SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
|X| Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 1998.
Commission File No. 0-28960
DECOR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911958
(State of or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
320 Washington Street
Mt. Vernon, New York 10553
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (914) 665-5400
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.0001 per share
(Title of Class)
Redeemable Class A Common Stock Purchase Warrants
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of the Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X]
Issuer's revenues for its most recent fiscal year were $5,186,334.
The aggregate market value of the voting stock held by non- affiliates of
the Registrant, computed by reference to the closing price of such stock as of
June 22, 1998, was approximately $806,088.
Number of shares outstanding of the Issuer's Common Stock as of June 22, 1998,
was 1,959,166 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant's definitive proxy statement to be filed.
<PAGE>
PART I
Item 1. BUSINESS.
This Annual Report on Form 10-KSB and the documents incorporated herein by
reference of Decor Group, Inc. contain forward-looking statements that have been
made pursuant to the provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on current expectations,
estimates and projections about the Company's industry , management's beliefs
and certain assumptions made by the Company's management. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates,"
or variations of such words and similar expressions, are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results may differ materially from
those expressed or forecasted in any such forward-looking statements. Investors
are cautioned not to place undue reliance on these forward-looking statements,
which reflects management's analysis only as of the date hereof.
Decor Group, Inc., a Delaware corporation (the "Company" or "Decor"), was
incorporated in March 1996 and formed Artisan Acquisition Corporation as a
Delaware corporation wholly owned by the Company ("AAC"). AAC was incorporated
for the purpose of entering into that certain Asset Purchase Agreement dated
March 1996 with Artisan House, Inc. ("Artisan House") pursuant to which AAC
agreed to purchase substantially all of the operating assets, and to assume
certain liabilities, of Artisan House. In November 1996 immediately following
the closing of the initial public offering of the Company's securities, AAC and
Artisan House closed on the transactions contemplated by the Asset Purchase
Agreement (the "Artisan House Acquisition"). In January 1997, AAC changed its
name to Artisan House, Inc. ("AHI").
As a result of the Artisan House Acquisition, the Company through AHI is
engaged in designing, manufacturing and marketing of metal wall-mounted,
tabletop and freestanding sculptures. The primary goal of AHI is to supply a
broad spectrum of design driven sculpture and decorative accessories at moderate
prices. AHI markets its products through a network of independent commissioned
sales representatives, as well as through strategically located showrooms
servicing the home furnishing and decorative accessory industries. AHI maintains
showrooms located in High Point, North Carolina and San Francisco, California.
Typical customers of AHI include fine furniture stores, interior
decorators and major department stores such as Sears and JC Penny, large
furniture chains such as Wickes, and catalogue houses such as Parke-Bell. For
the fiscal year ended March 31, 1998, sales to JC Penny, Sears, Parke-Bell,
Wickes represented 7.2%, 6.7%, 7.6% and 2.7% respectively, of AHI's total sales.
The Company believes that the home furnishing and decorative accessory
supply industry will consolidate as major retailers attempt to increase their
"single-sourcing" in order to reduce distribution and related expenses.
Initially, the Company's objective was to capitalize on the fragmented nature of
the supply side of the home decorative accessory industry and the consolidation
of such industry by acquiring manufacturers and distributors of art-related
decorative accessories. The Company still believes this is the preferred way to
proceed in the industry as a whole, but believes this can best be accomplished
by merging the Company with and into Interiors, Inc., an affiliated Delaware
corporation ("Interiors") with Interiors remaining as the survivor (the
"Merger"). To accomplish that goal the Company began discussions with Interiors
in the fall of 1997 that resulted in both companies entering into an agreement
and plan of merger dated April 20, 1998 as amended on April 21, 1998 (together
"the Merger Agreement") pursuant to which Interiors will offer .5 shares of
Interiors Class A common stock for each share of common stock of the Company.
The Company's classes of convertible preferred stock will be treated as if
converted to common stock of the Company in accordance with their terms of
conversion; provided, however, that the 20,000,000 shares of Class B Preferred
Stock of the Company owed by Interiors will be cancelled without exchange and
without any other consideration at the closing of the Merger. The Merger
requires approval of the stockholders of the Company, and the Company is
cooperating with Interiors in the preparation of a Registration Statement on
Form S-4 to be distributed to the Company's stockholders in connection with a
special meeting of stockholders currently scheduled for August 1998. There can
be no assurance that the Merger will be completed and that the Company will
recognize the anticipated benefits that will flow therefrom.
<PAGE>
On November 18, 1996, the Company completed an initial public offering
(the "IPO") pursuant to which the Company sold 345,000 shares of Common Stock to
the public at $10 per share. The proceeds from the IPO were used primarily to
close on the Artisan House Acquisition and to repay certain indebtedness of the
Company. The Company's shares of Common Stock trade on the NASD OTC Bulletin
Board and on June 22, 1998 the closing bid price for the shares was $.50 per
share.
On May 6, 1997 the Company filed an application with The Nasdaq Stock
Market, Inc. for initial listing of the Company's Common Stock and Class A
Common Stock Purchase Warrants. The Company's application has been withdrawn.
The Company's executive offices are located at 320 Washington Street, Mt.
Vernon, New York 10553, and the offices of AHI are located at 1755 Glendale
Boulevard, Los Angeles, California 90026.
Manufacturing
AHI manufactures substantially all of its sculptures and decorative pieces
at its facility in Los Angeles, California. Virtually all of the products are
made of assorted metals, such as brass, bronze, steel and aluminum which are
then formed and hand finished. Manufacturing operations include the use of
customized proprietary metal fabrication equipment and tools, jigs and dies
especially created for AHI. Production also includes finishing, which involves
hand painting and toning, and a finishing process which uses proprietary
techniques which AHI believes substantially improves the appearance of the
product.
AHI maintains an inventory of various metal such as brass, bronze and
stainless steel and other materials for use in its manufacturing processes.
AHI's tool and die inventory allows for the manufacturing of a broad range of
designs. These tools can be used to produce hundreds of styles of decorative
wall sculptures.
No single outside manufacturer supplies more than 10% of AHI's raw
materials except McDonald Packaging which supplies 12.7% (packaging) and
Industrias Montoya which supplies 13.5% (raw components) and AHI's management is
not aware at this time of any product or manufacturer which AHI cannot replace
with a comparable product from an alternative manufacturer.
Products
AHI's products include metal wall-mounted, tabletop and freestanding
sculpture. AHI's product styles range from contemporary to neoclassical, from
Americana to transitional. AHI also manufactures products based on popular
themes such as sports, music and nostalgia. In addition, AHI has several
licensing programs pursuant to which AHI produces sculptures with designs
derived from the popular 1940's movie entitled, "Casablanca," RCA's Little
Nipper, and Warner Bros. Looney Tunes characters. In total, AHI produces
hundreds of different styles within its product line.
License Agreements
AHI currently manufacturers products pursuant to license agreements for
(i) the cartoon character, "Betty Boop", (ii) the movie classic, "Casablanca"
and (iii) the "Nipper Dog" (the RCA dog). The "Betty Boop", "Casablanca," and
"Nipper Dog" licenses terminate on December 31, 1999, June 30, 1999, and April
30, 1999, respectively.
On September 24, 1996, Artisan entered into a license agreement with
Warner Bros., a division of Time Warner Entertainment Company, L.P., pursuant to
which Artisan was granted the non-exclusive right to produce a number of Warner
Bros. "Looney Tunes" cartoon characters, including, but not limited to, Bugs
Bunny, Sylvester, Tweety, Porky Pig, Road Runner, Daffy Duck, Tasmanian Devil
and Yosemite Sam. The license terminates on December 31, 1998.
Generally, all of the license agreements are non-exclusive, permit sales
in the United States and require AHI to make periodic royalty payments based
upon revenues from the sale of licensed works.
<PAGE>
Marketing
AHI markets its products through a network of independent commissioned
sales representatives. Domestically, AHI has, as of June 1, 1998, twenty four
(24) commissioned sales representatives. Internationally, AHI has distributors
in Taiwan, Australia, the United Kingdom, Belgium and Holland. In addition, AHI
has non-exclusive representation in the Middle East, Taiwan and parts of Europe.
