<PAGE>
As filed with the Securities and Exchange Commission on July 17, 1997
Registration No. 333-17671
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
AMENDMENT NO. 2 TO FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
INTERIORS, INC.
(Name of small business issuer in its charter)
Delaware 5961 13-3590047
(State or other juris- (Primary Standard Industrial (I.R.S. Employer
diction of organization) Classification Code No.) Identification No.)
320 Washington Street
Mt. Vernon, New York 10553
(914) 665-5400
(Address and telephone number
of principal executive offices and principal place of business)
Max Munn
President
320 Washington Street
Mt. Vernon, New York 10553
(914) 665-5400
(Name, address and telephone number of agent for service)
Copies to:
Hartley T. Bernstein, Esq.
Bernstein & Wasserman, LLP
950 Third Avenue
New York, NY 10022
(212) 826-0730
Approximate date of proposed sale to the public: As soon as reasonably
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis, pursuant to Rule 415 under the
Securities Act of 1933, check the following box: | |
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each class of Amount to be Proposed Proposed maximum Amount of
securities to be registered registered maximum offering aggregate offering Registration
price per price(1) Fee
Securities(1)
<S> <C> <C> <C> <C>
Class A Common Stock par 154,000 $2.00 $308,000 $93.32
value, $.001 per shar(2)
Series A Convertible 24,400 $6.66 $200,000 $60.94
Preferred Stock par value,
$.01 per share(2)
Class A Common Stock par 50,000 $2.00 $100,000 $30.30
value, $.001 per share(3)
Class A Common Stock par 150,000 $2.00 $300,000 $90.90
value, $.001 per share(4)
Class A Common Stock par 100,000 $2.00 $200,000 $60.60
value, $.001 per share(5)
Series A Convertible 100,000 $6.66 $660,000 $201.80
Preferred Stock par value
$.01 per share(6)
Class A Common Stock par 200,000 $2.00 $400,000 $121.20
value, $.001 per share(7)
Series A Convertible 200,000 $6.66 $1,320,000 $403.60
Preferred Stock par value
$.01 per share(7)
Amount Previously Paid $328.15(8)
Total Registration Fee $3,488,000 $1,062.66
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933. The proposed maximum
offering price was calculating based upon the average of the high and low
price of the Company's securities on the Nasdaq Small Cap Market for
January 6, 1997.
(2) Includes 154,000 Class A Common Shares and 24,400 Series A Preferred
Shares issued by the Company in April 1996 in a private placement of these
securities. This filing is for the purpose of registering these shares
which have been previously offered and sold with the Securities and
Exchange Commission.
(3) Includes 50,000 Class A Common Shares, issued to a former executive of the
Company in July 1996, pursuant to the settlement of certain litigation
involving the former executive's employment contract.
(4) Includes 150,000 Class A Common Shares issued to the uncle of the
Company's President and Chief Executive Officer in April 1996.
(5) Includes 100,000 Class A Common Shares issued to BH Funding, LLC in
February 1997 for consulting and other services.
(6) Includes 100,000 Series A Preferred shares issued to BH Funding, LLC in
February 1997 for consulting and other services.
(7) Includes 200,000 Class A Common Shares and 200,000 Series A Convertible
Preferred Shares issued to Decor Group, Inc., ("Decor").
(8) $734.51 is being paid herewith.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH AN OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
SUBJECT TO COMPLETION DATED , 1997
PROSPECTUS
INTERIORS, INC.
654,000 Shares of Class A Common Stock, and 324,400 Shares Series A, 10%
Cumulative Convertible Preferred Stock
This Prospectus (the "Prospectus") and the registration statement of which this
Prospectus forms a part (the "Registration Statement") relates to the sale of
654,000 shares of Class A Common Stock (the "Common Stock") and 324,400 Shares
of Series A, 10% Cumulative Convertible Preferred Stock (the "Preferred Stock")
by certain selling securityholders ("Selling Securityholders").
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. The Selling Securityholders
and intermediaries through whom such securities are sold may be deemed
"underwriters" within the meaning of the Act with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of securities is made by or on behalf of the
Selling Securityholders, to the extent required, a Prospectus will be
distributed which will set forth the number of shares being offered and the
terms of the Offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for sales
purchased from the Selling Securityholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers and the proposed selling
price to the public.
Prior to the Company's initial public offering (the "Initial Public Offering")
of 517,500 Class A Shares, 460,000 Class WA Warrants and 258,750 Class WB
Warrants (including securities issued upon exercise of the over-allotment option
granted to J. Gregory & Company, Inc., the Representative of the Underwriters
(the "Representative") in connection with the Initial Public Offering) in June
1994, there was no established trading market for the Class A Shares or the
Warrants. In September 1995, the Company completed a secondary public offering
460,000 shares of Series A 10% Convertible Preferred Stock (the "Series A
Preferred Shares") and 230,000 Redeemable Class WC Warrants (the "Class WC
Warrants"). The Company's Series A Preferred Shares, Class A Shares, Class WA
Warrants, Class WB Warrants and Class WC Warrants are currently listed for
quotation on The Nasdaq SmallCap Market ("Nasdaq") under the symbols "INTXP",
"INTXA, "INTXL", "INTXW," and "INTXZ," respectively. As of the date of this
prospectus, the last reported bid and ask prices of the Company's Series A
Preferred Shares, Class A Shares, Class WA Warrants, Class WB Warrants and
Class WC Warrants as reported by Nasdaq on such date were $ , $ ,
respectively, for Series A Preferred Shares, $ , $ , respectively,
for Class A Shares, $ , $ , respectively, for Class WA Warrants,
$ and $ , respectively for Class WB Warrants $ and $ ,
respectively, for Class WC Warrants. No assurances may be given that any public
market for the foregoing securities that has developed since completion of the
Initial Public Offering will continue or be sustained. See "Market for the
Company's Securities and Related Stockholder Matters" and "Risk Factors."
Each Class A Common Share is entitled to one (1) vote, while each Class B Common
Share is entitled to five (5) votes. The Series A Preferred Stock has no voting
rights, but each Series A Preferred Share is convertible into three (3) shares
of Class A Common Stock commencing September 18, 1996. After September 17, 2000,
the Series A Preferred Stock is redeemable by the Company in whole or in part at
$5.50 per share upon 30 days prior written notice. The Series A Preferred
<PAGE>
Stock is entitled to a dividend, prior to any payment of dividends on the Class
A or Class B Common Stock, of $0.50 per share per annum payable in semi-annual
installments of $0.25 per share. Such payment may be made either in cash or
Class A Common Stock at the discretion of the Company. (See "Description of
Securities.")
Certain shares held by individuals deemed to be insiders cannot be sold by such
holders prior to September 17, 1997 without the prior written consent of VTR
Capital Corp., the Company's investment banking firm.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK AND
SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "DILUTION" and "RISK FACTORS", WHICH BEGINS ON PAGE 12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
2
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and in
accordance therewith, files reports, proxy statements and other information
including annual and quarterly reports on Forms 10-KSB and 10-QSB (File No.
0-24352) (the "1934 Act Filings") with the Securities and Exchange Commission
(the "Commission"). The Company filed with the Commission in Washington, D.C. a
Registration Statement on Form SB-2 under the Securities Act of 1933, as amended
(the "Securities Act), with respect to the securities described herein. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. This Prospectus also does not contain all of
the information set forth in the Company's Form 10-KSB/A No. 2 and Form
10-QSB/A filed for the periods ended June 30, 1996, and March 31, 1997
respectively. For further information about the Company and the securities
described herein, reference is made to the Registration Statement and to the
exhibits filed therewith, and to the Company's Form 10-KSB/A No. 2 and Form
10-QSB/A filed for the periods ended June 30, 1996, and March 31, 1997
respectively. The statements contained in this Prospectus with respect to the
contents of any agreement or other document referred to herein are not
necessarily complete and, in each instance, reference is made to a copy of such
agreement or document as filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by reference to the provisions of
the relevant documents. The Registration Statement, including the exhibits
thereto, and the Company's 1934 Act Filings may be inspected at: (i) the public
reference facilities of the Commission located at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549; and (ii) the offices of the
Commission located at Citicorp Center, 500 West Madison Street, Room 1400,
Chicago, Illinois 60661, and the offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material may
also be obtained upon request and payment of the appropriate fee from the Public
Reference Section of the Commission located at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site
on the Internet (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission through the Electronic Data Gathering,
Analysis, and Retrieval System (EDGAR).
3
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to and
should be read in conjunction with the detailed information and financial
statements and notes thereto included elsewhere in this Prospectus. Unless
otherwise indicated, all share and per share amounts set forth herein have been
adjusted to reflect a 4,464.286:1 stock exchange which occurred in connection
with the merger of A.P.F. (as defined below) with and into the Company (as
previously defined) in March, 1994. Each prospective investor is urged to read
this Prospectus in its entirety.
The Company
General
The Company was incorporated in October 1990 under the name A.P.F.
Holdings, Inc., a New York corporation ("A.P.F.") and merged with and into
Interiors, Inc., a Delaware corporation in March 1994. It has been engaged since
1990, through its A.P.F. Master Framemakers and Conservators Division ("A.P.F.
Master Framemakers"), in the manufacturing and marketing of museum quality
traditional and contemporary picture and mirror frames to museums, art
galleries, decorators, collectors and frame retailers. The Company is qualified
to do business in New York under the name A.P.F. Master Framemakers. See
"Business" and "Recent developments."
The Company operates three showrooms, one at 75th Street in Manhattan, one
in "Old City" in Philadelphia and one at the Company's Mt. Vernon location. The
sales generated from the Manhattan showroom were approximately $1,872,000 and
$1,606,000 for the nine months ended March 31, 1997 and 1996, respectively. The
Philadelphia showroom generated sales of approximately $79,000 and $190,000 for
the nine months ended March 31, 1997 and 1996, respectively. The Company's
showroom in Mt. Vernon, New York, conducts business with upscale custom picture
frame shops located throughout the country. Sales generated from the Mt. Vernon
showroom were approximately $1,007,000 and $1,144,000 for the nine months ending
March 31, 1997 and 1996, respectively.
A.P.F. Master Framemakers
The Company's custom picture frames are marketed primarily to museums,
better art galleries, upscale frame shops and decorators, as well as collectors
of important works of art under the trade name "A.P.F. Master Framemakers and
Conservators" (previously defined and hereinafter referred to as "A.P.F. Master
Framemakers"). A.P.F. Master Framemakers' customers have included nationally
known museums, art institutes and galleries. See "Business."
Italia Collection
On October 21, 1994 (the "Closing Date") the Company, through its
wholly-owned subsidiary, Italia, acquired all of the issued and outstanding
stock of Murano Crystal Corp., a Florida corporation doing business under the
name "Italia Collection," pursuant to the terms of a certain stock purchase
agreement dated October 21, 1994.
During April 1996, the Company moved the operations of Italia to The Lance
Corporation ("Lance") (A Delaware Corporation), a Massachusetts manufacturer and
distributor of various products to the giftware and collectibles market. Lance
was acquired by The Lance Acquisition Corporation, owned by several investors,
some of whom were investors in the Company. Subsequent to the relocation of
Italia to Lance, disagreements arose between the Company and Lance, and the
Company was required to again relocate the operations of Italia to the Company's
headquarters. These relocations led to a significant disruption of Italia's
business operations. Italia's revenues declined substantially during this
period. Because of these declining revenues and high operating costs, on
December 16, 1996, the Board of Directors decided to dissolve and discontinue
Italia. On December 27, 1996, a Notice of Public Auction was distributed by the
Company,
4
<PAGE>
advising all interested parties that a public auction of all of the assets of
Italia consisting of molds, equipment, models, and inventory listed in a
Security Agreement entered into between Italia, as debtor, and United Credit
Corporation, as secured party, was to occur. The auction took place on January
10, 1997 and the Company was the successful bidder, thereby acquiring all of the
assets of Italia in consideration of a payment of $2,000 and the assumption by
the Company of the liabilities of Italia to United Credit Corporation, which as
of March 31, 1997 totaled approximately $806,000. The Company is obligated to,
in finalizing its arrangement with United Credit Corporation, issue up to
100,000 shares of the Company's Class A Common Stock. Since the financial
statements of Italia are consolidated into those of the Company, Italia's
liabilities have already been reflected on the Company's Consolidated Financial
Statements. See "Business."
Discontinuation of operations of Interiors Catalog
On March 31, 1996, the Company's Board of Directors decided to discontinue
the Company's catalog operations because of declining revenues and high
operating costs. For the nine months ended March 31, 1997 and 1996, losses from
discontinuing catalog operations totaled $0 and $1,523,714, respectively. The
Company plans to fully carry out the discontinuation of the catalog operation by
June 30, 1997. 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. No catalog related assets or liabilities are expected to remain on
the Company's balance sheet by June 30, 1997. The financial statements included
with this filing have reclassified the results of operations for the nine months
ended March 31, 1997 and March 31, 1996 as if the Company's catalog operations
had been discontinued in the beginning of each respective fiscal period.
Acquisitions and Strategic Alliances
Part of the Company's long-term plan for growth includes either the
acquisition of or entering into strategic alliances 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"), an affiliate of the Company, Decor issued to the Company 250,000
shares of its Series A Convertible Preferred Stock, which have since been sold
by the Company, and an option to purchase 10,000,000 shares of its Series B
Non-Convertible Voting Preferred Stock (the "Option Shares") in exchange for
issuance to Decor by the Company of 200,000 shares of its Class A Common Stock,
to be registered by this filing, and 200,000 shares of its Series A Convertible
Preferred stock, also to be registered by this filing, and a guarantee with
respect to certain indebtedness should such indebtedness become necessary. (The
Decor securities are adjusted to reflect a 1-for-2 reverse split effected by
Decor in October 1996.) Also, the Company exercised its option to purchase the
Option Shares in September 1996, for total cash consideration of $2,000.
