<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For Nine Month Period Ended March 31, 1996.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to .
Commission File No. 0-24352
INTERIORS, INC.
---------------
(Doing Business in New York under the name A.P.F. Master Framemakers)
(Exact name of small business issuer as specified in its charter)
Delaware 13-3590047
-------- ----------
(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)
Issuer's Telephone Number: (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 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 [ ] .
The number of shares outstanding of the issuer's Class A Common Stock and Class
B Common Stock as of June 11, 1996 was 2,435,247 and 552,500, respectively.
Transitional Small Business Disclosure Format (check one). Yes [ ]. No [X].
<PAGE>
INTERIORS, INC.
TABLE OF CONTENTS
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................ 1
Consolidated Balance Sheet as of March 31, 1996................... 2
Consolidated Statements of Operations -
For the Three Months Ended March 31, 1996 and 1995........... 3
Consolidated Statements of Operattions -
For the Nine Months Ended March 31, 1996 and 1995............ 4
Consolidated Statement Changes in Stockholders' Equity -
For the Nine Months Ended March 31, 1996..................... 5
Consolidated Statements of Cash Flows-
For the Nine Months Ended March 31, 1996 and 1995............ 6
Item 2. Management's Discussion and Analysis................................ 14
PART II - OTHER INFORMATION
Item 1. Legal Proceeding................................................... 21
Item 2. Changes in Securities.............................................. 23
Item 3. Defaults Upon Senior Securities.................................... 23
Item 4. Submission of Matters to a Vote of Security Holders................ 23
Item 5. Other Information.................................................. 23
Item 6. Exhibits and Reports on Form 8-K................................... 23
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements included herein have been prepared by
Interiors, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
statements include all adjustments necessary to present fairly the financial
condition of the Company as of March 31, 1996 and the results of operations for
the three and nine month periods ended March 31, 1996 and 1995.
The Company's results of operations during the three and nine months ended
March 31, 1996 are not necessarily indicative of any future results. It is
suggested that the financial statements included in this report be read in
conjunction with the financial statements and notes thereto in the Company's
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1995.
1
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INTERIORS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
March 31,
ASSETS 1996
----------
CURRENT ASSETS:
Cash $0
Accounts receivables -
Trade, net of allowance of $40,000 1,596,437
Inventories 2,542,130
Prepaid expenses and other current assets 415,422
-------
Total current assets 4,553,989
---------
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 1,709,415
Furniture and fixtures 156,179
Leasehold improvements 259,405
-------
Total property and equipment, at cost 2,124,999
Less- Accumulated depreciation and amortization 908,234
-------
Net property and equipment 1,216,765
OTHER ASSETS 820,934
-------
Total assets $6,591,688
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt $2,310,742
Accounts payable and accrued liabilities 1,374,350
Prepaid sales and customer deposits 46,583
Capital lease obligations 26,729
------
Total current liabilities 3,758,404
---------
NON-CURRENT LIABILITIES:
Notes payable 302,843
Capital lease obligations 10,594
------
Total noncurrent liabilities 313,437
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,300,000 shares authorized,
740,000 issued and outstanding 7,400
Class A common stock, $.001 par value,
30,000,000 shares authorized, 3,035,247
shares issued and 2,435,247 outstanding 2,435
Class B common stock, $.001 par value,
2,500,000 shares authorized,
552,500 shares issued and outstanding 553
Additional paid-in-capital 7,911,261
Retained deficit (5,131,545)
Treasury Stock (270,257)
--------
Total stockholders' equity 2,519,847
---------
Total liabilities and stockholders'
equity $6,591,688
==========
The accompanying notes are an integral part of this balance sheet
2
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INTERIORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
1996 1995
---- ----
NET SALES $1,756,106 $1,706,792
COST OF GOODS SOLD 863,937 670,264
------- -------
Gross profit from continuing operations 892,169 1,036,528
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 821,741 933,994
PROVISION - ISSUANCE OF STOCK OPTIONS (6,800) 0
------ --------
Operating expenses 814,941 933,994
Income (loss) from continuing operations
before interest and provision for taxes 77,228 102,534
INTEREST EXPENSE (including financing charges) 73,714 80,671
------ ------
Income (loss) from continuing operations
before provision for taxes 3,514 21,863
PROVISION FOR INCOME TAXES 0 4,235
------- -----
Income (loss) from continuing operations 3,514 17,628
DISCONTINUED OPERATIONS (Note 3)
Loss from operations of discontinued
operations 112,647 0
Provision for disposal of discontinued
operations 750,000 0
------- ------
Loss from discontinued operations 862,647 0
NET INCOME (LOSS) ($859,133) $17,628
========= =======
NET INCOME (LOSS) PER SHARE OF COMMON STOCK ($0.33) $0.01
====== =====
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 2,604,869 1,927,611
========= =========
The accompanying notes are an integral part of these financial statements
3
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INTERIORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
NET SALES $5,032,906 $5,201,639
COST OF GOODS SOLD 2,497,620 2,195,089
--------- ---------
Gross profit from continuing operations 2,535,286 3,006,550
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,121,320 2,738,125
PROVISION - ISSUANCE OF STOCK OPTIONS 193,200
------- --------
Operating expenses 2,314,520 2,738,125
Income (loss) from continuing operations
before interest and provision for taxes 220,766 268,425
INTEREST EXPENSE (including financing charges) 321,240 177,924
------- -------
Income (loss) from continuing operations
before provision for taxes (100,474) 90,501
PROVISION FOR INCOME TAXES 5,998 17,300
----- ------
Income (loss) from continuing operations (106,472) 73,201
DISCONTINUED OPERATIONS (Note 3)
Loss from operations of discontinued
operations 423,714
Provision for disposal of discontinued
operations 1,100,000
--------- -------
Loss from discontinued operations 1,523,714 0
NET INCOME (LOSS) ($1,630,186) $73,201
=========== =======
NET INCOME (LOSS) PER SHARE OF COMMON STOCK ($0.63) $0.04
====== =====
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 2,604,869 1,853,668
========= =========
The accompanying notes are an integral part of these financial statements
</TABLE>
4
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INTERIORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1996
(unaudited)
<TABLE>
<CAPTION>
Series A Class A Class B
Preferred Stock Common Stock Common Stock
--------------- ------------ ------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 0 $0 1,570,000 $1,570 882,500 $883
Proceeds from issuance of Series A Preferred 460,000 $4,600
Conversion of Class B Shares 330,000 $330 (330,000) ($330)
Conversion of convertible debt into Class WC Warrants
Issuance of Series A Common Stock 280,000 $280
Conversion of Convertible Debt into Series A Preferred 80,000 $800
Provision-issuance of stock to employees
Issuance of CIA Com Stk as dividend on Pfd. Stk Ser A 55,247 $ 55
Investment in Decor Group, Inc 200,000 $2,000 200,000 $ 200
Net loss
-------- ------- --------- ------ -------- -----
BALANCE, MARCH 31, 1996 740,000 $7,400 2,435,247 $2,435 552,500 $553
=== ==== ======= ====== ========= ====== ======= ====
</TABLE>
<TABLE>
<CAPTION>
Additional Retained
Paid-In Earnings Treasury
Capital (Deficit) Stock Total
------- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 $5,595,763 ($3,335,618) ($270,257) $1,992,341
Proceeds from issuance of Series A Preferred $1,628,032 $1,632,632
Conversion of Class B Shares $0
Conversion of convertible debt into Class WC Warrants $100,000 $100,000
Issuance of Series A Common Stock $31,580 $31,860
Conversion of Convertible Debt into Series A Preferred $199,200 $200,000
Provision-issuance of stock to employees $193,200 $193,200
Issuance of CIA Com Stk as dividend on Pfd. Stk Ser A $165,686 ($165,741) $0
Investment in Decor Group, Inc ($2,200) $0
Net loss ($1,630,186) ($1,630,186)
$0
$0
$0
$0
---------- ----------- -------- ----------
BALANCE, MARCH 31, 1996 $7,911,261 ($5,131,545) ($270,257) $2,519,847
=== ==== ========== =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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INTERIORS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
---------------------
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ($1,630,186) $73,201
Adjustments to reconcile net Income (loss) to net cash used in operating activities:
Depreciation and amortization ` 666,937 456,709
Provision for losses on accounts receivable 33,766
Provision for discontinued catalog operations 1,100,000
Provision for issuance of stock options 193,200
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, trade (147,616) (407,292)
Decrease (increase) in inventories (560,484) (738,806)
Decrease (increase) in prepaid catalog costs, prepaid expenses and other
current assets (149,669) (252,983)
Decrease (increase) in other assets (99,995) (731,198)
Increase (decrease) in accounts payable and accrued expenses (317,114) 288,975
Increase (decrease) in prepaid sales & customer deposits 3,415 (12,107)
-------- ----------
Net cash used in operating activities (907,746) (1,323,501)
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (483,234) (280,169)
Investment in Decor Group, Inc. (2,200)
--------
Net cash used in investing activities (485,434) (280,169)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 2,030,542
Repayments of debt and capitalized lease obligations (275,626) (1,990,117)
Net proceeds from sale of Series A preferred stock, common stock, and warrants 1,666,692 810,083
--------- ---------
Net cash provided by financing activities 1,391,066 850,508
--------- ---------
Net Increase (decrease) in cash (2,114) (753,162)
CASH, beginning of period 2,114 1,042,112
--------- ---------
CASH, end of period ($0) $288,950
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $366,118 $160,344
Taxes
$5,998 $5,233
NON-CASH FINANCING ACTIVITIES:
Conversion of convertible debt into Class WC Warrants $100,000 $0
Conversion of convertible debt into Class A Preferred Stock $200,000 $0
Investment - Decor Group, Inc. - issuance of Common A and Pfd. Shares $2,200 $0
Other $0 $63,000
</TABLE>
The accompanying notes are an integral part of these financial statements
6
<PAGE>
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company
without audit, in accordance with generally accepted accounting principles, and
pursuant to the rules and regulations of the Securities and Exchange Commission.