AHI has permanent showrooms located in High Point, North Carolina and San
Francisco, California. These showrooms are strategically located in an effort to
efficiently service the home furnishing and decorative accessory industries.
Suppliers
AHI purchases metal and other materials from a wide variety of sources,
and has at least two, and often more, suppliers for each item used in its
manufacturing process, and is not dependent upon any one supplier. AHI currently
purchases from a vendor base of more than 150 suppliers. While there are many
suppliers of most materials, AHI has chosen to limit the majority of its
purchases to the one or two vendors with whom it has developed long-term
relationships. Generally AHI does not need to enter into contracts with its
suppliers as most merchandise is readily available from multiple sources.
The suppliers for those decorative accessory products which are not
manufactured by AHI include items such as marble, glass, mirror, and wood. AHI
does not currently purchase more than 10% of any of these products from any one
outside supplier except McDonald Packaging which supplies 12.7% (packaging) and
Industrias Montoya which supplies 13.5% (raw components). Products purchased
from suppliers are produced exclusively for AHI and therefore are not commonly
available.
Competition
The sculpture and decorative accessory industry in the United States is
highly fragmented and consists primarily of small, local manufacturers and
assemblers. Only a few companies are basic manufacturers of metal wall hangings
and sculptures. However, there can be no assurance that AHI's position in this
industry will continue in this manner.
Management believes that the sale of decorative accessories in the
wholesale market is also highly fragmented, with thousands of small, specialized
manufacturers and distributors.
AHI believes that its competitive advantage lies in its ownership of a
substantial number of models, tools, jigs and dies and its continuing ability to
manufacture quality products. Management also believes that AHI is further
protected by what AHI considers to be its excellent reputation with its customer
base and management's estimation that the cost to build tools, jigs, dies and
molds, make the entry of meaningful competition extremely difficult. Management
also believes that it would be difficult to establish a trained work force of
skilled crafts people. However, there can be no assurance that such assets will
continue to afford AHI any competitive advantage.
Trademark Protection
The trademarks "Artisan House", "C. Jere", "Sauteur", and "Glendale
Ironworks" have been registered with the United States Patent and Trademark
Office ("PTO"). AHI presently makes all appropriate filings and registrations
and takes all other actions necessary, to protect all of its intellectual
property rights. There can be no assurance, however, that AHI will be able to
effectively protect such property rights. The failure by AHI to protect such
rights from unlawful and improper appropriation may have a material adverse
effect on AHI. Although to date no claims have been brought against AHI alleging
that it infringes on the intellectual property rights of others, there can be no
assurance that such claims will not be brought against AHI in the future, or
that if made, such claims will not be successful. In addition to any potential
monetary liability for damage, AHI could be required to obtain a license in
order to continue to use the trademarks in question or could be enjoined from
using such trademarks if such license were not made available on acceptable
terms. If AHI becomes involved in such litigation, it may divert significant
Company resources, which could have a material adverse effect on AHI and its
results or operations, and, if such a claim were successful, AHI's business
could be materially adversely affected.
<PAGE>
Copyright Protection
The Company has been granted and currently maintains over 954 copyrights
on written and visual product designs for metal wall hangings and free-standing
sculptures, from the United States Copyright Office.
Research and Development
AHI continually seeks to develop additional product designs and product
concepts and their related tooling, through product design proposals submitted
by independent commissioned artists. So long as AHI generates sufficient cash
flow, AHI expects to continue to increase its expenditures for product
development as it increases its in-house manufacturing to expand its finishing
and fabrication capabilities. However, there can be no assurance that such
product development will yield profitable growth.
Government Regulation
AHI's operations are subject to numerous Federal, state and local laws and
regulations relating to the environment and health and safety and other
regulatory matters. Certain materials used in the manufacturing of AHI's
products such as paints, solvents and other water-based related finishes may be
classified by Federal and certain state and local governments as "hazardous
materials." Control of those substances is regulated by the Environmental
Protection Agency ("EPA") and certain state and local environmental protection
agencies which require reports and inspect facilities to monitor compliance. In
addition, under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA"), any generator of hazardous waste sent to a hazardous
waste disposal site is potentially responsible for the clean up and remediation
costs required for such site in the event that the site is not properly closed
by the owner or operator, irrespective of the amount of waste sent to the site.
AHI's manufacturing facilities have been and will continue to be inspected by
the Occupational Safety and Health Administration and by certain state and local
inspection agencies and departments. AHI has obtained all permits and
anticipates that its facilities and operations will be in substantial compliance
with all material applicable laws and regulations. Nevertheless, no assurance
can be given that AHI will be able to obtain such permits in the future or that
future events, such as changes in or modified interpretations of existing laws
or regulations or enforcement policies, may give rise to additional compliance
costs that could have a material adverse effect on the Company.
Employees
As of June 22, 1998, the Company had a total of 84 full-time employees, 17
of whom are engaged in performing administrative functions, and 67 of whom are
engaged in manufacturing and shipping. The Company and its employees are not
parties to any collective bargaining agreements. The Company believes its
relationship with all of its personnel is good.
Item 2. PROPERTIES.
The Company has its principal executive offices at 320 Washington Street,
Mt. Vernon, New York, where the Company has sub-leased approximately 3,500
square feet of administrative offices from Interiors, Inc., a stockholder of the
Company. AHI's principal offices, manufacturing and warehousing facilities and
factory showroom are located at 1755 Glendale Boulevard, Los Angeles, California
(the "Los Angeles Facility"). On November 18, 1996, AHI entered into a five (5)
year lease with Henry Goldman, formerly President and Chief Executive Officer of
AHI, for the Los Angeles facility. The lease is for approximately 33,000 square
feet and requires a monthly rent payment of $14,203. AHI has determined that
there is substantial manufacturing and warehousing space available in the Los
Angeles area if AHI were required to expand or relocate some or all of its
current facilities.
AHI also operates two (2) leased showrooms in San Francisco, California
and High Point, North Carolina.
<PAGE>
Item 3. LEGAL PROCEEDINGS.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's shares of Common Stock commenced trading on the NASD OTC
Bulletin Board on the effectiveness of the Company's initial public offering on
November 12, 1996, under the symbol "DECG".
The following table indicates the high and low bid prices for the
Company's Common Stock for the period from November 12, 1996 to March 31, 1997
and from April 1, 1997 to March 30, 1998 based upon information supplied by the
Nasdaq OTC Bulletin Board system. Prices represent quotations between dealers
without adjustments for retail markups, markdowns or commissions, and may not
represent actual transactions. The trading volume of the Company's securities
fluctuates and may be limited during certain periods.
Common Stock*
High Low
November 12, 1996 though
December 31, 1996 $18.00 $5.375
First Quarter, 1997 $6.5625 $4.688
Second Quarter, 1997 $6.3125 $3.50
Third Quarter, 1997 $5.625 $1.50
Fourth Quarter, 1997 $6.875 $2.125
First Quarter, 1998 $4.50 $0.375
* Prices for the period after December 16, 1996 reflect the Company's 3- for- 1
stock split and the subsequent 1 for 3 reverse stock split in October 1997.
On June 22 1998, the final quoted price as reported by The NASD OTC
Bulletin Board was $.50 for the Common Stock. As of June 22, 1998, there were
1,709,176 shares of Common Stock outstanding, held of record by approximately 47
record holders and approximately 1,400 beneficial owners.
<PAGE>
Item 6
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 year ended March 31, 1998
of $5,186,334 and $3,167,620, respectively. This represents Artisan's sales and
cost of sales transactions for the year then ended which resulted in a gross
profit of $2,018,714 to the Company.
The Company had selling, general and administrative expenses for the year ended
March 31, 1998 of $5,365,426 of which approximately $4,104,000 represented
Artisan's expenses for the year then ended.
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS [CONTINUED]
For the year ended March 31, 1998, Artisan had an operating loss of
approximately $2,086,000. 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 $4,527,233 for the year ended March 31, 1998
of which approximately $2,100,000 was from the Artisan House operation and
$2,400,000 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.