Concurrent with the exercise of this option, the Company executed a Voting
Agreement (the "Voting Agreement") to vest the power to vote the Option Shares
in a Voting Trust (the "Voting Trust".) The Voting Agreement will expire upon
the earlier of February 7, 2007 or upon the Company's repayment in full of its
obligations to BH Funding, LLC, but not earlier than December 31, 1997. The
Voting Trust comprises three individuals: the Company's President and Chief
Executive Officer (and also the Chairman of the Board of Decor), and two
Directors of Decor who are otherwise unrelated to the Company. As part of the
Company's investment in Decor, during the months of August and September 1996,
the Company purchased 54,934 shares of Decor's Series C NonVoting, Convertible,
Preferred Stock at a cost of $824,000. In the formation of Decor, the Company's
intention was to create an affiliate with a corporate identity clearly separate
and distinct from that of the Company. Decor was organized for the purpose of
acquiring the business operations of unrelated companies. On November 12, 1996
(the "Effective Date"), a public offering by Decor of certain of its securities
was declared effective by the Securities and Exchange Commission. Subsequent to
the effective date of Decor's initial public offering, the Company owned
approximately 79.6% of the total voting stock of Decor. In December 1996, Decor
declared and issued a dividend on its common stock payable in the form of two
(2) shares of common stock for each one (1) share of common stock held as of the
record date of December 16, 1996. Each share of Decor's Series A and Series C
Preferred stock are convertible into three (3) shares of Decor's common stock
effective December 16, 1996. During February 1997, the Company sold its entire
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holdings of Series A Convertible Preferred Stock to BH Funding, LLC. Assuming
conversion of the Series A Convertible Preferred Stock by BH Funding to common
stock, the Company will own approximately 77.5% of the total voting stock of
Decor subsequent to such sale and conversion. As of March 31, 1997, the holding
in Decor is recorded on the Company's financial statements at the market value
on November 12, 1996, the "Measurement Date" of the Company's trading securities
previously transferred to Decor during March 1996, plus acquisition costs, less
the proportionate value of the securities sold during February 1997.
In May 1996, the Company entered into a two year Management Services
Agreement with Decor whereby the Company will advise Decor on the manufacturing,
sale, marketing and distribution of Decor's products as well as providing Decor
with accounting and administrative services and advice on strategic planning of
joint ventures, acquisitions, and other long term initiatives. Pursuant to this
agreement, the Company will be paid on an annual basis the greater of (1)
$75,000 or (2) 1.5% of excess cashflow as defined in the agreement. The Company
and Decor amended this agreement to increase this payment to $90,000 per annum.
Additional transfers of funds from Decor to the Company will be subject to the
attainment by Decor of excess cash flow totaling $4,000,000 per year through
December 31, 1999. At March 31, 1997, the Company has accrued approximately
$60,000 of fees pursuant to this agreement.
Decor entered into an asset purchase agreement (the "Agreement") with
Artisan House, Inc. ("Artisan House") to purchase substantially all of the
operating assets, and assume certain liabilities of Artisan House for an
aggregate purchase price of $3,526,400, subject to certain adjustments. Decor
completed the Artisan House acquisition on November 18, 1996. Artisan House,
located in Los Angeles, California and founded in 1964, is engaged in the
design, manufacturing, and marketing of metal wall, table and freestanding
sculptures. Management believes that Artisan House's products bridge the gap
between high priced gallery art and mass produced decorative pieces. Artisan
House products retail from approximately $100 to over $400. The primary goal of
Artisan House is to supply a broad spectrum of design driven sculpture and
decorative accessories at moderate prices. At December 31, 1996, the balance
sheet of Artisan House reflected total assets of approximately $4,500,000. For
the period November 19, 1996 to December 31, 1996, Artisan House realized net
income of approximately $41,000 on revenues totaling approximately $635,000.
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 entered into an
agreement whereby each entity would guarantee certain liabilities of the other.
Subsequently, LAC disposed of its assets and discontinued its operations. (See
"The Company - Italia Collection")
6
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Other
For disclosure about the Company's manufacturing activities, products,
organization, marketing, suppliers, competition, backlogs, patents and
trademarks, research and development, government regulation, employees, and
description of property. See "Business."
Recent Developments
In February 1997 the Company received a loan from BH Funding, LLC
("BH") in the aggregate principal amount of $600,000 to be utilized to repay
certain indebtedness of the Company and for continued operating expenses. The
Company in order to collateralize the loan to BH pledged and assigned to BH and
granted to BH a continuing security interest in the Company's 20,000,000 shares
of Series B Non-Convertible Preferred Stock of Decor, and the Company's 54,934
shares of Series C Convertible Preferred Stock of Decor. Simultaneously with the
loan to the Company, BH purchased all of the Company's Series A Convertible
Preferred Stock holdings in Decor Group, Inc., a total of 250,000 shares. The
loan is to be repaid to B.H. Funding, LLC with interest on April 28, 1998. In
addition, the Company entered into a Consulting Agreement with BH whereby BH
would agree to provide consulting and other services to the Company in exchange
for 100,000 shares of the Company's Class A Common Stock and 100,000 shares of
the Company's Series A Convertible Preferred stock (the "Consulting Shares"). In
connection with this agreement, the fair market value of these shares on the
date of issuance was allocated as follows: $300,000 as acquisition consulting on
the Decor transaction; $300,000 as interest on the loan (to be amortized over
the life of the loan using the effective interest method); and $25,000 as
additional expense of the Company's sale of its 250,000 Series A Convertible
Preferred Stock holdings in Decor Group, Inc. The Company received $375,000 of
proceeds relating to this sale.
In November 1996, the Company announced that it had entered into an
exclusive three year contract (the "Requirements Agreement") with Photo-to-Art,
Inc. ("P-2-A"), a major "direct-in-home" marketer of customized "photo to
canvas" computer-enhanced enlargements. This process enables a customer to have
photographs digitally enhanced, scanned, enlarged and printed at considerably
less cost than traditional photographic enlargement processes. Under the
agreement, the Company was to finish, pack, frame, and fulfill all of P-2-A's
products. As of March 31, 1997, approximately $222,000 of revenues have been
realized by the Company from this relationship.
On June 1, 1997 the Company entered into an agreement with P-2-A (the
"Agreement"), which agreement superseded the Requirements Agreement. The
Agreement provides that, in exchange for the Company agreeing to supersede the
terms of the Requirements Agreement and sell certain manufacturing equipment and
related assets to P-2-A, P-2-A will pay to the Company $600,000 in cash. The
Company agreed that upon its receipt of the $600,000, the Company will purchase
from P-2-A 150,000 shares of P-2-A's common stock and 120,000 of P-2-A's common
stock purchase warrants for an aggregate purchase price of $600,000.
Additionally, P-2-A will pay the Company $50,000 for the non-exclusive right to
utilize the Company's existing mail-order customer list. P-2- A also agreed to
sublease approximately 21,000 square feet of office and manufacturing space from
the Company at an annual rental rate of $63,000 per year plus rent escalations.
The term of the sublease is from June 1, 1997 to December 31, 2001.
In October 1996, the Company filed its June 30, 1996 Form 10-KSB. The
Company's independent auditors have modified their report on the Company's
financial statements for the year ended June 30, 1996. The Company's ability to
continue as a going concern is dependent upon the successful achievement of
certain initiatives currently in progress.
The Company's executive offices are located at 320 Washington Street, Mt.
Vernon, New York 10553. Its telephone number is (914) 665-5400.
7
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8
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THE OFFERING
Securities Offered............. No new securities are being offered by the
Company pursuant to this filing. The purpose
of this filing is to register (a) 154,000
shares of the Company's Class A Common Stock,
and 24,400 shares of the Company's Series A
Preferred Stock issued by the Company in an
April 1996 private placement of these shares
to certain independent investors (b) 50,000
shares of the Company's Class A Common Stock
issued by the Company in July 1996 pursuant
to the settlement of a former executive's
employment contract (c) 150,000 shares of the
Company's Class A Common Stock in April 1996
pursuant to consulting services provided by
the uncle of the Company's President and
Chief Executive Officer (d) 100,000 shares of
the Company's Class A Common Stock and
100,000 shares of the Company's Series A
Preferred Stock issued to BH Funding, LLC for
consulting services, and (e) 200,000 shares
of the Company's Class A Common Stock and
200,000 shares of the Company's Series A
Preferred Stock issued to Decor Group Inc. ,
pursuant to a March 3, 1996 agreement
relating to the capitalization of Decor. See
"Selling Securityholders".
Securities Outstanding prior to this Offering:
Class A Common Stock........ 4,961,241 Shares
Class B Common Stock........ 1,769,750 Shares
Series A Preferred Stock.... 1,147,060 Shares
Class WA Warrants .......... 3,055,588 Warrants
Class WB Warrants........... 845,150 Warrants
Class WC Warrants........... 2,270,000 Warrants
9
<PAGE>
Use of Proceeds........ The Company will not realize any
proceeds pursuant to this
filing.
Risk Factors........... An investment in the Securities involve a high
degree of risk. See "Risk Factors."
Transfer Agent......... American Stock Transfer & Trust Company, 40
Wall Street, New York, NY 10005.
Nasdaq Symbols(1)...... Class A Common Stock- INTXA
Series A Preferred Stock- INTXP
Class WA Warrants- INTXW
Class WB Warrants- INTXZ
Class WC Warrants- INTXL
- -----------
(1) No assurance can be given that a trading market will be sustained for all,
or any of, the Company's securities. See "Risk Factors - No Assurance of
Public Trading Market and Nasdaq Inclusion."
10
<PAGE>
Summary Financial Information
The following summary financial data has been summarized from the
financial statements included elsewhere herein and should be read in conjunction
with such financial statements and related notes thereto and "Management's
Discussion and Analysis" included elsewhere in the Prospectus.
Summary Balance Sheet Data
<TABLE>
<CAPTION>
At June 30, 1996 At March 31, 1997
---------------- -----------------
<S> <C> <C>
Working capital $(2,512,319) $ (486,251)
Total assets $4,721,201 $7,516,183
Total current $5,335,630 $3,910,906
liabilities
Total long-term $30,652 $23,282
debt
Stockholder's $(645,081) $3,581,995
equity
</TABLE>
Summary Statement of Income Data
<TABLE>
<CAPTION>
Year ended June 30 Nine months ended March 31,
---------------------------------------- -----------------------------------------
1996 1995 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $5,378,761(1) $5,155,275(1) $ 2,958,167(1) $5,032,906(1)
(Loss) Income $(1,791,784) $257,780 $ (82,057) $ 220,766
from continuing
operations before
interest and taxes
(Loss) from $(2,935,633)(2) $(938,546)(2) $0(2) $(1,523,714)(2)
discontinued
operations of
catalog
Net Loss $(5,283,773) $(817,754) $(406,432) $(1,630,186)
(income)
Loss (income) per $(0.83) $0.06 $(0.09) $(0.04)
share of Common
Stock from
continuing
operations
(Loss) per share $(1.03) $(0.47) $0.00 $(0.59)
from discontinued
operations
Net Loss $(1.86) $(0.41) $(0.09) $(0.63)
(income) per
share
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30 Nine months ended March 31,
---------------------------------------- -----------------------------------------
1996 1995 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average 2,837,293 1,977,158 4,408,553 2,604,869
number of shares
used in
computation
</TABLE>
- ------------------------------
(1) Does not include revenues from discontinued operations during the
nine months ending March 31, 1997 and the year ending June 30, 1996.
Prior period revenues have been restated as if the discontinuation of
operations had taken place during the nine months ended March 31, 1996
and the year ended June 30, 1995. Revenues from discontinued operations
totaled approximately $34,000 and approximately $743,000 respectively
for the nine months ended March 31, 1997 and March 31, 1996. Revenues
from discontinued operations totaled $72,640 and $1,895,011
respectively for the years ended June 30, 1996 and June 30, 1995.
(2) Includes, in addition to loss from operations of discontinued
operations (see Note (1) above) non-operating charges of $-0- and
approximately $88,000 respectively for the nine months ended March 31,
1997 and March 31, 1996. Non-operating charges for the years ended June
30, 1996 and 1995 were $44,878 and $74,326 respectively.
12
<PAGE>
RISK FACTORS
The purchase of the securities offered hereby involves a high degree of
risk. Prospective purchasers should carefully consider the following risk
factors, as well as other matters set forth elsewhere in this Prospectus, before
deciding whether to invest in the Company's securities
Modified Auditor's Report; Working Capital Deficit: The Company's
independent auditors have modified their report on the Company's financial
statements for the year ended June 30, 1996. The Company's ability to continue
as a going concern is dependent upon the successful achievement of certain
initiatives currently in progress. Most importantly, the Company has made a
major investment in Decor Group, Inc. ("Decor"). Effective November 19, 1996,
Decor has acquired substantially all of the operating assets and assumed certain
liabilities of a California based manufacturer of metal wall-art and related
accessories. To finance this acquisition, Decor offered for sale to the public
certain of its equity shares. Such Offering was declared effective by the
Securities and Exchange Commission on November 12, 1996. (See "Business") As of
March 31, 1997, the Company had a working capital deficit of approximately
$486,000 and negative cash flow from operations for the nine months ending March
31, 1997 totaling approximately $1,225,000. See "Business." Further, in
connection with Decor's public offering, the Company will recognize any gains in
accordance with Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin No. 51.
Cash Flow Constraints: The Company has been experiencing a shortage of
working capital since commencement of its catalog operations in February 1992.