Reference should be made to the Company's financial statements for the year
ended June 30, 1995 for a description of the accounting policies which have been
applied consistently. Also, reference should be made to the notes to the
Company's June 30, 1995 financial statements contained in the Company's Form
10-KSB for the fiscal year ended June 30, 1995, for additional details of the
Company's financial condition, results of operations and cash flows. The details
in those notes have not changed except as a result of normal transactions in the
interim. All adjustments (of normal recurring nature) which are, in the opinion
of management, necessary for a fair presentation of the results of the interim
period have been included. The results of operations for the three and nine
months ended March 31, 1996 are not necessarily indicative of those to be
expected for the entire year. The Company, for the three and nine months ended
March 31, 1996 and 1995, used the gross profit method to value inventory.
2. ACQUISITIONS AND STRATEGIC ALLIANCES
Part of the Company's long term plan for growth includes either the acquisition
of or entering into strategic alliances with unrelated companies in the
decorative accessories industry to maximize market potential. For this purpose,
pursuant to a March 3, 1996 agreement relating to the capitalization of Decor
Group, Inc., ("Decor"), Decor issued to the Company 500,000 shares of Series A
Convertible Preferred Stock and an option to purchase 20,000,000 shares of
Series B Non-Convertible Voting Preferred Stock in exchange for issuance to
Decor by the Company of 200,000 shares of its Class A Common stock and 200,000
shares of its Series A Convertible Preferred stock and a guarantee with respect
to certain indebtedness. Conversion of the 500,000 shares of Series A
Convertible Preferred stock into common stock would give the Company
approximately 16% of the voting stock of Decor as of the date of this filing.
Decor is planning a public offering of certain of its securities within the next
quarter. If, after this public offering is effective, the Company exercises its
option to purchase 20,000,000 shares of Series B Non-Convertible Voting
Preferred Stock, it will own approximately 86.5% of the total voting stock of
Decor. As of the date of this filing, the Company is recording its investment in
Decor at $2,200, which is the par value of the Company's shares issued in
exchange therefor. If the Company exercises its option to purchase 20,000,000
shares of Series B Non-Convertible Voting Preferred Stock of Decor, the date of
such exercise will be the measurement date for determining the valuation of the
Company's investment in Decor to be recorded on the Company's financial
statements.
Pursuant to a March 31, 1996 agreement relating to the capitalization of Decor,
Laurie Munn, wife of the Company's President and Chief Executive Officer was
issued certain shares of the Common Stock of Decor. As of the date of this
filing, Ms. Munn was issued 200,000 shares of the outstanding 2,625,000 common
shares of Decor. As of the date of this filing, Decor is finalizing the
acquisition of a California based manufacturer of metal wall sculpture marketed
to the home furnishing and decorative accessories market. Also, as of the date
of this filing, the
7
<PAGE>
Company is finalizing a management agreement with Decor, whereby the Company
will provide management and administrative support for the companies acquired by
Decor. At March 31, 1996, approximately $77,000 of fees were accrued by the
Company for such services.
As of the date of this filing, Laurie Munn, wife of the Company's President and
Chief Executive Officer, was issued 9 of the outstanding 100 Common shares of
Lance Acquisition Corp ("LAC"), which on March 3, 1996 acquired the assets of
The Lance Corporation ("Lance") a Massachusetts manufacturer and distributor of
various products for the giftware and collectibles marketplace. The Company and
LAC have entered into an agreement whereby each entity will guarantee certain
liabilities of the other. During April 1996, the Company moved the operations of
its Italia Collections Inc. subsidiary ("Italia") to Lance. The Company is
currently finalizing the terms under which Lance will manufacture and support
the entire product line of Italia, which largely consists of ceramic and
porcelain collectibles, mirrors, and other decorative accessories for the home.
As of the date of this filing, the Company has executed no contracts for this
purpose, but anticipates doing so during the month of July 1996. Subsequent to
the move of Italia to Lance, LAC has determined that the overall business
activities of Lance are not consistent with its own longer-term goals. Thus, as
of the date of this filing, LAC is seeking to dispose its holding in Lance. The
Company and LAC intend that any subsequent acquirer of Lance will continue to
support Italia.
3. DISCONTINUATION OF CERTAIN OPERATIONS
On March 31, 1996, Company management decided to discontinue its catalog
operations. As reported in prior filings, reduced revenues and high operating
costs from this operation necessitated a charge against earnings for catalog
write-downs of $350,000 in December 1995. The Company estimates that additional
charges against earnings of $750,000 relating to the discontinuance of the
catalog operation are necessary at March 1996. This charge, recorded in March
1996 will result in total charges relating to the discontinuation of the catalog
operation of $1,100,000. For the nine months ended March 31, 1996, losses from
continuing catalog operations ,will total $423,714. Of this amount, $112,647 was
generated during the quarter ended March 31, 1996. The Company plans to fully
carry out the discontinuation of the catalog operation within one year from
March 31, 1996. Subsequent to that date, the Company plans to wind down
operations by filling existing orders and possibly mailing one final catalog as
a "close-out sale" to liquidate inventory. Subsequently, no new orders will be
accepted and the business will be terminated. At that time no remaining assets
or liabilities are expected to remain on the Company's balance sheet.
4. NOTES PAYABLE
In November 1994, the Company borrowed the sum of $225,000 from an unaffiliated
third party, pursuant to a promissory note due March 30, 1995, together with
interest at the rate of 14% per annum and 5% financing charge. As security for
the obligations under the promissory note, the Company granted a security
interest in and a lien upon all real property, personal property and fixtures of
the Company then owned or subsequently acquired. Said lien was subordinate to
the lien of a New York Bank. In addition, Max Munn, the President and his wife
and a director
8
<PAGE>
and his wife, an Executive Vice President, each executed a personal guaranty of
the Company's obligations under the promissory note. On April 21, 1995, the
Company entered into an agreement to restructure the terms of the promissory
note. The security interest, liens, and guarantees previously granted continued
pursuant to the restructuring. On April 24, 1995, the Company paid the lender
$25,000 principal plus $13,010 of accrued interest. The promissory note was due
October 20, 1995. The note bore interest at the rate of 14% payable monthly. The
promissory note was convertible in whole or in part into a maximum of 80,000
shares of the Preferred Stock, and on December 15, 1995, such conversion took
place.
In June and July 1995, the Company delivered to unaffiliated parties promissory
notes in the aggregate amount of $300,000 with interest at the rate of 10% per
annum (the 10% Notes) and promissory notes in the principal amount of $100,000
with interest at the rate of 6% per annum (the 6% Notes). The 10% Notes and 6%
Notes were each payable in June and July, 1996 or the closing of the sale by the
Company of an issue of Preferred Stock whichever is earlier. The 6% Notes were
convertible, in whole or in part, at the option of the holder, into a maximum of
2,000,000 WC Warrants entitling the holders for a period of five years to
purchase one share of Preferred Stock per Warrant at a price of $5.50 per share.
