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 three months ended June 30, 1998 Commission File Number 0-28960
DECOR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 Washington Street
Mt. Vernon, New York 10553
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (914) 665-5400
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock. As of August 1, 1998 there were 1,959,166 shares of common stock
outstanding.
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
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INDEX
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Page to Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet as of June 30, 1998 [Unaudited]........ 1....... 2
Consolidated Statements of Operations for the three months
ended June 30, 1998 and 1997 [Unaudited].......................... 3.......
Consolidated Statements of Stockholders' Equity for the
three months ended June 30, 1998 [Unaudited] and the fiscal
year ended March 31, 1998 [Audited]............................... 4
Consolidated Statements of Cash Flows for the three months
ended June 30, 1998 and 1997 [Unaudited] ......................... 5
Notes to Consolidated Financial Statements........................ 6.......17
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................18.......23
Signature............................................................24.......
. . . . . . . . . . . . . . . . . .
<PAGE>
Item 1:
DECOR GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998.
[UNAUDITED]
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Assets:
Current Assets:
Cash $ 37,101
Accounts Receivable [Net of Allowance of $149,562] 571,174
Loan - Related Party 150,000
Non-Trade Receivable 19,429
Inventories [Net of Allowance of $110,000] 580,915
Prepaid Expenses and Other Current Assets 97,146
-----------
Total Current Assets 1,455,765
Property and Equipment [Net of Accumulated Depreciation of $453,656] 91,917
-----------
Other Assets:
Goodwill [Net of Accumulated Amortization of $179,278] 1,648,029
Other Assets 25,163
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Total Other Assets 1,673,192
Total Assets $ 3,220,874
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
1
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DECOR GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998.
[UNAUDITED]
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Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable and Accrued Expenses $ 617,328
Accounts Payable - Related Party 125,000
Due to Stockholders 247,785
Accrued Compensation and Benefits - Former Officer 139,178
Accrued Costs for Restructuring 645,000
Line of Credit 441,028
Current Portion of Long-Term Debt 117,437
-----------
Total Current Liabilities 2,332,756
Long-Term Debt 572,132
Total Liabilities 2,904,888
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 Convertible 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, 1,959,166 Issued and Outstanding 196
Additional Paid-in Capital - Common Stock 4,186,732
Accumulated Deficit (6,010,561)
Deferred Compensation (286,381)
Total Stockholders' Equity 315,986
Total Liabilities and Stockholders' Equity $ 3,220,874
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
2
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DECOR GROUP, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months ended
June 30,
1 9 9 8 1 9 9 7
------- -------
Revenues $1,126,346 $1,448,694
Cost of Revenues 619,462 750,279
---------- ----------
Gross Profit 506,884 698,415
---------- ----------
Selling, General and Administrative Expenses:
Selling Expense 313,824 231,575
General and Administrative Expense 373,901 644,324
Consulting Services - Related Party 125,000 --
Bad Debt Writeoff - Related Party 193,661 --
---------- ----------
Total Selling, General and Administrative Expenses 1,006,386 875,899
---------- ----------
[Loss] from Operations (499,502) (177,484)
---------- ----------
Other Income [Expense]:
Net Miscellaneous Income/Expense 1,212 (71,709)
Interest Expense (22,256) (15,500)
Interest Expense - Related Party -- (5,162)
---------- ----------
Other Income [Expense] - Net (21,044) (92,371)
---------- ----------
[Loss] Before Provision for Income Taxes (520,546) (269,855)
Provision for Income Taxes 7,236 --
---------- ----------
Net [Loss] $ (527,782) $ (269,855)
========== ==========
[Loss] Per Share $ (.28) $ (0.05)
========== ==========
Number of Common Shares 1,859,166 5,122,500
========== ==========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
3
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DECOR GROUP, INC. AND SUBSIDIARIES
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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-in Accumulated Deferred Loss on Stockholders'
