UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarter ended September 30, 1997 Commission File Number 0-28960
DECOR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 Washington Street
Mt. Vernon, New York 10553
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (914) 665-5400
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock. As of November 13, 1997 there were 1,709,176 shares of common
stock outstanding.
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
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INDEX
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Page to Page
Part I: Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet as of September 30, 1997 [Unaudited].. 1....... 2
Consolidated Statements of Operations for the three and six months
ended September 30, 1997 and 1996 [Unaudited]..................... 3.......
Consolidated Statement of Stockholders' Equity for the six months
ended September 30, 1997 [Unaudited].............................. 4.......
Consolidated Statements of Cash Flows for the six months ended
September 30, 1997 and 1996 [Unaudited]........................... 5....... 6
Notes to Consolidated Financial Statements [Unaudited]............ 7.......14
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................15.......19
Signature............................................................20.......
. . . . . . . . . . . . . . . . . .
<PAGE>
Item 1:
DECOR GROUP, INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997.
[UNAUDITED]
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Assets:
Current Assets:
Cash $ 517,324
Accounts Receivable [Net of Allowance of $150,549] 892,885
Inventories 798,315
Prepaid Expenses and Other Current Assets 131,739
-----------
Total Current Assets 2,340,263
Property and Equipment [Net of Accumulated Depreciation of $411,801] 113,575
-----------
Other Assets:
Other Intangible Assets [Net of Accumulated Amortization of $5,696] 94,304
Other Assets 50,506
----------
Total Other Assets 144,810
Total Assets 2,598,648
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
1
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
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CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997.
[UNAUDITED]
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Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 511,338
Due to Stockholders 273,785
Accrued Compensation and Benefits - Former Officer 232,005
Accrued Costs for Restructuring 230,375
Line of Credit 221,320
Current Portion of Long-Term Debt 60,013
Accrued Interest - Related Party 18,221
-----------
Total Current Liabilities 1,547,057
Long-Term Debt 617,282
Total Liabilities 2,164,339
Commitments and Contingencies [7] --
Stockholders' Equity:
Preferred Stock, $.0001 Par Value Per Share, 35,000,000 Blank
Check Shares Authorized of which 5,000,000 are Convertible
Non-Voting Series A - 250,000 Shares Issued and Outstanding;
20,000,000 Non-Convertible Voting Series B - 20,000,000 Shares
Issued and Outstanding; 10,000,000 Non-Voting Series C - 54,934
Issued and Outstanding 2,030
Additional Paid-in Capital - Preferred Stock 2,423,970
Common Stock - $.0001 Par Value, Authorized 20,000,000 Shares,
1,709,176 Issued and Outstanding 171
Additional Paid-in Capital - Common Stock 4,052,752
Accumulated Deficit (5,310,947)
Deferred Compensation (733,667)
Total Stockholders' Equity 434,309
Total Liabilities and Stockholders' Equity $ 2,598,648
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
2
<PAGE>
DECOR GROUP, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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<TABLE>
Three months ended Six months ended
September 30, September 30,
------------- -------------
1 9 9 7 1 9 9 6 1 9 9 7 1 9 9 6
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $1,154,748 $ -- $2,603,442 $ --
Cost of Revenues 569,497 -- 1,319,776 --
---------- ----------- ---------- -----------
Gross Profit 585,251 -- 1,283,666 --
---------- ----------- ---------- -----------
Selling, General and Administrative
Expenses:
Administrative Expenses 1,032,869 15,067 1,677,193 153,918
Selling Expense 466,396 -- 697,971 --
---------- ----------- ---------- -----------
Total Selling, General and
Administrative Expenses 1,499,265 15,067 2,375,164 153,918
---------- ----------- ---------- -----------
Loss on Writedown of Goodwill
and Other Intangible Assets 2,108,567 -- 2,108,567 --
---------- ----------- ---------- -----------
[Loss] from Operations (3,022,581) (15,067) (3,200,065) (153,918)
---------- ----------- ---------- -----------
Other Income [Expense]:
Loss on Sale of Investment in
Related Party (1,112,873) -- (1,112,873) --
Interest Income -- (1,555) -- (1,555)
Miscellaneous Income 76,299 -- 4,590 --
Interest Expense - Related Party (5,612) 1,500 (10,774) 1,500
Interest Expense (19,683) 58,575 (35,183) 165,725
---------- ----------- ---------- -----------
Other [Expense] Income - Net (1,061,869) 58,520 (1,154,240) 165,670
---------- ----------- ---------- -----------
[Loss] Before Provision for
Income Taxes (4,084,450) (73,587) (4,354,305) (319,588)
Provision for Income Taxes 1,096 -- 1,096 --
---------- ----------- ---------- -----------
Net [Loss] $(4,085,546) $ (73,587) $(4,355,401) $ (319,588)
=========== =========== =========== ===========
[Loss] Per Share $ (2.39) $ (.09) $ (2.55) $ (.34)
========== =========== ========== ===========
Number of Common Shares 1,709,176 817,633 1,709,176 937,500
========== =========== ========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
3
