UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
---------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the three months ended June 30, 1999 Commission File Number 0-28960
DECOR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3911958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 Washington Street
Mt. Vernon, New York 10553
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (914) 665-5400
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock. As of August 1, 1999 there were 2,009,166 shares of common stock
outstanding.
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
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INDEX
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Page to Page
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheet as of June 30, 1999 [Unaudited]........ 1.......2
Consolidated Statements of Operations for the three months ended
June 30, 1999 and 1998 [Unaudited]................................ 3
Consolidated Statements of Stockholders' Equity [Deficit] for the three
months ended June 30, 1999 [Unaudited] and the fiscal year ended
March 31, 1999 [Audited].......................................... 4
Consolidated Statements of Cash Flows for the three months ended
June 30, 1999 and 1998 [Unaudited] ............................... 5
Notes to Consolidated Financial Statements........................ 6.......20
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................21.......24
Signature............................................................25
. . . . . . . . . . . . . . . . . .
<PAGE>
Item 1:
DECOR GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999.
[UNAUDITED]
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Assets:
Current Assets:
Accounts Receivable [Net of Allowance of $145,928] $ 551,648
Loan - Related Party 2,050
Inventories [Net of Allowance of $60,340] 237,549
Prepaid Expenses and Other Current Assets 28,879
-----------
Total Current Assets 820,126
Property and Equipment [Net of Accumulated Depreciation of $450,705] 52,729
-----------
Other Assets:
Goodwill [Net of Accumulated Amortization of $1,090,543] 736,764
Other Assets 18,456
-----------
Total Other Assets 755,220
Total Assets $ 1,628,075
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
1
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999.
[UNAUDITED]
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Liabilities and Stockholders' Equity [Deficit]:
Current Liabilities:
Cash Shortage $ 34,112
Notes Payable - Interiors 519,000
Accounts Payable and Accrued Expenses 417,873
Accounts Payable - Related Party 125,000
Non-Trade Payables 69,895
Due to Stockholders 337,785
Accrued Compensation and Benefits - Former Officer 49,005
Accrued Costs for Restructuring 411,376
Line of Credit 580,036
Current Portion of Long-Term Debt 117,437
Accrued Indemnification - Related Party 300,000
-----------
Total Current Liabilities 2,961,519
Long-Term Debt 452,128
Total Liabilities 3,413,647
Commitments and Contingencies [7] --
Stockholders' Equity [Deficit]:
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,
2,009,166 Issued and Outstanding 201
Additional Paid-in Capital - Common Stock 4,196,732
Accumulated Deficit (8,365,648)
Deferred Compensation (42,857)
Total Stockholders' Equity [Deficit] (1,785,572)
Total Liabilities and Stockholders' Equity [Deficit] $ 1,628,075
===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
2
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DECOR GROUP, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
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Three months ended
June 30,
1 9 9 9 1 9 9 8
------- -------
Revenues $1,053,803 $ 1,126,346
Cost of Revenues 595,399 619,462
---------- -----------
Gross Profit 458,404 506,884
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Selling, General and Administrative Expenses:
Selling Expense 271,754 313,824
General and Administrative Expense 326,772 373,901
Consulting Services - Related Party -- 125,000
Bad Debt Writeoff - Related Party -- 193,661
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Total Selling, General and Administrative Expenses 598,526 1,006,386
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[Loss] from Operations (140,122) (499,502)
---------- -----------
Other Income [Expense]:
Net Miscellaneous Income 14,822 1,212
Interest Expense (32,477) (22,256)
Interest Expense - Related Party (6,980) --
Made to Order (19,892) --
---------- -----------
Other [Expense] - Net (44,527) (21,044)
---------- -----------
[Loss] Before Provision for Income Taxes (184,649) (520,546)
Provision for Income Taxes -- 7,236
---------- -----------
Net [Loss] $ (184,649) $ (527,782)
========== ===========
[Loss] Per Share $ (.09) $ (.28)
========== ===========
Number of Common Shares 2,009,166 1,859,166
========== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
3
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY [DEFICIT]
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<TABLE>
Preferred Stock Common Stock Accumulated Total
Additional Additional Other Stockholders'
Paid-in Paid-in Accumulated Deferred Comprehensive Equity
Shares Amount Capital Shares Amount Capital Deficit Compensation Income [Deficit]
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of Options for
20,000 Shares of Common
Stock to President -- -- -- -- -- 10,000 -- -- -- 10,000
Exercise of Options -- -- -- 50,000 5 -- -- -- -- 5
Amortization of Deferred
Compensation -- -- -- -- -- -- -- 381,167 -- 381,167