Shares Amount Capital Shares Amount Capital Deficit Compensation Investment Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - March 31,
1997 20,304,934 $ 2,030 $2,423,970 1,707,500 $ 171 $4,035,252 $ (955,546) $ (991,167) $(787,400) $3,727,310
Issuance of Common Shares to
Former Employee -- -- -- 1,666 -- 17,500 -- -- -- 17,500
Issuance of Options for 20,000
Shares of Common Stock to
President -- -- -- -- -- 90,000 -- -- -- 90,000
Exercise of Options -- -- -- 50,000 5 -- -- -- -- 5
Adjustment on Disposal of
Securities Available for
Sale -- -- -- -- -- -- -- -- 787,400 787,400
Amortization of Deferred
Compensation -- -- -- -- -- -- -- 554,285 -- 554,285
Net [Loss] for the year ended
March 31, 1998 -- -- -- -- -- -- (4,527,233) -- -- (4,527,233)
-------- ------- --------- ------ ------ -------- ---------- --------- -------- ----------
Balance - March 31,
1998 20,304,934 2,030 2,423,970 1,759,166 176 4,142,752 (5,482,779) (436,882) -- 649,267
Amortization of Deferred
Compensation -- -- -- -- -- -- -- 150,501 -- 150,501
Stock Issued for Service -- -- -- 200,000 20 43,980 -- -- -- 44,000
Net [Loss] for the three months
ended June 30, 1998 -- -- -- -- -- -- (527,782) -- -- (527,782)
-------- ------- --------- ------ ------ -------- --------- --------- -------- ---------
Balance - June 30,
1998 20,304,934 $ 2,030 $2,423,970 1,959,166 $ 196 $4,186,732 $(6,010,561) $ (286,381) $ -- $ 315,986
========== ======= ========== ========= ====== ========== =========== ========= ======== =========
The Accompanying Notes are an Integral Part of These Consolidated Financial Statements.
</TABLE>
4
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Three months ended
June 30,
1 9 9 8 1 9 9 7
------- -------
Operating Activities:
Net [Loss] $ (527,782) $ (269,855)
Adjustment to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Accounts Payable - Related Party 125,000 --
Bad Debt Expense - Related Party 193,661 --
Amortization of Deferred Compensation 150,501 128,750
Bad Debt Expense -- 14,099
Depreciation 11,733 11,753
Amortization of Intangibles 22,498 30,180
Accrual for Returns and Allowances (10,752) --
Stock Issued for Services Performed 43,980 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable - Trade (34,033) 142,281
Accounts Receivable - Interiors (39,048) (17,778)
Inventory 6,038 15,001
Other Assets -- (50,102)
Increase [Decrease] in:
Accounts Payable and Accrued Expenses (97,793) (117,301)
Accrued Settlement - Former Officer (21,845) --
---------- ----------
Net Cash - Operating Activities (177,842) (112,972)
---------- ----------
Investing Activities:
Purchase of Property and Equipment (6,529) --
Other Assets (492) --
---------- ----------
Net Cash - Investing Activities (7,021) --
---------- ----------
Financing Activities:
Issuance of Stock 20 --
Proceeds from Line of Credit 177,601 --
Loan from Stockholder 22,500 22,500
Payment of Stockholder Loans (28,413) (30,231)
---------- ----------
Net Cash - Financing Activities 171,708 (7,731)
---------- ----------
Net [Decrease] in Cash (13,155) (120,703)
Cash - Beginning of Periods 50,256 169,508
---------- ----------
Cash - End of Periods $ 37,101 $ 48,805
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid for the periods for:
Interest $ 22,257 $ 15,500
Income Taxes $ 7,236 $ --
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
5
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
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 June 30, 1998.
[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 3 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] 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 had
decided to amortize its goodwill over a period of ten 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
twenty years. The effect of this change is to reduce future annual amortization
of goodwill by $75,000. Goodwill and other intangible assets were previously
written off as of September 30, 1997. An amendment was filed in February of 1998
for the September 1997 Form 10-QSB that reversed the writedown of the goodwill
based upon revised information obtained after the original filing. 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.
6
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[1] Summary of Significant Accounting Policies [Continued]
[F] Goodwill [Continued] - Goodwill has been amortized using the straight-line
method over twenty years. In connection with the acquisition of Artisan House,
Inc. in November 1996, goodwill of approximately $1,800,000 was recorded using
the purchase method.
[G] 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 value 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.