These Warrants are redeemable by the Company. The Notes are secured by a lien on
the Company's assets. In September 1995 the Company repaid all 10% notes in
full, plus all accrued interest for both the 10% Notes and 6% Notes. All holders
of 6% notes have opted to convert, in full, into a total of 2,000,000 WC
Warrants, which were registered in a Registration Statement declared effective
by the Securities and Exchange Commission on September 18, 1995 (See Note 5).
On October 16, 1995, the Company entered into a new agreement to restructure a
promissory note dated May 1995, with the principal amount of $500,000 bearing
interest at the rate of 18% per annum with the principal which was due and
payable in full on September 30, 1995 and a $150,000 note dated May 12, 1995,
bearing interest at the rate of 18% payable monthly with 135% of the principal
which was also due and payable in full on September 30, 1995 with a Nevis, BWI
Corporation. As of October 16, 1995 the parties agreed the Company owed the
lender, including interest and monthly extension fees of approximately $102,500
through December 15, 1995, an aggregate amount of approximately $805,000.
According to the new agreement, the Company paid $405,000 to the Nevis BWI
Corporation upon acceptance of the agreement, The Company also delivered a
Promissory Note in the principal amount of approximately $400,000, in extension
and replacement of the remaining balance due payable of $180,000 on or before
December 15, 1995 and $220,000 on July 31, 1996. The new agreement also
stipulates that the lender shall sell the 180,000 shares of the Company's Class
A Common Stock, owned by the lender and held in escrow, for $180,000 to an
unaffiliated third party designated by the Company. This sale took place in
January 1996. In addition, during December 1995 the Company issued 35,000 shares
of Class A Common Stock to the lender (such shares carry registration rights.)
The Note is also guaranteed by Max Munn, the President of the Company.
5. COMMITMENTS AND CONTINGENCIES
Consulting and Employment Agreements
9
<PAGE>
On October 27, 1995 the Company entered into a one year employment agreement
with the Vice President, Operations with an annual base salary of $120,000. The
Agreement may be terminated by the Company with a payment of 50% of the
employee's salary remaining under the agreement or a payment of six week's
salary in the event the employee resigns from the Company. The Agreement also
provides for the employee to be granted certain stock options to purchase an
aggregate of 100,000 Class A Shares, 50,000 of which to be granted and vested
immediately at a price of $2.00 per share, exercisable in six months from the
date of grant, and any attempt to exercise these options during the exercise
period will terminate the options granted on September 16, 1994; options to
purchase 25,000 shares at a price of $4.00 per share to be granted on the second
anniversary; and options to purchase 25,000 shares at a price of $5.00 per share
to be granted on the third anniversary. The Agreement also provides for a bonus
program based on the Company meeting certain minimum profit goals. In April
1996, the employment of the Vice President, Operations was terminated. The
Company will settle its obligations to the employee during the subsequent
quarter. This settlement will be in the form of severance payments totalling
approximately $27,000. No securities have been issued to the employee, nor will
they be as part of the settlement.
In August 1995, the Company entered into a four year employment agreement with
the Executive Vice President, with an annual salary of $150,000. In addition, on
or about September 30, 1995, the agreement provided for the Executive Vice
President to receive a one time payment at the Company's option of either,
$50,000 or 50,000 shares of Class A Common Stock. As of the date of this filing,
this one time payment has not been made. This person is also entitled to receive
stock options, stock bonuses and other equity instruments in an amount equal to
that of which is received by Max Munn, the President or members of his immediate
family.
As part of the Italia acquisition during fiscal year ended June 30, 1995, The
Company entered into various consulting and employment agreements aggregating
$176,000 per annum. The agreements were subject to termination at any time by
Italia for reasons specified in the agreements. In July 1995, the employment
agreement for the President of Italia, as well as all other agreements, were
terminated by the Company.
On February 15, 1996, the Company's Board of Directors agreed to enter into a
four-year employment agreement between the Company and its President and Chief
Executive Officer. The agreement will provide an annual base salary of $150,000,
with annual increases of 10%. Such increases will be subject to the attainment
of profitable results of operations by the Company. In addition, the agreement
will grant the President and Chief Executive Officer an option to purchase at
any time 150,000 shares of the Company's Series A, 10% Cumulative Convertible
Preferred Stock at a price of $2.50 per share. The exercise of this option, as
well as any subsequent conversion to the Company's Class A Common Stock, will
require the prior approval of the Company's investment banker. The agreement
will also contain a "non-compete" clause and provide the President and Chief
Executive Officer with life insurance and the use of an automobile. As of the
date of this filing, the document for this agreement has not been finalized or
executed. This is expected to occur during the subsequent quarter. Presently,
the President
10
<PAGE>
and Chief Executive Officer draws an annual salary of $150,000 and has the use
of an automobile provided by the Company.
Legal Matters
On October 13, 1995, Ted Stevens, individually, as a Shareholder and Director
and Morris Munn, individually and as a Director and on behalf of themselves and
all other similarly situated Shareholders and Directors of Interiors, Inc.,
filed a complaint in the Supreme Court of the State of New York, County of
Westchester, against the Company, Max Munn, Richard Josephberg, Roger Lourie and
Steven Morse seeking, among other things, to enjoin Max Munn from serving as
President and Chief Executive Officer and seeking to enjoin Messrs. Josephberg
and Morse from serving as Directors. Further, they are seeking unspecified
damages. Mr. Steven Morse has since resigned as a director of the Company. The
Plaintiffs have moved for a preliminary injunction, and this motion was denied.
On November 9, 1995, Max Munn filed a complaint in the Court of Chancery of the
State of Delaware in and for New Castle County, against the Company, Ted
Stevens, Morris Munn and Sidney Burns seeking, among other things, a summary or
expedited proceeding directing the Company to hold an Annual Meeting of its
Stockholders and setting the record date for the determination of Stockholders
entitled to vote at the meeting. In May 1996, the Court set the date of the
Company's annual meeting at June 21, 1996 for shareholders of record at April
10, 1996. The Company held the meeting at its offices on this date.
On December 1, 1995, Ted Stevens filed a complaint in United States District
Court, Southern District of New York against Laurie Munn and American Stock
Transfer & Trust Company seeking, among other things, the equitable recision of
a stock sale agreement between Mr. Stevens and Ms. Munn and return of the
269,500 Class B Common shares of stock sold by Mr. Stevens to Ms. Munn, together
with punitive and compensatory damages. Mr. Stevens moved for a preliminary
injunction to prohibit Ms. Munn from voting her shares during the action. On
February 29, 1996, the Court held that Mr. Stevens did not have the right to
recision and denied Mr. Stevens' motion for a preliminary injunction. On April
17, 1996, the Court dismissed the action for lack of subject matter jurisdiction
because it was for less than the jurisdictional minimum amount.
On December 12, 1995, Ann Stevens filed a complaint in United States District
Court, Southern District of New York (now pending in the Supreme Court of New
York, County of Nassau) against Interiors, Inc., Italia Collection, Inc., Max
Munn, Robert Schildkraut, Roger Lourie, Richard Josephberg, and Michael
Freehling seeking, among other things, compensatory damages of $734,694 and
punitive damages of $3,000,000 arising out of the alleged breach of Ann Stevens'
Employment Agreement. On January 26, 1996, this motion was discontinued in
Federal Court and recommenced in the Supreme Court of the State of New York,
County of Nassau. A motion to dismiss all but her breach of contract cause of
action was served on February 19, 1996 and is pending as of the date of this
filing.
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On April 23, 1996, Ted Stevens filed a complaint in the Court of Chancery of the
State of Delaware against Max Munn, Michael Amore, Donald Feldman, Richard
Josephberg, and Roger Lourie and Interiors, Inc., seeking, among other things,
the recision of a stock sale agreement between the Company and Laurie Munn for
the sale of 250,000 shares of the Company's Class B Common stock to Ms. Munn,
voiding the results of any election at a shareholders meeting should the company
hold such a meeting during the pendency of this complaint, requiring the
immediate repayment with interest to the company of a loan made by the company
to Mr. Munn on February 8, 1996 for $39,305.42, plus damages and expenses. This
action is brought as a derivative and class action suit. The company and the
individual defendants consider this complaint to be without merit and will
vigorously defend the action.