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
[UNAUDITED]
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<TABLE>
Preferred Stock Common Stock Unrealized
Additional Additional Holding Total
Paid-in Paid-inAccumulated Deferred Loss onStockholders'
Shares Amount Capital Shares Amount Capital Deficit CompensationInvestment Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - April 1, 1997 20,304,934 $2,030 $2,423,970 1,707,510 $171 $4,035,252 $(955,546) $(991,167) $(787,400) $3,727,310
Issuance of Common Shares to
Former Employee [7C] -- -- -- 1,666 -- 17,500 -- -- -- 17,500
Adjustment on Disposal of
Securities Available for Sale -- -- -- -- -- -- -- -- 787,400 787,400
Amortization of Deferred
Compensation -- -- -- -- -- -- -- 257,500 -- 257,500
Net [Loss] for the six months
ended September 30, 1997 -- -- -- -- -- -- (4,355,401) -- -- (4,355,401)
---------- ----- ---------- --------- ---- ---------- ----------- --------- ------- ----------
Balance - September 30, 1997 20,304,934 $2,030 $2,423,970 1,709,176 $171 $4,052,752 $(5,310,947) $(733,667) $ -- $ 434,309
=========== ====== ========== ========= ==== ========== =========== ========= ======== =========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
4
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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<TABLE>
Six months ended
September 30,
1 9 9 7 1 9 9 6
------- -------
Operating Activities:
<S> <C> <C>
Net [Loss] $(4,355,401) $ (319,588)
Adjustment to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Accrued Management Fees - Related Party 45,000 --
Stock Issued for Services - Former Employee 17,500 --
Amortization of Deferred Compensation 257,500 --
Accrued Interest Receivable -- (182)
Interest - Cost of Bridge Warrants -- 160,725
Amortization of Intangibles 56,455 --
Depreciation 21,521 --
Bad Debt Expense 26,807 --
Loss on Sale of Investment in Related Party 1,112,873 --
Loss on Writedown of Goodwill and Other Intangible
Assets - Noncash Portion 1,875,393 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 197,883 --
Inventory 161,703 --
Other Assets (75,108) (2,000)
Note Receivable -- (50,000)
Related Party Receivable -- (6,500)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (14,060) 125,500
Accrued Compensation and Benefit - Former Officer 232,005 --
Accrued Acquisition Costs (25,263) --
Accrued Costs for Restructuring 230,375 --
---------- -----------
Net Cash - Operating Activities - Forward (234,817) (92,045)
---------- -----------
Investing Activities:
Cash Paid for Acquisition of Artisan House -- (85,000)
Collections on Note Receivable -- 50,000
Purchase of Fixed Assets (18,943) --
Proceeds from Sale of Investment in Related Party 487,127 --
---------- -----------
Net Cash - Investing Activities - Forward 468,184 (35,000)
---------- -----------
Financing Activities:
Proceeds from Line of Credit 221,320
Proceeds from Stockholder Loans -- 50,000
Proceeds from Sale of Preferred Stock -- 826,000
Proceeds from Sale of Common Stock -- 8,000
Payment of Notes and Leases Payable (106,871) --
Deferred Offering Costs -- (85,658)
---------- -----------
Net Cash - Financing Activities - Forward $ 114,449 $ 798,342
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
5
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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<TABLE>
Six months ended
September 30,
1 9 9 7 1 9 9 6
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $ (234,817) $ (92,045)
Net Cash - Investing Activities - Forwarded 468,184 (35,000)
Net Cash - Financing Activities - Forwarded 114,449 798,342
---------- -----------
Net Increase in Cash 347,816 671,297
Cash - Beginning of Periods 169,508 47,000
---------- -----------
Cash - End of Periods $ 517,324 $ 718,297
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for the periods for:
Interest $ 35,183 $ --
Income Taxes $ 1,096 $ --
</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 20,000,000 shares
of Class B Non-Convertible Preferred Stock in exchange for Interiors, Inc.
issuing to the Company 200,000 shares of Common Stock valued at $600,000 and
200,000 shares of Series A Convertible Preferred Stock valued at $1,000,000 and
a guarantee with respect to certain indebtedness [See Notes 6, Investment in
Interiors, Inc. and 12A, Subsequent Events - Proposed Merger].
In March 1996, the Company issued 1,312,500 shares of common stock to seven
parties for $105,000 of which $103,000 was in cash and $2,000 was for the fair
value of services. At March 31, 1996, $8,000 was reflected as a stock
subscription receivable and was collected on May 21, 1996.
On November 18, 1996, the Company's wholly owned subsidiary Artisan
Acquisition Corp., Inc. purchased substantially all of the assets and assumed
certain liabilities of Artisan House, Inc. for approximately $3,700,000, of
which $2,400,000 was paid in cash, $300,000 in shares of common stock and
$1,050,000 in notes. The Company primarily acquired accounts receivable of
approximately $1,100,000, inventory of approximately $800,000 and assumed
liabilities of approximately $578,000 [See Note 1G for Impairment].
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
6
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
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[1] Summary of Significant Accounting Policies
[A] Nature of Operations - Decor Group, Inc., a Delaware corporation [the
"Company" or "Decor"], was incorporated on March 1, 1996. The Company is a
subsidiary of Interiors, Inc. 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. [See Notes 2 and 6].