[H] Loss Per Share - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings per
Share"; which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the three months ended June 30, 1998, have been calculated in
accordance with SFAS No. 128. Prior periods earnings per share data have been
recalculated as necessary to conform prior years data to SFAS No. 128. Prior
periods' earnings per share data have been restated to give retroactive effect
for the one for three reverse stock split in October of 1997.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with a new basic
earnings per share representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period. SFAS No.
128 also requires a dual presentation of basic and diluted earnings per share on
the face of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share [i.e., increasing earnings per share or reducing
loss per share]. The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
Potential common shares of 80,000 are not currently dilutive, but may be in the
future.
For the year ended March 31, 1997, the number of shares to be used for earnings
per share calculation purposes was based on a) 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 b) for after the IPO: the 1,312,500 shares outstanding from July
1, 1996 through November 18, 1996 and the 1,707,500 shares outstanding from
November 18, 1996 to March 31, 1997.
7
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[1] Summary of Significant Accounting Policies [Continued]
[I] Risk Concentrations - Financial instruments that potentially subject the
Company to concentrations of credit risk include cash and accounts receivable
arising from its normal business activities. The Company places its cash with a
high credit quality financial institution and periodically has cash balances
subject to credit risk beyond insured amounts. At June 30, 1998, the Company had
no cash in excess of insured amounts.
The Company routinely assesses the financial strength of its customers, and
based upon factors surrounding the credit risk of its customers, established an
allowance for uncollectible accounts of approximately $150,000 for the fiscal
period ended March 31, 1998 and as a consequence, believes that its accounts
receivable credit risk exposure beyond this allowance is limited. The Company
does not require collateral to support financial instruments subject to credit
risk.
[J] 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.
[K] 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.
[L] Principles of Consolidation - The consolidated financial statements include
the accounts of the Company and its subsidiaries. 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.
Effective September 8, 1997, the Company, pursuant to a settlement agreement
arising from a dispute concerning the asset purchase agreement paid an
additional $258,438 in cash and recorded goodwill for such amount. The
transaction was recorded under the purchase method. Goodwill of approximately
$1,800,000 is being amortized over 20 years using the straight-line method.
Intangible assets of $537,046 were written off in March of 1998. 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.
8
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
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[3] Inventories
The components of inventory were as follows:
Raw Materials $ 259,396
Work-in Process 229,340
Finished Goods 92,179
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Totals $ 580,915
------ ==========
[4] Related Party Transactions
[A] Due to Interiors - Management Agreement - 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 of $90,000 has been accrued
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.
[B] Due to Interiors - At March 31, 1997, the Company had amounts due to
Interiors of $185,285, consisting of $18,750 in management fees and $166,535 of
advances. The Company accrued additional management fees of $90,000 and paid
$50,000 during the year ended March 31, 1998. As of March 31, 1998, the Company
has an outstanding balance due to Interiors of $225,285. The Company recorded
interest expense for the year ended March 31, 1998 of $16,116 on this obligation
[Note 16A]. The Company recorded $125,000 of management consulting fees due
Interiors on June 30, 1998, relating to marketing and merchandising services
provided by the related party to the Company.
The outstanding balance at June 30, 1998 was $247,885 consisting of $116,535 in
advances and $131,350 in management fee.
[C] 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 had a maturity date of April 1998.
Interest expense for the three months ended June 30, 1998 was $1,305.
[D] Due from Interiors - In March of 1998, the Company advanced approximately
$300,000 to Interiors, Inc., $200,000 of which carried interest at the Company's
borrowing rate. The $200,000 was repaid with interest in April of 1998. The
Company wrote off the $193,661 balance of accounts receivable due from Interiors
on June 30, 1998, in exchange for product marketing and merchandising cost being
incurred by the related party on behalf of the Company.
[5] Property and Equipment
Property and equipment consisted of the following:
Machinery and Equipment $ 175,862
Leasehold Improvements 153,409
Furniture and Fixtures 150,244
Office and Computer Equipment 66,058
----------
Total - At Cost 545,573
Less: Accumulated Depreciation (453,656)
Net $ 91,917
--- ==========
9
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
- ------------------------------------------------------------------------------
[5] Property and Equipment [Continued]
Depreciation expense was approximately $11,733 and $11,753, respectively for the
three months ended June 30, 1998 and 1997.