Stock Issued for Service -- -- -- 200,000 20 43,980 -- -- -- 44,000
Comprehensive Income:
Net [Loss] for the year
ended March 31, 1999 -- -- -- -- -- -- (2,698,220) -- -- (2,698,220)
-------- ------- --------- ------ ------ -------- ---------- --------- -------- ----------
Balance - March 31, 1999 20,304,934 2,030 2,423,970 2,009,166 201 4,196,732 (8,180,999) (55,715) -- (1,613,781)
Amortization of Deferred
Compensation -- -- -- -- -- -- -- 12,858 -- 12,858
Comprehensive Income:
Net [Loss] for the
three months
ended June 30, 1999 -- -- -- -- -- -- (184,649) -- -- (184,649)
-------- ------- --------- ------ ------ -------- --------- --------- -------- ---------
Balance - June 30, 1999
[Unaudited] 20,304,934 $ 2,030 $2,423,970 2,009,166 $ 201 $4,196,732 $(8,365,648) $ (42,857) $ -- $(1,785,572)
========== ======= ========== ========= ====== ========== =========== ========= ======== ===========
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
</TABLE>
4
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
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Three months ended
June 30,
1 9 9 9 1 9 9 8
------- -------
Operating Activities:
Net [Loss] $ (184,649) $ (527,782)
Adjustment to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Accounts Payable - Related Party -- 125,000
Bad Debt Expense - Related Party -- 193,661
Amortization of Deferred Compensation 12,858 150,501
Depreciation 6,365 11,733
Amortization of Intangibles 13,236 22,498
Accrual for Returns and Allowances -- (10,752)
Stock Issued for Services Performed -- 43,980
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable - Trade (63,092) (34,033)
Accounts Receivable - Interiors (52,006) (39,048)
Inventory 33,331 6,038
Accrued Costs for Restructuring (43,169) --
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 10,310 (97,793)
Accrued Settlement - Former Officer (23,993) (21,845)
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Net Cash - Operating Activities (290,809) (177,842)
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Investing Activities:
Purchase of Property and Equipment -- (6,529)
Other Assets 667 (492)
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Net Cash - Investing Activities 667 (7,021)
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Financing Activities:
Issuance of Stock -- 20
Proceeds from Line of Credit (36,067) 177,601
Loan from Stockholder 22,500 22,500
Payment of Stockholder Loans (30,979) (28,413)
Loan to Related Party - Windsor Art & Mirror 300,000 --
---------- -----------
Net Cash - Financing Activities 255,454 171,708
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Net [Decrease] in Cash (34,688) (13,155)
Cash - Beginning of Periods 576 50,256
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Cash - End of Periods $ (34,112) $ 37,101
========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for the periods for:
Interest $ 39,457 $ 22,257
Income Taxes $ -- $ 7,236
The Accompanying Notes are an Integral Part of These Consolidated Financial
Statements.
5
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
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[1] Summary of Significant Accounting Policies
[A] Nature of Operations - Decor Group, Inc., a Delaware corporation [the
"Company" or "Decor"], was incorporated on March 1, 1996. The Company is a
subsidiary of Interiors, Inc. The Company was organized for the purpose of
acquiring Artisan House, Inc. ["Artisan"]. The acquisition was completed on
November 18, 1996. Artisan is engaged in the business of designing,
manufacturing, marketing, selling and distributing metal wall-mounted, tabletop
and freestanding sculptures. Artisan manufactures its products at one location
in southern California and sells through sales representatives and from its
regional showrooms to furniture retailers and department stores throughout the
United States and internationally. The transaction was recorded under the
purchase method. The Company does not maintain separate divisions, segments, or
product lines for its business. [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 June 30, 1999.
[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. In connection with
the acquisition of Artisan House, Inc. in November 1996, goodwill of
approximately $1,800,000 was originally recorded using the purchase method. 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 greater than the projected
undiscounted cash flow from the acquired assets or business. Accordingly, in
March of 1999, the Company decided to write down the carrying value of goodwill
to $750,000 [See Note 2].
6
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
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[1] Summary of Significant Accounting Policies [Continued]
[F] 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 years ended March 31, 1999 and 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 and the Company reports income from operations.
Potential common shares of 50,000 are not currently dilutive, but may be in the
future.
[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 June 30, 1999, the Company had
no cash in excess of insured amounts.
The Company routinely assesses the financial strength of its customers, and
based upon factors surrounding the credit risk of its customers, established an
allowance for uncollectible accounts of $145,928 for the fiscal period ended
June 30, 1999 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.