The Company is subject to other claims and litigation in the ordinary course of
business. In Management's opinion, such claims are not material to its financial
position or its results of operations.
6. SHAREHOLDERS' EQUITY
On April 13, 1995, the Company lowered the price at which its Class WA Warrants
may be converted into Class A Shares from $5.17 per share to $1.50 per share,
subject to 30 days notice to all warrant holders and the filing by the Company
of an amended Registration Statement, and the Securities and Exchange Commission
declaring such Registration Statement, as amended, effective. The Company has
filed such amendment with the Securities and Exchange Commission on May 15, 1995
and the Commission declared it effective on June 15, 1995. As of the date of
this filing, none of the subject warrants have been exercised and the amended
Registration Statement is no longer effective because financial information
included therein is not current. The Company plans to refile an amended
Registration Statement with the Securities and Exchange Commission during June
1996 for this purpose.
In September 1995, the Company's "Registration Statement" with respect to
460,000 shares of Series A, 10% Cumulative Convertible Preferred Stock
("Preferred Stock"), and 230,000 Redeemable Class WC Warrants ("Warrants") to
purchase Preferred Stock at the exercise price of $5.50 per share was declared
effective by the Securities and Exchange Commission. Each share of Preferred
Stock is convertible commencing one year from the date of issue, subject to
adjustment, into three shares of Class A Common Stock of the Company. On May 5,
1995 the former President was reappointed as President, Chief Executive Officer
and Treasurer of the Company in connection with this offering. In September
1995, upon completion of the Preferred Offering, the President resigned. The net
proceeds from this Offering were approximately $1,633,000, including
over-allotments.
In December 1995, pursuant to the terms of a promissory note, the holder of such
note converted the note into 80,000 shares of Preferred Stock. Also in December
1995, pursuant to the terms of a promissory note, 35,000 shares of the Company's
Class A Common Stock were issued to the lender. Approximately $25,000 was
charged against earnings during the quarter ended December 31, 1995 in
conjunction with the issuance of these shares. (See Note 4. Notes Payable.)
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In December 1995, in consideration for certain services rendered, 10,000 shares
of the Company's Class A Common Stock were issued to various individuals.
Approximately $7,000 was charged against earnings during the quarter ended
December 31, 1995 in conjunction with the issuance of these shares.
In August 1995, the Company has agreed to issue, at a future date, 60,000 Class
A Common shares in settlement of all current and future liabilities under a
two-year Marketing and Organizational Agreement (the "Marketing Agreement") with
a consulting firm dated January 4, 1994. These shares, which bear a restrictive
legend, were issued on April 16, 1996. In conjunction with the issuance of these
shares, approximately $55,000 of charges against earnings are necessary and were
fully accrued in December 1995.
In January 1996, pursuant to the terms of restructure of a promissory note,
180,000 shares of the Company's Class A Common Stock, owned by the lender and
held in escrow, were sold to unrelated investors. (See Note 4. Notes Payable.)
In January 1996, the Company's Board of Directors elected to lower the exercise
price of the Company's Class WB Warrant to $2.00 per Class A Common share,
subject to the filing and effectiveness of a Registration Statement with the
Securities and Exchange Commission. The Company expects to file such statement
during July 1996.
In February 1996, the Company's Board of Directors declared a stock dividend
equivalent to $0.25 per share to its Series A 10% Cumulative Convertible
Preferred Stockholders of record as of the close of business on February 23,
1996 (the record date). Payment was made on March 1, 1996 by the issuance of
0.10231 of a share of the Company's Class A Common Stock for each share of
Series A Preferred Stock held of record on the record date. Accordingly, 55,247
shares of the Company's Class A Common Stock was issued for this purpose.
Retained earnings was charged $165,741 in March 1996 in conjunction with the
issuance of these shares.
In February 1996, the Company's Board of Directors approved the issuance to Sol
Munn of 150,000 shares of the Company's Class A Common Stock, in consideration
for past consulting services provided. These shares, which bear a restrictive
legend, were issued on April 12, 1996. In conjunction with the issuance of these
shares, approximately $138,000 of charges against earnings are necessary and
were fully accrued in December 1995.
On March 3, 1996, the Company acquired 500,000 shares of Series A Convertible
Preferred Stock and an option to purchase 20,000,000 shares of Series B
Non-Convertible Voting Preferred Stock of Decor Group, Inc., ("Decor") in
exchange for issuance to Decor by the Company of 200,000 shares of its Class A
Common stock and 200,000 shares of its Series A Convertible Preferred stock and
a guarantee with respect to certain indebtedness. Conversion of the 500,000
shares of Series A Convertible Preferred stock into common stock would give the
Company approximately 16% of the voting stock of Decor as of the date of this
filing. Decor is planning a public offering of certain of its securities within
the next quarter. If, after this public offering is effective, the Company
exercises its option to purchase 20,000,000 shares of Series B Non-
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Convertible Voting Preferred Stock, it will own approximately 86.5% of the total
voting stock of Decor. The holding in Decor will be accounted for as an
investment at cost on the books of the Company. It also will be accounted for as
a non-cash financing activity.
In April 1996, the Company's investment banking firm arranged for the private
placement of 175,000 shares of the Company's Common A Stock and 50,000 shares of
the Company's Series A Preferred Stock. These shares were issued on April 24,
1996 to various unrelated investors generating gross proceeds of $431,251. The
Company realized net proceeds of $310,609 which was used to pay certain
outstanding liabilities.
On April 4, 1996, the Company's Board of Directors resolved to issue 250,000
shares of the Company's Class B Common Stock to Laurie Munn, wife of the
Company's President and Chief Executive Officer. This issuance is in
consideration for a down payment of $250, Ms. Munn's 6.6% note to the Company
providing for principal of $437,500 to be paid to the Company in five equal
annual installments of $105,561.90, and Ms. Munn's guaranty and pledge of her
assets for certain Company debt. The shares were issued to Ms. Munn on April 8,
1996. Ms. Munn has executed a Promissory Note and Security Agreement in
conjunction with the issuance of these shares. Copies of these documents are
included with this filing.
In July 1996, the Company will enter into a consulting agreement with Morris
Munn, father of the Company's President and Chief Executive Officer, in exchange
for certain services. As part of this agreement, the Company will issue to
Morris Munn options to purchase up to 350,000 shares of the Company's series A
preferred shares.
Item 2. Management's Discussion
The following discussion should be read in conjunction with the information
contained in the financial statements of the Company (the "Financial
Statements") and the Notes (the "Notes") thereto appearing elsewhere herein and
in conjunction with the Management's Discussion and Analysis set forth in the
Company's Form 10-KSB for the fiscal year ended June 30, 1995, which discussion
is incorporated herein by reference.
Results of Operations
The Company's net sales for the quarter ended March 31, 1996, increased by
$185,000 or 10.8% to $1,892,000 (including $136,000 of revenue from discontinued
operations - Note 3) from $1,707,000 for the quarter ended March 31, 1995. The
Company's net sales for the first nine months ended March 31, 1996 increased by
$574,000 or 11.0% to $5,776,000 (including $743,000 of revenue from discontinued
operations - Note 3) from $5,202,000 for the nine months ended March 31, 1995.
Net sales for the A.P.F. Master Framemakers division for the quarter ended
March 31, 1996, increased by 526,000 or 53.5% to $1,509,000 from $983,000 for
the quarter ended March 31, 1995. Net sales for the A.P.F. Master Framemakers
division for the nine months ended
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March 31, 1996 increased by $535,000 or 20.5% to $3,144,000 from $2,609,000 for
the nine months ended March 31, 1995. Net sales for the Interiors Catalog
division, which will be discontinued (Note 3) for the quarter ended March 31,
1996, decreased by $163,000 or 54.5% to $136,000 from $299,000 for the quarter
ended March 31, 1995. Net sales for the Interiors Catalog division for the nine
months ended March 31, 1996 decreased by $1,032,000 or 58.1% to $743,000 from
$1,775,000 for the nine months ended March 31, 1995. The decreases for both
comparative periods was largely due to the generally high operating costs
associated with catalog operations. It is for this reason that this business
activity will be discontinued, as discussed at Note 3. Net sales of Italia
Collection for the quarter ended March 31, 1996 decreased by $176,000 or 41.6%
to $247,000 from $423,000 for the quarter ended March 31, 1995. This decrease
was largely due to the relocation of Italia Collection to Massachusetts during
the quarter (See Note 2.) Net sales of Italia Collection for the nine months
ended March 31, 1996 totalled $1,889,000. During the prior period, net sales of
Italia Collection from the date of acquisition (October 21, 1994) to March 31,
1995 totalled $747,000.