[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 66,666 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 4A]. 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 June 30, 1998, Interiors, Inc. owned approximately 67% of the
Company's total voting stock outstanding assuming no conversion of the Series A
and Series C Preferred Stock [See Note 16[A] - Pending Merger].
[7] Commitments and Contingencies
[A] Employment Agreement - Seller - On October 30, 1997, the Seller's employment
agreement dated November 18, 1996 was amended to provide for the issuance of
options to purchase 50,000 shares of the Company's common stock on each of the
first and second anniversaries of the agreement. The options are exercisable at
$.0001 per share commencing the date of issuance and expiring in four years. In
December of 1997, the seller exercised options for 50,000 shares of common
stock. 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. For the year
ended March 31, 1998, the Company amortized $500,000 as deferred compensation
and amortized $150,501 for the period ended June 30, 1998.
In July 1997, there was an attempt to terminate Artisan's employment agreement
with the seller. In connection with a settlement agreement reached in September
1997 with CIDCOA International, Inc. ["CIDCOA"], formerly known, as Artisan
House, Inc. [See Note 9], the Company reinstated the employment agreement with
the seller and recorded additional monies owed to the seller of approximately
$290,000 whereby $139,177 is due to the seller at June 30, 1998 pursuant to this
agreement. The employment agreement also provides for additional fees to be
earned by the seller pursuant to certain acquisitions made by the Company, its
parent or affiliates. The Company has expensed $64,000 in accrued liabilities
representing an estimate of compensation earned by the seller as a consequence
of the two acquisitions already made by Interiors, Inc. in March of 1998.
[B] 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. At June 30, 1998, the Company accrued
$131,000 to the director as monies due upon his resignation.
10
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- ------------------------------------------------------------------------------
[7] Commitments and Contingencies [Continued]
[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.
[D] Line of Credit - 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 June 30, 1998 was $600,000. At June
30, 1998, Artisan had an outstanding balance of $441,028. The line of credit was
renewed for an additional year on June 30, 1998 and expires June 30, 1999. The
term of the credit line automatically renews each year unless notice is given by
either the Company or the lender to the other, respectively within a period not
less than 60 days prior to expiration. The Company is not in violation of any of
the covenants of the loan. Interest expense for the three months ended June 30,
1998 was $7,312.
[E] Leases - The Company leases manufacturing and office space in California
from the seller of Artisan. This operating lease, which expires November 30,
2001 is for Artisan's operations. The lease provides for additional rent based
on increases in the Consumer Price Index [See Note 12 - Restructuring Plan].
Future minimum lease payments under all operating leases are as follows at June
30, 1998:
Twelve months ended
June 30,
1999 $ 182,948
2000 190,572
2001 189,114
2002 100,856
Thereafter -
---------
Total $ 663,490
----- =========
Artisan also rents showroom space in High Point, North Carolina and San
Francisco, California. The High Point lease expires April of 1999 and the San
Francisco lease expires in July of 2001. The current monthly lease payments are
$3,126 for High Point and $1,465 for San Francisco.
11
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
- ------------------------------------------------------------------------------
[7] Commitments and Contingencies [Continued]
[F] Employment Agreement - President/Chief Financial Officer - 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
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
10,000 shares of the Company's common stock per year for each year of the
agreement at an exercise price equal to $.0003 per share exercisable after one
year for a period of five years. The Company recorded deferred compensation of
$180,000 for the 10,000 options. For the year ended March 31, 1998, the Company
amortized $54,285 as compensation expense. In March 1997, the officer was
elected to the offices of President and Chief Financial Officer of the Company.
In December of 1997, the officer received 20,000 options, which represented the
additional 10,000 options due on January 1, 1998 under the employment agreement
and an additional 10,000 options. The Company recorded compensation expense of
$90,000 on January 1, 1998.
The agreement also provides additional performance options to purchase 10,000
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 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.