Initially, this shortage was due substantially to the fact that the unexpected
response to catalog mailings and therefore the demand for the products offered
exceeded the Company's ability to finance the cost of inventory levels adequate
for such demand, thus leading to delays in fulfilling orders. Ultimately, the
working capital shortages became more a function of the difficulty in sustaining
revenue levels from the catalog business and the high costs associated with the
conduct of such business, particularly with respect to recent substantial
increases in paper, printing, and postage costs. Although management has decided
to discontinue the catalog business as of March 31, 1996, there can be no
assurance that such action will eliminate current cash restraints. Because of
the Company's cash flow constraints, it has experienced problems in making
payments for such liabilities as payroll taxes, accrued rent, and third-party
debt service. As of the date of this filing, the Company is meeting all current
obligations for payroll taxes and rent, has paid all its prior period payroll
tax liabilities. The Company is also working to arrange for paydowns of existing
debt. In support of this effort, during February 1997, the Company arranged for
additional financing of approximately $975,000 based on a loan of $600,000 and
the sale of certain its holdings in Decor Group, Inc. to BH Funding, LLC. No
assurances, however, can be given that the Company's efforts will ultimately be
successful. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," and "Financial Statements and Notes."
Dependence on major customers. The Company's A.P.F. Master Framemakers
Division conducts significant business activities with certain major customers.
For example, revenues during the nine months ended March 31, 1997 from shipments
to The Limited, Inc. totaled approximately $788,000, or approximately 27% of
total revenues. No guarantees can be given that the Company will continue to
receive orders from existing major customers. Should such customers discontinue
the placement of orders with the Company, the resulting diminishment of the
Company's revenues and results of operations would be significant.
Financing costs of doing business. Currently, the Company incurs
significant costs incurred in the financing of its business operations. Two
principal sources of financing are currently available to the Company. On
February 15, 1995, the Company entered into an asset based financing agreement
with a New York based secured lender. As of March 31, 1997, the amount due to
the lender was approximately $700,000. As of the date of this Prospectus,
interest charges for the nine months ended March 31, 1997 pursuant to this
arrangement total approximately $113,000. The Company currently maintains a line
of credit with a New York bank based on certain receivables and inventories,
bearing interest at a rate of prime plus 1% (9.25% as of the date of this
Prospectus.) As of March 31, 1997, the balance of the line of credit is
$745,000. Interest
13
<PAGE>
charges for the nine months ended March 31, 1997 pursuant to this line of credit
total approximately $60,000. The Company and the bank have agreed that the line
of credit will be reduced by $30,000 per month. See "Management's Discussion and
Analysis."
Liquidity of Current Business Operations. Management believes that cash
flow from operations through March 31, 1997 were not sufficient to support such
operations. For the nine months ended March 31, 1996, approximately $1,225,000
of cash was used in the Company's operating activities. Accordingly, Company
management had identified and implemented the corrective changes deemed
necessary. As of March 31, 1996, the Company decided to discontinue its catalog
operation. The difficulty associated with the maintenance of such revenues,
together with relatively high costs of operations led to this decision. Also,
during the months of March and April 1996, the Company moved its Italia
Collections subsidiary. (See "The Company - Italia Collection".) During the
quarter ended December 31, 1996, the Company entered into an exclusive
three-year contract to provide certain services to a major "direct-in-home"
marketer of computer enhanced photographic enlargements. The Company expects
that this arrangement will provide significant incremental revenues. On June 1,
1997 the Company entered into an agreement with P-2-A (the "Agreement"), which
agreement superseded the Requirements Agreement. The Agreement provides that, in
exchange for the Company agreeing to supersede the terms of the Requirements
Agreement and sell certain manufacturing equipment and related assets to P-2-A,
P-2-A will pay to the Company $600,000 in cash. The Company agreed that upon its
receipt of the $600,000, the Company will purchase from P-2-A 150,000 shares of
P-2-A's common stock and 120,000 of P-2-A's common stock purchase warrants for
an aggregate purchase price of $600,000. Additionally, P-2-A will pay the
Company $50,000 for the non-exclusive right to utilize the Company's existing
mail-order customer list. P-2-A also agreed to sublease approximately 21,000
square feet of office and manufacturing space from the Company at an annual
rental rate of $63,000 per year plus rent escalations. The term of the sublease
is from June 1, 1997 to December 31, 2001. Finally, the Company continues to
review its staffing needs and has already made certain staff reductions. No
assurances can be given that the actions described above, or any subsequent
actions will fully meet management expectations.
Dilution. Dilution may result to holders of the Company's Series A
Preferred Shares in the event of exercise of outstanding Warrants at
exercise prices that are less than the prices paid by purchasers of
Series A Preferred Shares. Additional dilution may result to holders of
the Company's Class A Common Shares in the event of the conversion of
outstanding Class B Shares, Series A Preferred Shares, or the exercise
of outstanding Warrants, or options at exercise prices that are less
than the prices paid by purchasers of Class A Shares. See "Description
of Securities," and "Recent Developments."
Dependence on Management. The Company is highly dependent on the
services of Max Munn, President, Chief Executive Officer and Treasurer. The loss
of the services of this executive could have a material adverse effect upon the
business and prospects of the Company. In the event that the Company's financial
condition stabilizes, the Company will investigate securing "key person" life
insurance in the amount of one million dollars on the life of Max Munn. See
"Management" and "Executive Compensation"
Voting Control by a related party, and an escrow agent. Laurie Munn,
wife of the Company's President and Chief Executive Officer owns approximately
29.4% (519,750), and Michael Levine, as escrow agent owns approximately 70.6%
(1,250,000) of the Company's 1,769,750 issued and outstanding Class B Shares,
each such Class B Share is entitled to five votes or approximately 64.07% of the
votes to which the Class A and Class B Shares taken as a single class are
entitled and assuming that none of the outstanding Warrants is exercised.
Accordingly, these two individuals may be in a position to influence the
election of the Company's directors and the Company's business affairs. The
escrow shares are entitled to vote only in the event of the Company's default
under its settlement agreement with Ann Stevens, a former Company executive. As
of the date of this filing, the Company is not in default on its obligation
under the settlement agreement. See "Description of Securities" and "Certain
Transactions." Also see subsequent risk factor "Terms of Settlement of
Litigation Involving Related Parties."
14
<PAGE>
Potential Conflicts of Interest. The Company has from time to time
entered into certain transactions with its officers, directors and/or associates
and relatives of such persons. Since two independent directors, and only one
inside director, currently serve on the Company's Board of Directors, the
likelihood of such transactions to continue in the future is minimized. Also,
all related party lawsuits were settled in July 1996. See "Certain Transactions,
"Terms of Settlement of Litigation Involving Related Parties," and "Legal
Proceedings."
Dependence on Skilled Craftsmen and Salespersons. The Company's A.P.F.
Master Framemakers division, a provider of fine picture frames for art
galleries, upscale retail picture framers, museums, collectors and decorators in
the U.S., relies on its skilled craftsmen with specialized skills in the design
and crafting of its frames and the manufacture of other of its products.
Although the Company attempts to hire and train skilled craftsmen, the inability
of the Company to retain skilled craftsmen and creative designers may adversely
affect the division's operations. Furthermore, the Company is dependent on the
showroom salespersons who have relationships with museum curators, art
collectors, architects and other purchasers of "museum" quality picture frames.
The loss of such persons could have a material adverse impact on the Company.
See "Business Personnel."
Possible Change of Control. Various legal proceedings, now settled,
occurred between and among the Company's President and Chief Executive Officer,
his wife, other members of the Company's Board of Directors, a former member of
the Company's Board of Directors, and such former member's wife who was also a
Company executive. The proceedings involved various issues, but primarily
involved the composition of the Company's Board of Directors, the status of a
sale of 269,500 of the Company's Class B Common shares by Theodore Stevens to
Laurie Munn, an alleged breach of an employment agreement between the Company
and Ann Stevens, wife of Theodore Stevens (a former Director), the status of a
sale of 250,000 shares of the Company's Class B Common shares to Laurie Munn,
and the sustainability of any election at a shareholder's meeting should the
Company hold such a meeting during the pendency of certain legal proceedings.
The parties to these various actions have entered into various agreements in
settlement of all differences. Under the terms of settlement, the Company must,
among other things, provide over the seven years beginning June 1996 bi-weekly
payments to Ann Stevens in settlement of her employment agreement with the
Company. Ms. Stevens' attorney, Michael Levine, Esq. has been appointed escrow
agent and issued 1,250,000 shares of the Company's Class B Common Stock (the
"Escrow Shares"). Mr. Levine is empowered to vote these shares, which represent
voting control of the Company, to replace the Company's Board of Directors in
the event of the Company's default of its obligations under the settlement
agreements. After the Company fully performs under the settlement agreements,
the Escrow Shares will be returned to the Company. See "Business - Legal
Proceedings."
Possibility of Litigation Involving Works of Art. Although the Company
endeavors to buy products which it believes the supplier has the right to
distribute, in the event an artist claims that his copyright has been violated,
the Company may be joined in any action against the supplier for infringement.
Each of the Company's vendors is required to execute and return to the Company a
certificate that the merchandise conforms to all federal and state laws as to
labeling, brands, etc. and agreeing to indemnify the Company against claims
arising from violation of trademark, patent or similar laws; however, there can
be no assurance that the Company would be successful in enforcing any such
agreement. The Company knows of no such claims which have been asserted nor
lawsuits which have been threatened other than as disclosed herein. There can be
no assurance that claims and/or lawsuits will not arise in the future or that
the cost of defending such actions will not be material. See "Business - Legal
Proceedings" and " - Patents and Trademarks."
Consent Order for Permanent Injunction as to Max Munn. In September
1991, without admitting or denying the allegations, Max Munn, the Company's
President and Chief Executive Officer agreed with the Federal Trade Commission
(FTC) to the entry of a Consent Order in an action brought against Mr. Munn and
others; which action arose out of the advertising of certain lithographs of
original works of art as regards to whether or not the artist had played a
substantial role in the production of lithographs. The case was settled before
trial or discovery solely with entry of the above Consent Order; which enjoins
Mr. Munn from making certain representations in
15
<PAGE>
connection with the sale of any works of art. The Consent Order also requires
Mr. Munn for a period of five years (which expired as of September 1996) as to
the maintenance of certain records as they concern the sale of certain
lithographs.
Competition. The custom framing industry in the United States is highly
fragmented and consists primarily of small, local framing retailers. Only a few
companies are basic manufacturers of higher priced picture frames, which frames
are selected for valuable works of art owned by museums, galleries and
collectors. Custom framing of this type is not in competition with local retail
frame stores. Management of the Company believes that its A.P.F. Master
Framemakers division is one of the largest custom framers of its type in the
country. However, there can be no assurance that the Company will be able to
maintain its position in this industry.
Management believes that the sale of decorative accessories in the
wholesale market is also highly fragmented, with thousands of small, specialized
manufacturers and distributors. Management is not aware of a manufacturer of
upscale decorative accessories similar to those distributed by Italia.
Reliance on Outside Suppliers. All picture and mirror frame
manufacturing is performed by the Company in its facility in Mt. Vernon, New
York. The Company purchases wood, gold leaf, plexiglass, matboards, composite
resins, and other materials from a wide variety of sources, and has at least
two, and often more, suppliers for each item used in its manufacturing process,
and is not dependent upon any sole supplier. Nevertheless, due to the
specialized nature of the Company's business operations and materials
requirements, should the present mix of suppliers change, a potential disruption
to the Company's business could occur. See "Business - Suppliers."
Convertibility of Class B Common Stock and Super Voting Rights. The
Company's Certificate of Incorporation authorizes the issuance of up to
2,500,000 Class B Shares, 519,750 of which are currently owned by Laurie Munn,
wife of the Company's President and Chief Executive Officer, and 1,250,000 of
which are held in escrow by Michael Levine as escrow agent and designated as
"Escrow Shares." During March 1997, Ted Stevens, a former director of the
Company converted 269,750 shares of Class B Stock into 269,750 shares of Class A
Common Stock. (See Risk Factor - Terms of Settlement of Litigation Involving
Related Parties). Each Class B Share entitles the holder thereof to five
non-cumulative votes per share on all matters on which stockholders may vote at
meetings of stockholders. The Escrow Shares shall only vote in the event of the
Company's default under the terms of settlement agreements under which the
Escrow Shares were issued. The Class A Shares and Class B Shares shall generally
vote together as a single class. The Class B Shares are convertible on a
one-for-one basis at any time after issuance at the option of the holder into
Class A Shares; however, there can be no assurance that any additional
conversion will occur. The Escrow Shares however are not subject to conversion.
In addition, such conversion could result in a charge to earnings to the extent
that the fair market value of the Class A Shares exceeds the fair market value
of the Class B Shares at the date of conversion. In addition, while the issue is
not entirely clear, the issuance of additional Class B Shares could, under
certain circumstances, have the effect of delaying or preventing a change in
control of the Company and may adversely affect the voting and other rights of
holders of Class A Shares. See "Description of Securities."
Reliance on Tradename Reputation. The Company's custom frame operation
is conducted under the tradename "A.P.F. Master Framemakers," which tradename
has been used in the custom frame business since 1955 and which tradename the
Company acquired in 1990. See "The Company." The Company believes that its
ability to market its high-end custom picture and mirror frames has been based
largely upon its reputation as a reliable source of high-quality frames suitable
for use by nationally known museums, art galleries, decorators, fine frame
retailers and collectors. As a result of this reliance on its reputation, if the
Company's custom frame products and service were to be deemed unreliable, the
Company could experience a significant adverse impact.
Absence of Dividends. The Company has not paid and does not anticipate
paying any cash dividends on its Class A Shares or Class B Shares in the
foreseeable future, but instead intends to retain all working capital and
earnings, if any, for use in the Company's business operations and in
16
<PAGE>
the expansion of its business. In February 1996, the Company did, however,
declare 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. See "Dividend Policy" and
"Description of Securities."