7
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
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[1] Summary of Significant Accounting Policies [Continued]
[I] 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.
[K] License Agreements - The Company currently manufactures a small segment of
its products pursuant to license agreements. Generally, all of the license
agreements are non-exclusive, permit sales in the United States and require the
Company to make periodic royalty payments based upon revenues from the sale of
licensed works.
[L] Advertising Expenses - The Company incurred advertising expenses of
approximately $15,000 and $25,000 for the three months ended June 30, 1999 and
1998, respectively.
[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 was recorded and amortized over 20 years using the straight-line
method. Intangible assets of $537,046 were written off in March of 1998. Upon
the Company's moving its operations in March of 1999, the Company reevaluated
its projected future cash flows and recorded an impairment of $826,469 based
upon management's revised and updated operational plans and management's updated
projected ability to generate future positive cash flows as of March 31, 1999
[See Note 1E]. The remaining carrying value of goodwill of $750,000 will be
written off over the remaining 17 years under the straight-line method.
Operations of Artisan were included with the Company from November 19, 1996
onward. The assets and liabilities of Artisan were combined with those of the
Company as of November 18, 1996 [See Note 12 - Restructuring Plan].
[3] Inventories
The components of inventory were as follows:
Raw Materials $ 202,372
Work-in Process 12,822
Finished Goods 82,695
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Totals $ 297,889
------ ==========
The Company has set up an allowance for slow moving products of $60,340 June 30,
1999.
8
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
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[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 annual management fee of $90,000 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 and is still in force.
Interest is accrued on the unpaid management fee.
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 [in accordance with amended
agreement dated February 1997] and paid $50,000 during the year ended March 31,
1998 and accrued the management fee of $90,000 during the year ended March 31,
1999.
On April 2, 1998, the Board of Directors amended the February 1997 management
services agreement in that it allowed the Company to make payments deemed
warranted or necessary to Interiors or third parties on behalf of Interiors [See
Note 4C].
Commencing December of 1998, Artisan incurred costs totaling approximately
$180,000, which remains unpaid as of June 30, 1999, for various expenses paid by
Troy Lighting primarily for moving costs of approximately $120,000 and payroll
costs of approximately $40,000. Interiors also paid $119,000 as a finders fee to
the former owner of Artisan House [See Note 9].
The Company recorded a non-cash $125,000 management consulting fee due Interiors
on June 30, 1998, relating to marketing and merchandising services provided by
the related party to the Company. In addition, the Company received a $400,000
advance from Interiors on July 23, 1998. As of June 30, 1999, the Company has an
outstanding balance due to Interiors of $1,079,494. The Company recorded
interest expense for the years ended March 31, 1999 and 1998 of $19,095 and
$16,116, respectively, on the unpaid management fee. The outstanding balance at
June 30, 1999 was $981,785 consisting of $519,000 in advances and $462,785 in
management fees.
[B] Stockholders' Loans Payable - The Company received $35,500 in June 1996 and
$8,000 in July 1996 in loan proceeds. The notes bear interest at 12% per annum
and had a maturity date of April 1998. Interest expense for the three months
ended June 30, 1999 and 1998 was $1,305 and 1,305, respectively.
[C] 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.
Throughout fiscal 1999, Artisan also incurred costs, which were allocated to
Interiors, totaling approximately $224,000 primarily for various employee and
consulting expenses on behalf of Interiors. In addition, Artisan reduced the
accounts receivable balance due from Interiors in exchange for product marketing
and merchandising costs being incurred by the related party on behalf of the
Company for $193,661, which is classified as consulting services by a related
party. As of June 30, 1999, the balance due on the intercompany charges was
$183,637.
During fiscal 1999, the Company also incurred additional costs for two entities
acquired by Interiors. These receivable transactions, which have no impact on
the statement of operations, with the exception of finder's fees paid to the
seller of Artisan House [See Note 7A], are summarized as follows:
o In fiscal 1999, Artisan incurred costs totaling approximately $35,000, which
remains unpaid as of March 31, 1999, for various expenses on behalf of
Vanguard Studios primarily for shared employee and freight costs.
9
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
- ------------------------------------------------------------------------------
[4] Related Party Transactions [Continued]
[C] Due from Interiors [Continued] -
o In September of 1998, Artisan used $300,000 from its financial line of credit
for an Interior's acquisition. An additional $2,050 of costs were incurred by
Artisan in February and March of 1999 for the entity. The balance due Artisan
from that entity as of March 31, 1999 was $302,050, of which $300,000 was
repaid in April 1999.