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, Decor had a working capital deficit of $578,263. For the year
ended March 31, 1998, the Company used $54,100 for operating activities,
generated $190,983 from investing activities and utilized $256,135 from
financing activities. The cash balance at March 31, 1998 was $50,256. 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 year ended March 31, 1998 of $16,116 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.
<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.
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 $161,022 is due to the seller at March 31, 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. 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.
<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 March 31, 1998 was $255,511. At March 31, 1998, Artisan
has an outstanding balance of $263,427. The line of credit has an expiration
date of June 30, 1998. 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. No such
notice has been given or received by the Company. The Company is not in
violation of any covenants of the loan. Interest expense for the year ended
March 31, 1998 was $19,627.
RESULTS OF OPERATIONS [MARCH 31, 1997]
Decor had revenues and cost of revenues for the period April 1, 1996 through
March 31, 1997 of $2,003,084 and $990,514, respectively. This represents
Artisan's sales and cost of sales transactions for the period November 19, 1996
through March 31, 1997.
Decor had acquisition fees, selling and administrative expenses for the period
April 1, 1996 through March 31, 1997 of $1,625,324 of which $945,305 represented
Artisan's expenses for the period November 19, 1996 through March 31, 1997.
The Company incurred a net loss of $855,796 for the year ended March 31, 1997.
This includes net income generated by Artisan House of approximately $55,000 for
the period November 19, 1996 through March 31, 1997.
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES [MARCH 31, 1997]
At March 31, 1997, Decor had working capital of $1,422,042. For the year ended
March 31, 1997, the Company used $410,159 for operating activities. For the year
ended March 31, 1997, investing activities utilized cash of $2,204,589 primarily
comprising $2,250,000 utilized for the acquisition of Artisan House, Inc. For
year ended March 31, 1997, financing activities generated $2,737,256 primarily
from the sale of common stock in connection with the initial public offering
with net proceeds of $2,236,123. The cash balance at March 31, 1997 was
$169,508.
In March 1996, the Company issued to Interiors 250,000 shares of Class A
Non-Voting Convertible Preferred Stock and an option to purchase 20,000,000
shares of Class B Non-Convertible Voting Preferred Stock in exchange for
Interiors issuing to the Company 200,000 shares of Common Stock valued at
$600,000 at March 31, 1996 and 200,000 shares of Series A Convertible Preferred
Stock valued at $1,000,000 at March 31, 1996. As of March 31, 1997, the per
share market value of Interior's common stock and Series A Convertible Preferred
Stock was $1.06 and $3.00, respectively. Therefore, the carrying value at March
31, 1997 was $812,600. Accordingly, gross unrealized holding losses of $387,400
and $400,000 existed at March 31, 1997 on the common stock and Series A
Convertible Preferred Stock, respectively.
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.
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.
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
INDEX
- ------------------------------------------------------------------------------
Page to Page
Item 7. Consolidated Financial Statements:
Independent Auditor's Report..................................F-1......
Consolidated Balance Sheet as of March 31, 1998...............F-2......F-3
Consolidated Statements of Operations for the years ended
March 31, 1998 and 1997 ......................................F-4......
Consolidated Statements of Stockholders' Equity for the
years ended March 31, 1998 and 1997...........................F-5......
Consolidated Statements of Cash Flows for the years
ended March 31, 1998 and 1997 ................................F-6......F-7
Notes to Consolidated Financial Statements....................F-8......F-20
. . . . . . . . . . . . . . . . . .
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders of
Decor Group, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Decor
Group, Inc. and its subsidiaries as of March 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years ended March 31, 1998 and 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall consolidated financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Decor Group, Inc. and its subsidiaries as of March 31, 1998, and the
results of their operations, and their cash flows for the years ended March 31,
1998 and 1997, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that Decor Group, Inc. and its subsidiaries will continue as a
going concern. As discussed in Note 11 to the consolidated financial statements,
Decor Group, Inc. and its subsidiaries suffered a loss from operations of
$3,346,712 for the year ended March 31, 1998 and have a working capital deficit
of $578,263 at March 31, 1998 that raise substantial doubt about Decor Group,
Inc. and its subsidiaries' ability to continue as a going concern. Management's
plans in regard to these matters are described in Note 11. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
MOORE STEPHENS, P. C.
Certified Public Accountants.
Cranford, New Jersey
May 21, 1998
F-1
<PAGE>
Item 7:
DECOR GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998.
- ------------------------------------------------------------------------------
<TABLE>
Assets:
Current Assets:
<S> <C>
Cash $ 50,256
Accounts Receivable [Net of Allowance of $149,646] 547,447
Due from Related Party 309,914
Inventories 586,953
Prepaid Expenses and Other Current Assets 100,061
-----------
Total Current Assets 1,594,631
Property and Equipment [Net of Accumulated Depreciation of $441,923] 97,121
-----------
Other Assets:
Goodwill [Net of Accumulated Amortization of $156,780] 1,670,526
Other Assets 16,928
-----------
Total Other Assets 1,687,454
Total Assets $ 3,379,206
===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-2
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998.
- ------------------------------------------------------------------------------
<TABLE>
Liabilities and Stockholders' Equity:
Current Liabilities:
<S> <C>
Accounts Payable and Accrued Expenses $ 717,222
Due to Related Party 225,285
Due to Stockholders 43,500
Accrued Compensation and Benefits - Former Officer 161,022
Accrued Costs for Restructuring 645,000
Line of Credit 263,428
Current Portion of Long-Term Debt 117,437
-----------
Total Current Liabilities 2,172,894
Long-Term Debt 557,045
Total Liabilities 2,729,939
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,
1,759,166 Issued and Outstanding 176
Additional Paid-in Capital - Common Stock 4,142,752
Accumulated Deficit (5,482,779)
Deferred Compensation (436,882)
Total Stockholders' Equity 649,267
Total Liabilities and Stockholders' Equity $ 3,379,206
===========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-3
<PAGE>
DECOR GROUP, INC.