[B] Basis of Reporting - The accompanying unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and Item
310(b)of Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying statements
include all adjustments which are considered necessary in order to make the
interim financial statements not misleading.
[C] Cash Equivalents - The Company's policy is to classify all highly liquid
investments with maturity of three months or less when purchased to be cash
equivalents. There were no cash equivalents at September 30, 1997.
[D] Inventory - Inventory is stated at the lower of cost or market, is comprised
of materials, labor and factory overhead, and is determined on the first-in,
first-out ["FIFO"] basis.
[E] Property and Equipment - Property and equipment is stated at cost and is net
of accumulated depreciation. The cost of additions and improvements are
capitalized and expenditures for repairs and maintenance are expensed in the
period incurred. Depreciation of property and equipment is provided utilizing
the straight-line method over the estimated useful lives of the respective
assets as follows:
Vehicles 2 Years
Machinery and Equipment 1 - 5 Years
Furniture and Fixtures 5 Years
Leasehold improvements are amortized utilizing the straight-line method over the
shorter of the remaining term of the lease or the useful life of the
improvement.
[F] Marketable Securities - Statement of Financial Accounting Standards ["SFAS"]
No. 115, "Accounting for Certain Investments in Debt and Equity Securities",
addresses the accounting and reporting for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. Those investments are to be classified into the following three
categories: held-to-maturity debt securities; trading securities; and
available-for-sale securities.
Management determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such determination
at each balance sheet date. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale,
along with the Company's investment in equity securities. Securities available
for sale are carried at fair value, with any unrealized holding gains and
losses, net of tax, reported in a separate component of shareholders' equity
until realized. Trading securities are securities bought and held principally
for the purpose of selling them in the near term and are reported at fair value,
with unrealized gains and losses included in operations for the current year.
Held-to-maturity debt securities are reported at amortized cost.
7
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[G] Goodwill and Other Intangible Assets - The Company is required to analyze
the value of its recorded intangible assets in accordance with SFAS No. 121 on
an ongoing basis to determine that the recorded amounts are reasonable and are
not impaired. The Company's management considered the Company's financial
condition and expected future operating income in determining if goodwill and
other intangibles were impaired at each balance sheet date.
In September of 1997, the Company recorded a writedown to goodwill and other
intangible assets for approximately $2,100,000, including certain purchase
adjustments recorded during September 1997. The writedown eliminated goodwill
and the other intangible assets with the exception of the non-compete agreement
in the amount of $94,300. The intangible assets and goodwill were determined to
have become impaired at September 30, 1997, because the projected undiscounted
cash flows from the assets were substantially below the carrying value of the
Company's assets. The Company's sales volume growth is uncertain in view of
increased competition, the financial trouble of a major customer and the absence
of substantial investment in upgrades of its facilities and infrastructure,
which the Company's financial condition does not permit. Furthermore, the
Company anticipates an escalation of its operating expenses. In combination
these conditions equate to an inability of the Company to generate future
operating income and sufficient cash flows. Upon determination that goodwill and
other intangibles were impaired, the amount of the impairment was calculated by
determining the excess of the carrying value of goodwill and other intangible
assets over their fair value. Fair value was determined using present value
techniques.
Goodwill and the other intangible assets had been amortized using the
straight-line method over fifteen to twenty years. In connection with the
acquisition of Artisan House, Inc. in November 1996, goodwill of $2,100,000 was
recorded using the purchase method. The covenant-not-to-compete is amortized
over fifteen years under the straight-line method.
[H] Stock Options and Similar Equity Instruments Issued to Employees - The
Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 123, "Accounting for Stock-Based
Compensation," in October 1995. SFAS No. 123 uses a fair value based method of
accounting for stock options and similar equity instruments as contrasted to the
intrinsic valued based method of accounting prescribed by Accounting Principles
Board ["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The
Company adopted SFAS No. 123 on April 1, 1996 for financial note disclosure
purposes and will continue to apply APB Opinion No. 25 for financial reporting
purposes.
[I] Offering Costs - Such costs were recorded as a reduction of the net proceeds
of the offering.
[J] Earnings Per Share - The number of shares to be used for earnings per share
calculation purposes for June 30, 1996 was based on the 1,312,500 common shares
issued since the initial capitalization and, pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, on the 1,500,000 common shares
assumed issued from the warrants in connection with the bridge loan, as if they
were outstanding since inception to June 30, 1996 [the last period in the IPO
Prospectus] and, for September 30, 1997, the 1,709,176 shares outstanding from
April 1, 1997. Convertible preferred stock options and warrants are not included
because the effect would be anti-dilutive.
8
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[1] Summary of Significant Accounting Policies [Continued]
[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 September 30, 1997, the
Company maintained cash of approximately $394,000 in excess of insured amounts.
The Company routinely assesses the financial strength of its customers, and
based upon factors surrounding the credit risk of its customers, established an
allowance for uncollectible accounts of $150,549 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 a small segment of
its products pursuant to license agreements. Generally, all of the license
agreements are non-exclusive, permit sales in the United States and require the
Company to make periodic royalty payments based upon revenues from the sale of
licensed works.