[8] Debt
June 30,
1 9 9 8
Acquisition Loan $ 717,814
Less: Discount 35,873
----------
Total 681,941
Less: Current Portion of Long-Term Debt 117,437
Long-Term Portion $ 564,504
----------------- ==========
Annual maturities of notes payable are as follows:
Twelve months ended
June 30,
1999 $ 117,437
2000 128,015
2001 139,472
2002 297,017
Thereafter --
---------
Total $ 681,941
----- =========
12
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[UNAUDITED]
- ------------------------------------------------------------------------------
[8] Debt [Continued]
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 $13,989
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 portion for the $150,000 was discounted at 8%. The
amortization on this discount for the three months ended June 30, 1998 was
approximately $2,500 and has been amortized as interest expense. Interest
expense for the three months ended June 30, 1998 was approximately $11,000 on
the note payable.
[9] 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 in lieu 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.
[10] Capital Stock
[A] Public Offering - On November 18, 1996, the Company successfully completed
its initial public offering and sold 345,000 shares of Common Stock at $10 per
share [giving effect to the reverse stock split See Note 10D]. As a result of
this offering, the Company received net proceeds of $2,236,123 [net of
$1,240,204 offering expense].
[B] 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.
[C] 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.
13
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[UNAUDITED]
- ------------------------------------------------------------------------------
[10] Capital Stock [Continued]
[D] 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 were
purchased by the Company at the average closing bid and ask price of the common
stock of the Company as of October 8, 1997.
[E] Additional Stock Issued - In March of 1998, the Company retained a financial
consulting firm to provide meager and acquisition consulting and advisory
services in connection with the pending merger with Interiors, Inc. [See Note
16A]. In May 1998, the Board of Directors of Decor issued 200,000 shares of the
Company's common stock in exchange for these services valued at $44,000.
[F] Preferred Stock - Series A Convertible - Each share shall not have the right
to vote nor to receive dividends and the liquidation rate is $.0001 per share.
Each share is convertible into one share of Common Stock, subject to certain
anti-dilution provisions. Series B Non-Convertible - Each share shall not
receive dividends, but will have the right to vote and the liquidation rate is
$.0001 per share. Series C Convertible - Each share shall not have the right to
vote nor receive dividends. The liquidation rate is $.0001 per share. Each share
is convertible commencing September 1, 1997, subject to adjustment, into one
share of common stock, subject to certain anti-dilution provisions.
[11] Restructuring Plan
In September of 1997, the Company commenced and approved an exit plan to satisfy
its various investor constituencies by improving the manufacturing and
administrative operations of the Company for growth through improved
competitiveness, quality and effectiveness. Such efforts have included the
retention of various advisors and analysis by management to improve the
manufacturing and administrative operations of the Company. The Company is
concentrating on strategies for growth through improved competitiveness, quality
and effectiveness. In order for the restructure plan to be completed
successfully, management believes that Interiors acquisitions of other companies
could provide the opportunity for Artisan House to move its facility and improve
the manufacturing process. Interiors closed on two acquisitions in March of
1998.
Management believes that the restructuring costs and charges for the cost of
shutting down the current operations are approximately $20,000 and the projected
remaining lease obligations on the current premises are $645,000. The
restructuring reserve through December 1997 had included an offset for sublease
income. However, since there has not been any successful commitment in this
endeavor since September of 1997, management has decided to increase the reserve
by approximately $435,000. This had represented management's previous estimate
of attainable sublease income for the remaining term of 44 months.
[12] Income Taxes
The Company and its consolidated subsidiaries apply the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
The Company has net operating loss carry forwards of approximately $3,100,000 of
which approximately $100,000 will expire in 2011, approximately $600,000 will
expire in 2012, and approximately $2,400,000 will expire in 2013.
14
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[UNAUDITED]
- ------------------------------------------------------------------------------
[12] Income Taxes [Continued]
The major components of deferred income tax assets and liability are as follows:
Deferred Tax Liability
Depreciation and Amortization $ 20,000
==========
Deferred Tax Asset
Reserves and allowances $ 144,000
Stock based compensation 225,000
Net Operating loss carry forwards 1,240,000
Total Deferred Tax Assets $1,609,000
Net Deferred Tax Asset Before
Valuation Allowance $1,589,000
Valuation Allowance (1,589,000)
----------
Net $ --
--- ==========
Due to the uncertainty whether the Company will generate income in the future
sufficient to fully or partially utilize the net operating loss carryforwards,
the Company recorded a valuation allowance of $1,589,000. This represents an
increase in its valuation allowance of $937,000 over the allowance at March 31,
1997.
[13] 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.