[D] Indemnification Agreement - Interiors - In September of 1998, the Company
recorded a $300,000 indemnification expense resulting from the Company's
indemnification of up to $300,000 to United Credit Corporation for an abandoned
acquisition by Interiors as a result of a business failure experienced by the
potential acquisition candidate. The Company believes that it could be liable
for up to $300,000 as a result of their indemnification of United Credit
Corporation. The Company also believes that this matter will be settled sometime
in fiscal 2000.
[E] Insurance Allocations - The Company pays an allocated premium for property
liability and workmens' compensation insurance as a part of the master policy of
Interiors. The master policy consolidates the various Interiors entities, and
produces a lower premium. The Company is allocated the premium based upon sales,
property value and payroll. The allocated insurance expense for the three months
ended June 30, 1999 was approximately $35,000.
[5] Property and Equipment
Property and equipment consisted of the following:
Machinery and Equipment $ 175,862
Leasehold Improvements 111,270
Furniture and Fixtures 150,244
Office and Computer Equipment 66,058
----------
Total - At Cost 503,434
Less: Accumulated Depreciation 450,705
Net $ 52,729
--- ==========
Depreciation expense was approximately $6,365 and $11,733, respectively for the
three months ended June 30, 1999 and 1998.
[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, 1999, Interiors, Inc. owned approximately 90% of the
Company's total voting stock outstanding assuming no conversion of the Series A
and Series C Preferred Stock.
10
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
- ------------------------------------------------------------------------------
[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. Henry Goldman pursuant to the terms of the AHI acquisition agreement
received options for an additional 50,000 shares of common stock in January
1999. The Company recorded deferred compensation cost for the fair value of
options for 100,000 shares of the Company's common stock 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 years ended March 31, 1999
and 1998, the Company amortized $381,167 and $500,000, respectively, 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. There are no monies outstanding at March 31, 1999 pursuant to this
agreement. The employment agreement also provides for finder's fees to be earned
by the seller pursuant to certain acquisitions made by the Company, its parent
or affiliates. The Company expensed $64,000 representing an estimate of
compensation earned by the seller as a consequence of the Vanguard and Artmaster
acquisitions made by Interiors, Inc. in March of 1998. The Company expensed
$119,000 in fiscal 1999, which is the compensation due the seller resulting from
Interiors' acquisition in fiscal 1999, which was paid by Interiors [See Notes 4A
and 9].
[B] Consulting Agreements - On January 1, 1997, the Company entered into a
consulting agreement with a now former 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, 1999, the Company owed
$50,000 to the director as monies due upon his resignation, which was paid in
April of 1999.
[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 September 15, 1998, Artisan obtained an increased
accounts receivable and inventory based line of credit for up to $950,000 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, 1999 was $85,545. At March 31, 1999, Artisan had an outstanding balance of
$610,121. The line of credit has an expiration date of June 30, 1999. The term
of the credit line automatically renews each year unless notice is given by
either the Company or the lender to the other, respectively, within a period not
less than 60 days prior to expiration. 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 and collection and processing fees for the three months
ended June 30, 1999 was $21,384 and $8,102, respectively. On July 1, 1999, the
loan agreement was renewed with a new interest rate of prime plus 2%.
11
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
- ------------------------------------------------------------------------------
[7] Commitments and Contingencies [Continued]
[D] Line of Credit [Continued] - The line of credit includes a term loan
originating in the amount of $100,000 as of September 30, 1998. Principal
payments of $5,000 per month are due on the loan.
The Company is contingently liable as guarantor of the debts owed to the lender
of the line of credit by related parties with aggregate indebtedness up to
$14,400,000.
[E] Leases - The Company leases manufacturing and office space in California
from the seller of Artisan, which expires November 30, 2001 and is currently
used for storage. The lease provides for additional rent based on increases in
the Consumer Price Index [See Note 12 - Restructuring Plan].
Commencing in April of 1999, the Company will incur approximately $20,000 per
month to a subsidiary of Interiors for all building and facility costs on a
month to month basis as a result of the March facility relocation.
Future minimum lease payments under all operating leases are as follows at June
30, 1999:
Year ended
June 30,
2000 $ 252,386
2001 248,079
2002 117,189
2003 44,220
2004 36,850
Thereafter --
---------
Total $ 698,724
----- =========
Artisan also rents showroom space in High Point, North Carolina and San
Francisco, California. The High Point lease expires April of 2004 and the San
Francisco lease expires in July of 2001. The current monthly lease payments are
$3,126 for High Point and $1,465 for San Francisco.
Rental expense was $17,489 and $59,990, respectively for the three months ended
June 30, 1999 and 1998.