The Company's cost of goods sold as a percentage of net sales (including
discontinued operations discussed at Note 3) increased to 50% for the nine
months ended March 31, 1996, from 42% for the nine months ended March 31, 1995.
The reduced margins are largely due to inventory charges relating to the
discontinuance of operations (Note 3.) The Company used, during the nine months
ended March 31, 1996 and 1995, the gross profit method to value inventory.
Selling, general and administrative expenses for the nine months ended
March 31, 1996, at $2,834,000 (including expenses for discontinued operations
discussed at Note 3 totalling $713,000) were $96,000 higher than the nine months
ended March 31, 1995. But because revenues were correspondingly greater, the
percent of expenses to revenues decreased in the current period to 49% versus
53% for the prior period. Selling, general and administrative expenses for the
three months ended March 31, 1996 (including expenses for discontinued
operations discussed at Note 3 totalling $171,000) were $59,000 higher than the
three months ended March 31, 1995. But because revenues were correspondingly
greater, the percent of expenses to revenues decreased in the current period to
52% versus 55%. Interest expense as a percentage of sales increased to 6.3% for
the nine months ended March 31, 1996 versus 4.7% for the nine months ended March
31, 1995, primarily due to the impact of carrying Italia's debt, and the
recording of finance charges pursuant to the restructuring of certain notes
outstanding. Such restructuring took place on October 16, 1995. For the three
months ended March 31, 1996, interest expense totalled $72,000 versus $81,000
for the three months ended March 31, 1995.
During the quarter ended March 31, 1996, non-cash charges of $750,000 were
reported against earnings for the discontinuance of catalog operations. During
the prior quarter, $350,000 of such charges were recorded. This total charge of
$1,100,000 is pursuant to management's decision to discontinue the catalog
operation as of March 31, 1996 (See Note 3.) During the quarter ended December
31, 1995, non-cash charges against earnings of $200,000 for the future issuance
of equity instruments to various consultants was recorded. As disclosed
elsewhere in this filing, these securities were issued in April 1996 and the
actual charges relating thereto total $193,200. Adjustment of $6,800 was
recorded in March 1996.
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For the three months ended March 31, 1996, the Company realized a net loss
of approximately $859,000 or $0.33 per share, as compared to net income of
approximately $18,000 or $0.01 per share for the three months ended March 31,
1995. For the nine months ended March 31, 1996, the Company realized a net loss
of approximately $1,630,000 or $0.63 per share, as compared to net income of
approximately $73,000 or $0.04 per share for the nine months ended March 31,
1995. For the three months ended March 31, 1996, income from continuing
operations totalled approximately $3,000 versus approximately $18,000 for the
three months ended March 31, 1995. For the nine months ended March 31, 1996,
loss from continuing operations totalled approximately $106,000 versus income
from continuing operations during the nine months ended March 31, 1995 totalling
approximately $73,000.
Liquidity and Capital Resources
At March 31, 1996, no cash balances were recorded as compared to
approximately $2,000 at June 30, 1995. Net cash used in operating activities
totalled approximately $908,000 for the nine months ended March 31, 1996 as
compared to $1,324,000 for the nine months ended March 31, 1995. For the nine
months ended March 31, 1996, the operating cash outflow was largely due to the
period's net loss, together with increases in inventories and accounts
receivable, decreases in accounts payable and accrued expenses, and partially
offset by the addback of non-cash charges to earnings (i.e. - provisions for
depreciation, amortization, discontinuation of operations, and the issuance of
stock).
Net cash used in investing activities totalled $483,000 for the nine months
ended March 31, 1996 as compared to $280,000 for the nine months ended March 31,
1995. This increase in investing activities was primarily due to the assets
acquired through the purchase of Italia.
Net cash provided by financing activities totalled $1,389,000 for the nine
months ended March 31, 1996, compared to $851,000 for the nine months ended
March 31, 1995. The increase is largely due to the net proceeds from the sale of
460,000 shares of Series A Preferred Stock that were registered by the Company
in September 1995. This enabled the retirement of $276,000 of debt during the
current period, versus the need to increase debt in the prior period of
approximately $41,000.
As of March 31, 1996, working capital was $796,000, as compared to a small
deficit as of June 30, 1995. During the nine months ended March 31, 1996, trade
accounts receivable increased $149,000, essentially due to the increased
revenues of the current period. Accounts payable and accrued liabilities for
March 31, 1996 decreased $317,000 during the nine months ended March 31, 1996.
During the current year, the Company conducts business activities largely on a
cash basis. This, together with the ongoing settlement of open liabilities has
led to an overall reduction of such liabilities.
In July 1994 the Company replaced its financing arrangement with a bank
line of credit of up to $950,000 with a New York Bank following the Company's
Initial Public Offering. Such borrowings are based on receivables and inventory.
The borrowings under such line of credit are
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secured by a lien on all personal property and fixtures of the Company and
personally guaranteed by certain of the Company's executive officers. The
Company has agreed with the bank to reduce the line of credit by $10,000 per
month. At March 31, 1996, the line of credit was reduced to $940,000. As of the
date of this filing, the line of credit has been reduced to $920,000. This line
of credit bears interest at a rate of prime plus 1% (9.25% as of the date of
this filing.) The Company is also seeking alternative sources of financing to
ultimately fully replace the current line of credit, but there can be no
assurance it will be able to do so.
In connection with the Company's plan to restructure its wholesale
business, the Company, through its wholly owned subsidiary, Italia Collection,
Inc. ("Italia Collection"), acquired the businesses of two privately held
Florida-based companies, Murano Crystal Corp. ("Murano") and Ceramic
Productions, Corp. ("CPC"), which manufacture and market upscale decorative
ceramic accessories to the home furnishings industry through a showroom in High
Point, North Carolina and a network of sales representatives. Closing on such
acquisitions occurred on October 21, 1994. These acquisitions were accounted for
under the purchase method of accounting. In connection therewith, the Company
agreed to pay the seller on the basis of a formula purchase price computed as a
factor of future earnings from continuing operations, subject to certain
adjustments and offsets in cash and/or Class A Shares. As of the date of this
filing, no payments have been made to the seller for this acquisition, nor have
any liabilities for such payment been recorded on the Company's books. The
parties are currently in dispute regarding the nature and amount, if any, of the
consideration necessary. Discussions are currently in progress. Upon resolution
of these discussions, appropriate payments will be made and recorded on the
Company's books.
On February 15, 1995, Italia Collection entered into a Financing Agreement
with a New York based secured lender whereby Italia Collection may borrow
pursuant to an asset-related formula. The agreement remains in effect as of the
date of this filing, and may be terminated by either party upon notice to the
other and payment of the commitment fee for the unexpired term of this
agreement. Although the Company is currently pursuing the alternative financing
agreements, as of the date of this filing no such arrrangements have been
finalized. According to the current agreement, the lender, upon confirmation of
shipments, will advance Italia Collection 70% of the receivable. Upon collection
of the receivable, the lender remits the balance of 30%. Interest is calculated
on the daily cash balance at the rate of prime plus 9% per annum (17 1/4% as of
the date of this filing) or a minimum of 18% per annum against a minimum monthly
defined compensation of $3,000. As of March 31, 1996, the amount due to the
lender was approximately $762,000. In addition, the secured lender received
personal guarantees from the President, Max Munn, of the Company and his spouse.
During February 1996, the Company's President and Chief Executive Officer
arranged for $160,000 additional financing from this lender at the rates in
effect for existing loans. The President and Chief Executive Officer, and his
spouse, have provided personal guarantees for this additional funding, in
addition to a security interest in certain real estate and Company stock owned
by his spouse. Of these proceeds, approximately $121,000 was used to pay
outstanding tax liabilities. The balance of the proceeds, was loaned by the
Company to the President and Chief Executive Officer. A demand loan dated
February 8, 1996, bearing an annual rate of interest of 18%, was executed by the
President and Chief Executive Officer, and countersigned by the Chief Financial
Officer. On May 13, 1996, the
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Company's Board of Directors affirmed the loan by the Company to its President
and Chief Executive Officer. The principal balance of the loan is expected to be
largely offset by unreimbursed business expenses generated by the President and
Chief Executive Officer during the past two years. An accounting of these
expenses will be made during July 1996. To the extent that a balance remains,
this balance will be repaid to the company in equal installments over one year,
at an annual interest rate of 18%.