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
March 31,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Revenues $5,186,334 $2,003,084
Cost of Revenues 3,167,620 990,514
---------- ----------
Gross Profit 2,018,714 1,012,570
---------- ----------
Selling, General and Administrative
Expenses:
Administrative Expenses 2,045,184 824,817
Selling Expense 1,493,911 521,674
Amortization of Deferred Compensation 554,285 188,833
Restructuring Costs 645,000 --
Write-off of Intangibles 537,046 --
Management Fee - Related Party 90,000 90,000
---------- ----------
Total Selling, General and Administrative
Expenses 5,365,426 1,625,324
---------- ----------
[Loss] from Operations (3,346,712) (612,754)
---------- ----------
Other Income [Expense]:
Loss on Sale of Investment in Related Party (1,112,873) --
Interest Income -- 3,426
Miscellaneous Income 61,800 --
Interest Expense - Related Party (39,410) (7,447)
Interest Expense (90,038) (239,974)
Interest Income - Related Party -- 953
---------- ----------
Other [Expense] Income - Net (1,180,521) (243,042)
---------- ----------
Net [Loss] $(4,527,233)$ (855,796)
=========== ==========
Net [Loss] Per Common Share:
Basic $ (2.65) $ (.47)
========== ==========
Diluted $ (2.65) $ (.47)
========== ==========
Weighted Average Number of Common
Shares Outstanding 1,708,343 1,832,333
Dilutive Potential Common Shares:
Warrants and Options -- --
---------- ----------
Adjusted Weighted Average Common Shares 1,708,343 1,832,333
========== ==========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-4
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<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> <C> <C>
Balance - March 31, 1996 250,000 $ 25 $1,599,975 1,312,500 $ 131 $ 319,169 $ (99,750) $ -- $187,600 $2,007,150
54,934 Shares of Series C
Convertible Non-Voting
Preferred Stock 54,934 5 823,995 -- -- -- -- -- -- 824,000
20,000,000 Shares of Series
B Non-Convertible
Voting Preferred Stock 20,000,000 2,000 -- -- -- -- -- -- -- 2,000
Net Proceeds from Sale of
Common Stock from
Initial Public Offering -- -- -- 345,000 35 2,236,088 -- -- -- 2,236,123
Issuance of Stock in
Connection with Acquisition -- -- -- 50,000 5 299,995 -- -- -- 300,000
Unrealized Loss on Investment
[Net of Income Taxes] -- -- -- -- -- -- -- -- (975,000) (975,000)
Deferred Compensation in
Connection With Issuance of
Stock Options -- -- -- -- -- 1,180,000 -- (1,180,000) -- --
Amortization of Deferred
Compensation -- -- -- -- -- -- -- 188,833 -- 188,833
Net Loss for the year ended
March 31, 1997 -- -- -- -- -- -- (855,796) -- -- (855,796)
---------- ------ ---------- --------- ----- ---------- --------- --------- -------- ----------
Balance - March 31, 1997 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
========== ====== ========== ========= ==== ========== =========== ========== ======== ==========
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-5
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
March 31,
1 9 9 8 1 9 9 7
------- -------
Operating Activities:
<S> <C> <C>
Net [Loss] $(4,527,233)$ (855,796)
Adjustment to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Loss on Sale of Investment in Related Party 1,112,873 --
Write-off of Intangibles 537,046 --
Amortization of Deferred Compensation 554,285 188,833
Accrued Management Fees - Related Party 90,000 --
Bad Debt Expense 208,366 19,900
Amortization of Intangibles 126,988 98,293
Depreciation 43,250 14,082
Interest - Cost of Bridge Warrants -- 214,300
Net Book Value of Transferred Assets for Services 13,478 --
Stock Issued for Services 107,500 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable 361,762 (131,823)
Inventory 373,065 (155,350)
Prepaid Expenses 5,612 250
Other Assets (15,474) 18,528
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 155,807 178,624
Accrued Compensation and Benefit - Former Officer 161,022 --
Accrued Costs for Restructuring 645,000 --
Accrued Interest - Related Party (7,447) --
---------- ----------
Net Cash - Operating Activities - Forward (54,100) (410,159)
---------- ----------
Investing Activities:
Sale of Property and Equipment 1,979 --
Purchase of Property and Equipment (39,685) (4,589)
Proceeds from Sale of Investment in Related Party 487,127 --
Cash Paid for Acquisition of Artisan House -- (2,250,000)
Additional Acquisition Costs - Settlement Agreement (258,438) --
---------- ----------
Net Cash - Investing Activities - Forward $ 190,983 $(2,254,589)
</TABLE>
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-6
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
March 31,
1 9 9 8 1 9 9 7
------- -------
<S> <C> <C>
Net Cash - Operating Activities - Forwarded $ (54,100) $ (410,159)
---------- ----------
Net Cash - Investing Activities - Forwarded 190,983 (2,254,589)
---------- ----------
Financing Activities:
Monies Advanced to Interiors (309,914) --
Payments on Payable to Interiors (50,000) 50,000
Proceeds from Line of Credit 263,428 --
Proceeds from Stockholder Loans -- 411,785
Proceeds from Sale of Common Stock in Connection
with Initial Public Offering -- 2,236,123
Proceeds from Sale of Preferred Stock -- 826,000
Payment of Notes and Leases Payable (159,654) (553,652)
Payment of Stockholder Loans -- (183,000)
Exercise of Options 5 --
---------- ----------
Net Cash - Financing Activities - Forward (256,135) 2,787,256
---------- ----------
Net [Decrease] Increase in Cash (119,252) 122,508
Cash - Beginning of Years 169,508 47,000
---------- ----------
Cash - End of Years $ 50,256 $ 169,508
========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash paid for the years for:
Interest $ 69,495 $ 26,218
Income Taxes $ -- $ --
</TABLE>
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the period ended March 31, 1996, the Company recorded a discount of
$214,300 on a 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 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 and
a guarantee with respect to certain indebtedness [See Note 6].
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
approximately $1,000,000 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. Additionally, the Company
recorded deferred compensation for options issued to the seller for 100,000
shares of common stock valued at $1,000,000.
In December of 1997, the Company issued options for 20,000 shares of the
Company's common stock to its President and recorded $90,000 as compensation
expense.
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
F-7
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies
[A] Nature of Operations - Decor Group, Inc., a Delaware corporation [the
"Company" or "Decor"], was incorporated on March 1, 1996. The Company 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] Cash Equivalents - The Company's policy is to classify all highly liquid
investments with maturity of three months or less when purchased to be cash
equivalents. There were no cash equivalents at March 31, 1998.
[C] Inventory - Inventory is stated at the lower of cost or market, is comprised
of materials, labor and factory overhead, and is determined on the first-in,
first-out ["FIFO"] basis.
[D] Property and Equipment - Property and equipment is stated at cost and is net
of accumulated depreciation. The cost of additions and improvements are
capitalized and expenditures for repairs and maintenance are expensed in the
period incurred. Depreciation of property and equipment is provided utilizing
the straight-line method over the estimated useful lives of the respective
assets as follows:
Vehicles 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.
[E] 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. This change decreased the fiscal 1998 net loss 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.
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.
F-8
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[F] 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.
[G] 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 year ended March 31, 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.
[H] Risk Concentrations - Financial instruments that potentially subject the
Company to concentrations of credit risk include cash and accounts receivable
arising from its normal business activities. The Company places its cash with a
high credit quality financial institution and periodically has cash balances
subject to credit risk beyond insured amounts. At March 31, 1998, the Company
had approximately $179,200 in cash in excess of insured amounts.
F-9
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[1] Summary of Significant Accounting Policies [Continued]
[H] Risk Concentrations [Continued] - 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.
[I] 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.
[J] 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.
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.
Year ended
March 31,
1 9 9 7
Total Revenues $5,575,105
Net [Loss] $(1,566,743)
Net [Loss] Per Common Share $ (.84)
Weighted Average Number of Common Shares
Outstanding 1,863,583
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.
F-10
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[3] Inventories
The components of inventory were as follows:
Raw Materials $ 259,396
Work-in Process 229,340
Finished Goods 98,217
----------
Totals $ 586,953
------ ==========
[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].
[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 year ended March 31, 1998 was $5,220.
[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.
[5] Property and Equipment
Property and equipment consisted of the following:
Machinery and Equipment $ 175,862
Leasehold Improvements 151,559
Furniture and Fixtures 145,565
Office and Computer Equipment 66,058
----------
Total - At Cost 539,044
Less: Accumulated Depreciation (441,923)
Net $ 97,121
--- ==========
Depreciation expense was approximately $43,000 and $14,000, respectively for the
years ended March 31, 1998 and 1997.
F-11
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[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 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 [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.
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 $161,022 is due to the seller at March 31, 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 March 31, 1998, the Company accrued
$131,000 to the director as monies due upon his resignation.
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 agreed to
pay $11,500 per month for the term of the Consulting Agreement. The initial term
of the Consulting Agreement was three [3] months with two, one month extensions.
This agreement expired in July 1997.
F-12
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[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 March 31, 1998 was $255,511. At
March 31, 1998, Artisan had an outstanding balance of $263,427. The line of
credit has an expiration date of June 30, 1998. 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. No such notice has been given or received by the Company.
The Company is not in violation of any of the covenants of the loan. Interest
expense for the year ended March 31, 1998 was $19,627.
[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 March
31, 1998:
Year ended
March 31,
1999 $ 245,088
2000 190,572
2001 189,114
2002 100,856
Thereafter -
---------
Total $ 725,630
----- =========
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 1998. The current monthly lease payments are
$3,126 for High Point and $1,098 for San Francisco.
Rental expense was $236,197 and $92,766, respectively for the years ended March
31, 1998 and 1997.