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 $150,501 and $160,000 for the three months ended June 30, 1998 and
1997. The exercise price for all stock options issued to employees during fiscal
years 1998 and 1997 were below the market price of the Company's stock at the
date of grant.
15
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[UNAUDITED]
- ------------------------------------------------------------------------------
[13] Stock Options [Continued]
A summary of the activity under the plan is as follows:
Weighted
Weighted Average
Average Remaining
Exercise Contractual
Shares Price Life
Outstanding - April 1, 1996 -- $ --
---------------------------
Granted 125,000 .0001
Exercised (15,000) .0001
Forfeited/Expired -- --
---------- ---------
Outstanding - March 31, 1997 110,000 .0001 4 Years
---------------------------- ========
Granted 20,000 .0003
Exercised (50,000) .0001
Forfeited/Expired -- --
---------- ---------
Outstanding - March 31, 1998 80,000 $ .0002
---------------------------- ========== =========
Outstanding - June 30, 1998 80,000 $ .0002
--------------------------- ========== =========
Exercisable - March 31, 1998 52,000 .0001 3 Years
---------------------------- ========== ========= ========
Exercisable - June 30, 1998 52,000 .0001
--------------------------- ========== =========
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 $4.50 for the year ended March 31, 1998 using the
Black-Scholes option-pricing model for the pro forma amounts with the following
weighted average assumptions:
March 31,
1 9 9 8
Risk-free Interest Rate 5.73%
Expected Life 5 Years
Expected Volatility 149.41%
Expected Dividends None
If compensation cost had been determined on the basis of fair value pursuant to
SFAS No. 123, net income and net earnings per share as reported would not be
materially affected.
[14] Fair Value of Financial Instruments
At June 30, 1998 financial instruments include cash, accounts receivable,
accounts payable, loans to and from related parties and debt. The fair values of
cash, accounts receivable, accounts payable and loans to and from related
parties approximates carrying value because of the short-term nature of these
instruments. The fair value of debt approximates carrying value since the
interest rates approximates the Company's cost of capital.
16
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
[UNAUDITED]
- ------------------------------------------------------------------------------
[15] Subsequent Events
[A] Pending Merger - On April 21, 1998, the Company entered into a merger
agreement with Interiors, Inc. ["Interiors"] whereby each of the issued and
outstanding shares of Decor common stock shall be converted into the right to
receive a one half share [the "Exchange Ratio"] of validly issued, fully paid
and nonassessable shares of Class A common stock of Interiors. The Company will
receive a fairness opinion of a qualified investment banking firm, to the effect
that, the Exchange Ratio for the conversion of Decor common stock into
Interiors' Class A common stock is fair from a financial point of view to
holders of shares of Decor common stock. All options and warrants outstanding
for Decor common stock will be subject to the same Exchange Ratio for Interiors'
Class A common stock.
Pursuant to the merger agreement, the outstanding Decor Series A preferred stock
will be converted into Decor common stock and the Decor Series B nonconvertible
preferred stock will be canceled. If the agreement is terminated by Decor, Decor
is required to pay a $250,000 termination fee to Interiors subject to certain
conditions.
In March of 1998, the Company retained a financial consulting firm to provide
merger and acquisition consulting and advisory services in connection with the
pending merger with Interiors, Inc.. In May 1998, the Board of Directors of
Decor issued 200,000 shares of the Company's common stock in exchange for these
services valued at $44,000.
[B] Loan Repayment - On April 2, 1998, the Company received $200,000, including
interest, from Interiors as repayment for the advances of approximately
$300,000.
[16] New Authoritative Pronouncements
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 does not have a material impact on the Company.
. . . . . . . . . . .
17
<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 4A]. 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 March 31, 1998, Interiors, Inc. owned approximately 79% of the total voting
stock outstanding assuming no conversion of the Series A and Series C Preferred
Stock.
On April 21, 1998, the Company entered into a merger agreement with Interiors,
Inc. ["Interiors"] whereby each of the issued and outstanding shares of Decor
common stock shall be converted into the right to receive a one half share [the
"Exchange Ratio"] of validly issued, fully paid and nonassessable shares of
Class A common stock of Interiors. The Company will receive a fairness opinion
of a qualified investment banking firm, to the effect that, the Exchange Ratio
for the conversion of Decor common stock into Interiors' Class A common stock is
fair from a financial point of view to holders of shares of Decor common stock.