Significant retained deficits and negative equity. At March 31, 1997,
the Company has recognized retained deficits totaling approximately $9,191,564.
Of this amount, approximately $2,200,000 was incurred as a provision for the
discontinuation of the Company's catalog operation in the fiscal year ended June
30, 1996. At June 30, 1996, the Company had recorded negative net worth totaling
approximately $645,000, primarily because of its retained deficits. During the
nine months ended March 31, 1997, the Company raised additional capital of
$4,629,000, generated a net loss totaling approximately $406,000, issued Class A
Common Stock to directors valued at $15,000, and increased the valuation of its
investment in Decor by approximately $2,038,000. Such actions resulted in the
restoration of net worth to approximately $3,582,000. However, no assurances can
be given that the Company's net worth will continue to grow in subsequent
periods. See "Business." and risk factor "No Assurance of Public Trading Market
or Continued Nasdaq Inclusion" below.
No Assurance of Public Trading Market or Continued Nasdaq Inclusion.
Prior to the Company's Initial Public Offering, which took place on June 23,
1994, there was no established trading market for the Company's securities. In
connection with the Initial Public Offering, the Company applied for, and was
granted, inclusion of the Class A Shares, the Class WA Warrants and the Class WB
Warrants on Nasdaq and the Class A Shares and Class WA Warrants commenced
quotation on Nasdaq on June 23, 1994 under the symbols INTXA and INTXW,
respectively. The Class WB Warrants commenced quotation on Nasdaq on June 24,
1994 under the symbol INTXZ. Further, on September 18, 1995, the Company
registered and issued 460,000 shares of Series A, 10% Cumulative Convertible
Preferred Stock and 230,000 Redeemable Class WC Warrants. The Series A, 10%
Cumulative Convertible Preferred Stock, and the Redeemable Class WC Warrants
commenced quotation on Nasdaq on September 19, 1995 under the symbols INTXP and
INTXL respectively. See "Market for the Company's Securities and Related
Stockholder Matters." However, there can be no assurance given that the Company
will be able to satisfy the requirements for continued quotation, that such
quotation will otherwise continue or that any market for the Company's
securities that has developed since completion of the Initial Public Offering or
the Preferred Stock Offering will continue or be sustained. If for any reason,
however, any of the Company's securities are not eligible for continued listing
or a public trading market does not develop, purchasers of the Class A Shares,
Series A, 10% Cumulative Convertible Preferred Shares and/or Warrants may have
difficulty selling their securities should they desire to do so. Under the
current rules adopted by the NASD for continued listing, a company, among other
things, must have $2,000,000 in total assets, $1,000,000 in total capital and
surplus, $1,000,000 in market value of public float and a minimum bid price of
$1.00 per share. As of the date of this filing, The Nasdaq Stock Market, Inc.
has proposed more stringent financial requirements for listing on The Nasdaq
SmallCap Market.. With respect to continued listing, such new requirements are
(i) at least $2,000,000 in tangible assets, a $35,000,000 market capitalization
or net income of at least $500,000 in two of the three prior years, (ii) at
least 500,000 shares in the public float valued at $1,000,000 or more, (iii) a
minimum Common Stock bid price of $1.00, (iv) at least two active market makers,
and (v) at least 300 holders of Common Stock. If the Company is unable to
satisfy the requirements for continued quotation on Nasdaq, trading, if any, in
the securities would be conducted in the over-the-counter market in what are
commonly referred to as the "pink sheets" or on the NASD OTC Electronic Bulletin
Board. As a result, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the Company's securities.
"Penny Stock" Regulations. The Commission has adopted regulations under
the Exchange Act which generally define a "penny stock" to be any equity
security that has a market price (as defined) of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to
17
<PAGE>
certain exceptions. If the securities offered hereby are removed from Nasdaq,
the Company's securities may be deemed to be "penny stocks" and become subject
to rules that impose additional sales practice requirements on broker-dealers
who sell such securities. For any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities, information on the limited market in penny stocks and, if the
broker-dealer is the sole marketmaker, the broker-dealer must disclose this fact
and the broker-dealer's presumed control over the market. In addition, the
broker-dealer must obtain a written acknowledgment from the customer that such
disclosure information was provided and must retain such acknowledgment for at
least three years. Further, monthly statements must be sent disclosing current
price information for the penny stock held in the account. While many
Nasdaq-listed securities would otherwise be covered by the definition of penny
stock, transactions in a non-Nasdaq-listed security would be exempt from all but
the sole marketmaker provision for (i) issuers who have $2,000,000 in tangible
assets, (ii) transactions in which the customer is an institutional accredited
investor and (iii) transactions that are not recommended by the broker-dealer.
In addition, transactions in a Nasdaq-listed security directly with a Nasdaq
marketmaker for such securities would be subject only to the sole marketmaker
disclosure, and the disclosure with respect to commissions to be paid to the
broker-dealer and the registered representative.
The above-described rules may materially adversely affect the liquidity
for the market for the Company's securities. Such rules may also affect the
ability of broker-dealers to sell the Company's securities and may impede the
ability of subsequent holders of the Class A Common Shares, Series A Preferred
Shares, or Warrants to sell such securities in the secondary market.
Future Issuances of Stock by the Company. The Company has authorized
capital stock of 32,500,000 shares of $.001 par value Common Stock, of which
30,000,000 have been designated as Class A Shares and 2,500,000 have been
designated as Class B Shares; and 5,300,000 shares of Preferred Stock, $.01 par
value per share (the "Preferred Stock"). As of the date hereof, there are
4,961,241 Class A Shares, 1,769,750 Class B Shares and 1,147,060 Preferred
Shares issued and outstanding. In addition, the Company has issued and
outstanding 3,055,588 Class WA Warrants, 845,150 Class WB Warrants, 2,270,000
Class WC Warrants and Representative's Warrants to purchase 14,985 Class A
Shares, for which it has reserved for issuance an aggregate of 9,673,407 Class A
Shares. Although there are no present plans, agreements or undertakings, written
or oral, with respect to the Company's issuance of any shares of stock or
related convertible securities, other than as disclosed herein, the issuance of
any of such securities by the Company could have anti-takeover effects insofar
as they could be used as a method of discouraging, delaying or preventing a
change in control of the Company. Such issuance could also dilute the public
ownership of the Company. Inasmuch as the Company may, in the future, issue
authorized shares of Common Stock or Preferred Stock without prior stockholder
approval, there may be substantial dilution to the interests of the Company's
stockholders. Given that the Company is authorized to issue additional
securities, there can be no assurance that the Company will not do so. In
addition, a stockholder's pro rata ownership interest in the Company may be
reduced to the extent of the issuance and/or exercise of any options or warrants
relating to the Common Stock or Preferred Stock.
Future Sales of Stock by Stockholders. All of the Company's outstanding
Class B Shares are "restricted securities" as that term is defined under the
Securities Act and in the future may only be sold in compliance with an
exemption from registration, including Rule 144, under the Securities Act or
pursuant to an effective registration statement. Rule 144 provides, in essence,
that a person (including a group of persons whose shares are aggregated) who has
satisfied a one year holding period for such restricted securities may sell
within any three-month period, under certain circumstances, an amount of
restricted securities which does not exceed the greater of one percent of that
class of the Company's outstanding securities (49,612 Class A Shares as of the
date hereof) or the average weekly trading volume of that class of securities
during the four calendar weeks prior to such sale. Persons who are not
affiliated with the Company and who have held their restricted securities for at
least two years are not subject to the quantity limitations or the manner of
sale restrictions of the rule. As of the date of this prospectus, Laurie Munn,
wife of the Company's
18
<PAGE>
President and Chief Executive Officer owns 519,750 shares of the Company's Class
B Common shares, and Michael Levine, as escrow agent, holds 1,250,000 of such
Class B Shares, designated Escrow Shares.(See preceding risk factor - "Terms of
Settlement of Litigation Involving Related Parties.") These holdings comprise
all of the Company's outstanding Class B Common shares as of the date of this
filing. As of the date of this Prospectus, the Company's stockholders own an
aggregate of 1,147,060 Preferred Shares and 4,961,241 Class A Shares. Of these
shares, 3,571,241 Common A Shares and 797,060 Series A Preferred Shares are
freely saleable in the public market. A sale of shares by current stockholders,
whether pursuant to Rule 144 or otherwise, may have a depressing effect upon the
market price of the Company's securities in any market that continues to exist.
To the extent that such shares enter the market, there may be a negative effect
on the market price of the Company's securities and on the ability of the
Company to obtain additional equity financing. See "Principal and Selling
Securityholders," "Description of Securities," "Certain Transactions" and
"Concurrent Sales."
Representative's Warrants. In connection with the Initial Public
Offering, the Company sold to the Representative's designees, for nominal
consideration, Representative's Warrants to purchase an aggregate of 45,000
Class A Shares, 40,000 Class WA Warrants and 22,500 Class WB Warrants. In
October 1994 Representative's Warrants to purchase 30,015 Class A Shares, 40,000
Class WA Warrants and 22,500 Class WB Warrants were repurchased by the Company.
The Representative's Warrants are exercisable until June 22, 1999, at an
exercise price equal to $1.50 per Class A Share, subject to certain adjustments.
In connection with the Preferred Stock Offering, the Company sold to VTR
Capital, Inc. a Warrant to purchase 40,000 shares of Series A Preferred Stock
and 20,000 Class WC Warrants for an aggregate price of $20.00, (the "VTR
Warrants"). The holders of outstanding Representative's Warrants and VTR
Warrants have the opportunity to profit from a rise in the market price of the
Company's securities, if any, without assuming the risk of ownership, with a
resulting dilution in the interest of other shareholders. The Company may find
it more difficult to raise additional equity capital if it should be needed for
the business of the Company while the Representative's Warrants and VTR Warrants
are outstanding. At any time when the holders thereof might be expected to
exercise such Warrants, the Company would probably be able to obtain additional
capital on terms more favorable than those provided by the Representative's
Warrants and VTR Warrants. The holders of the Representative's Warrants and VTR
Warrants have the right to require registration under the Securities Act of the
securities issuable upon exercise of such Warrants and have certain "piggy-back"
registration rights. The cost to the Company of effecting a demand registration
may be substantial. See "Description of Securities" and for a description of the
termination agreement with the Representative.
Certain Provisions of Certificate of Incorporation and By-Laws;
Potential Anti-Takeover Effect. The Company's Board of Directors may designate
the terms of and issue up to 2,500,000 shares of Preferred Stock without further
action by the stockholders, of which 1,147,060 are issued and outstanding as of
the date of this filing. Voting rights that may be granted in the future to
holders of Preferred Stock could adversely affect the voting power of holders of
Class A Shares. The Company's By-Laws contain provisions which may discourage
certain transactions which involve an actual or threatened change in control of
the Company. The By-Laws provide that certain vacancies on the Board of
Directors shall be filled by a majority of the remaining directors then in
office, limit the ability to call a special meeting of shareholders, and require
that no proposal by a shareholder be presented for vote at a special or annual
meeting of shareholders unless the shareholder provides the Board of Directors
or the secretary of the Company with written notice of intention to present a
proposal for action at the meeting in accordance with the By-Laws. See
"Description of Securities."
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation provides that a director of the Company will not be
personally liable to the Company or its stockholders for monetary damages for
breach of the fiduciary duty of care as a director, except under certain
circumstances including breach of the director's duty of loyalty to the Company
or its stockholders or any transaction from which the director derived an
improper personal benefit. See "Management - Indemnification of Directors and
Officers."
19
<PAGE>
The Company has expressly not opted out of, and is therefore subject
to, Section 203 of the Delaware General Corporation Law regulating "business
combinations" between Delaware corporations and "interested stockholders." Under
this provision, a corporation subject to Section 203 may not engage in any
business combination with any interested stockholder for a period of three years
from the date such person became an interested stockholder unless certain
conditions are satisfied. This provision may also have the effect of delaying or
preventing a change in control of the Company. See "Description of Securities."
Possible Redemption of the Class WA Class WB and Class WC Warrants.
Commencing at any time after June 22, 1995, in the event the closing bid price
per share of the Class A Shares as quoted in the over-the-counter market (as
reported by Nasdaq) or on an exchange on which the Company's securities are then
listed has equaled or exceeded 120% or more of the then effective exercise price
of the Class WA and Class WB Warrants, respectively, for 20 consecutive trading
days, the Warrants may be redeemed by the Company at a redemption price of $.01
per warrant prior to exercise or expiration upon 30 days prior written notice
thereof. Commencing at any time after September 17, 2000, in the event the
closing bid price per share of the Preferred Stock as quoted in the
over-the-counter market (as reported by Nasdaq) or on an exchange on which the
Company's securities are then listed has equaled or exceeded 110% or more of the
then effective exercise price of the Class WC Warrants for 20 consecutive
trading days, the Warrants may be redeemed by the Company at a redemption price
of $.01 per WC warrant prior to exercise or expiration upon 30 days prior
written notice thereof. Although holders of the Warrants will have the right to
exercise their Warrants through the date of redemption, they may be unable to do
so because they lack sufficient funds at the time of redemption, or they may
simply not wish to invest any more money in the Company's Class A Shares, Series
A Preferred Shares, Class WB Warrants, or Class WC Warrants at that time. Should
holders of the Warrants fail to exercise such Warrants or to sell such Warrants
on or prior to the redemption date, such Warrants will have no value beyond
their redemption value. As noted above, the Company may not redeem the Warrants
unless the Company has available a current prospectus with respect to the
Warrants. See "Description of Securities - Redeemable Warrants."