F-13
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[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
March 31,
1 9 9 8
Acquisition Loan $ 712,857
Less: Discount 38,375
----------
Total 674,482
Less: Current Portion of Long-Term Debt 117,437
Long-Term Portion $ 557,045
----------------- ==========
Annual maturities of notes payable are as follows:
Year ended
March 31,
1999 $ 117,437
2000 128,015
2001 139,472
2002 289,558
Thereafter --
---------
Total $ 674,482
----- =========
F-14
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
[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 year ended March 31, 1998 was
approximately $10,000 and has been amortized as interest expense. Interest
expense for the year ended March 31, 1998 was approximately $50,000 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.
F-15
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[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 a valuation for the exchange rates for the stock to
be exchanged 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] Going Concern
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities and commitments in the normal course of business.
Since the Company's operations commenced in April of 1996, revenues have not
been sufficient to cover the Company's fixed administrative costs resulting in
operating losses of $3,346,712 and $612,754 for the years ended March 31, 1998
and 1997, respectively. The Company had a working capital deficit of $578,263
and an accumulated deficit of $5,482,779 at March 31, 1998. The Company was
primarily funded for the year ended March 31, 1998 by its line of credit and the
sale of its investment in Interiors, Inc. [See Note 6].
As part of a restructuring plan adopted in September of 1997, the Company has
taken steps to further reduce its selling, general and administrative expense
for its operating activities in an effort to generate future cash from
operations. 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 Interiors, Inc.
metal fabrication manufacturing business.
At March 31, 1998, the Company had amounts available on its line of credit of
approximately $256,000. It does not have any other additional commitments to
secure financing. There is no assurance that the Company will be able to secure
financing in the future and that even if the Company is able to obtain
financing, such financing will be available on terms acceptable to the Company.
If the Company's plans change, or if the assumptions or estimates prove to be
inaccurate, or if the Company is unable to raise more funds through equity or
debt financing, this could have an adverse impact on the Company.
The Company does believe, however, that its pending merger with Interiors will
help by providing the Company access to an expanded working capital line of
credit in addition to a credit facility for the purchase of machinery and
equipment which is contemplated to be provided through Interiors, Inc. to all of
its subsidiaries upon their successful completion of a credit review process.
The credit facility could reduce the Company's interest rate on its borrowings.
F-16
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[11] Going Concern [Continued]
There can be no assurances that management's plans to reduce operating expenses
and obtain additional financing to fund operations will be successful. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
[12] 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.
[13] 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.
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 $ --
==========
F-17
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[13] Income Taxes [Continued]
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.
[14] 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
amounts of $554,285 and $188,833 for the years ended March 31, 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.
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
---------------------------- ========== =========
Exercisable - March 31, 1998 52,000 .0001 3 Years
---------------------------- ========== ========= ========
F-18
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[14] Stock Options [Continued]
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.
[15] Fair Value of Financial Instruments
At March 31, 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] 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 servicesin 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.
F-19
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
- ------------------------------------------------------------------------------
[17] 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.
. . . . . . . . . . .
F-20
<PAGE>
Item 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
Directors and Executive Officers
The names and ages of the directors and executive officers of the Company are
set forth below:
Name
Age
Position
Dennis D'Amore 48 President and Chief Financial Officer and Director
of the Company; Chairman of the Board,
President and Chief Operating Officer and
Treasurer of AHI.
Max Munn 53 Chairman of the Board and Secretary
James Herman 54 Director
Donald Graves 53 Vice President of Sales and Marketing of AHI.
Dennis D'Amore has been President and Chief Financial Officer and a
Director of the Company since March 1997 and Chairman of the Board, Chief
Operating Officer, and Treasurer of AHI since January 1997 and President since
July 1997. In June 1998 Mr. D'Amore was appointed Executive Vice President of
Interiors, Inc. the majority stockholder of the Company. From 1991 through 1996,
Mr. D'Amore was a consultant to various private and public companies. From 1989
to 1991, Mr. D'Amore served as Vice President of Sales and Marketing for Lasco
Bathware, a division of Tomkins Industries, Inc. From 1988 to 1989, Mr. D'Amore
served as President of Colford-D'Amore, Inc., a management consulting firm. From
1981 to 1988, Mr. D'Amore served as Executive Vice President and General Manager
of Water Jet Corporation. Mr. D'Amore holds a Bachelor of Engineering-Mechanical
Degree from New York University and subsequently received a Masters of Business
Administration in Finance from Fairleigh Dickinson University.
Max Munn has been the Chairman of the Board of Directors since the
Company's inception and was the President of the Company from inception until
May 1996. Mr. Munn became Secretary of the Company in March 1997. Mr. Munn is
currently President and Chief Executive Officer and Chairman of the Board of
Director of Interiors, Inc., which is the majority stockholder of the Company.
Mr. Munn has been President of Interiors since October 1995 and a Director and
principal stockholder since March 1994. From May 1993 to September 1995 Mr. Munn
served as Vice President of Interiors. From November 1990 to May 11, 1993, Mr.
Munn served as a consultant to Interiors, Inc., as well as a consultant directly
and indirectly to Imperial Enterprises, Inc., a catalog company in Japan, and
the IEI Corporation, a direct marketer, in Princeton, NJ. Mr. Munn holds a
Bachelor of Architecture from Massachusetts Institute of Technology and
subsequently did graduate level study in Art History at Columbia University.
<PAGE>
James Herman has been a Director of the Company since October 1997. Since
1983 Mr. Herman has been a consultant and designer in the decorative accessory
and home furnishings industry. Prior thereto Mr. Herman held positions with M.
Grumbacher Inc. and Hunt Manufacturing Company, Inc., both of which are
manufacturers of art materials. Mr. Herman holds a Bachelor of Fine Arts degree
from Southwest Missouri in 1970 and a Master of Fine Arts degree from University
of Oregon in 1972.
Donald Graves has been the Vice-President of Sales and Marketing of AHI
since March 1997. From 1995 through 1996, Mr. Graves was Vice President of Sales
and Marketing for Knape & Vogt a $170 million manufacturer of hardware products.
From 1991 to 1995, Mr. Graves served as Vice President of Sales and Marketing
for Lasco Bathware, a division of Tomkins Industries, Inc. From 1990 to 1991,
Mr. Graves served as National Sales Manager for Lasco Bathware. From 1975 to
1990, Mr. Graves served as Vice President of Sales and Marketing for the Filon
Division of Standard Oil. Mr. Graves holds a Bachelor Arts Degree from Dartmouth
College and subsequently received a Masters of Business Administration from the
Columbia University School of Business.
There are no family relationships between the officers and directors of
the Company.
Compliance with Section 16(a) of
The Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent (10%) of a registered class of the Company's equity securities, to file
with the Securities and Exchange Commission initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, based solely on its review of the copies of
such reports furnished to the Company during the year ended March 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent beneficial owners were satisfied.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the compensation paid to the executive
officers of the Company and its wholly owned subsidiary, AHI, for the Company's
fiscal year ending March 31, 1998.
<TABLE>
Summary Compensation Table
Annual Compensation Long-Term Compensation
Awards Payouts
Securities All other
Name and Principal Other Annual Restricted underlying LTIP Payouts compensation
Position Year Salary Bonus Compensation Stock award($) options/SARs ($) ($)
(a) (b) (c) (d ) (e) (f) (g) (h) (i)
<S> <C> <C>
Dennis D'Amore 1998 $125,000 -- -- -- -- -- --
President and Chief
Financial Officer,
Decor Group, Inc.,
and Chairman of the
Board, President
Chief Operating
Officer, and
Treasurer of AHI.
Donald Graves.........1998 -- -- -- -- -- -- --
Vice President of Sales and
Marketing, Artisan House, Inc.
</TABLE>
*Mr. D'Amore received $100,000 per annum until December 31, 1997 and $125,000
per annum beginning January 1, 1998.
<PAGE>
The following table sets forth certain information with respect to options
granted during the last fiscal year to the Company's Chief Executive Officer and
the other executive officers named in the above Summary Compensation Table.