During the month of February 1996, the Company finalized negotiations with
the Internal Revenue Service (the service) for the payment of outstanding tax
liabilities. The agreement will require the Company to pay approximately $9,000
per month for approximately 14 months for this purpose. The Company executed an
agreement with the service in March 1996 for this purpose.
On November 23, 1994, the Company borrowed the sum of $225,000 from
Ekistics Corp., a Bahamian corporation, pursuant to a promissory note due March
30, 1995, together with interest at the rate of 14% per annum and a 5% financing
charge. In April 1995, the Company paid $25,000, plus interest on account of the
principal amount of said Note and entered into a revised note for the $200,000
balance with such revised note providing for payment of principal on October 20,
1995, having an interest rate of 14% per annum and being convertible into 80,000
shares of Preferred Stock and 40,000 Class WC Warrants. On December 15, 1995,
this conversion took place. The 80,000 Preferred Shares and 40,000 WC Warrants
were registered in a Registration Statement declared effective September 18,
1995.
In August 1995, the Company has agreed to issue, at a future date, 60,000
Class A Common shares in settlement of all current and future liabilities under
a two-year Marketing and Organizational Agreement (the "Marketing Agreement")
with a consulting firm dated January 4, 1994. These shares were issued on April
16, 1996. This consultant agreed to arrange to have a secured lender restructure
its $225,000 secured loan with the Company. The consultant has also arranged for
the sale of 330,000 registered Class A shares of Theodore Stevens. Mr. Stevens
is a principal stockholder and Director of the Company.
In June and July 1995, the Company delivered to unaffiliated parties
promissory notes in the aggregate amount of $300,000 with interest at the rate
of 10% per annum (the "10% Notes") and promissory notes in the principal amount
of $100,000 with interest at the rate of 6% per annum (the "6% Notes"). The 10%
Notes and 6% Notes were each payable in June and July, 1996 or the closing of
the sale by the Company of an issue of Preferred Stock, whichever is earlier.
The 6% Notes were convertible, in whole or in part, at the option of the holder,
into a maximum of 2,000,000 WC Warrants entitling the holders for a period of
five years to purchase one share of Preferred Stock per Class Warrant at a price
of $5.50 per share. These Warrants are redeemable by the Company. The Notes were
secured by a lien on the Company's assets. In September 1995 the Company repaid
all 10% Notes in full, plus all accrued interest for both the 10% Notes and 6%
Notes. All holders of 6% Notes have converted in full, into a total of 2,000,000
Class WC Warrants, which were registered in a Registration Statement declared
effective by the Securities and Exchange Commission on September 18, 1995.
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In September 1995 the Company issued 460,000 shares Series A, 10%
Cumulative Convertible Preferred Stock ("Preferred Stock"), and 230,000
Redeemable Class WC Warrants ("Warrants") to purchase Preferred Stock at the
exercise price of $5.50 per share. Each share of Preferred Stock is convertible,
commencing one year from the date of issue, subject to adjustment, into three
shares of Class A Common Stock of the Company. On May 5,1995 Mr. Ted Stevens was
reappointed as President, Chief Executive Officer and Treasurer of the Company
in connection with this offering. In September 1995, upon completion of the
Preferred Offering, Mr. Stevens resigned. The net proceeds from this Offering
were approximately $1,633,000, including over-allotments.
In September 1995, the Company lowered the exercise price of the Company's
Class WA Warrant to $1.50 per share and arranged to place 180,000 shares of the
Company's Class A shares which were previously sold pursuant to a Regulation S
private placement into escrow and to be repurchased by the Company over the next
12 months. These shares were sold in January 1996 to unrelated parties pursuant
to a restructuring of a note payable by the Company to the holder of these
shares as discussed below.
On October 16, 1995, the Company entered into an agreement to restructure a
promissory note dated May 1995, with the principal amount of $500,000 bearing
interest at the rate of 18% per annum with the principal which was due and
payable in full on September 30, 1995 and a $150,000 note dated May 12, 1995,
bearing interest at the rate of 18% payable monthly with 135% of the principal
which was also due and payable in full on September 30, 1995 with a Nevis, BWI
Corporation. As of October 16, 1995 the parties agreed the Company owes the
lender, including interest and monthly extension fees of approximately $102,500
through December 15, 1995, an aggregate amount of approximately $805,000.
According to the new agreement, the Company paid $405,000 to the Nevis
Corporation upon acceptance of the agreement, The Company also delivered a
Promissory Note in the principal amount of approximately $400,000, in extension
and replacement of the remaining balance due payable of $180,000 on or before
December 15, 1995 and $220,000 on July 31, 1996. The new agreement also
stipulates that the lender shall sell the 180,000 shares of the Company's Class
A Common Stock, owned by the lender and held in escrow, for $180,000 to an
unaffiliated third party. The proceeds of such sale will be applied against the
note and was scheduled to occur prior to December 15, 1995. The stock sale took
place in January 1996. In Addition, during December 1995, the Company issued to
the lender 35,000 unregistered shares of Class A Common Stock. Such shares shall
be afforded a piggyback registration right for all registration statements filed
by the Company before July 31, 1996 and a one time demand registration right
commencing after July 31, 1996. The note is also guaranteed by Max Munn, the
President of the Company.
In April 1996, the Company's investment banking firm arranged for the
private placement of 175,000 shares of the Company's Common A Stock and 50,000
shares of the Company's Series A Preferred Stock. These shares were issued on
April 24, 1996 to various independent investors generating gross proceeds of
$431,251. The Company realized net proceeds of $310,609 which was used to pay
certain outstanding liabilities.
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Except as otherwise set forth herein, the Company has no material
commitments for capital expenditures other than for ordinary expenses incurred
during the usual course of business. In order to fund growth over the long term,
the Company anticipates possible future issuance of its securities resulting in
further dilution to its security holders.
Management believes that cash flow from operations as they currently exist
are not sufficient to support such operations. Accordingly, Company management
is now identifying and implementing the corrective changes deemed necessary. Two
important actions, as disclosed elsewhere in this filing are the discontinuation
of its catalog business, and the relocation of its Italia operation. The Company
has also reduced staffing during the quarter ended March 31, 1996 to generate
payroll cost savings. In addition, the company is actively pursuing additional
financing to provide an immediate benefit.
The Company has no current plans to employ financing strategies which will
materially affect the Company's operating results or financial condition, other
than those disclosed herein.
While the Company operates pursuant to a policy that generally precludes
acceptance of goods on a non-cash basis (sometimes known as barter
transactions), the Company does from time to time execute upon goods provided by
a customer in the event of non-payment by that customer.
Impact of Inflation
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in supplies
and other operating costs could adversely affect the Company's operations.
However, the Company believes it could increase prices to offset increases in
cost of goods sold or other operating costs.
Sales Variations
Although the Company's net sales are not subject to seasonality
fluctuations experienced by certain retailers, the Company experiences some
minor variations in the level of sales by quarter. The first quarter of the
fiscal year (i.e., July 1 through September 30) is generally the Company's
slowest sales period due to the fact that the summer period is typically the
period when art galleries are at their slowest purchasing period and the
Company's catalog mailings are reduced. During this period, the Company's
warehouse and factory closes for three to five days to take the annual physical
inventory and to consolidate vacation periods for the Company's employees. On
the other hand, the Company's sales during its second quarter (October 1 through
December 31) modestly exceed each of the Company's other three quarters due to a
greater number of catalog orders received during the Christmas holiday period.
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PART II
OTHER INFORMATION
Item 1. Legal Proceeding
On or about May 11, 1995, Hideo Tashiro commenced a lawsuit against
Interiors, Inc. and others, by filing a motion for summary judgment in lieu of a
complaint. Mr. Tashiro demands a sum of $75,000 in repayment of a loan to Decor
Holdings, Inc., together with interest and attorney's fees. The loan was
guaranteed by A.P.F. Holdings, Inc., predecessor to Interiors, Inc. The Company
believes it has meritorious defenses and intends to vigorously defend against
the claim. On April 23, 1996, the Court denied Mr. Tashiro's motion for summary
judgement.
The Company in April 1992 borrowed $150,000 from Hideo Tashiro and $150,000
from Takehisa Nishijima evidenced by promissory notes due July 1, 1995.