20
<PAGE>
PUBLIC OFFERINGS
The Company completed its Initial Public Offering on June 30, 1994, at
which time the Company issued 517,500 Class A Shares at $5.00 per share, 460,000
Class WA Warrants at $0.10 per Warrant, and 258,750 Class WB Warrants at $0.10
per Warrant (including 67,500 Class A Shares, 60,000 Class WA Warrants and
33,570 Class WB Warrants upon exercise of the Representative's Over-Allotment
Option). The Class A Shares, Class WA Warrants and Class WB Warrants were
purchasable and transferable separately upon issuance. Such securities were sold
by the Company pursuant to a "firm commitment" underwritten public offering
(previously defined as the "Initial Public Offering"). The Company received
approximately $1,600,000 in net proceeds (including the proceeds from the
exercise of the Over-Allotment Option) after payment of certain offering
expenses, commissions and non-accountable expenses including approximately
$100,000 in expenses paid by the Company prior to the receipt of the net
proceeds. The Initial Public Offering was underwritten by certain underwriters,
including J. Gregory & Company, Inc., which acted as the Representative of the
Underwriters. In accordance with the Underwriting Agreement between the Company
and the Representative, the Company issued to the Representative's designees
Representative's Warrants to purchase up to 45,000 Class A Shares, 40,000 Class
WA Warrants and 22,500 Class WB Warrants, exercisable through June 22, 1999. In
October 1994 the Company entered into a termination agreement with the
Representative and with Vincent Mongno for the repurchase of Representative's
Warrants to purchase 30,015 Class A Shares, 40,000 Class WA Warrants and 22,500
Class WB Warrants and the mutual termination of certain rights and obligations.
See "Risk Factors," "Description of Securities" and "Management's Discussion and
Analysis."
In September 1995, the Company's registration statement (the "Preferred
Stock 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 ("WC Warrants") to purchase Preferred Stock at the
exercise price of $5.50 per share was completed and 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.
USE OF PROCEEDS
No new securities are being offered by the Company pursuant to this filing. The
Company will not realize any proceeds pursuant to this filing as a result of the
sale of securities by the Selling Securityholders.
21
<PAGE>
DIVIDEND POLICY
The Company has not paid and does not anticipate paying any cash dividends
on its Class A Shares or Class B Shares in the foreseeable future, but instead
intends to retain all working capital and earnings, if any, for use in the
Company's business operations, and in the expansion of its business. The
Company's Series A Preferred Stock is entitled to a 10% cumulative dividend,
payable semi-annually in the months of March and September. This dividend is
payable either in cash or Class A Common shares at the option of the Company. In
March 1996, and in satisfaction of the first semi-annual dividend obligation
with respect to the Preferred Stock, the Company issued 55,247 Common A shares
to the Preferred Stock holders of record as of February 23, 1996. As of the date
of this filing, the Company has not declared or established a record date for a
dividend for its Series A 10% Cumulative Convertible Preferred Stock for
September 1996, or March 1997. Cumulative but unpaid dividends on Series A 10%
Cumulative Preferred Stock as of March 31, 1997 totals approximately $524,000.
See "Description of Securities."
22
<PAGE>
SELECTED FINANCIAL INFORMATION
The following summary financial data has been summarized from the financial
statements included elsewhere herein and should be read in conjunction with such
financial statements and related notes thereto. See Financial Statements.
Summary Balance Sheet Data
<TABLE>
<CAPTION>
At June 30, 1996 At March 31, 1997
---------------- -----------------
<S> <C> <C>
Working capital $(2,512,319) $(486,251)
Total assets $4,721,201 $7,516,183
Total current $5,335,630 $3,910,906
liabilities
Total long-term $30,652 $23,282
debt
Stockholder's $(645,081) $3,581,995
equity
</TABLE>
Summary Statement of Income Data
<TABLE>
<CAPTION>
Year ended June 30 Nine months ended March 31,
---------------------------------------- ----------------------------------------
1996 1995 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $5,378,761(1) $5,155,275(1) $2,958,167(1) $5,032,906(1)
Loss (income) $(1,791,784) $257,780 $(82,057) $220,766
from continuing
operations before
interest and taxes
(Loss) from $(2,935,633)(2) $(938,546)(2) $0(2) $(1,523,714)(2)
discontinued
operations
Net Loss $(5,283,773) $(817,754) $(406,432) $(1,630,186)
(income)
Loss (income) per $(0.83) $0.06 $(0.09) $(0.04)
share of Common
Stock from
continuing
operations
(Loss) per share $(1.03) $(0.47) $0.00 $(0.59)
from discontinued
operations
Net Loss $(1.86) $(0.41) $(0.09) $(0.63)
(income) per
share
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30 Nine months ended March 31,
---------------------------------------- ----------------------------------------
1996 1995 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average 2,837,293 1,977,158 4,408,553 2,604,869
number of shares
used in
computation
</TABLE>
- ----------------
(1) Does not include revenues from discontinued operations during the nine
months ending March 31, 1997 and the year ending June 30, 1996. Prior
period revenues have been restated as if the discontinuation of operations
had taken place during the nine months ended March 31, 1996 and the year
ended June 30, 1995. Revenues from discontinued operations totaled
approximately $34,000 and approximately $743,000 respectively for the nine
months ended March 31, 1997 and March 31, 1996. Revenues from discontinued
operations totaled $742,640 and $1,895,011 respectively for the years
ended June 30, 1996 and June 30, 1995.
(2) Includes, in addition to loss from operations of discontinued operations
(see Note (1) above) non-operating charges of $-0- and approximately
$88,000 respectively for the nine months ended March 31, 1997 and March
31, 1996. Non-operating charges for the years ended June 30, 1996 and 1995
were $44,878 and $74,326 respectively.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
General
The following discussion should be read in conjunction with
(a) the information contained in the financial statements of the
Company (the "Financial Statements") and the Notes (the "Notes")
thereto appearing elsewhere herein, and b) the Company's Form 10-KSB/A
No. 2 and Form 10-QSB/A filed for the periods ended June 30,1996, and
March 31, 1997. The financial statements have been prepared in
conformity with generally accepted accounting principles, but have
not been audited, except that financial balances at June 30, 1996
disclosed herein are based on the Company's financial statements for
the fiscal year ended June 30, 1996, which have been audited by the
Company's independent auditors ("Auditors".) The auditors have issued
a modified opinion on the Company's financial statements at June 30,
1996 (See Risk Factors - Modified Auditor's Report.) Due to
$5,283,773 net losses during the year ended June 30, 1996, and
negative net worth at that date, substantial doubt existed as to the
Company's ability to continue as a going concern. During the period
subsequent to June 30, 1996, certain events led to improvement of the
Company's financial position.
Results of Operations
Period Ended March 31, 1997 as Compared to Period Ended March 31, 1996
The Company's net sales from continuing operations for the quarter
ended March 31, 1997 decreased by $851,000 or 48.5% to $905,000 from
$1,756,000 for the quarter ended March 31, 1996. The Company's net
sales from continuing operations for the nine months ended March 31,
1997 decreased $2,075,000 or 41.2% to $2,958,000 from $5,033,000 for
the nine months ended March 31, 1996. (See following discussion.)
Net sales for the A.P.F. Master Framemakers division for the
quarter ended March 31, 1997 decreased $582,000 or 38.6% to $927,000
from $1,509,000 for the quarter ended March 31, 1996. Net sales for the
A.P.F. Master Framemakers division for the nine months ended March 31,
1997 decreased $229,000 or 7.3% to $2,915,000 from $3,144,000 for the
nine months ended March 31, 1996. These decreases are largely due to
the discontinuation of selling certain products to the discontinued
Italia unit, partially offset by approximately $222,000 of revenues
realized by a new relationship with a major party plan marketer. (See
"Liquidity and Capital Resources.") Due to the termination of
operations, the net sales for the Italia Collection subsidiary for the
quarter ended March 31, 1997 decreased $269,000 or 108.9% to ($22,000)
from $247,000 for the quarter ended March 31, 1996. The negative sales
for the current quarter reflect certain returns of merchandise by
customers during the current quarter. Due to termination of operations,
the net sales for the Italia Collection subsidiary for the nine months
ended March 31, 1997 decreased $1,846,000 or 97.7% to $43,000 from
$1,889,000 for the nine months ended March 31, 1996. Because of
declining revenues and high operating costs, the Company decided to
discontinue and dissolve Italia.(See "The Company - Italia
Collection.")
25
<PAGE>
The Company's cost of goods sold as a percentage of net sales
increased to 60% for the nine months ended March 31, 1997, from 50% for
the nine months ended March 31, 1996. During March 1997, pursuant to
the dissolution of Italia, inventory totaling approximately $226,000
was written off. Without this charge, the Company's cost of goods sold
as a percentage of net sales would have totaled approximately 53% for
the nine months ended March 31, 1997. Revenues of Italia have
historically been generated at a higher gross margin than those of the
A.P.F. Master Framemakers Division. Since Italia revenues have
significantly declined during the current period versus the prior
period, the consolidated gross margins for the current period have
declined versus the prior period, even without the charges recorded for
inventory write offs. The Company used during the three and nine months
ended March 31, 1997 and 1996 the gross profit method to value
inventory. The Company expects to begin the implementation of a
perpetual inventory system within the next twelve months. The Company
believes that such a system will enable it to determine product costing
and margins more precisely. No assurances can be given however that the
Company will successfully implement this new system, or that greater
precision in the determination of product costing or margins will be
achieved.
The Company's selling, general and administrative expenses as a
percentage of net sales totaled 48.4% for the nine months ended March
31, 1997, versus 42.1% for the nine months ended March 31, 1996. The
increase was due to a reserve for bad debts of $250,000. without this
reserve, the Company's selling, general and administrative expenses as
a percentage of net sales would have totaled approximately 39.9% for
the nine months ended March 31, 1997. To achieve the reduction in the
ratio of selling, general, and administrative expenses as a percentage
of net sales for the nine months ended March 31, 1997 versus the prior
period, the Company has taken certain measures to reduce expenses. For
example, reductions of administrative personnel have led to reduced
salaries, benefits, and travel expenses. Also discretionary spending
for such items as stationery and supplies, advertising, and consulting
fees has been curtailed. Finally, due to the overall reduction of
revenues, sales commission expenses are reduced in the current period
versus the prior period. Interest expense as a percentage of net sales
totaled approximately 10.6% for the nine months ended March 31, 1997,
versus approximately 6.4% for the nine months ended March 31, 1996. In
absolute dollars however, interest expense is approximately $7,000
lower in the nine months ended March 31, 1997 versus the nine months
ended March 31, 1996 because certain debts outstanding at higher rates
of interest have been replaced by loans carrying lower interest costs.
Interest as a percent of sales has increased because of the reduced
sales of the current period versus the prior period.
For the quarter ended March 31, 1997, the Company realized a net
loss of approximately $291,000 ($0.07 per share), versus net income
from continuing operations of approximately $4,000 ($0.00 per share),
and a loss from discontinued operations of approximately $863,000
($0.33 per share) for the quarter ended March 31, 1996. For the nine
months ended March 31, 1997, the Company realized a net loss of
approximately $406,000 ($0.09 per share), versus a net loss from
continuing operations of approximately $106,000 ($0.04 per share), and
a loss from discontinued operations of approximately $1,524,000 ($0.59
per share) for the nine months ended March 31, 1996.
26
<PAGE>
Year Ended June 30, 1996 as Compared to Year Ended June 30, 1995
As disclosed in the "Description of Business", during the year ended
June 30, 1996, the Company decided to discontinue its catalog
operations. Prior year financial statements were reclassified to
disclose the results of catalog operations as if they were discontinued
at the beginning of the year ending June 30, 1996.
The Company's net sales from continuing operations for the fiscal
year ended June 30, 1996, increased by $224,000 or 4.4% to $5,379,000
from $5,155,000 for the fiscal year ended June 30, 1995.
Net sales for the A.P.F. Master Framemakers division for the
fiscal year ended June 30, 1996 decreased by $154,000 or 4.4% to
3,369,000 from $3,523,000 for the fiscal year ended June 30, 1995. The
average selling price per order for the A.P.F. Master Framemakers
division remained relatively unchanged for the fiscal years ended June
30, 1996 and 1995.
With the acquisition by the Company of Italia Collections Inc.
("Italia") in October 1994 (See "Description of Business"), the Company
began to conduct its wholesale business through Italia. During the
transition from the Company's prior wholesale business to Italia, the
Company generated revenues of $528,000 from this wholesale business
during the year ended June 30, 1995. Italia revenues for this same
period totaled $1,104,000. Thus, for the year ended June 30, 1995, the
Company's wholesale based revenues totaled $1,632,000. Net sales for
Italia for the fiscal year ended June 30, 1996 totaled $2,010,000,
which is an increase of $378,000 or 23.2% over total wholesale business
for the prior year. During the year ended June 30, 1996, as disclosed
in the "Description of Business", Italia has been undergoing disruption
due to efforts to relocate Italia operations to a suitable location.
Because of this disruption, the revenues for the year ended June 30,
1996 have been negatively affected. Also, additional expenses pursuant
to relocation efforts totaling some $235,000 have been incurred.
The Company's cost of goods sold from continuing operations as a
percentage of net sales increased to 66.1% for the fiscal year ended
June 30, 1996, from 59.7% for the fiscal year ended June 30, 1995. This
increase is due to larger fourth quarter book-to-physical adjustments
as compared to the prior year recorded by the Company during the year
ended June 30, 1996. Gross margins for the year ended June 30, 1996 are
largely consistent with those of the prior year.
Selling, general and administrative expenses from continuing
operations increased $1,791,000 or approximately 98% over the
comparable amount in the prior year. Such increase included additional
costs relating to the relocation of Italia in the amount of
approximately $763,000, additional reserves for certain assets of
$310,000, additional facilities charges of approximately $120,000, with
the balance relating to various other costs associated with the
implementation of the Company's strategic plan.