All options and warrants outstanding for Decor common stock will be subject to
the same Exchange Ratio for Interiors' Class A common stock.
Pursuant to the merger agreement, the outstanding Decor Series A preferred stock
will be converted into Decor common stock and the Decor Series B nonconvertible
preferred stock will be canceled. If the agreement is terminated by Decor, Decor
is required to pay a $250,000 termination fee to Interiors subject to certain
conditions.
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 three months ended June
30, 1998 of $1,126,346 and $619,462, respectively. This represents Artisan's
sales and cost of sales transactions for the year then ended which resulted in a
gross profit of $506,884 to the Company.
The Company had selling, general and administrative expenses for the three
months ended June 30, 1998 of $1,006,386 of which $689,023 represented Artisan's
expenses for the year then ended. The selling, general and administrative
expenses of the Company include two related party transactions with Interiors.
$125,000 was accrued for consulting services and a bad debt writeoff of $193,661
was recorded on June 30, 1998.
18
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS [CONTINUED]
For the three months ended June 30, 1998, Artisan had an operating loss of
approximately $182,139. The loss included a $193,661 write off as bad debt
expense - related party. Management believes that for the year ended March 31,
1999, the Company can reduce its losses by increasing its gross profit by
approximately $300,000, and by reducing operating expenses by approximately
$600,000. A reduction of manpower and operating expenses related to the
Company's administrative and sales functions is currently being implemented. The
process will continue throughout the year in conjunction with the Company's
anticipated relocation to the facilities of an imminent Interiors, Inc. metal
fabrication manufacturing business acquisition. Management believes that in
fiscal 1999 by outsourcing its products to vendors outside the United States an
improved gross profit can be achieved. In addition, the recent minimum wage
increases in the United States has created a favorable environment for choosing
outsourcing as a means of reducing labor costs. Artisan House is currently in
negotiations with two vendors to pursue this plan.
Management also believes that in fiscal 1999, administrative and sales expenses
can be decreased by the installation of a new computer system and merging the
administrative and sales functions with the acquisition candidate of Interiors,
Inc. Interiors has advised the Company of its intent to provide the funding for
the acquisition through private placement of either stock or subordinate
debentures.
Management believes the planned restructuring and relocation of its headquarters
and manufacturing operations, together with the subletting of its present
facilities, will occur in October of 1998 in conjunction with space that will be
made available to it as a result of Interiors, Inc.'s imminent acquisition of a
metal fabrication manufacturing business with excess, underutilized capacity.
In September of 1997, the Company commenced and approved an exit plan to satisfy
its various investor constituencies by improving the manufacturing and
administrative operations of the Company for growth through improved
competitiveness, quality and effectiveness. Such efforts have included the
retention of various advisors and analysis by management, to improve the
manufacturing and administrative operations of the Company for growth through
improved competitiveness, quality and effectiveness. Essential to the success of
the restructuring plan is Interiors acquisitions of other companies. This could
provide the opportunity for Artisan House to move its facility and improve the
manufacturing process.
Management believes that the restructuring costs and charges for the cost of
shutting down the current operations are approximately $20,000 and the projected
remaining lease obligations on the current premises are $625,000. The
restructuring reserve through December 1997 had included an offset for sublease
income, however, since March 31, 1998, there had not been any successful
commitment in this endeavor management has decided to increase the reserve by
approximately $435,000, which represents management's previous estimate of
attainable sublease income. Interiors closed on two acquisitions in March of
1998.
The Company incurred a net loss of $527,782 for the three months ended June 30,
1998 of which approximately $196,140 was from the Artisan House operation and
$331,642 was from the Decor operation.
The Company's auditors rendered a going concern report as of March 31, 1998 as
the Company has suffered recurring losses from operations.
19
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, Decor had a working capital deficit of $876,991. For the three
months ended June 30, 1998, the Company used $177,842 for operating activities,
utilized $7,021 for investing activities and generated $171,708 from financing
activities. The cash balance at June 30, 1998 was $37,101. 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.