Subsequent to June 30, 1995, Mr. Tashiro commenced an action by motion for
summary judgement in lieu of a complaint for the alleged failure by the Company
to pay the sum of $150,000 with interest and cost. The motion was denied , and
the Court held that there was an issue of fact to be tried.
In July 1995, the Company through its attorneys made demand against Morgan
Steel Ltd. which is located on the Isle of Man, England, for the payment of
$362,507 on account of a perceived violation of Section 16(b) of the Securities
and Exchange Act. No response to said demand for payment has been made to date.
On May 23, 1996, the Company's Board of Directors resolved that the Company and
its officers and directors undertake no action given the uncertainty of the
cost, collectibility, and ultimate legal liability of Morgan Steel Ltd., either
in the United States or the Isle of Man.
Gear Holdings, Inc. claims that it is owed license fees by Italia in an
amount in excess of $40,000. Italia is investigating the merits of this claim,
and believes that it does not have a liability to Gear Holdings, Inc.
On or about December 23, 1994, Merrill Corporation brought action against
the Company for $55,672.80 plus interest and attorney's fees relating to the
printing of the Company's registration statement. The Company maintains that
Merrill billed approximately five times the price estimate and that bills were
unreasonable. Merrill moved for summary judgement, and the motion was denied.
This action has been settled subject to review and execution of a stipulation of
settlement. The parties have agreed in principle to a settlement.
On October 13, 1995 Ted Stevens, individually, as a Shareholder and
Director and Morris Munn, individually and as a Director and on behalf of
themselves and all other similarly situated Shareholders and Directors of
Interiors, Inc., filed a complaint in the Supreme Court of the State of New
York, County of Westchester, against the Company, Max Munn, Richard Josephberg,
Roger Louire and Steven Morse seeking, among other things, to enjoin Max Munn
from serving as President and Chief Executive Officer and seeking to enjoin
Messrs. Josephberg and Morse
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from serving as Directors. Further, they are seeking unspecified damages. Mr.
Steven Morse has since resigned as a director of the Company. The Plaintiffs
have moved for a preliminary injunction, and this motion was denied. On November
9, 1995, Max Munn filed a complaint in the Court of Chancery of the State of
Delaware in and for New Castle County, against the Company, Ted Stevens, Morris
Munn and Sidney Burns seeking, among other things, a summary or expedited
proceeding directing the Company to hold an Annual Meeting of its Stockholders
and setting the record date for the determination of Stockholders entitled to
vote at the meeting. In May 1996, the Court set the date of the Company's annual
meeting at June 21, 1996 for shareholders of record at April 10, 1996. The
Company held the meeting at its offices on this date.
On December 1, 1995, Ted Stevens filed a complaint in United States
District Court, Southern District of New York against Laurie Munn and American
Stock Transfer & Trust Company seeking, among other things, the equitable
recision of a stock sale agreement between Mr. Stevens and Ms. Munn and return
of 269,500 Class B Common shares of stock sold by Mr. Stevens to Ms. Munn,
together with punitive and compensatory damages. Mr. Stevens moved for a
preliminary injunction to prohibit Ms. Munn from voting her shares during the
action. On February 29, 1996, the Court held that Mr. Stevens did not have the
right to recision and denied Mr. Stevens' motion for a preliminary injunction.
On April 17, 1996, the Court dismissed the action for lack of subject matter
jurisdiction because it was for less than the jurisdictional minimum amount.
On December 12, 1995, Ann Stevens filed a complaint in United States
District Court, Southern District of New York (now pending in the Supreme Court
of New York, County of Nassau) against Interiors, Inc., Italia Collection, Inc.,
Max Munn, Robert Schildkraut, Roger Lourie, Richard Josephberg, and Michael
Freehling seeking, among other things, compensatory damages of $734,694 and
punitive damages of $3,000,000 arising out of the alleged breach of Ann Stevens'
Employment Agreement. On January 26, 1996, this action was discontinued in
Federal Court and recommenced in the Supreme Court of the State of New York,
County of Nassau. A motion to dismiss all but her breach of contract cause of
action was served on February 19, 1996 and is pending as of the date of this
filing.
On April 23, 1996, Ted Stevens filed a complaint in the Court of Chancery
of the State of Delaware against Max Munn, Michael Amore, Donald Feldman,
Richard Josephberg, and Roger Lourie and Interiors, Inc., seeking among other
things, the recision of a stock sale agreement between the Company and Laurie
Munn for the sale of 250,000 shares of the Company's Class B Common stock to Ms.
Munn, voiding the results of any election at a shareholders meeting should the
company hold such a meeting during the pendency of this complaint, requiring the
immediate repayment with interest to the company of a loan made by the company
to Mr. Munn on February 8, 1996 for $39,305.42, plus damages and expenses. This
action is brought as a derivative and class action suit. The company and the
individual defendants consider the complaint to be without merit and will
virouously defend the action.
22
<PAGE>
Item 2. Changes in Securities
None in addition to those disclosed herein.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re: computation of per share earnings.
12 Promissory note and security agreement of Laurie Munn regarding
the purchase of 250,000 shares of the Company's Common B shares on April 8,
1996.
27 Financial data summary
(b) Reports on Form 8-K
During the Nine Months Ended March 31, 1996, no report on Form
8-K was filed.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERIORS, INC.
July 2, 1996 By: /s/Max Munn
--------------------------------
Max Munn, President and
Chief Executive Officer
July 2, 1996 By: /s/Michael J. Amore
--------------------------------
Michael J. Amore, Vice President
and Chief Financial Officer
<PAGE>
<PAGE>
Interiors, Inc
Earnings Per Share
March 31, 1996
Exhibit 11
COMMON A SHARES QTY DAYS O/S WEIGHTED
- ---------------- --- -------- --------
As of IPO 517,500 275/275 517,500
Conversion of Bridge Loan units 300,000 275/275 300,000
Sale to Morgan Steel 2/10/95 200,000 275/275 200,000
Ted Stevens conversion of B shares 117,500 275/275 117,500
Reg S sale to Canillo 3/29/95 55,000 275/275 55,000
Class A sh sold to various
investors on 4/25/95 300,000 275/275 300,000
Subscription agreement Ekistics
4/24/95 80,000 275/275 80,000
0
--------- ---------
Com A sh O/S per Form 10K - 6/95 1,570,000 1,570,000
COMMON B SHARES
- ---------------
As of IPO 1,000,000 275/275 1,000,000
Ted Stevens conversion of B shares (117,500) 275/275 (117,500)
--------- ---------
Com B sh O/S per Form 10K - 6/95 882,500 882,500
Total A & B shares at June 1995 1,000,000 2,452,500
ISSUED IN FISCAL YEAR 1996
- --------------------------
Common A shares
Conversion B shares 8/95 330,000 213/275 255,600
Iss'd to various investors 7/95 55,000 275/275 55,000
Iss'd to various investors - 12/15/95 10,000 107/275 3,891
Iss'd to Infinity Investors - 12/17/05 30,000 105/275 11,455
Iss'd to Infinity Investors - 12/18/95 5,000 104/275 1,891
Sold by Infinity Investors - 1/8/96 180,000 83/275 54,327
Iss'd to various investors -3/1/96 1,529 30/275 167
Iss'd to Decor Group Inc - 3/3/96 200,000 28/275 20,364
Iss'd to various investors - 3/4/96 53,718 27/275 5,274
------- -------
Com A Sh issued 1st nine mos 6/96 865,247 407,969
Common B shares
- ---------------
Conversion B shares 8/95 (330,000) 213/275 (255,600)
-------- -------
Com A & B sh iss'd 1st 9 mos 6/96 535,247 152,369
-------- -------
Total shares outstanding - 3/31/96 2,987,747 2,604,869
========= =========
NON-NEGOTIABLE PROMISSORY NOTE
$437,500.00 April 8, 1996
FOR VALUE RECEIVED, the undersigned, Laurie Munn, of 60 Skimhampton Rd., East
Hampton, NY 11937 promises to pay to the order of Interiors Inc., a Delaware
Corporation, at 320 Washington Street, Mt. Vernon, NY 10553 or such other place
as the holder may designate in writing to the undersigned, the principal sum of
Four hundred thirty seven thousand five hundred dollars and no cents
($437,500.00), together with interest thereon from date hereof until paid, at
the rate of Six and six tenth percent (6.6%) per annum as follows: five (5)
consecutive installments of principal and interest in the amount of One hundred
five thousand five hundred sixty one dollars and ninety cents ($105,561.90) each
April 1 commencing April 1, 1997. The entire note shall be paid in full with the
fifth payment due April 1, 2001.