Interest expense for the year ended June 30, 1996 increased
approximately $302,000 to $538,000 versus the year ended June 30, 1995.
Italia's revenues were financed with a New
27
<PAGE>
York based secured lender pursuant to an asset-related formula. (See
Liquidity and Capital Resources.) Italia's revenues have increased
$906,000 during the year ended June 30, 1996 versus the June 30, 1995.
This is the basis for approximately $122,000 of the current year
increase. The balance relates to financing costs related to certain
third-party loans obtained during the prior year.
Because of the Company's decision to discontinue its catalog
operations, it incurred charges during the year ended June 30, 1996 for
such discontinuation totaling $2,935,633. These charges relate
primarily to a loss for the current year's operations of approximately
$789,000, inventory reserves of approximately $954,000, reserves for
other assets of approximately $354,000, charges for the settlement of
related party lawsuits of approximately $519,000, with the balance
primarily relating to estimated charges for operating losses.
The Company believes that the charges recorded during the year
ended June 30, 1996 are sufficient. The Company will wind down its
catalog business by March 31, 1997, and may possibly mail one final
clearance catalog. The Company's management believes that no additional
charges will be necessary from such efforts.
Liquidity and Capital Resources
Management believes that cash flow from operations through March
31, 1997 were not sufficient to support such operations. Accordingly,
Company management has been implementing what it believes to be the
corrective changes deemed necessary. Specific action taken as of the
date of this filing include the following: a) The Company is seeking
either the acquisition of or entering into strategic alliances with
unrelated companies in the decorative accessories industry. As part of
this strategy, a public offering of certain securities of Decor Group,
Inc. ("Decor"), an affiliate of the Company, has been declared
effective by the Securities and Exchange Commission on November 12,
1996 (the "Effective Date.") On November 18, 1996, Decor acquired
substantially all of the operating assets and assumed certain
liabilities of Artisan House, Inc., a California based manufacturer and
distributor of metal wall, table, and freestanding sculptures. (See
"Acquisitions and Strategic Alliances."), b) Due to declining revenues
and high operating costs, the Company has discontinued its catalog
business effective March 31, 1996 (See "The Company - Discontinuation
of operations of Interiors Catalog"), c) Beginning with the quarter
ended March 31, 1996, the Company has begun to reduce operating
expenses through a combination of staff reductions and expense
controls, d) Due to declining revenues and high operating costs, in
December 1996, the Company dissolved its Italia Collections subsidiary
(See "The Company - Italia Collection"), and e) The Company is seeking
additional sources of revenues. As part of this effort, on October 12,
1996, the Company announced that it has entered into an exclusive three
year agreement with a major party plan marketer of customized, canvas
based enlargement of photographs. As of March 31, 1997, approximately
$222,000 of revenues have been realized by the Company from this
relationship. No assurances however can be given that these, or any
subsequent initiatives by the Company will ultimately produce the
desired positive cash flow from operations. Finally, the Company has
begun to implement a marketing program meant to increase revenues of
its Master Framemakers Division. No
28
<PAGE>
assurances can be given that these measures will generate the fiscal
improvement sought by the Company.
On June 1, 1997 the Company entered into an agreement with P-2-A
(the "Agreement"), which agreement superseded the Requirements
Agreement. The Agreement provides that, in exchange for the Company
agreeing to supersede the terms of the Requirements Agreement and
sell certain manufacturing equipment and related assets to P-2-A,
P-2-A will pay to the Company $600,000 in cash. The Company agreed
that upon its receipt of the $600,000, the Company will purchase from
P-2-A 150,000 shares of P-2-A's common stock and 120,000 of P-2-A's
common stock purchase warrants for an aggregate purchase price of
$600,000. Additionally, P-2-A will pay the Company $50,000 for the
non-exclusive right to utilize the Company's existing mail-order
customer list. P-2-A also agreed to sublease approximately 21,000
square feet of office and manufacturing space from the Company at an
annual rental rate of $63,000 per year plus rent escalations. The
term of the sublease is from June 1, 1997 to December 31, 2001.
At March 31, 1997, cash balances totaling approximately $173,000
were recorded as compared to approximately $4,000 at June 30, 1996. Net
cash used in operating activities during the nine months ended March
31, 1997 totaled approximately $1,225,000 compared with net cash used
in operating activity of approximately $808,000 during the nine months
ended March 31, 1996. During the nine months ended March 31, 1997, cash
used from operations was largely a result of the current period's net
loss of approximately $406,000, increased by non-cash charges for
depreciation, amortization, bad debts, write-offs of nonproductive
assets, dissolution of subsidiary, and stock issuances of approximately
$1,529,000, and reduced by non-cash reduction of liabilities from
extinguishment of debt, and gain on sale of investment securities of
approximately $830,000, and impacted by decreases in trade receivables
of approximately $2,000, increases in inventories of approximately
$532,000, decreases in prepaid expenses of approximately $91,000,
increases in other assets of approximately $128,000, and decreases in
notes payable, accounts payable and accrued expenses of approximately
$1,000,000.
Because of declining revenues and high operating costs, on
December 16, 1996, the Board of Directors decided to discontinue and
dissolve Italia. On December 27, 1996, a Notice of Public Auction was
distributed by Italia, advising all interested parties that a public
auction of the assets of Italia consisting of molds, equipment, models,
and inventory listed in a Security Agreement entered into between
Italia, as debtor, and United Credit Corporation, as secured party, was
to occur. The auction took place on January 10, 1997 and the Company
was the successful bidder, thereby acquiring all of the assets of
Italia in consideration for a payment of $2,000 and the assumption by
the Company of the liabilities of Italia to United Credit Corp., which
as of March 31, 1997 totaled approximately $806,000. Since the
financial statements of Italia are consolidated into those of the
Company, Italia'a liabilities have already been reflected on the
Company's historical consolidated financial statements. At March 31,
1997, the Company made the adjustments necessary to properly restate
recorded assets and liabilities, together with a general reserve of
approximately $56,000. These adjustments included approximately
$590,000 writeoff of debt recorded based on the advise of the
29
<PAGE>
Company's legal counsel (as the Company is not legally liable for such
liabilities). Further, the Company wrote-off approximately $700,000 in
assets related to its Italia subsidiary which were not considered to
benefit the Company's future operations.
Cash balances of approximately $4,000 were recorded as of June 30,
1996, as compared to approximately $2,000 at June 30, 1995,
representing an increase of approximately $2,000. Net cash used in
operating activities was $1,144,000 at June 30, 1996, as compared to
net cash used in operating activities of approximately $2,287,000 at
June 30, 1995. The decrease in net cash used in operating activities
was primarily due to the net loss of $5,284,000 offset by a non-cash
provision for discontinued operation totaling $2,236,000, and also
offset by the following changes from continuing operations: non-cash
charges for depreciation of $680,000, and for stock issuances of
$141,000, increases in accounts payable and accrued expenses of
$1,113,000, inventories of $346,000, and a decrease in accounts
receivable of $179,000. The decrease in accounts receivable was
primarily due to the Company's adherence to established credit policies
while at the same time successfully pursuing the collection of past due
balances. Although total inventories decreased during the current
period, inventories from continuing operations increased due largely to
support the Italia business. The increase in accounts payable and
accrued expenses was due largely to increased operating expenses
incurred during the current year. (See "Results of Operations".)
Net cash used in investing activities during the nine months ended
March 31, 1997 totaled approximately $1,326,000 versus approximately
$585,000 for the nine months ended March 31, 1996. During the current
period, the Company invested $826,000 of cash to acquire 54,934 shares
of Series C Non-Voting Convertible Preferred Stock and 10,000,000
shares of Series B Non Convertible Voting Preferred Stock of Decor
Group, Inc., (See "Acquisitions and Strategic Alliances.") During the
same current period, an additional amount of approximately $500,000 was
used to acquire equipment, versus approximately $583,000 used to
acquire equipment and other assets during the nine months ended March
31, 1996.
Net cash used in investing activities was $543,000 for the year
ended June 30, 1996, versus $591,000 for the year ended June 30, 1995.
Net cash provided by financing activities totaled approximately
$2,720,000 during the nine months ended March 31, 1997 versus
approximately $1,391,000 during the nine months ended March 31, 1996.
During the current period, the funding was the result of the exercise
by investors of 704,412 Class WA Warrants to acquire 704,412 shares of
Class A Common shares and 704,412 Class WB Warrants for an exercise
price of $1.50, and the exercise by investors of 118,012 Class WB
Warrants to acquire 118,012 shares of Class A Common shares for an
exercise price of $2.00, and the exercise of an option to acquire
350,000 shares of Series A Preferred Shares at a net exercise price of
$2.25, and the receipt of proceeds totaling $600,000 pursuant to new
debt financing obtained by the Company during February 1997, and the
receipt of proceeds totaling $372,500 pursuant to the sale by the
Company during February 1997 of certain securities held for sale, less
repayments of notes payable of $470,000. During the nine months ended
March 31, 1996, the funding was the result of the sale by the Company
of 460,000 shares of Series A Preferred Stock registered by the Company
in
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September 1995, offset by debt repayments totaling approximately
$276,000. The net proceeds form the Preferred Offering were
approximately $1,633,000, including over-allotments. In addition,
Laurie Munn, wife of the Company's President, loaned the Company
$100,000 on March 28, 1997. The demand Promissory Note bears interest
at a rate of 6.0% per annum.
Net cash provided by financing activities was $1,689,000 for the
year ended June 30, 1996, compared to $1,839,000 for the year ended
June 30, 1995. The primary source of the current year's financing was
the Company's Preferred Stock Offering in September 1995 generating
proceeds of $1,633,000. During fiscal 1995, the Company sold 3,000,000
Class WA Warrants to raise net proceeds of approximately $372,000 in
additional working capital in part to support the acquired operations,
sale of 500,000 registered Class A Common shares to raise net proceeds
of approximately $438,000, and the sale of 235,000 Class A Common
shares pursuant to Regulation S under the Securities Act of 1933
("Regulation S") to raise net proceeds of approximately $283,000.
As of March 31, 1997, the Company's financial position reflected a
working capital deficit of approximately $486,000, versus a working
capital deficit of approximately $2,512,000 at June 30, 1996. Of this
working capital deficit at March 31, 1997, $826,000 is directly
attributable to the Company's direct investment in Decor Group, Inc.
(See above.) As of March 31, 1997 versus June 30, 1996, trade
receivables decreased approximately $252,000, inventories increased
approximately $476,000, and current liabilities decreased approximately
$1,425,000, due largely to the proceeds received from the equity
transactions described above, and to the extinguishment of liabilities
totaling approximately $587,000 during March 1997.
As of June 30, 1996, working capital was ($2,512,000), as compared
to ($15,000) as of June 30, 1995. As of June 30, 1996, trade accounts
receivable decreased $179,000 and inventories decreased $346,000 versus
the prior period. Notes payable and current maturities of long-term
debt reduced $369,000 during this same period. The changes from these
specific accounts produce a reduction to working capital of $536,000.
Additionally, in connection with plans to discontinue its catalog
operations, the Company recorded reserves totaling approximately
$2,200,000, which is the substantial cause of the decrease of working
capital during the year ended June 30, 1996. The Company's Management
believes that this working capital reduction will be isolated to the
year ended June 30, 1996, and that positive working capital will be
generated during subsequent periods. As disclosed at the beginning of
"Results of Operations" the negative working capital changes during the
year ended June 30, 1996 are consistent with the Company's intentions
to reposition itself for growth and profitability in subsequent
periods. No assurances can be given, however, that the Company's
expectations of improved results in subsequent periods will occur.
In March 1996, the Company executed an agreement with the Internal
Revenue Service (the "Service") for the payment of outstanding payroll
tax liabilities totaling approximately $100,000. The agreement required
the Company to pay approximately $9,000 per month until the liability
is fully paid down. The final payment in the amount of $11,000 was made
on February 28, 1997.
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In September 1995, the Company issued 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. The net proceeds from
this Offering were approximately $1,633,000, including over-allotments.
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. As of the date of this filing, independent
holders of 81,140 shares of Preferred Stock have converted such shares
into 243,420 shares of the Company's Class A Common Stock.
In May 1995, the Company filed a registration statement with the
Securities and Exchange Commission which, among other things, lowered
the exercise price of the Company's Class WA Warrant to $1.50 per
share. Also in May 1995, the Company 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. 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 July 16, 1996, the Company filed a Registration Statement
with the Securities and Exchange Commission to re-register the Class WB
Warrants and underlying Common A Shares issuable if all outstanding
Class WA Warrants were exercised. The Commission declared this
Registration Statement effective on July 19, 1996. Through the date of
this filing, 704,412 of the Company's Class WA Warrants were exercised
at $1.50 per warrant, generating proceeds to the Company totaling
$1,056,618. Of these proceeds, $811,500 was used to purchase 54,100
shares of Decor Group, Inc.'s Series C Non-Voting, Convertible,
Preferred Stock. The balance of the proceeds was retained by the
Company for working capital needs, and for the provision of loans to
Decor Group, Inc.
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 Infinity Investors, Ltd., a
Nevis, BWI Corporation. ("Infinity") The $500,000 note arose from the
restructuring of a sale of 270,000 shares of the Company's Class A
Common Stock to Infinity for proceeds totaling $501,120 under
Regulation S into a loan whereby 180,000 of the 270,000 Class A shares
would be placed into escrow, and ultimately sold by Infinity in
satisfaction of $180,000 of the note, with the balance of $220,000 to
be paid by the Company in installment payments. As of October 16, 1995
the parties agreed the Company owes Infinity, including interest and
monthly extension fees of approximately $102,500 through December 15,
1995, an aggregate amount of approximately $805,000. Pursuant to the
new agreement, the Company paid $405,000 to Infinity 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 and payable of $180,000 on or
before December 15, 1995 and $220,000 on July 31, 1996. As noted above,
the new agreement also stipulates that Infinity shall sell the 180,000
shares of the Company's Class A Common Stock, held in escrow by the
Infinity, for $180,000 to an unaffiliated third party. The proceeds of
such sale will be applied against the note during
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January 1996. In addition, during December 1995, the Company issued to
the Infinity 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.