[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 options. For the years ended March 31, 1999 and 1998, the
Company amortized $60,000 and $64,285, respectively, as compensation expense. In
March 1997, the officer was elected to the offices of President and Chief
Financial Officer of the Company.
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.
12
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[UNAUDITED]
- ------------------------------------------------------------------------------
[7] Commitments and Contingencies [Continued]
[F] Employment Agreement - President/Chief Financial Officer [Continued] - 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.
On January 2, 1999, pursuant to an incentive stock option agreement, the officer
received 20,000 options under the employment agreement whereby the Company
recorded compensation expense of $10,000 on January 2, 1999. The options vest
immediately and not more than 20% per year are available for exercise at $.0001
per share until January 2000. The options will expire January 2005.
In March of 1999, the Company accrued a bonus of $35,000 to the President/Chief
Financial Officer.
[8] Debt
June 30,
1 9 9 9
Acquisition Loan $ 595,427
Less: Discount 25,862
----------
Total 569,565
Less: Current Portion of Long-Term Debt 117,437
Long-Term Portion $ 452,128
----------------- ==========
Annual maturities of notes payable are as follows:
Twelve months ended
June 30,
2000 $ 117,437
2001 152,492
2002 299,636
Thereafter --
---------
Total $ 569,565
----- =========
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 years ended March 31, 1999 and 1998 was
approximately $10,000 and $10,000, respectively, and has been amortized as
interest expense. Interest expense for the years ended March 31, 1999 and 1998
was approximately $50,000 and $50,000, respectively, on the note payable.
13
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[UNAUDITED]
- ------------------------------------------------------------------------------
[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.
The Company entered into an arbitration with the seller concerning various
financial compensation claims on October 29, 1998. A settlement was reached in
January 1999, that provides for (i) payment of a finder's fee on companies
purchased by Interiors of $119,000, which was paid by Interiors, [See Notes 4A
and 7A], (ii) the removal of the restrictive legend on the stock issued pursuant
to a H. Goldman exercise of options in 1997 and (iii) the issuance of stock due
in 1998.
[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 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.
[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.
14
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[UNAUDITED]
- ------------------------------------------------------------------------------
[10] Capital Stock
[E] Additional Stock Issued - In March of 1998, the Company retained a financial
consulting firm to provide merger and acquisition consulting and advisory
services in connection with the pending merger with Interiors, Inc. and other
acquisition candidates. 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. In July 1998, the Company paid the financial consulting firm
$200,000 for these services performed in fiscal 1999. A total of $244,000 was
expensed in the year ended March 31, 1999.
[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 $2,582,290 and $3,346,712 for the years ended March 31, 1999
and 1998, respectively. The Company had a working capital deficit of $2,010,712
and an accumulated deficit of $8,180,999 at March 31, 1999. The Company was
primarily funded for the year ended March 31, 1999 by proceeds from the line of
credit and monies advanced by Interiors. Management believes that as a result of
the Company's move in March of 1999 it will be able to continue its expenditure
reductions as a result of sharing many costs with entities acquired by
Interiors.
There can be no assurances that management's plans to reduce operating expenses
and obtain additional financing to fund its working capital needs 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 has been
concentrating on strategies for growth through improved competitiveness, quality
and effectiveness. Accordingly, Artisan finalized its planned move into the
facilities of Interior's subsidiary, Troy Lighting, Inc., and began sharing
common facilities with Troy in March 1999 [See Note 4C].
As of March 31, 1998, management believed that the restructuring costs and
charges for the cost of shutting down the operations were approximately $20,000
and the projected remaining lease obligations on the premises were $625,000. The
restructuring reserve through December 1997 had included an offset for sublease
income. However, since there had not been any successful commitment in this
endeavor since September of 1997, management decided to increase the reserve by
approximately $435,000. This represented management's previous estimate of
attainable sublease income for the remaining term of 44 months, and leasehold
improvements.
15
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11
[UNAUDITED]
- ------------------------------------------------------------------------------
[12] Restructuring Plan [Continued]
During the year ended March 31, 1999, the Company reduced the reserve by
$170,454 which represented the annual lease payments. Therefore, the Company's
restructuring reserve as of June 30, 1999 of $411,376 represents the 29
remaining months on the lease term.
[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 $4,600,000 of
which approximately $100,000 will expire in 2011, approximately $600,000 will
expire in 2012, approximately $2,400,000 will expire in 2013, and approximately
$1,500,000 will expire in 2014.