Option/SAR Grants In Last Fiscal Year
<TABLE>
Number of Securities Percent of Total
Underlying Options/ Percent of Total Exercise or Base
SAR Options Options/SARS Granted Base Price Market Price
Name Granted to Employees in Fiscal Year ($/Shr on Date of Grant Expiration Date
(a) (b) (c) (d) (e)
<S> <C> <C> <C> <C> <C>
Dennis D'Amore 20,000 100% $.0003 $6.875 January 1, 2004
</TABLE>
The following table sets forth certain information with respect to options
exercised during the last fiscal year by the Company's Chief Executive Officer
and the executive officers named in the Summary Compensation Table, and with
respect to unexercised options held by such persons at the end of the last
fiscal year:
Aggregate Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End
Option/SAR Values
Shares Number of Value of
Acquired on Value Securities Unexercised in the
Name Exercise (#) Realized $Underlying Money
---- ------------ ----------
Unexercised Options/SARS at
Options/SARS FY-End ($)
at FY-End (#)exercisable/
exercisable/ unexercisable
-------------
unexercisable
-------------
(a) (b) (c) (d) (e)
Dennis D'Amore __ __ 2,000/28,000 $8,500/$119,000
Employment Agreements
AHI entered into a three (3) year employment agreement with a former
officer of AHI on November 18, 1996 with (i) an annual salary of $75,000; (ii) a
signing bonus of $70,000, $30,000 of which was paid at the closing of the
Company's acquisition of Artisan House, Inc. and $40,000 of which is paid in
equal monthly installments of $3,333.33 during the first year of the employment
agreement, (iii) reimbursement of expenses incurred by the officer for lease and
insurance payments with respect to his automobile, (iv) an annual performance
bonus equal to 1% of AHI's sales in excess of those achieved by Artisan for the
twelve months ended June 30, 1996, payable within 60 days after the end of AHI's
fiscal year, with the first and last payments being calculated on a pro rated
basis, (v) 2.5% (llater amended to 1.25%) of the consideration paid by the
Company in connection with an acquisition of an unrelated third party introduced
to the Purchaser, the Company, Interiors, or any affiliate of them by the
officer, and (vi) an annual performance bonus equal to 5% of the increase in
AHI's export sales in excess of those export sales and 1.25% of the increase in
domestic sales in excess of the increase in AHI's domestic salesachieved by
Artisan for the twelve months ended June 30, 1996. The Employment Agreement also
contains provisions protecting the confidential information of the Company and
restricting the officer from competing with the Company. In July 1997, there was
an attempt to terminate Artisan's employment agreement with the officer. In
connection with a settlement agreement reached in September 1997 with CIDCOA
International, Inc. ("CIDCOA") formerly known as AHI, the Company reinstated the
employment agreement with the former officer and recorded additional monies owed
to him of approximately $290,000 whereby $161,022 is due to him at March 31,
1998 pursuant to this agreement.
<PAGE>
On December 31, 1996, AHI entered into a three (3) year employment
agreement (the "Employment Agreement") with Dennis D'Amore pursuant to which Mr.
D'Amore agreed to serve as AHI's Chief Operating Officer and Treasurer. AHI
agreed to pay Mr. D'Amore (i) an annual salary of $100,000 (increased to
$125,000 as of January 1, 1998), (ii) a cash bonus equal to ten percent (10%) of
Mr. D'Amore's annual salary based upon AHI's net profit before taxes ("NPBT"),
and (iii) a cash bonus equal to five percent (5%) of AHI's increases in NPBT
over the fiscal year, not to exceed forty percent (40%) of Mr. D'Amore's annual
base salary. The Employment Agreement provides that Mr. D'Amore is entitled to
receive options to purchase 10,000 shares of the Company's Common Stock for each
of the years of the contract at an exercise price of 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. The Employment 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, 2000. Continued
employment of the Company is required and the Company must meet or exceed 115%
of the prior year's NPBT. In December of 1997, Mr. D'Amore 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.
On January 14, 1997, the Company entered into a two year employment
agreement with Donald Graves pursuant to which Mr. Graves will serve as the
Company's Vice President of Sales and Marketing. The Company agreed to pay Mr.
Graves (1) an annual salary of $90,000, (2) a cash bonus equal to two percent
(2%) of net sales growth of the Company in excess of ten percent (10%) growth
over the Company's previous fiscal year, and (3) a cash bonus equal to one
percent (1%) of AHI's gross margin less selling expenses increased over AHI's
prior fiscal year, provided that AHI's net sales increase a minimum of ten
percent (10%) over that same period.
Consulting Agreements
On January 1, 1997 the Company entered into a Consulting Agreement with
Matthew Harriton, a Director of the Company until October 1997, pursuant to
which Mr. Harriton agreed to provide the Company with such consulting services
as requested by the Company in connection with strategic planning, marketing and
management issues. As payment for the services provided by Mr. Harriton, the
Company has agreed to pay an aggregate of $150,000 to be paid over the period of
three (3) years from the date of the agreement.
Stock Option Plans and Agreements
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1996 Stock Plan
(hereinafter called the "1996 Plan"). The purpose of the 1996 Plan is to provide
an incentive and reward for those executive officers and other key employees in
a position to contribute substantially to the progress and success of the
Company, to closely align employees with the interests of stockholders of the
Company by linking benefits to stock performance and to retain the services of
such employees, as well as to attract new key employees. In furtherance of that
purpose, the 1996 Plan authorizes the grant to executives and other key
employees of the Company stock options, restricted stock, deferred stock, bonus
shares, performance awards, dividend equivalent rights, limited stock
appreciation rights and other stock-based awards, or any combination thereof.
The 1996 Plan is expected to provide flexibility to the Company's compensation
methods, after giving due consideration to competitive conditions and the impact
of federal tax laws.
<PAGE>
The maximum number of shares of Common Stock with respect to which awards
may be granted pursuant to the 1996 Plan is initially 250,000 shares. Shares
issuable under the 1996 Plan may be either treasury shares or authorized but
unissued shares. The number of shares available for issuance will be subject to
adjustment to prevent dilution in the event of stock splits, stock dividends or
other changes in the capitalization of the Company.
The 1996 Plan will be administered by a committee consisting of not less
than two (2) members of the Board of Directors who are "disinterested" within
the meaning of Rule 16b-3 promulgated under the Exchange Act and "outside
directors" within the meaning of Section 162(m) of the Code (including persons
who may be deemed outside directors by virtue of any transitional rule which may
be adopted by the Internal Revenue Service implementing such Section). The Board
will determine the persons to whom awards will be granted, the type of award
and, if applicable, the number of shares to be covered by the award. During any
calendar year no person may be granted under the 1996 Plan awards aggregating
more than 100,000 shares (which number shall be subject to adjustment to prevent
dilution in the event of stock splits, stock dividends or capitalization of the
Company).
Types of Awards
Stock Options. Options granted under the 1996 Plan may be "incentive stock
options" ("Incentive Options") within the meaning of Section 422 of the Code or
stock options which are not incentive stock options ("Non-Incentive Options"
and, collectively with Incentive Options, hereinafter referred to as "Options").
The persons to whom Options will be granted, the number of shares subject to
each Option grant, the prices at which Options may be exercised (which shall not
be less than the fair market value of shares of Common Stock on the date of
grant), whether an Option will be an Incentive Option or a Non-Incentive Option,
time or times and the extent to which Options may be exercised and all other
terms and conditions of options will be determined by the Committee.
Each Incentive Option shall terminate no later than ten (10) years from
the date of grant, except as provided below with respect to Incentive Options
granted to 10% Stockholders (as hereinafter defined. No Incentive Option may be
granted at any time after October 2005. Each Non-Incentive Option shall
terminate no later than ten (10) years from the date of grant. The exercise
price at which the shares may be purchased may not be less than the Fair Market
Value of shares of Common Stock at the time the Option is granted, except as
provided below with respect to Incentive Options granted to 10% Stockholders.
Options granted to executive officers may not be exercised at any time prior to
six (6) months after the date of grant.
The exercise price of an Incentive Option granted to a person possessing
more than 10% of the total combined voting power of all shares of stock of the
Company or a parent or subsidiary of the Company ("10% Stockholder") shall in no
event be less than 110% of the Fair Market Value of the shares of the Common
Stock at the time the Incentive Option is granted. The term of an Incentive
Option granted to a 10% Stockholder shall not exceed five (5) years from the
date of grant.