Approximately $25,000 was charged against earnings during the quarter
ended December 31, 1995 in conjunction with the issuance of these
shares. The promissory note is also guaranteed by Max Munn, President
and Chief Executive Officer of the Company. The note is collateralized
by 600,000 shares of the Company's Class A Common Stock formerly owned
by the Company's Italia Collections Inc. subsidiary.
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.
Such Registration Statement was filed with the Commission on July 16,
1996 and declared effective on July 19, 1996. This registration
statement registered all Class WB Warrants issuable upon exercise of
all outstanding Class WA Warrants, as well as Class A Common Stock
issuable upon exercise of all potentially outstanding warrants. As of
the date of this filing, 118,012 of the Company's Class WB Warrants
were exercised generating proceeds of $236,024. These proceeds were
retained by the Company to support working capital needs, and for the
provision of loans to Decor Group, Inc. Further, in connection with
Decor's public offering, the Company will recognize any gains in
accordance with Securities and exchange Commission ("SEC") Staff
Accounting Bulletin No. 51.
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. As of the date of this filing, the Company has not yet
declared a dividend to its Series A 10% Cumulative Convertible
Preferred Stockholders for either September 1996, or March 1997.
Cumulative but unpaid dividends on Series A 10% Cumulative Preferred
Stock as of March 31, 1997 totals approximately $524,000, which the
Company intends to declare and issue during the subsequent period in
the form of Class A Common 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. The
Company is planning to register these securities with the Securities
and Exchange Commission during the quarter ended March 31, 1997. These
shares, which bear a restrictive legend, were issued on April 12, 1996.
In conjunction with the issuance of these shares, approximately $54,000
of charges were recorded against
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earnings during the year ended June 30, 1996. This filing is meant,
among other things, for the purpose of registering these 150,000 Class
A Common Shares with the Securities and Exchange Commission. The
150,000 Class A Common Shares are subject to a "lock-up" agreement with
VTR Capital Corporation, the Company's investment bankers.
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,
all of which bear a restrictive legend, were issued on April 24, 1996
to various independent investors (the "Investors") generating gross
proceeds of $431,251. The Company realized net proceeds of $310,609
which was used to pay certain outstanding liabilities. Commencing
thirty (30) days following the date of the close of the private
placement, the Investors had the right to demand in writing (the
"Demand Notice") that the Company file a registration statement with
the Securities and Exchange Commission (the "Commission") which shall
cover the shares and allow the Investor to sell the shares to the
public. Within fifteen (15) days following receipt of the Demand
Notice, the Company is required to file such registration statement and
use its best efforts to have such registration statement declared
effective by the Commission and such state securities regulators as
reasonably requested by the Investor. This filing is meant, among other
things, to register 154,000 of these Class A Common Shares and 24,400
of these Series A Preferred Shares with the Securities and Exchange
Commission, which as of the date of this filing are still being held by
the Investors.
Pursuant to the Company's June 30, 1996 settlement with Ann
Stevens (the "Settlement"), a former executive of the Company, the
Company issued to Ms. Stevens 50,000 shares of the Company's Class A
Common Stock. This filing is meant, among other things, for the purpose
of registering these 50,000 Class A Common Shares with the Securities
and Exchange Commission. The 50,000 Class A Common Shares are subject
to a "lock-up" agreement with VTR Capital Corporation, the Company's
investment bankers. These shares are being registered as part of this
registration statement. Also pursuant to the Settlement, the Company
issued to Michael Levine as escrow agent (the "Escrow Agent") 1,250,000
unregistered shares of the Company's Class B Common shares (the "Escrow
Shares".) The Escrow Shares shall not be voted by the Escrow Agent,
unless the Company defaults on its obligations under the agreement.
Upon satisfaction of such obligations, the Escrow Shares shall be
returned by the Escrow Agent to the Company. See "Legal Proceedings".
In conjunction with the issuance of the Company's shares to Ms.
Stevens, the Company recorded charges against earnings totaling $71,400
at June 30, 1996.
Pursuant to the settlements reached with Ann Stevens, as well as
other related parties (See "Legal Proceedings"), the Company is
required to make various periodic payments as disclosed at "Legal
Proceedings." The Company believes that these settlements will have no
other effect on the Company's activities in future periods.
During September 1996, pursuant to the Company's Director Stock
Option Plan, the Company issued: 10,000 shares of its Class A Common
shares to Roger Lourie, an outside director of the Company, and 10,000
shares of its Class A Common shares to various individuals named by
Richard Josephberg, also an outside director of the Company. These
shares bear a restrictive legend. Pursuant to the issuance of these
shares, approximately $15,000 was charged against earnings at March 31,
1997.
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The Company has outstanding secured financing with Infinity
Investors, Ltd. totaling approximately $181,000 at March 31, 1997. The
Company paid $40,000 of this balance during April 1997 and will
subsequently pay principal of $7,500 per month plus interest calculated
at an annual rate of 15% against the unpaid principal balance for 12
months plus a balloon payment comprising all financing interest and
principal on March 15, 1998. In connection with the settlement of terms
agreement (March 1996), the Company also issued 25,000 Warrants
purchase Common Stock at $2.50 per share. This lender also continues to
hold 600,000 Common Stock as collateral.
In February 1997 the Company received a loan from BH Funding, LLC
("BH") in the aggregate principal amount of $600,000 to be utilized to
repay certain indebtedness of the Company and for continued operating
expenses. The Company in order to collateralize the loan to BH pledged
and assigned to BH and granted to BH a continuing security interest in
the Company's 20,000,000 shares of Series B Non-Convertible Preferred
Stock of Decor, and the Company's 54,934 shares of Series C Convertible
Preferred Stock of Decor. Simultaneously with the loan to the Company,
BH purchased all of the Company's Series A Convertible Preferred Stock
holdings in Decor Group, Inc., a total of 250,000 shares.
In connection with this agreement, the fair market value of these
shares on the date of issuance was allocated as follows: $300,000 as
acquisition consulting on the Decor transaction; $300,000 as interest
on the loan additional financing costs on the loan (to be amortized
over the life of the loan using the effective interest method); and
$25,000 as additional expense of the Company's sale of its 250,000
Series A Convertible Preferred Stock holdings in Decor Group, Inc.
On May 7, 1997 the Company announced that it had extended the
exercise period of its Class A Warrants to June 22, 1998
The Company is currently a party in various legal proceedings.
(See "Legal Proceedings"). The Company believes that it has meritorious
defenses against all such proceedings and intends to vigorously assert
its rights with respect thereto. Although the Company cannot predict
the outcome of these proceedings, it is the Company's opinion that all
such proceedings, both individually and in the aggregate, will not have
a material adverse effect on its results of operations, liquidity, or
equity.
Except as otherwise set forth herein, the Company has no material
commitments for capital expenditures. In order to fund growth over the
long term, the Company anticipates possible future issuance of its
securities resulting in further dilution to its securityholders.
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
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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. 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.
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BUSINESS
General
The Company's management believes that its highest priority is to set
the stage for growth and profitability in current and subsequent
periods. The Company is now identifying and finalizing new business
ventures to achieve this goal. Two important activities currently in
progress are summarized below:
* The Company has made a major investment in Decor Group, Inc. ("Decor")
as fully disclosed below.
* In November 1996, the Company announced that it had entered into an
exclusive three year contract (the "Requirements Agreement") with
Photo-to-Art, Inc. ("P-2-A"), a major "direct-in-home" marketer of
customized "photo to canvas" computer-enhanced enlargements. This process
enables a customer to have photographs digitally enhanced, scanned,
enlarged and printed at considerably less cost than traditional
photographic enlargement processes. Under the agreement, the Company was
to finish, pack, frame, and fulfill all of P-2-A's products. As of March
31, 1997, approximately $222,000 of revenues have been realized by the
Company from this relationship. On June 1, 1997 the Company entered into
an agreement with P-2-A (the "Agreement"), which agreement superseded the
Requirements Agreement. The Agreement provides that, in exchange for the
Company agreeing to supersede the terms of the Requirements Agreement and
sell certain manufacturing equipment and related assets to P-2-A, P-2-A
will pay to the Company $600,000 in cash. The Company agreed that upon
its receipt of the $600,000, the Company will purchase from P-2-A 150,000
shares of P-2-A's common stock and 120,000 of P-2-A's common stock
purchase warrants for an aggregate purchase price of $600,000.
Additionally, P-2-A will pay the Company $50,000 for the non-exclusive
right to utilize the Company's existing mail-order customer list. P-2-A
also agreed to sublease approximately 21,000 square feet of office and
manufacturing space from the Company at an annual rental rate of $63,000
per year plus rent escalations. The term of the sublease is from June 1,
1997 to December 31, 2001.
Although the Company believes that these initiatives will lead to improved
financial results, no assurances can be provided that this will be the
case.
The Company was incorporated in October 1990 under the name A.P.F.
Holdings, Inc., a New York corporation ("A.P.F.") and merged with and into
Interiors, Inc., a Delaware corporation in March 1994. It has been engaged
since 1990, through its A.P.F. Master Framemakers and Conservators Division
("A.P.F. Master Framemakers"), in the manufacturing and marketing of museum
quality traditional and contemporary picture and mirror frames to museums,
art galleries, decorators, collectors and frame retailers. The Company is
qualified to do business in New York under the name A.P.F. Master
Framemakers.
The Company operates three showrooms, one at 75th Street in Manhattan,
one in "Old City" in Philadelphia and one at the Company's Mt. Vernon
location. The sales generated from the Manhattan showroom were
approximately $1,872,000 and $1,606,000 for the nine months ended March 31,
1997 and 1996, respectively. The Philadelphia showroom generated sales of
approximately $79,000 and $190,000 for the nine months ended March 31, 1997
and
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1996, respectively. The Company's showroom in Mt. Vernon, New York,
conducts business with upscale custom picture frame shops located
throughout the country. Sales generated from the Mt. Vernon showroom were
approximately $1,007,000 and $1,144,000 for the nine months ending March
31, 1997 and 1996, respectively.
The Company believes that the decorative accessory supply industry will
consolidate as major retailers attempt to increase their "single-sourcing"
in order to reduce distribution and related expenses. The Company intends
to capitalize on the fragmented nature of the supply side of the home
decorative accessory industry and the consolidation of such industry
through either strategic alliances or the acquisition of manufacturers and
distributors of art-related decorative accessories. Through such means, the
Company intends to increase the number and nature of products manufactured
by the Company, thereby expanding its presence in the decorative
accessories market. Such products will be offered for sale by the Company
through its existing segments or other newly created units. Management
believes that increasing the number and kinds of products it manufactures
will enhance its ability to expand its wholesale operations as the Company
develops the ability to market "whole room" packages of accessories to
furniture and department stores.
A.P.F. Master Framemakers
The Company's custom picture frames are marketed primarily to museums,
better art galleries, upscale frame shops and decorators, as well as
collectors of important works of art under the trade name "A.P.F. Master
Framemakers and Conservators" (previously defined and hereinafter referred
to as "A.P.F. Master Framemakers"). A.P.F. Master Framemakers' customers
have included nationally known museums, art institutes and galleries.
There are approximately 15,000 picture frame retailers in the United
States alone. In management's opinion, approximately 3,000 of these serve
markets which the Company believes may be sufficiently affluent to support
the Company's product line. The A.P.F. Master Framemakers division now
conducts business with only approximately 300 of these retailers, or about
10% of this market segment. The Company plans to expand its sales to the
"high-end" of this industry.
Prices on individual custom-made frames range from $100 to well over
$10,000 with the majority under $5,000. The Company has crafted several
single frames in excess of $20,000 each during the last three years. The
Company utilizes varying discount and pricing structures for its different
market segments, with frame retailers receiving the largest price discount
and art collectors receiving minimal price reductions depending on the
level of aggregate annual purchases and the degree of customization
requested. Historically, The A.P.F. Master Framemakers division has not
experienced significant returns since its business is generated from orders
for custom-made products.
Italia Collection
On October 21, 1994 (the "Closing Date") the Company, through its
newly-formed wholly-owned subsidiary, Italia, acquired all of the issued
and outstanding stock of Murano Crystal Corp. ("Murano"), a Florida
corporation doing business under the name "Italia Collection," pursuant to
the terms of a certain stock purchase agreement dated October 21, 1994 (the
"Murano
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Purchase Agreement") between Italia and Murano and Stephen M. Tucker, the
sole stockholder and acquired all of the issued and outstanding capital
stock of Ceramic Productions Corp., a Florida corporation ("Ceramic")
pursuant to the terms of a certain stock purchase agreement dated as of
such date (the "Ceramic Purchase Agreement") between Italia and Ceramic
and Stephen M. Tucker and Michael D. Tucker, the sole stockholders. The
Company agreed to pay such respective stockholders an "allocated portion"
of three times the combined "after-tax earnings" of Murano and Ceramic,
net of intercompany transactions for the third fiscal year following the
Closing date. One-third of the purchase price is payable on or before each
of September 28, 1997, 1998, and 1999 and, at the sole election of Italia,
up to two-thirds of the purchase price is payable by the delivery of Class
A Common Stock of the Company but in no event shall more than an aggregate
of 300,000 shares of Class A Common Stock be issuable in payment of the
purchase price under the Murano and Ceramic Purchase Agreements. Italia
further agreed that in the event that it elects to pay a portion of the
purchase price in shares of Class A Common Stock, that it will grant to
the stockholders a one-time "piggy-back" registration right for the
inclusion for registration of such securities in a registration statement
filed under the Securities Act at such time as other securities are
registered following the fifth anniversary of the Closing Date provided
that the respective stockholder is at the time of such registration an
employee of the Purchaser. 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 financial statements. The
parties are currently in dispute regarding the nature and amount, if any,
of the consideration necessary. Discussions are currently in progress. In
the opinion of management, there will not be any material adjustment to
the Company's financial position or results of operations as a result of
the outcome of such discussion. In connection with the Italia transaction,
the Company entered into an employment agreement with one of such
stockholders and a consulting agreement with a relative of such
stockholders. In July 1995, both the employment and consulting agreements
were terminated by the Company.