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 $ 352,000
Stock based compensation 152,000
Net Operating loss carry forwards 1,840,000
Total Deferred Tax Assets $2,344,000
Net Deferred Tax Asset Before
Valuation Allowance $2,324,000
Valuation Allowance (2,324,000)
----------
Net $ --
--- ==========
Due to the uncertainty whether the Company will generate income in the future
sufficient to fully or partially utilize the net operating loss carryforwards,
the Company recorded a valuation allowance of $2,324,000. This represents an
increase in its valuation allowance of $735,000 over the allowance at March 31,
1998.
[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.
16
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #12
[UNAUDITED]
- ------------------------------------------------------------------------------
[14] Stock Options [Continued]
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. Pursuant to an
employment agreement and incentive stock option plan entered into December 1996,
compensation expense has been recognized for the Company's stock-based
compensation in the amounts of $10,000 and $90,000 for the years ended March 31,
1999 and 1998. The exercise price for all stock options issued to employees
during fiscal years 1999 and 1998 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
Seller/ President Exercise Contractual
Others [Note 7F] Shares Price Life
Outstanding - March 31, 1997 100,000 10,000 110,000 $ .0001
----------------------------
Granted -- 20,000 20,000 .0003
Exercised (50,000) -- (50,000) (.0001)
Forfeited/Expired -- -- -- --
--------- -------- --------- -------
Outstanding - March 31, 1998 50,000 30,000 80,000 .0002
----------------------------
Granted 50,000 20,000 70,000 .0001
Exercised (50,000) -- (50,000) (.0001)
Forfeited/Expired (50,000) -- (50,000) (.0001)
--------- -------- --------- -------
Outstanding - March 31, 1999 -- 50,000 50,000 $ .0002
---------------------------- ======== ======== ========= =======
Outstanding - June 30, 1999 -- 50,000 50,000 $ .0002
--------------------------- ========= ======== ========= =======
Exercisable - March 31, 1999 -- 8,000 8,000 .0002 3 Years
---------------------------- ======== ======== ========= ======= =========
Exercisable - June 30, 1999 -- 8,000 8,000 .0002 3 Years
--------------------------- ========= ======== ========= ======= =========
Weighted average fair value of options granted during fiscal 1999 and 1998 was
$.50 and $4.50, respectively.
Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123, for the shares under employee options [See Note 7F] for the years
ended March 31, 1999 and 1998, net loss and loss per share would have been as
follows:
1 9 9 8 1 9 9 7
------- -------
Net Loss:
As Reported $(2,698,220) $(4,527,233)
=========== ===========
Pro Forma $(2,698,218) $(4,527,228)
=========== ===========
Basic Earnings Per Share:
As Reported $ (1.37) $ (2.65)
=========== ===========
Pro Forma $ (1.37) $ (2.65)
=========== ===========
17
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #13
[UNAUDITED]
- ------------------------------------------------------------------------------
[14] Stock Options [Continued]
The fair value used in the pro forma data was estimated by using an option
pricing model which took into account as of the grant date, the exercise price
and the expected life of the option, the current price of the underlying stock
and its expected volatility, expected dividends on the stock and the risk-free
interest rate for the expected term of the option. The following is the average
of the data used for the following items.
Risk-Free Expected Expected
Interest Rate Expected Life Volatility Dividends
6% 2 Years 188% None
[15] Fair Value of Financial Instruments
At both June 30, 1999 and March 31, 1999, 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
Termination of Merger Agreement - 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
received 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 were subject to the same Exchange Ratio for Interiors'
Class A common stock.
On August 4, 1999, this merger agreement was terminated by Interiors, Inc.
[17] New Authoritative Pronouncements
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.
18
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #14
[UNAUDITED]
- ------------------------------------------------------------------------------
[17] New Authoritative Pronouncements [Continued]
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
Company does not currently have any derivative instruments and is not currently
engaged in any hedging activities.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ["SOP"] 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs, and requires that such costs to be expensed as
incurred. SOP 98-5 applies to all nongovernmental entities and is generally
effective for fiscal years beginning after December 15, 1998. Earlier
application is encouraged in fiscal years for which annual financial statements
previously have not been issued. The adoption of SOP 98-5 is not expected to
have a material impact on results of operations, financial position, or cash
flows of the Company as the Company's current policy is substantially in
accordance with SOP 98-5.