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 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 of
$90,000 has been accrued 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. At March 31, 1997, the Company had amounts due to Interiors of
$185,285, consisting of $18,750 in management fees and $166,535 of advances. The
Company accrued additional management fees of $90,000 and paid $50,000 during
the year ended March 31, 1998. As of March 31, 1998, the Company has an
outstanding balance due to Interiors of $225,285. The Company recorded interest
expense for the three months ended June 30, 1998 of $4,056 on this obligation.
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 March 31, 1998, 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.
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.
20
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES [CONTINUED]
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.
On October 30, 1996, the Seller's employment agreement was amended to provide
for the issuance of options to purchase 50,000 shares of the Company's common
stock on each of the first and second anniversaries 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.
For the year ended March 31, 1998, the Company amortized $500,000 as deferred
compensation and $150,501 for the three months ended June 30, 1998.
In July 1997, there was an attempt to terminate Artisan's employment agreement
with the seller. In connection with a settlement agreement reached in September
1997 with CIDCOA International, Inc. ["CIDCOA"], formerly known, as Artisan
House, Inc. [See Note 7], the Company reinstated the employment agreement with
the seller and recorded additional monies owed to the seller of approximately
$290,000 whereby $139,177 is due to the seller at June 30, 1998 pursuant to this
agreement. The employment agreement also provides for additional fees to be
earned by the seller pursuant to certain acquisitions made by the Company, its
parent or affiliates. The Company has expensed $64,000 in accrued liabilities
representing an estimate of compensation earned by the seller as a consequence
of the two acquisitions made in March of 1998 by Interiors, Inc.
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 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 10,000 shares of the Company's common stock for each of the years of
the contract at an exercise price equal to $.0003 per share exercisable after
one year for a period of five years. The Company recorded deferred compensation
of $180,000 for the 10,000 options. For the year ended March 31, 1998 amortized
approximately $55,000 as compensation expense and $12,858 for the three months
ended June 30, 1998.
In March 1997, the officer was elected to the offices of President and Chief
Financial Officer of the Company.
In December of 1997, the officer received 20,000 options, which represented the
additional 10,000 options due on January 1, 1998 under the employment agreement
and an additional 10,000 options. The Company recorded compensation expense of
$90,000 on January 1, 1998.
The agreement also provides additional performance options to purchase 10,000
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 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.
21
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES [CONTINUED]
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 in lieu 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 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 June 30, 1998 was $600,000. At June 30, 1998, Artisan has
an outstanding balance of $441,028. The line of credit has an expiration date of
June 30, 1999. The term of the credit line automatically renews each year unless
notice is given by either the Company or the lender to the other, respectively
within a period not less than 60 days prior to expiration. The Company is not in
violation of any covenants of the loan. Interest expense for the three months
ended June 30, 1998 was $7,312.
NEW AUTHORITATIVE PRONOUNCEMENTS
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 does not have a material impact on the Company.
22
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
IMPACT OF INFLATION
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past periods. Increases in supplies or other
operating costs could adversely affect the Company's operations; however, the
Company believes it could increase prices to offset increases in costs of goods
sold or other operating costs.
23
<PAGE>
SIGNATURES
- ------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DECOR GROUP, INC.
Date: August 13, 1998 By:/s/ Dennis D'Amore
Dennis D'Amore,
President and Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial data extracted from the
consolidated balance sheet and the consolidated statement of operations
and is qualified in its entirety by reference to such schedules
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Mar-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 37,101
<SECURITIES> 0
<RECEIVABLES> 720,736
<ALLOWANCES> 149,562
<INVENTORY> 580,915
<CURRENT-ASSETS> 1,455,765
<PP&E> 545,573
<DEPRECIATION> 453,656
<TOTAL-ASSETS> 3,220,874
<CURRENT-LIABILITIES> 2,332,756
<BONDS> 0
0
2,030
<COMMON> 196
<OTHER-SE> 313,760
<TOTAL-LIABILITY-AND-EQUITY> 3,220,874
<SALES> 1,126,346
<TOTAL-REVENUES> 1,126,346
<CGS> 619,462
<TOTAL-COSTS> 1,006,386
<OTHER-EXPENSES> 21,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,256
<INCOME-PRETAX> (520,546)
<INCOME-TAX> 7,236
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (527,782)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