[N] Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiary. All material intercompany
accounts and transactions are eliminated.
[2] Acquisition - Artisan
On November 18, 1996, the Company's wholly owned subsidiary Artisan Acquisition
Corp., Inc. purchased substantially all of the assets and assumed certain
liabilities of Artisan for $3,694,826, of which a total of $2,400,000 was paid
in cash. A secured promissory note for $923,496 was issued to the seller. The
note provides for the payment to the seller of the following: a) $100,000 within
90 days after the closing, b) beginning 120 days after the closing, 60 equal
monthly payments of $13,989 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 $48,387 which will be amortized to interest expense.
Separately, the seller was issued 50,000 shares, giving effect to the stock
dividend and the reverse stock split, of Decor common stock, valued at $300,000.
The Company recorded additional costs of the acquisition of approximately
$25,263 and $236,102 at March 31, 1997 and September 30, 1997, respectively,
which represented the excess fair value over the prescribed contract amounts
[See Note 8]. The $236,102 was accrued and expensed at September 30, 1997, as a
result of management's settlement with the seller and its assessment of the
impairment of goodwill and other intangible assets. The transaction was recorded
under the purchase method. Goodwill and other intangibles totaling approximately
$2,119,000 were amortized between 15- 20 years using the straight-line method
and were subsequently written down at September 30, 1997 [See Note 1].
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.
9
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
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[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.
Six months ended
September 30,
1 9 9 6
Total Revenues $2,708,000
Net [Loss] $ (540,000)
==========
Net [Loss] Per Common Share $ (.58)
==========
Weighted Average Number of Common Shares
Outstanding 937,500
These pro forma amounts may not be indicative of results that actually would
have occurred if the combination had been in effect on the date indicated or
which may be obtained in the future.
[3] Inventories
The components of inventory were as follows:
Raw Materials $ 345,424
Work-in Process 186,561
Finished Goods 266,330
----------
Totals $ 798,315
------ ==========
During September 1997, the Company wrote-off obsolete inventory of $67,330
resulting from lack of market demand. This write off is included in the cost of
revenues.
[4] Related Party Transactions
[A] Note Receivable - Interiors - On March 5, 1996, the Company advanced $50,000
with 8% interest to a firm that renders management services to the Company. The
Company was repaid on April 16, 1996. Interest income of $250 was recorded as of
March 31, 1996. On August 29, 1996 and September 13, 1996, the Company advanced
an additional $50,000 with 10% interest. The Company was repaid on November 15,
1996.
[B] Management Agreements - On May 28, 1996, the Company entered into a two year
management agreement with Interiors, Inc. which specializes in the home
furnishings and decorative accessories industries. The agreement calls for a
management fee of $90,000 or 1.5% of gross sales, whichever is greater, per
annum. The management fee has been accrued quarterly and will be 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 12A - Proposed Merger]
10
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
- ------------------------------------------------------------------------------
[4] Related Party Transactions [Continued]
[C] Due to Stockholder - Interiors - Interest at 8%, or approximately $8,164,
has been accrued on the outstanding balance due to Interiors of $230,285 for the
six months ended September 30, 1997 [See Note 12A - Proposed Merger].
[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 six months ended September 30, 1997 was $2,610.
[5] Commitment Letter - Secured Loan Agreement
On May 31, 1996, the Company received a commitment letter for a revolving credit
agreement for a maximum loan amount of $1,100,000. The agreement requires the
satisfaction of a number of conditions prior to funding including the completion
of a due diligence review. The terms of the loan include an annual interest rate
of prime plus 4%, a management fee of 3% of sales, a security interest in all of
the Company's accounts receivable, inventory, and equipment, and any proceeds
therefrom, a personal guaranty by the Company's Chairman of the Board, and a
prepayment fee of $25,000. In the event that the Company is unable to satisfy
such conditions, the Company will not receive the proceeds from such loan. Due
to the consummation of a new agreement in July 1997, the Company allowed this
commitment letter to expire.
On July 1, 1997, Artisan obtained an accounts receivable based line of credit
for up to $600,000 with interest at prime plus 5.5% secured by all of Artisan's
assets and guaranteed by Decor and Interiors, Inc. The amount available under
the line of credit at September 30, 1997 was $228,933.
[6] Investment in Interiors, Inc. - Related Party
On March 3, 1996, the Company issued to Interiors, Inc. 250,000 shares of Series
A Non-Voting Convertible Preferred Stock and an option to purchase 20,000,000
shares of Series B Non-Convertible Voting Preferred Stock for $2,000 in exchange
for Interiors, Inc. issuing to the Company 200,000 shares of Common Stock valued
at $600,000 and 200,000 shares of Series A Convertible Preferred Stock valued at
$1,000,000. This option was exercised in September of 1996. On May 28, 1996, the
Company entered into a management agreement with Interiors, Inc. whereby
Interiors, Inc. will provide the Company certain marketing and management
services [See Note 4B]. The exchange of shares between the Company and
Interiors, Inc. was pursuant to the Company's intentions to secure the ongoing
and long-term availability of these services. In September 1997, the Company
sold all of the common and preferred shares of Interiors stock to an unrelated
party for gross proceeds of $487,127 and, accordingly, realized a loss of
$1,112,873. As of September 30, 1997, Interiors, Inc. owned approximately 79% of
the Company's total voting stock outstanding assuming no conversion of the
Series A and Series C Preferred Stock [See Note 12 - Proposed Merger].