The Financial Accounting Standards Board ["FASB"] has had on its agenda a
project to address certain practice issues regarding Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The FASB
plans on issuing various interpretations of APB Opinion No. 25 to address these
practice issues. The proposed effective date of these interpretations would be
the issuance date of the final Interpretation, which is expected to be in
September 1999. If adopted, the Interpretation would be applied prospectively
but would be applied to plan modification and grants that occur after December
15, 1998. The FASB's tentative interpretations are as follows:
* APB Opinion No. 25 has been applied in practice to include in its definition
of employees, outside members of the board or directors and independent
contractors. The FASB's interpretation of APB Opinion No. 25 will limit the
definition of an employee to individuals who meet the common law definition
of an employee [which also is the basis for the distinction between
employees and nonemployees in the current U.S. tax code]. Outside members of
the board of directors and independent contractors would be excluded from
the scope of APB Opinion No. 25 unless they qualify as employees under
common law. Accordingly, the cost of issuing stock options to board members
and independent contractors not meeting the common law definition of an
employee will have to be determined in accordance with FASB Statement No.
123, "Accounting for Stock-Based Compensation," and usually recorded as an
expense in the period of the grant [the service period could be prospective,
however, see EITF 96-18].
* Options [or other equity instruments] of a parent company issued to
employees of a subsidiary should be considered options, etc. issued by the
employer corporation in the consolidated financial statements, and,
accordingly, APB Opinion No. 25 should continue to be applied in such
situations. This interpretation would apply to subsidiary companies only; it
would not apply to equity method investees or joint ventures.
19
<PAGE>
DECOR GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #15
[UNAUDITED]
- ------------------------------------------------------------------------------
[17] New Authoritative Pronouncements [Continued]
* If the terms of an option [originally accounted for as a fixed option] are
modified during the option term to directly change the exercise price, the
modified option should be accounted for as a variable option. Variable grant
accounting should be applied to the modified option from the date of the
modification until the date of exercise. Consequently, the final measurement
of compensation expense would occur at the date of exercise. The
cancellation of an option and the issuance of a new option with a lower
exercise price shortly thereafter [for example, within six months] to the
same individual should be considered in substance a modified [variable]
option.
* Additional interpretations will address how to measure compensation expense
when a new measurement date is required.
. . . . . . . . . . .
20
<PAGE>
Item 2
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
OVERVIEW
Decor Group, Inc. [the "Company" or "Decor"] was formed in March of 1996. The
primary activities of Decor prior to the $3,700,000 acquisition of Artisan
House, Inc. ["Artisan"] on November 18, 1996, 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 Notes 4]. 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, 1999, Interiors, Inc. owned approximately 90% 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 received 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 were subject to the
same Exchange Ratio for Interiors' Class A common stock.
On August 4, 1999, this merger agreement was terminated by Interiors, Inc.
The financial statements consolidated the results of Artisan House with the
Company commencing November 18, 1996, the date of acquisition.
RESULTS OF OPERATIONS
The Company had revenues and cost of revenues for the three months ended June
30, 1999 of $1,053,803 and $595,399, respectively. This represents Artisan's
sales and cost of sales transactions for the quarter then ended which resulted
in a gross profit of $458,404 to the Company.
The Company had selling, general and administrative expenses for the three
months ended June 30, 1999 of $598,526 of which approximately $404,329
represented Artisan's expenses for the period then ended. The selling, general
and administrative expenses of the Company for the three months ended June 30,
1999 include $152,000 in payment of pending litigation settlement.
For the three months ended June 30, 1999, Artisan had an operating loss of
$140,122. The minimum wage increases in the United States has created a
favorable environment for choosing outsourcing as a means of reducing labor
costs. Management believes that in fiscal 2000 by outsourcing its products from
vendors outside the United States an improved gross profit can be achieved.
Artisan House has placed its first container load order with a foreign vendor
who will deliver packaged, ready-to-sell versions of several of Artisan's
existing line of products, the result of which is to reduce costs on the items
affected by between 32% and 43%. Should the quality and delivery be acceptable,
Artisan will expand this outsourcing process to additional items and further
reduce the cost of goods sold.
21
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS [CONTINUED]
The Company incurred a net loss of $184,649 for the three months ended June 30,
1999 of which Artisan House had a gain of approximately $16,581 and Decor
incurred a net loss of approximately $201,230.
The net loss included noncash expenses of approximately $32,459.
Management believes that in fiscal 2000, administrative and sales expenses can
be decreased by the installation of a new computer system and merging the
administrative and sales functions with those of entities acquired by Interiors,
Inc. The restructuring and relocation of the Company's headquarters and
manufacturing operations that occurred in March 1999 is the result of Interiors,
Inc.'s acquisition of various companies.
The Company's auditors rendered a going concern report as of March 31, 1999 as
the Company has suffered recurring losses from operations.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, Decor had a working capital deficit of $2,141,393. For the
three months ended June 30, 1999, the Company used $290,809 for operating
activities, generated $667 from investing activities and generated $255,454 from
financing activities. The cash overdraft balance at June 30, 1999 was
approximately $34,000. Management believes that its short and long-term cash
requirements will be generated from operations in fiscal 2000 resulting from its
forecasted improved gross profit and reduction of selling, general and
administrative expenses.