The exercise price of the shares to be purchased pursuant to each Option
shall be paid (i) in full in cash, (ii) by delivery (i.e., surrender) of shares
of the Company's Common Stock owned by the option at the time of the exercise of
the Option (iii) in installments, payable in cash, if permitted by the Committee
or for any combination of the foregoing. The stock-for-stock payment method
permits an optionee to deliver one (1) or more shares of previously owned Common
Stock of the Company in satisfaction of the exercise price of subsequent
Options. The optionee may use the shares obtained on each exercise to purchase a
larger number of shares on the next exercise. (The foregoing assumes an
appreciation in value of previously acquired shares). The result of the
stock-for-stock payment method is that the optionee can generally avoid
immediate tax liability with respect to any appreciation in the value of the
stock utilized to exercise the Option.
<PAGE>
Shares received by an optionee upon exercise of a Non-Incentive Option may
not be sold or otherwise disposed of for a period determined by the Board upon
grant of the Option, which period shall be not less than six (6) months nor more
than three (3) years from the date of acquisition of the shares (the "Restricted
Period"), except that, during the Restricted Period (i) the optionee may offer
the shares to the Company and the Company may, in its discretion, purchase up to
all the shares offered at the exercise price and (ii) if the optionee's
employment terminates during the Restricted Period (except in limited
instances), the optionee upon written request of the Company, must offer to sell
the shares to the Company at the exercise price within seven (7) business days.
The Restricted Period shall terminate in the event of a Change in Control of the
Company (as defined), or at the discretion of the Board. After the Restricted
Period, an optionee wishing to sell must first offer such shares to the Company
at the Fair Market Value.
Limited Stock Appreciation Rights. The Committee is authorized, in
connection with any Option granted under the 1996 Plan, to grant the holder of
such Option a limited stock appreciation right ("LSAR"), entitling the holder to
receive, within sixty (60) days following a Change in Control, an amount in cash
equal to the difference between the exercise price of the Option and the market
value of the Common Stock on the effective date of the Change in Control. The
LSAR may be granted in tandem with an Option or subsequent to grant of the
Option. The LSAR will only be exercisable to the extent the related Option is
exercisable and will terminate if and when the Option is exercised.
Restricted and Deferred Stock. An award of restricted stock or deferred
stock may be granted under the 1996 Plan. Restricted stock is subject to
restrictions on transferability and other restrictions by the Committee at the
time of grant. In the event that the holder of restricted stock cease to be
emplostrictive period, restricted stock that is at the time subject to
restrictions shall be forfeited and reacquired by the Company. Except as
otherwise provided by the Committee at the time of the grant, a holder of
restricted stock shall have all the rights of a stockholder including, without
limitation, the right to vote restricted stock and the right to recover
dividends thereon. An award of deferred stock is an award that provides for the
issuance of stock upon expiration of a deferral period established by the
Committee. Except as otherwise determined by the Committee, upon termination of
employment of the recipient of the award during the applicable deferral period,
all stock that is at the time subject to deferral shall be forfeited until such
time as the stock which is the subject of the award is issued, the recipient of
the award has no rights as a stockholder.
Dividend Equivalent Awards. A dividend equivalent gives the recipient the
right to receive cash or other property equal in value to the dividends that
would be paid if the recipient held a specified number of shares of Common
Stock. A dividend equivalent right may be granted as a component of another
award or as a freestanding award.
Bonus Shares and other Share Based Awards. The 1996 Plan authorizes the
Committee to grant shares as a bonus, or to grant shares or other awards in lieu
of obligations of the Company to pay cash under other plans or compensatory
arrangements, upon such terms as shall be determined by the Committee. The 1996
Plan also authorizes the Committee to grant other forms of awards based upon,
payable in, or otherwise related in whole or in part to, Common Stock,
including, without limitation, convertible or exchangeable debentures, or other
debt securities, other rights convertible or exchangeable into shares, purchase
rights for shares, awards contingent upon performance of the Company, and awards
valued by reference to the book value of shares of Common Stock or aware of
securities of, or the performance of, specified subsidiaries.
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth as of June 30, 1998, certain information
with respect to the beneficial ownership of the Company's Common Stock and the
Series B Preferred Stock by each person or entity known by the Company to be the
beneficial owner of 5% or more of such shares, each officer and director of the
Company, and all officers and directors of the Company as a group:
Shares of Shares of Series
Common Percentage B Preferred Percentage (%) of
Name and AddressStock (%) of Stock Series B Preferred
of Beneficial Beneficially Common Beneficially Stock Beneficially
Owner(1) Owned(2) Stock Owned Owned(2) Owned
Dennis D'Amore(3) 30,000 * -- --
Max Munn(4)(5) 67,000 * -- --
Henry Goldman(6) 200,000 11.1% -- --
James Herman -- -- -- --
Interiors, Inc. (7) -- -- 20,000,000 100%
The Skyes
Corporation (8) 200,000 11.1% -- --
All directors and
officers as a
group (9) 97,000 -- -- --
* indicates ownership of less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is
c/o Decor Group, Inc., 320 Washington Street, Mt. Vernon, New York
10553.
(2) Beneficial ownership as reported in the table above has been
determined in accordance with Item 403 of Regulation S-B of the
Securities Act of 1933 and Rule 13(d)-3 of the Securities Exchange
Act.
(3) Mr. D'Amore is President and Chief Financial Officer and a Director
of the Company and Chairman of the Board, President, Chief Operating
Officer and Treasurer of AHI. Mr. D'Amore holds options to purchase
30,000 shares of Common Stock for a period of five (5) years at an
exercise price of $.0003 per share.
(4) Mr. Munn is Chairman of the Board and Secretary of the Company. (5)
Includes 67,000 shares of Common Stock held by Laurie Munn, Mr. Munn's
wife.
Mr. Munn disclaims beneficial ownership of such shares.
(6) Mr. Goldman's address is c/o 12841 Bloomfield #305, Studio City,
CA 91604.
(7) Includes 20,000,000 shares of Series B Preferred Stock owned by
Interiors, Inc. Mr. Munn, Chairman of the Board of the Company, and
President, Chief Executive Officer and Chairman of the Board of
Directors of Interiors may vote the shares of Series B Preferred
Stock held by Interiors, Inc. on all matters presented to the vote
of stockholders. Mr. Munn disclaims beneficial ownership of such
shares.
(8) The Skyes Corporation address c/o 430 Chestnut Street, East Hill,
New York
(9) Excludes the 20,000,000 shares of Series B Preferred Stock owned by
Interiors, Inc. as to which all of the directors and officers
disclaim beneficial ownership.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In March, 1996, the Company issued to certain investors (i) 913,750 shares
of Common Stock to M.D. Funding, Inc. for cash consideration of $73,100, (ii)
100,000 shares of Common Stock to Laurie Munn, the wife of Max Munn, the
Chairman of the Board of the Company, for cash consideration of $8,000, (iii)
61,250 shares of Common Stock to Judy Pace for cash consideration of $4,900,
(iv) 125,000 shares of Common Stock to First National Funding, Inc. for cash
consideration of $10,000, (v) 62,500 shares of Common Stock to Ulster
Investments, Ltd. for cash consideration of $5,000, and (vi) 25,000 shares of
Common Stock to Matthew Harriton, a director and formerly the President of the
Company, for cash consideration of $2,000. In addition, the Company also issued
in March 1996 25,000 shares of Common Stock and 12,500 Class A Warrants to
Gordon Brothers Capital Corporation ("GBCC") for services rendered valued at an
aggregate of $2,000. Neither GBCC nor any of its affiliates are affiliated with
the Company, the Representative, the Underwriters or any of their respective
affiliates. GBCC assisted the Company in identifying and negotiating with
potential acquisition candidates.