[7] Commitments and Contingencies
[A] Employment Agreement - Seller - Artisan's employment agreement with the
seller was terminated effective July 8, 1997. In connection with the settlement
agreement in September 1997 with CIDCOA International, Inc. ["CIDCOA"], formerly
known, as Artisan House, Inc. [See Note 8], the Company reinstated the
employment agreement with the seller. Accordingly, the Company accrued all
salary and benefits owed to the seller in the amount of $217,379 as of September
30, 1997.
11
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- ------------------------------------------------------------------------------
[7] Commitments and Contingencies [Continued]
[B] Consulting Agreement - On March 1, 1997, Artisan entered into a consulting
agreement to provide Artisan with such consulting services as requested in
connection with the stabilization, updating and transition of Artisan's
accounting systems. The Company has agreed to pay $11,500 per month for the term
of the Consulting Agreement. The initial term of the Consulting Agreement is
three [3] months with two, one month extensions. This agreement expired in July
1997.
[C] Termination Agreement - Under a termination agreement with a former
employee, the Company was required to pay severance in the amount of $3,889 per
month for 18 months beginning April 1997. In addition, the Company was required
to provide various other minimal benefits to the former employee. The Company
recorded a liability for the total compensation payments of $70,000 at March 31,
1997.
In June 1997, the Company ceased paying the severance pay required under this
termination agreement. In August 1997, the Company entered into a settlement
agreement with the former employee which called for the payment of $45,000 and
the issuance of 1,666 shares of the Company's common stock, with a value of
$17,500. The stock shall be restricted for a period of twelve months after the
date of issuance.
[8] Legal Proceedings
In March 1997, CIDCOA brought an arbitration proceeding against the Company,
currently settled, alleging that it had 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 alleged
that it was owed a purchase price adjustment. The Company denied the
allegations, and brought counterclaims against CIDCOA alleging breach of
contract, breach of warranty, misrepresentation and fraud by CIDCOA. In August
1997, CIDCOA filed a motion seeking to enforce an alleged settlement agreement
made by the parties. In September 1997, the Company entered into a settlement
agreement with CIDCOA included in which was the payment of (i) a purchase price
adjustment of approximately $100,000 and (ii) $158,438 representing the market
value as of June 13, 1997 of 10,000 registered shares of the Company which were
never issued to CIDCOA. In addition, the settlement confirms that the original
amount of the promissory note is $926,400 and confirms that the monthly payments
under the note shall be $13,989, reinstates the terminated employment agreement
with Henry Goldman [See Note 7A] and provides for the Company to bring current
all disputed payments and amounts due Goldman and CIDCOA under the original
purchase and employment agreements. Further, the settlement agreement provides
that obligations to CIDCOA and Goldman under the promissory note, the employment
agreement and Artisan House's real property lease for its operating facilities
will be guaranteed by the Company and Interiors, Inc.
[9] Capital Stock
[A] Stock Dividends - On December 3, 1996, the Board of Directors declared a
dividend on its shares of Common Stock, distributable to stockholders of record
of the Company as of December 16, 1996 on the basis of two additional shares of
Common Stock for each one share of common stock previously outstanding. All
share data in the financial statements have been adjusted for this dividend.
[B] Series B Preferred Stock Dividend - In January of 1997, the Company issued a
dividend on its Series B Preferred Stock payable to the stockholder of record as
of December 16, 1996 on the basis of 1 share of Series B Preferred Stock for
each 1 share of Series B Preferred Stock outstanding. All share data have been
adjusted for this dividend. In addition, the resolution was made that if at any
time the Company's Board of Directors and stockholders approve an increase in
the number of authorized shares of Series B Preferred Stock to not less than
30,000,000 shares, then the Series B Preferred stockholder shall be issued an
additional 10,000,000 shares of Series B Preferred.
12
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
- ------------------------------------------------------------------------------
[9] Capital Stock [Continued]
[C] Reverse Stock Split - Effective October 8, 1997, the Company completed a one
share for three shares reverse stock split of its common stock. All shares and
per share amounts have been restated retroactively. Any fractional shares will
be purchased by the Company at the average closing bid and ask price of the
common stock of the Company as of October 8, 1997.
[10] New Authoritative Pronouncements
The FASB issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure" in February 1997. SFAS No.
128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS No. 130 is
not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and
comparative information for earlier years is to be restated. SFAS No. 131 need
not be applied to interim financial statements in the initial year of its
application. SFAS No. 131 is not expected to have a material impact on the
Company.
[11] Restructuring Plan
[A] In September of 1997, the Company commenced and finalized efforts to
formulate a restructuring plan to satisfy its various investor constituencies.
Such efforts have included the retention of various advisors and analysis by
management to develop an exit plan and strategy to address the Company's
financial situation and disappointing financial performance.
