
(including cash) or rights, as a result of one or more reorganizations,
recapitalization, spin-offs, stock splits, reverse stock splits, stock dividends
or the like, appropriate adjustments shall be made in the number and/or kind of
shares or securities or other forms of property (including cash) or rights for
which this Option may thereafter be exercised, all without any change in the
aggregate exercise price applicable to the unexercised portions of this Option,
but with a corresponding adjustment in the exercise price per share or other
unit. No fractional share of stock shall be issued under this Option or in
connection with any such adjustment. Such adjustments shall be made by or under
authority of the Company's board of directors whose determinations as to what
adjustments shall be made, and the extent thereof, shall be final, binding and
conclusive.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company as a result of which the
outstanding securities of the class then
2
<PAGE>
subject to this Option are changed into or exchanged for property (including
cash), rights or securities not of the Company's issue, or any combination
thereof, or upon a sale of substantially all the property of the Company to, or
the acquisition of stock representing more than eighty percent (80%) of the
voting power of the stock of the Company then outstanding by, another
corporation or person, this Option shall terminate, unless provision be made in
writing in connection with such transaction for the assumption of this Option,
or the substitution for this Option of an option covering the stock of a
successor employer corporation, or a parent or a subsidiary thereof, with
appropriate adjustments in accordance with the provisions hereinabove in this
Section 4 as to the number and kind of shares optioned and their exercise
prices, in which event this Option shall continue in the manner and under the
terms so provided.
If this Option shall terminate pursuant to the preceding paragraph, the
Optionee or other person then entitled to exercise this Option shall have the
right, at such time prior to the consummation of the transaction causing such
termination as the Company shall designate, to exercise the unexercised portions
of this Option, including the portions thereof which would, but for this Section
5 not yet be exercisable.
6. Exercise, Payment For and Delivery of Stock. This Option may be
exercised by the Optionee or other person then entitled to exercise it by giving
four business days' written notice of exercise to the Company specifying the
number of shares to be purchased and the total purchase price, accompanied by a
check to the order of the Company in payment of such price. If the Company is
required to withhold on account of any federal, state or local tax imposed as a
result of such exercise, the notice of exercise shall also be accompanied by a
check to the order of the Company in payment of the amount thus required to be
withheld.
3
<PAGE>
7. Cashless Exercise The Optionee may exercise part or all of the Option
by tender to the Company of a written notice of exercise together with advice of
the delivery of an order to a broker to sell part or all of the Option Shares,
subject to such exercise notice and an irrevocable order to such broker to
deliver to the Company (or its transfer agent) sufficient proceeds from the sale
of such Option Shares to pay the exercise price and any withholding taxes. All
documentation and procedures to be followed in connection with such a "cashless
exercise" shall be approved in advance by the Company, which approval shall be
expeditiously provided and not unreasonably withheld.
8. Rights in Stock Before Issuance and Delivery. No person shall be
entitled to the privileges of stock ownership in respect of any shares issuable
upon exercise of this Option, unless and until such shares have been issued to
such person as fully paid shares.
9. Registration of Option Shares. The Company shall use it's best efforts
to register the Option Shares for sale to the public and to maintain the
effectiveness of such registration.
10. Miscellaneous Provisions.
(a) Notices. Unless otherwise specifically provided herein, all notices to
be given hereunder shall be in writing and sent to the parties by certified
mail, return receipt requested, which shall be addressed to each party's
respective address, as set forth in the first paragraph of this Agreement, or to
such other address as such party shall give to the other party hereto by a
notice given in accordance with this Section and, except as otherwise provided
in this Agreement, shall be effective when deposited in the United States mail
properly addressed and postage prepaid. If such notice is sent other than by the
United States mail, such notice shall be effective when actually received by the
party being noticed.
4
<PAGE>
(b) Assignment. This Agreement and the rights granted hereunder may not be
assigned in whole or in part by Optionee except by will or the laws of descent
and distribution, and the Option is exercisable during Optionee's lifetime only
by the Optionee. This Agreement may be assigned by the Company without the
consent of the Optionee.
(c) Further Assurances. Both parties hereto shall execute and deliver such
other instruments and do such other acts as may be reasonably necessary to carry
out the intent and purposes of this Agreement.
(d) Gender. Whenever the context may require, any pronouns used herein
shall include the corresponding masculine, feminine or neuter forms and the
singular form of nouns and pronouns shall include the plural and vice versa.
(e) Captions. The captions contained in this Agreement are inserted only as
a matter of convenience and in no way define, limit, extend or prescribe the
scope of this Agreement or the intent of any of the provisions hereof.
(f) Completeness and Modification. This Agreement constitutes the entire
understanding between the parties hereto superseding all prior and
contemporaneous agreements or understandings among the parties hereto concerning
the grant of stock options to the Optionee. This Agreement shall not terminated,
except in accordance with its terms, or amended in writing executed by all of
the parties hereto.
(g) Waiver. The waiver of a breach of any term or condition of this
Agreement shall not be deemed to constitute the waiver of any other breach of
the same or any other term or condition.
(h) Severability. The invalidity or enforceability, in whole or in part,
of any covenant, promise or undertaking, or any section, subsection, paragraph,
sentence, clause phrase or word or
5
<PAGE>
of any provision of this Agreement shall not affect the validity or
enforceability of the remaining portions thereof.
(i) Construction. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
(j) Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the heirs, successors, estate and personal representatives of the
Optionee and upon the successors and assigns of the Company.
(k) Litigation-Attorney' Fees. In connection with any litigation arising
out of the enforcement of this Agreement or for its interpretation, the
prevailing party shall be entitled to recover its costs, including reasonable
attorneys' fees, at the trial and all appellate levels from the other party
hereto, who was an adverse party to such litigation.
6
<PAGE>
IN WITNESS WHEREOF, the Company has granted this Option on the date of
grant specified above.
DECOR GROUP, INC.
By: /s/ Max Munn
-----------------------------
Name: Max Munn
Title: Chairman of the Board
/s/ Dennis D'Amore
--------------------------------
Dennis D'Amore
7
<PAGE>
EXHIBIT 11.1
DECOR GROUP, INC.
- --------------------------------------------------------------------------------
EXHIBIT 11 - COMPUTATION OF LOSS PER SHARE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period
March 1,
Year ended 1997 to
March 31, March 31
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Average Shares Outstanding 4,369,295 3,937,500
Additional Shares Outstanding Pursuant to Staff
Accounting Bulletin No. 83 Weighted Through
the Date of the Latest Financial Statements in the
Initial Public Offering 1,127,705 4,500,000
-------------- -------------
Shares Outstanding 5,497,000 8,437,500
============== =============
Net Loss $ (855,796) $ (99,750)
============== =============
Net Loss Per Share $ (.16) $ (.01)
============== ==============
</TABLE>
This computation is submitted in accordance with Regulation S-K, Item 601(b)(11)
although it is contrary to paragraph 40 of APB Opinion No. 15 in that its result
is anti-dilutive.
9
<PAGE>
EXHIBIT 21.01
Subsidiaries of the Registrant
------------------------------
Name State of Incorporation
- ---- ----------------------
Artisan House, Inc. Delaware
11