In March 1996, the Company issued to Interiors, Inc. 250,000 shares of
Class A Convertible Preferred Stock and an option to purchase 20,000,000 shares
of Class B NonConvertible Voting Preferred Stock (the "Series B Option") in
exchange for Interiors, Inc. issuing to the Company 200,000 shares of Common
Stock valued at $600,000 and 200,000 shares of Series A Convertible Preferred
Stock valued at $1,000,000. The Series B Option was exercised by Interiors in
September 1996 at an exercise price of $.0001 per share. Immediately following
the exercise of the Series B Option, Interiors entered into a Voting Agreement
with the Company and Messrs. Max Munn, Matt Harriton and Michael Lulkin
(collectively, the "Voting Trustees") each of whom is a director of the Company.
Under the terms of the Voting Agreement, the Voting Trustees have the right to
vote the shares of Series B Preferred Stock held by Interiors on all matters
presented to the stockholders prior to December 31, 1997. A majority of the
Voting Trustees shall determine the manner in which the shares of Series B
Preferred Stock are to be voted. A unanimous vote of the Voting Trustees is
required in order for the Company to enter into certain transactions, including
any mergers, consolidations, significant acquisitions, recapitalizations,
reorganizations or any transaction which would result in Interiors' ownership of
less than 51% of the outstanding voting stock of the Company (so long as
Interiors does not sell or transfer any of the Series B Preferred Stock held
thereby).
In May 1996, the Company entered into a two year Management Services
Agreement with Interiors, Inc. ("Interiors"). Interiors has, pursuant to such
agreement, agreed to advise the Company on the manufacturing, sale, marketing
and distribution of the Company's products as well as providing the Company
accounting and administrative services and strategic planning with regard to
joint ventures, acquisitions, and other long term business initiatives. In
exchange for such services, the Company has agreed to pay to Interiors an annual
amount equal to the greater of (i) $75,000 or (ii) 1 1/2% of Excess Cashflow (as
defined in the agreement). The Management Services Agreement is automatically
renewable for an additional one (1) year term unless terminated by either party
not less than sixty (60) days prior to the end of the term may be terminated by
the Company or Interiors upon sixty (60) days prior written notice. In the event
that the Management Services Agreement is terminated for any reason, the
Company's business may be negatively effected. In such an event, the Company may
be required to hire additional personnel or engage one or more independent
contractors at an added cost to the Company. In February 1997, the Company and
Interiors amended the Management Services Agreement pursuant to which Interiors
agreed to advise the Company on the manufacturing, sale, marketing and
distribution of the Company's products as well as providing the Company with
accounting and administrative services and strategic planning with regard to
joint ventures, acquisitions, and other long term business initiatives. In
exchange for such services, the Company has agreed to pay to Interiors an annual
amount equal to the greater of (i) $90,000 or (ii) 1 1/2% of Excess Cashflow (as
defined in the agreement). Additionally, the amendment provides that the
Management Services Agreement may not be modified in any manner without the
unanimous consent of the Board of Directors of the Company. For the year ended
March 31, 1998 the Company paid Interiors $50,000 under the Management Agreement
and owes Interiors $225,285. The Company recorded interest expense of $16,116 on
this obligation for the year ended March 31, 1998.
<PAGE>
In June 1996, the Company borrowed an aggregate of $50,000 from the
Company's stockholders, other than Gordon Brothers Capital Corporation, on a pro
rata basis based upon ownership of the Company's shares of Common Stock. Each
lender received a promissory note obligating the Company to repay the loan on
the earlier of (i) fifteen (15) months following the Effective Date or (ii) June
21, 1997. The Company utilized the proceeds from the loan for working capital
purposes. At March 31, 1998 the Company owed $43,000 to stockholders.
In August 1996, the Company agreed to issue 47,084 shares of Series C
Preferred Stock to Interiors, Inc. in exchange for the payment of $706,250. In
September 1996, the Company agreed to issue 7,850 shares of Series C Preferred
Stock to Interiors in exchange for the payment of $117,750.
In October 1996, the Company effected a recapitalization with respect to
its outstanding shares of capital stock (the "Recapitalization"). Pursuant to
the Recapitalization, the Company effected a 1-for-3 reverse stock split with
respect to its shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Common Stock.
In November and December 1996, Interiors loaned the Company $50,238 and
$60,000, respectively. Both of these loans are demand loans, callable at any
time by Interiors and bear interest at the rate of eight percent (8%) per annum.
The Company has repaid these loans to Interiors.
On November 18, 1996, AHI entered into a five (5) year lease with Henry
Goldman. The lease is for approximately 33,000 square feet and requires a
monthly rent payment of $14,203.
On December 31, 1996, the Company entitled Dennis D'Amore, the Company's
President and Chief Financial Officer to be granted an option to purchase an
aggregate of 30,000 shares of Common Stock at an exercise price of $.0003 per
share, for a period of five (5) years, in accordance with the terms of the
Employment Agreement entered into between the Company and Mr. D'Amore. Mr.
D'Amore is also entitled to receive options to purchase twenty thousand (20,000)
shares of the Company's Common Stock under the terms of the Company's 1996 Stock
Plan (the "Performance Options"). The Performance Options are exercisable for a
period of one (1) year following the date of grant at an exercise price equal to
the average closing price as reported on the NASD OTC Bulletin Board for the
twenty (20) trading days ending two (2) trading days prior to the date the
Performance Options are granted to Employee.
On January 1, 1997, the Company entered into a Consulting Agreement with
Matthew Harriton, formerly a Director of the Company until October 1997, whereby
Mr. Harriton agreed to provide the Company with such consulting services as
requested by the Company in connection with strategic planning, marketing and
management issues. As consideration for the services provided by Mr. Harriton,
the Company has agreed to pay to Mr. Harriton an aggregate of $150,000 to be
paid over the period of three (3) years from the date of the agreement.
In March 1998, the Company retained a firm to render ongoing investment
banking and other related consulting services to the Company in connection with
the proposed merger between the Company and Interiors, Inc. In return for these
services, the Company issued $200,000 shares of its common stock to the firm in
May of 1998.
Item 13.EXHIBITS AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements:
Independent Auditor's Report
Consolidated Balance Sheet as of March 31, 1998
Consolidated Statements of Operations for the years ended March 31, 1998
and 1997
Consolidated Statements of Stockholders' Equity for the years ended
March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended March 31, 1998
and 1997
Notes to Consolidated Financial Statements
(b) None.
<PAGE>
SIGNATURE PAGE
- ------------------------------------------------------------------------------
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DECOR GROUP, INC.
/s/ Dennis D'Amore
June 13, 1998 Dennis D'Amore,
President and Chief Operating Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Dennis D'Amore
June 13, 1998 Dennis D'Amore,
President and Chief Operating Officer
/s/ Max Munn
June 13, 1998 Max Munn, Chairman and Secretary
*Print the name and title of each signing officer under his signature.
Supplemental information to be Furnished with Reports Filed Pursuant to
Section 15(d) of the Exchange Act by Non-reporting Issuers.
(c) Registrant has not furnished its annual report or proxy materials to
its security holders. Such report and proxy materials are to be furnished to
registrant's security holders subsequent to the filing of the annual report on
this Form.
<PAGE>
<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> Mar-31-1998
<CASH> 50,256
<SECURITIES> 0
<RECEIVABLES> 697,093
<ALLOWANCES> 149,646
<INVENTORY> 586,953
<CURRENT-ASSETS> 1,594,631
<PP&E> 539,044
<DEPRECIATION> 441,923
<TOTAL-ASSETS> 3,379,206
<CURRENT-LIABILITIES> 2,172,894
<BONDS> 0
0
2,425,970
<COMMON> 4,142,928
<OTHER-SE> (5,919,661)
<TOTAL-LIABILITY-AND-EQUITY> 3,379,206
<SALES> 5,186,334
<TOTAL-REVENUES> 5,186,334
<CGS> 3,167,620
<TOTAL-COSTS> 5,365,426
<OTHER-EXPENSES> 1,180,521
<LOSS-PROVISION> (4,527,233)
<INTEREST-EXPENSE> 129,448
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,527,233)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (2.65)
<EPS-DILUTED> (2.65)
</TABLE>