13
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[UNAUDITED]
- ------------------------------------------------------------------------------
[11] Restructuring Plan [Continued]
[A] [Continued] - In September 1997, the Company's management approved an exit
plan which addresses the above concerns by improving the manufacturing and
administrative operations of the Company for growth through improved
competitiveness, quality and effectiveness [See Note 1].
Accrued restructuring costs and charges include the cost of shutting down the
current operations and moving expenses to a new location for approximately
$20,000 and the projected cost differential between the projected sublease
income and the lease obligations on the current premises subject to Artisan's
House move in the amount of $210,375.
[12] Subsequent Event
[A] Proposed Merger - On October 20, 1997, the Company received a letter of
intent from Interiors, Inc. whereby Interiors, Inc. will acquire the remaining
shares of Decor Group, Inc. it does not currently own. Interiors, Inc. would be
the surviving corporation and all the outstanding shares of Decor would be
canceled. The merger consideration to be delivered by Interiors, Inc. to the
stockholders of Decor Group, Inc. for the shares of common stock outstanding at
the date of closing of the proposed transaction will be an aggregate $10 million
of common stock of Interiors, Inc. subject to a fair market value adjustment.
There can be no assurance that the proposed transaction will be completed.
. . . . . . . . . . .
14
<PAGE>
Item 2.
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
OVERVIEW
Decor Group, Inc. [the "Company" or "Decor"] was formed in March of 1996. The
primary activities of Decor prior to the acquisition of Artisan House, Inc.
["Artisan"] on November 18, 1996 for approximately $3,700,000, was investing and
financing activities. 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. The exchange of
shares between the Company and Interiors, Inc. was pursuant to the Company's
intentions to secure the ongoing and long-term availability of these services.
On May 28, 1996, the Company entered into a management agreement with Interiors,
Inc. whereby Interiors, Inc. will provide the Company certain marketing and
management services [See Note 4B]. In September 1997, the Company sold all of
the common and preferred shares of Interiors stock to an unrelated party for
gross proceeds of $487,127 and, accordingly, realized a loss of $1,112,873. As
of September 30, 1997, Interiors, Inc. owned approximately 79% of the total
voting stock outstanding assuming no conversion of the Series A and Series C
Preferred Stock.
On October 20, 1997, the Company received a letter of intent from Interiors,
Inc. whereby Interiors, Inc. will acquire the remaining shares of Decor Group,
Inc. Interiors, Inc. would be the surviving corporation and all the outstanding
shares of Decor would be canceled. The merger consideration to be delivered by
Interiors, Inc. to the stockholders of Decor Group, Inc. for the shares of
common stock outstanding at the date of closing of the proposed transaction will
be an aggregate $10 million of common stock of Interiors, Inc. subject to a fair
market value adjustment. There can be no assurance that the proposed
transaction will be completed.
The financial statements consolidate the results of Artisan House with the
Company commencing November 18, 1996, the date of acquisition.
RESULTS OF OPERATIONS
The Company had revenues and cost of revenues for the six months ended September
30, 1997 of $2,603,442 and $1,319,776, respectively. This represents Artisan's
sales and cost of sales transactions for six months ended September 30, 1997.
For the quarter September 30, 1997, Artisan's sales were approximately
$1,200,000, representing approximately $300,000 less than the June 30, 1997, or
20%. This decrease is primarily attributable to a general softening in the home
furnishings industry, increased competition, normal seasonality, a sharp decline
in export sales and the bankruptcy of a major customer.
During September 1997, the Company wrote-off obsolete inventory of $67,330
resulting from lack of market demand. This write off is included in the cost of
revenues.
The Company had selling, general and administrative expenses for the six months
ended September 30, 1997 of $2,375,164 of which $1,631,617 represented Artisan's
expenses for the six months ended September 30, 1997. Selling, general and
administrative expenses increased approximately $600,000 in the September 1997
over the June 1997. This is primarily attributable to the compensation
settlements with former officers of the Company and the costs accrued in
connection with the Company's restructuring plans.
For the six months ended September 30, 1997, Artisan had losses before interest,
taxes, depreciation and amortization of $2,193,531.
15
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS [CONTINUED]
In September of 1997, the Company commenced and finalized its efforts to
formulate a restructuring plan to satisfy its various investor constituencies.
Such efforts have included the retention of various advisors and analysis by
management to develop an exit plan and strategy to address the Company's
financial situation and disappointing financial performance.
In September 1997, the Company's management approved an exit plan which
addresses the above concerns by improving the manufacturing and administrative
operations of the Company for growth through improved competitiveness, quality
and effectiveness.
Accrued restructuring costs and charges include the cost of shutting down the
current operations and moving expenses to a new location for approximately
$20,000 and the projected cost differential between the projected sublease
income and the lease obligations on the current premises subject to Artisan's
House move in the amount of $210,375.
During the quarter ended September 30, 1997, the Company realized a loss of
approximately $2,100,000 from the impairment of intangible assets resulting rom
the Artisan acquisition and a $1,100,000 loss resulting from the sale of its
investment in Interiors, Inc.