On November 18, 1996, the Company issued a secured promissory note in the amount
of $923,496 to the seller of Artisan House of which $100,000 was paid in
February of 1997 and the balance will be paid in 60 equal monthly installments
of $13,989 with a final payment of $150,000 at maturity bearing interest at 8%.
The note is secured by a second interest on all of Artisan's assets. The
non-interest bearing portion of the note was discounted at 8% which gave rise to
a discount of $48,387.
In connection with the acquisition, the Company assumed notes payable in the
aggregate amount of $212,891 of which approximately $190,000 was paid off in
connection with the closing of the acquisition and the remaining notes of
approximately $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 December 31, 1996, Artisan entered into a three year employment agreement
with Artisan's Chief Operating Officer and Treasurer for (i) a base 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 options in the year ended March 31,
1997. For the years ended March 31, 1999 and 1998, the Company amortized $60,000
and $64,285, respectively, as compensation expense. Amortization of compensation
expense was $12,858 for the three months ended June 30, 1999.
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.
22
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES [CONTINUED]
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.
On January 2, 1999, the officer received an additional 20,000 options under the
employment agreement whereby the Company recorded compensation expense of
$10,000 on January 2, 1999. The options vest immediately and are not available
for exercise until January 2000 and will expire January 2005.
In March of 1999, the Company accrued a bonus of $35,000 to the President/Chief
Financial Officer.
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.
The Company entered into an arbitration with Goldman/CIDCOA concerning various
financial compensation claims on October 29, 1998. A settlement was reached in
January 1999, that provided for (i) payment of a finders fee of $119,000 on
companies purchased by Interiors [See Notes 4A and 7A], (ii) the removal of the
restrictive legend on the stock issued pursuant to H. Goldman exercise of
options in 1997 and (iii) the issuance of stock due in 1998. Goldman/CIDCOA also
withdrew their claims.
On September 15, 1998, Artisan obtained an increased accounts receivable based
line of credit for up to $950,000 with interest at prime plus 5.5% secured by
all of Artisan's assets and guaranteed by Decor and Interiors, Inc. The
unborrowed amount available under the line of credit at June 30, 1999 was
$24,220. At June 30, 1999, Artisan had an outstanding balance of $585,036. The
line of credit has an expiration date of June 30, 1999. The term of the credit
line automatically renews each year unless notice is given by either the Company
or the lender to the other, respectively within a period not less than 60 days
prior to expiration. 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 and collection and processing fees for the three months ended June 30,
1999 was $21,384 and $8,102, respectively. On July 1, 1999, the loan agreement
was renewed with a new interest rate of prime plus 2%.
The line of credit includes a term loan originating in the amount of $100,000 as
of September 30, 1998. Principal payments of $5,000 per month are due on the
loan.
The Company is contingently liable as guarantor of the debts owed to the lender
of the line of credit by related parties with aggregate indebtedness up to
$14,400,000.
23
<PAGE>
DECOR GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
NEW AUTHORITATIVE PRONOUNCEMENTS
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and how it its designated, for
example, gain or losses related to changes in the fair value of a derivative not
designated as a hedging instrument is recognized in earnings in the period of
the change, while certain types of hedges may be initially reported as a
component of other comprehensive income [outside earnings] until the
consummation of the underlying transaction.
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.
24
<PAGE>
SIGNATURES
- ------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DECOR GROUP, INC.
Date: August 16, 1999 By:/s/ Dennis D'Amore
------------------------------
Dennis D'Amore,
President
25
<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-31-1999
<PERIOD-END> Jun-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 551,648
<ALLOWANCES> 145,928
<INVENTORY> 237,549
<CURRENT-ASSETS> 820,126
<PP&E> 503,434
<DEPRECIATION> 450,705
<TOTAL-ASSETS> 1,628,075
<CURRENT-LIABILITIES> 2,961,519
<BONDS> 0
0
2,426,000
<COMMON> 4,196,933
<OTHER-SE> (8,408,505)
<TOTAL-LIABILITY-AND-EQUITY> 1,628,075
<SALES> 1,053,803
<TOTAL-REVENUES> 1,053,803
<CGS> 595,399
<TOTAL-COSTS> 1,193,925
<OTHER-EXPENSES> 44,527
<LOSS-PROVISION> (184,649)
<INTEREST-EXPENSE> 39,457
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (184,649)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (184,649)
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