Payments shall be applied first to accrued interest and the balance to
principal.
All or any part of the aforesaid principal sum may be prepaid at any time and
from time to time without penalty. Notwithstanding the foregoing, no such
prepayment may be made prior to June 30, 1996.
In the event of any default by the undersigned in the payment of principal or
interest when due or in the event of the suspension of actual business,
insolvency, assignment for the benefit of creditors, adjudication of bankruptcy,
or appointment of a receiver, of or against the undersigned, the unpaid balance
of the principal sum of this promissory note shall at the option of the holder
become immediately due and payable and the amount then due shall accrue interest
until payment at the rate of eighteen percent (18%) per annum or the highest
rate permitted by law, whichever is less.
Borrower's obligations in this Promissory Note are secured by a security
interest in certain personal property of the Borrower as reflected in the
Security Agreement dated the same date as this Promissory Note.
The maker and all other persons who may become liable for the payment hereof
severally waive demand, presentment, protest, notice of dishonor or nonpayment,
notice of protest, and any and all lack of diligence or delays in collection
which may occur, and expressly consent and agree to each and any extension or
postponement of time of payment hereof from time to time at or after maturity or
other indulgence, and waive all notice thereof.
In case suit or action is instituted to collect this note, or any portion
hereof, the maker promises to pay such additional sum, as the court may adjudge
reasonable, attorneys' fees in said proceedings.
This note is made and executed under, and is in all respects governed by, the
laws of the State of New York.
Interiors Inc.
/s/Laurie Munn By:/s/Michael J. Amore
- ----------------------- ---------------------------
Laurie Munn Michael J. Amore
Vice President and Chief Financial Officer
- 1 -
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("Agreement") is made and effective this April 8, 1996,
by and between Laurie Munn ("Borrower"), and Interiors Inc., a Delaware
Corporation ("Secured Party").
Borrower is in the debt of Secured Party.
Borrower desires to give, and Secured Party desires to receive, a security
interest in certain tangible personal property of Borrower to secure such debt.
NOW, THEREFORE, Secured Party and Borrower agree as follows:
1. DEFINITIONS.
-----------
A. "Collateral": The following described tangible, personal property of
Borrower: (i) Two hundred fifty thousand (250,000) shares of Class B Common
Stock of Interiors Inc.; and (ii) all additions and substitutions to or for the
items referred to in Section 1.(A) (i) above, and all proceeds therefrom.
B. "Obligation": All of the interest, principal and other amounts payable under
that certain promissory note dated April 8, 1996, payable by Borrower to Secured
Party for Four hundred thirty seven thousand five hundred dollars and no cents
($437,500.00), bearing interest at a rate of Six and six tenth percent (6.6%)
per annum, a copy of which is attached hereto as Exhibit A.
2. SECURITY INTEREST.
-----------------
Borrower hereby grants to Secured Party a security interest in the Collateral in
order to secure payment of the Obligation.
3. BOOKS AND RECORDS; INSPECTION.
-----------------------------
Borrower shall keep and maintain, at its expense, complete records of the
Collateral. Secured Party shall have the right at any time and from time to
time, without notice, to call at Borrower's place of business during normal
business hours to inspect the Collateral and to inspect the correspondence,
books, and records of Borrower relating to the Collateral.
4. REPRESENTATIONS AND WARRANTIES OF BORROWER.
------------------------------------------
Borrower represents and warrants to Secured Party that, with respect to the
Collateral, Borrower possesses and shall possess at all times while this
Security Agreement is in effect, full, complete and unencumbered title to such
goods, subject only to Secured Party's security interest hereunder, and liens,
if any, for current taxes, assessments and other governmental charges are not
delinquent.
5. COVENANTS OF BORROWER.
---------------------
The Borrower agrees and covenants with Secured Party that:
A. The Collateral shall be kept at the offices of Interiors Inc., and Borrower
shall not change the location of the Collateral without the prior written
consent of Secured Party.
- 1 -
<PAGE>
B. Borrower shall not at any time cause or suffer any part of the Collateral, or
any interest in any of Collateral to be subject to any Security Interest other
than that of Secured Party.
C. Borrower shall defend the Collateral against the claims and demands of all
persons other than Secured Party.
D. Borrower shall at all times promptly pay and discharge, at Borrower's
expense, all taxes, assessments and other governmental charges which constitute
or may become liens on the Collateral.
E. At the request of Secured Party, at any time and from time to time, Borrower
shall execute such financing statements and other documents, pay such filing,
recording and other fees, and do or cause to be done such other acts or things
as Secured Party deems reasonably necessary to establish, perfect, and continue
its security interest hereunder.
F. Borrower shall pay all costs, expenses, charges and other obligations,
including, without limitation, reasonable attorneys' fees, suffered or incurred
by Secured Party to protect, preserve, maintain and obtain possession of or
title to the Collateral, to perfect, protect, preserve and maintain the security
interest granted by this Security Agreement, and to enforce or assert any one or
more of its rights, powers, remedies and defenses under this Security Agreement.
6. EVENTS OF DEFAULT.
-----------------
Borrower shall be in default under this Security Agreement if Borrower fails
timely to observe and perform any covenants, conditions or agreements required
to be observed or performed by Borrower under this Security Agreement, or if
Borrower defaults upon any material promise in the obligation.
7. REMEDIES UPON EVENT OF DEFAULT.
------------------------------
At any time upon or following the occurrence of one or more of the events of
default under Section 6 hereof, Secured Party may, at its option, assert or
avail itself of any one or more of the rights, powers, remedies and defenses
conferred upon Secured Party under the Uniform Commercial Code and other laws of
the State of New York, which laws shall generally govern the construction and
interpretation of this Agreement, or assert or avail itself of any one or more
of the rights, powers, remedies and defenses conferred upon Secured Party under
any other appropriate law or regulation, whether federal or state.
8. APPLICATION OF PROCEEDS.
-----------------------
Any and all proceeds resulting from the disposition of all or any part of the
Collateral following the occurrence of one or more events of default shall be
applied to pay and provide for the Obligations of Borrower to Secured Party,
with any balance remaining to be paid to Borrower or its successors and assigns,
as their respective interests may appear.
9. NOTICES.
-------
Any notice required by this Agreement or given in connection with it, shall be
in writing and shall
- 2 -
<PAGE>
be given to the appropriate party by personal delivery or by certified mail,
postage prepaid, or recognized overnight delivery services.
If to Borrower:
Laurie Munn
60 Skimhampton Rd.
East Hampton, NY 11937
If to Secured Party:
Interiors Inc.
320 Washington Street
Mt. Vernon, NY 10553
10. SEVERABILITY.
------------
The invalidity or unenforceability of any provision in this Agreement shall not
cause any other provision to be invalid or unenforceable.
11. FINAL AGREEMENT.
---------------
This Agreement constitutes the final agreement and understanding between the
parties on the subject matter hereof and supersedes all prior understandings or
agreements whether oral or written. This Agreement may be modified only by a
further writing that is duly executed by both parties.
12. HEADINGS.
--------
Headings used in this Agreement are provided for convenience only and shall not
be used to construe meaning or intent.
IN WITNESS WHEREOF, Borrower and Secured Party have executed this Security
Agreement on the date first above written.
Interiors Inc.
By /s/Michael J. Amore
/s/Laurie Munn -------------------------------
- ----------------------------- Michael J. Amore
Laurie Munn Vice President and Chief Financial Officer
3
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,636,437
<ALLOWANCES> 40,000
<INVENTORY> 2,542,130
<CURRENT-ASSETS> 4,553,989
<PP&E> 2,124,999
<DEPRECIATION> 1,216,765
<TOTAL-ASSETS> 6,591,688
<CURRENT-LIABILITIES> 3,758,404
<BONDS> 0
0
7,400
<COMMON> 2,988
<OTHER-SE> 2,509,459
<TOTAL-LIABILITY-AND-EQUITY> 6,591,688
<SALES> 5,032,906
<TOTAL-REVENUES> 5,032,906
<CGS> 2,497,620
<TOTAL-COSTS> 2,497,620
<OTHER-EXPENSES> 2,314,520
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 321,240
<INCOME-PRETAX> (100,474)
<INCOME-TAX> 5,998
<INCOME-CONTINUING> 220,766
<DISCONTINUED> 1,523,714
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,630,186)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
<PAGE>
</TABLE>