The Company incurred a net loss of $4,355,401 for the six months ended September
30, 1997. This includes a net loss generated by Artisan House of approximately
$2,562,000 for the six months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, Decor had working capital of $793,206. For the six months
ended September 30, 1997, the Company used $234,817 for operating activities,
generated $468,184 from investing activities and generated $114,449 from
financing activities. The cash balance at September 30, 1997 was $517,324.
Management believes that in the next twelve months cash requirements will be met
by cash provided from operations and the asset based line of credit. Management
believes that its long-term cash needs will be provided by operations and
additional debt and/or equity financing.
In September of 1997, the Company recorded a writedown to goodwill and other
intangible assets for approximately $2,100,000, including certain purchase
adjustments recorded during September 1997. The writedown eliminated goodwill
and the other intangible assets with the exception of the non-compete agreement
in the amount of $94,300. The intangible assets and goodwill were determined to
have become impaired at September 30, 1997, because the projected undiscounted
cash flows from the assets were substantially below the carrying value of the
Company's assets. The Company's sales volume growth is uncertain in view of
increased competition, the financial trouble of a major customer and the absence
of substantial investment in upgrades of its facilities and infrastructure,
which the Company's financial condition does not permit. Furthermore, the
Company anticipates an escalation of its operating expenses. In combination
these conditions equate to an inability of the Company to generate future
operating income and sufficient cash flows. Upon determination that goodwill and
other intangibles were impaired, the amount of the impairment was calculated by
determining the excess of the carrying value of goodwill and other intangible
assets over their fair value. Fair value was determined using present value
techniques.
16
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES [CONTINUED]
In May 1996, the Company entered into a management agreement with Interiors
which specializes in the home furnishings and decorative accessories industries.
The agreement calls for a management fee of $90,000 or 1.5% of excess cash
flows, whichever is greater, per annum. The management fee is accrued quarterly
and will be paid quarterly to the extent that there is excess cash flow
available to the Company. Excess cash flow is defined in the agreement to mean
cash flow from operations adjusted to reflect changes in working capital,
interest payments, principal repayments and capital expenditures. No payment in
any quarter will exceed 50% of excess cash flow as defined. The agreement has a
term of two years with renewal options at the mutual consent of both parties.
On June 21, 1996, the Company received commitments from its stockholders for an
additional $50,000 in loan proceeds. However, the Company received $35,500 in
June 1996 and $8,000 in July 1996. The remaining balance for $6,500 was not
required. The notes bear interest at 12% per annum.
On August 9, 1996, the Company agreed to issue to Interiors 28,334 shares of
Series C Non-Voting, Convertible, Preferred Stock for cash of $425,000. On
August 23, 1996, the Company agreed to issue to Interiors an additional 18,750
shares of Series C Non-Voting, Convertible, Preferred Stock for cash of
$281,250. On September 6 and 13, 1996, the Company agreed to issue to Interiors
an additional aggregate 7,850 shares of Series C Non-Voting, Convertible,
Preferred Stock for cash of $117,750.
On August 29, 1996 and September 13, 1996, the Company advanced an aggregate
$50,000 with 10% interest to a firm that renders management services to the
Company. The Company was repaid on November 16, 1996.
On November 12, 1996, the Company realized net proceeds of $2,248,033 from the
initial public offering of the Company's common stock.
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 $13,989 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 $48,387.
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.
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. which
was subsequently modified as a result of the below settlement. The original
agreement called for the Seller to be employed on a part time basis with (i) an
annual salary of $75,000, (ii) a signing bonus of $70,000, $30,000 of which was
paid at closing and $40,000 of which is to be paid in twelve equal monthly
installments of $3,333 during the first year of the employment agreement, (iii)
reimbursement of expenses incurred by the Seller for lease and insurance
payments with respect to an automobile, (iv) an annual performance bonus equal
to 1% of Artisan's sales and 5% of the Artisan's export sales in excess of those
achieved by Artisan House, Inc. for the twelve months ended June 30, 1996,
payable within 60 days after the end of the fiscal year, with the first and last
payments being calculated on a pro rated basis, and (v) 2.5% of the
consideration paid by the Company in connection with an acquisition of an
unrelated third party introduced to the Company or its affiliates by the Seller
subject to certain restrictions as defined in the employment agreement.
17
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES [CONTINUED]
Artisan's employment agreement with the seller was terminated effective July 8,
1997. In connection with the settlement agreement in September 1997 with CIDCOA
International, Inc. ["CIDCOA"], formerly known, as Artisan House, Inc. [See Note
8], the Company reinstated the employment agreement with the seller.
Accordingly, the Company accrued all salary and benefits owed to the seller in
the amount of $217,379 as of September 30, 1997.
On December 31, 1996, Artisan entered into a three year employment agreement
with Artisan's Chief Operating Officer and President for (i) an annual salary of
$100,000; (ii) a cash bonus equal to ten percent [10%] of the annual salary,
based upon the Artisan's net profit before taxes ["NPBT"]; and (iii) a cash
bonus equal to five percent [5%] of the increase in NPBT over the previous
fiscal year, not to exceed 40% of the base salary. The agreement also provides
options to purchase 30,000 shares of the Company's Common Stock at an exercise
price of equal to $.0001 per share exercisable for a period of six years for
each of the next three years. For each of the three years ended March 31, 1998,
1999 and 2000 additional options to purchase 30,000 shares of the Company's
Common Stock exercisable for a period of one year at an exercise price equal to
the average closing price of the Company's stock for the 20 days ending two days
prior to date of grant. Continued employment by Artisan is required and Artisan
must meet or exceed 115% of the prior year's NPBT. In March 1997, the officer
was elected to the offices of President and Chief Financial Officer of the
Company.
In March 1997, CIDCOA brought an arbitration proceeding against the Company,
currently settled, alleging that it had 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 alleged
that it was owed a purchase price adjustment. The Company denied the
allegations, and brought counterclaims against CIDCOA alleging breach of
contract, breach of warranty, misrepresentation and fraud by CIDCOA. In August
1997, CIDCOA filed a motion seeking to enforce an alleged settlement agreement
made by the parties. In September 1997, the Company entered into a settlement
agreement with CIDCOA included in which was the payment of (i) a purchase price
adjustment of approximately $100,000 and (ii) $158,438 representing the market
value as of June 13, 1997 of 10,000 registered shares of the Company which were
never issued to CIDCOA. In addition, the settlement confirms that the original
amount of the promissory note is $926,400 and confirms that the monthly payments
under the note shall be $13,989, reinstates the terminated employment agreement
with Henry Goldman [See Note 7A] and provides for the Company to bring current
all disputed payments and amounts due Goldman and CIDCOA under the original
purchase and employment agreements. In addition, the settlement modifies certain
compensation provisions of the employment agreement. Further, the settlement
agreement provides that obligations to CIDCOA and Goldman under the promissory
note, the employment agreement and Artisan House's real property lease for its
operating facilities will be guaranteed by the Company and Interiors, Inc.
Under a termination agreement with a former employee, the Company was required
to pay severance in the amount of $3,889 per month for 18 months beginning April
1997. In addition, the Company was required to provide various other minimal
benefits to the former employee. The Company recorded a liability for the total
compensation payments of $70,000 at March 31, 1997. In June 1997, the Company
ceased paying the severance pay required under this termination agreement. In
August 1997, the Company entered into a settlement agreement with the former
employee which called for the payment of $45,000 and the issuance of 1,666
shares of the Company's common stock, with a value of $17,500. The stock shall
be restricted for a period of twelve months after the date of issuance.
On July 1, 1997, Artisan obtained a line of credit for up to $600,000 with
interest at prime plus 5.5% secured by all of Artisan's assets and guaranteed by
Decor and Interiors, Inc. The amount available under the line of credit at
September 30, 1997 was $228,933.
18
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
NEW AUTHORITATIVE PRONOUNCEMENTS
The FASB issued SFAS No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information about Capital Structure" in February 1997. SFAS No.
128 simplifies the earnings per share ["EPS"] calculations required by
Accounting Principles Board ["APB"] Opinion No. 15, and related interpretations,
by replacing the presentation of primary EPS with a presentation of basic EPS.
SFAS No. 128 requires dual presentation of basic and diluted EPS by entities
with complex capital structures. Basic EPS includes no dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to the fully diluted EPS of APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. When
adopted, SFAS No. 128 will require restatement of all prior-period EPS data
presented; however, the Company has not sufficiently analyzed SFAS No. 128 to
determine what effect SFAS No. 128 will have on its historically reported EPS
amounts.
SFAS No. 129 does not change any previous disclosure requirements, but rather
consolidates existing disclosure requirements for ease of retrieval.
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income." SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Earlier application is permitted. Reclassification of financial statements for
earlier periods provided for comparative purposes is required. SFAS No. 130
is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after
December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. SFAS No. 131 is not expected to have a
material impact on the Company.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past periods. Increases in supplies or other
operating costs could adversely affect the Company's operations; however, the
Company believes it could increase prices to offset increases in costs of goods
sold or other operating costs.
19
<PAGE>
SIGNATURES
- ------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Decor Group, Inc.
Date: November 13, 1997 By:/s/ Dennis D'Amore
------------------
Dennis D'Amore
President and Chief Financial Officer
20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated starement of operations and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> mar-31-1997
<PERIOD-END> sep-30-1997
<CASH> 517,324
<SECURITIES> 0
<RECEIVABLES> 892,885
<ALLOWANCES> 0
<INVENTORY> 798,315
<CURRENT-ASSETS> 2,340,263
<PP&E> 113,575
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,598,648
<CURRENT-LIABILITIES> 1,547,057
<BONDS> 0
0
2,030
<COMMON> 171
<OTHER-SE> 432,108
<TOTAL-LIABILITY-AND-EQUITY> 2,598,648
<SALES> 1,154,748
<TOTAL-REVENUES> 1,154,748
<CGS> 569,497
<TOTAL-COSTS> 3,607,832
<OTHER-EXPENSES> (1,042,186)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,683
<INCOME-PRETAX> (4,084,450)
<INCOME-TAX> 1,096
<INCOME-CONTINUING> (4,085,546)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,085,546)
<EPS-PRIMARY> (2.39)
<EPS-DILUTED> (2.39)
</TABLE>