During April 1996, the Company moved the operations of Italia to the
Lance Corporation ("Lance") (a Delaware corporation), a Massachusetts
manufacturer and distributor of various products tot he giftware and
collectibles market. Lance was acquired by the Lance Acquisition
Corporation, owned by several investors, some of which are investors of the
Company. Subsequent to the relocation of Italia to Lance, disagreements
arose between the Company and Lance, and the Company was required to again
relocate the operations of Italia to the Company's headquarters. These
relocations led to a significant disruption of Italia's business
operations. Italia's revenues declined substantially during this period.
Because of these declining revenues and high operating costs, on December
16, 1996, the Board of Directors decided to dissolve and discontinue
Italia. On December 27, 1996, a Notice of Public Auction was distributed by
the Company, advising all interested parties that a public auction of all
of the assets of Italia consisting of molds, equipment, models, and
inventory listed in a Security Agreement entered into between Italia, as
debtor, and United Credit Corporation, as secured party, was to occur. The
auction took place on January 10, 1997 and the Company was the successful
bidder, thereby acquiring all of the assets of Italia in consideration of a
payment of $2,000 and the assumption by the Company of the liabilities of
Italia to United Credit Corporation, which as of March 31, 1997 totaled
approximately $806,000. Pursuant to this agreement the Company is obligated
to issue up to 100,000 shares of the Company's Class A Stock. To date, no
shares have been issued. Since the financial statements of Italia are
consolidated into those of the Company, Italia's liabilities have already
been reflected on the Company's Consolidated Financial Statements. As of
the date of this filing, the Company has
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not made a determination of the realizability of assets acquired pursuant
to this auction. Such evaluation will take place during the subsequent
period. Should any charge against earnings be accordingly necessary, they
will be recorded at the time such charge is determined. See "Business."
Discontinuation of operations of Interiors Catalog
On March 31, 1996, the Company's Board of Directors decided to
discontinue the Company's catalog operations because of declining revenues
and high operating costs. As a result, a charge against earnings of
approximately $2,100,000 was recorded at June 30, 1996. For the twelve
months ended June 30, 1996, losses from continuing catalog operations
totaled $789,332. The Company plans to fully carry out the discontinuation
of the catalog operation by June 30, 1997. 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. The financial
statements included with this filing have reclassified the results of
operations for the period ended March 31, 1996 as if the Company's catalog
operations had been discontinued at the beginning of such period.
Manufacturing
The Company's manufacturing operations include specialized woodworking
systems using unique and customized proprietary equipment, tools, dies and
molds especially created for the Company. Production also includes frame
finishing, which involves gold leaf application, antiquing and painting.
The Company maintains an inventory of metal and wood molding, composite
resins and other materials for use in its manufacturing processes. The
Company's mold and steel die inventory allows reproduction of frames from
the 14th Century (gothic) to the present day. These tools can be used to
produce over 1,500 styles of picture and mirror frames. The Company has an
extensive collection of tools, molds and dies and has been unable to locate
any other manufacturer of picture frames which casts glass and urethane
composite reproductions of decorative frames to the extent and type that
the Company does.
No single outside manufacturer supplies five percent or more of the
Company's products, and the Company's management is not aware at this time
of any product or manufacturer that the Company cannot replace with a
comparable product from an alternative manufacturer.
Products
Custom Frames. Each frame manufactured by the Company's A.P.F Master
Framemakers Division is individually made to the customer's size and finish
"coloration" specifications. In approximately 40% of the orders received by
this division, the customer also specifies a customized decorative element
or carving change to the basic design of the frame. The A.P.F. Master
Framemakers Division uses primarily fine domestic hardwoods and other
traditional materials to hand carve a "museum" quality frame. The Company's
custom frames include styles as follows: (a) Gothic through the Renaissance
and various Italian styles; (b) a product range of 15th through 17th
Century Spanish designs; (c) a variety of French "Empire" styles; (d) Dutch
and Northern European designs, generally 17th Century styles; (e) various
English designs, including Queen Anne and Georgian; (f) a broad range of
American styles, including
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Colonial, Federal, Empire, Late 19th Century Hudson River School type
frames, turn-of-the- century designs, including designs by the artists
Whistler, Prendergast, and others; and (g) contemporary designs utilizing
hardwoods and welded brass and aluminum. The Company has selected the most
popular segments of some of these periods, and has incorporated them into
brochures which picture the actual designs.
Ceramic accessories and collectibles. The Company's Italia Collections
Inc. subsidiary ("Italia") manufactures and markets ceramic and hydrocal
sculptures, resin framed mirrors, and other decorative accessories for the
home.
Organization
Interiors, Inc. (the "Company" or "Interiors" known formally as A.P.F.
Holdings, Inc. or "A.P.F.") was incorporated pursuant to the laws of
Delaware in February 1994. A.P.F. was incorporated pursuant to the laws of
New York in October 1990. A.P.F. was incorporated in order to reincorporate
in the State of Delaware. Effective March 1994, A.P.F. merged with and into
the Company. In October 1994, the Company purchased "Ceramic Production
Corp." and "Murano Crystal" to form a wholly-owned subsidiary, "Italia
Collections, Inc."
After giving effect to the discontinuance of the Catalog operations,
the Company has two operating divisions: 1) the Custom Framing Division
which is engaged in the manufacture of antique and contemporary picture
frames for museums, art galleries, designers, collectors and frame
retailers; and 2) the Wholesale Division, which manufactures and markets a
line of high- end traditional and contemporary mirrors through upscale
retail furniture and department stores. The wholesale division's wholly
owned subsidiary manufactures and markets ceramic vases and bowls,
sculpture and lamps to upscale furniture stores, furniture galleries,
department stores, catalog and other decorative accessory retailers. The
majority of the Company's sales are domestic. Sales to the largest customer
totaled approximately $788,000, or 27% of total revenues for the nine
months ended March 31, 1997.
Marketing
The Company currently markets its custom picture frames to art
galleries, museums, custom frame retailers, art consultants, artists,
corporations and private collectors.
Typically, sales for the picture frame division are generated through
the following activities:
o Sales of "high-end" custom-made picture and mirror frames through the
Company's three showrooms.
o Sales to retail picture framers. These sales generally require that the
Company supply samples or "corners," consisting of two short sides of
the frame, to the retailers who use the "corners" to promote the sales
of the Company's frames.
The Company has established an unwritten arrangement with an art
gallery in Manhattan at 231 E. 60th Street to allow one of the Company's
employees to work from that location to assist the gallery in the sale of
custom picture frames to gallery clients and other customers. The Company
operates from such location without a lease or any cost or obligation of
any kind and
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has done so since the Company's inception. Less than 4% of the Company's
revenues are generated through that location. While the Company believes
that the relationship is mutually beneficial to both the Company and such
gallery, there can be no assurance that the art gallery will allow the
relationship to continue.
The Company markets its corners to the retail framer through direct
mail brochures and through advertising in trade publications. The Company
believes these corners aid the retail framer in the sale of custom framing
to the consumer. The retail framers' investment in new corners is made
significantly easier by both the Company's extended payment terms for
corners and its coupon redemption program. The Company offers the retailer
the opportunity to extend payments for corners over several months. The
coupon redemption program encourages utilization of the corners by
affording the retail framer credit on his first order of that particular
style of frame from the Company. The Company intends to expand its
distribution of such corners through the increase in its advertising
expenditures and by offering more liberal payment terms. To the extent
retail framers accept such extended payment terms, the Company expects that
its levels of accounts receivable will increase.
The Company plans to add an additional showroom in a key market on the
West Coast of the United States during the next fiscal year. The Company
has not identified the exact location of such showroom facility and there
can be no assurance that the Company will be able to select locations which
are suitable or be able to lease showroom space on acceptable terms or be
able to attract and hire qualified personnel for such facility. The
possibility exists that the Company will not adequately forecast the time,
costs, management and capital needed to expand its A.P.F.
Master Framemakers Division.
Suppliers
Substantially all of the picture and mirror frames sold by the Company
are manufactured by the Company in its facility in Mt. Vernon, New York.
The Company purchases wood, composite resins, gold leaf, plexiglas,
matboards and other materials from a wide variety of sources, and has at
least two, and often more, suppliers for each item used in its
manufacturing process, and is not dependent upon any one supplier. The
Company currently purchases from a vendor base of more than 300 suppliers.
While there are many suppliers of most materials, the Company has chosen to
limit the majority of its purchases to the one or two vendors with whom it
has developed long-term relationships. The Company generally does not need
to enter into contracts with its suppliers as most merchandise is readily
available from multiple sources.
Competition
The custom framing industry in the United States is highly fragmented
and consists primarily of small, local framing retailers. Only a few
companies are basic manufacturers of higher priced picture frames, which
frames are selected for valuable works of art owned by museums, galleries
and collectors. Custom framing of the type produced by the Company is not
in competition with local frame stores. Management of the Company believes
that its A.P.F. Master Framemakers division is one of the largest custom
framers of its type in the country. However, there can be no assurance that
the Company's position in this industry will continue.
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Management believes that the sale of decorative accessories in the
wholesale market is also highly fragmented, with thousands of small,
specialized manufacturers and distributors and management is not aware of a
manufacturer of upscale decorative accessories similar to those distributed
by Italia.
The Company believes that its competitive advantage lies in its
ownership of a substantial number of models, tools, dies and molds
developed from museum-quality antiques and its continuing ability to
manufacture quality reproductions of those antiques. Management also
believes that the Company is further protected by what the Company
considers to be its excellent reputation with its customer base and
management's estimation that the cost today (i.e. - the difficulty) of
obtaining antiques to reproduce, as well as the costs to build tools, dies
and molds, make the entry of meaningful competition extremely difficult.
Management believes that it would be difficult to build such a collection
of tools, dies and molds because of the cost of acquiring antiques and the
reluctance of museums and collectors to loan or dispose of irreplaceable
antiques and the difficulty in establishing a trained work force of skilled
crafts people.
However, there can be no assurance that such assets will continue to
afford the Company any competitive advantage. See "Manufacturing."
Backlog and Backorders
The Company has no backlog in its A.P.F. Master Framemakers division
since the nature of custom framemaking requires that frames be constructed
only after receipt of an order. Such custom orders are generally filled
approximately thirty days after receipt of the order. At March 31, 1997,
open orders totaled approximately $775,000.
During the month of April 1996, the Company moved its Italia
Collections, Inc. ("Italia") operations from Florida to Massachusetts. Soon
thereafter, it became apparent that operational restrictions at this new
location would prevent Italia from providing a reliable and ongoing supply
of merchandise. As disclosed elsewhere in this filing, because of declining
revenues and high operating costs, on December 16, 1997, the Board of
Directors decided to discontinue and dissolve Italia. (See "The Company -
Italia Collection") Thus, as of December 31, 1997, Italia had no
outstanding backorders.
Patents and Trademarks
The Company believes that its future success does not depend upon
patents. Instead, the Company depends, to a large extent, upon the
technical competence and creative skills of its personnel and on its
unpatented proprietary technology as well as its collection of tools, dies
and molds. The Company believes that it owns or has the right to use all
proprietary technology necessary to manufacture and market its existing and
planned products. The Company has no knowledge that it is infringing on any
existing patent such that it would be liable for material damages or be
prevented from manufacturing or marketing its products. In fact, most of
the Company's technology is process-related and may not be patentable. The
decorative accessory manufacturing industry is generally not technology
driven, but is more design and marketing driven; consequently there are few
applicable patents in this industry. In the event the Company's right to
market any of its products were to be successfully challenged, the Company
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may be required to discontinue certain products and the Company's business
and prospects may be adversely affected if acceptable alternative products
were not available.
The Company owns the registered trademarks: "Interiors" and "A.P.F."
The name "Italia Collection" was registered by the former owner of this
business with the Secretary of State of Florida. Pursuant to the
acquisition of this business by the Company, it also owns this trademark.
The Company does not own any other patents, copyrights, or other
intellectual property. The Company relies upon trade secrets, a substantial
quantity of tools, dies and molds and continuing design and marketing
innovation to maintain its competitive position.
Research and Development
The Company continually seeks to develop additional design and related
molds for picture and mirror frames and capitalizes the cost thereof over a
five-year period. The Company estimates that it has expended approximately
$17,000 and $2,000 on such activities during the nine months ended March
31, 1997 and 1996, respectively. There can be no assurance that such
product development activity will yield profitable growth.
Government Regulation
The Company must comply with federal, state and local laws affecting
companies in the manufacturing and catalog business. To date, such
government regulations have not had a material adverse effect on the
Company. Prior to the date of this filing, the New York Environment
Conservation Department has requested the Company to provide operation
plans with regard to the management of chemical and waste material
currently stored on the Company's premises. The Company has complied with
this request. No other requirements or requests are currently pending from
any agency or representative or any governmental authority.
Employees
As of the date of this filing, the Company had a total of 86 full-time
employees, of whom 66 are engaged in manufacturing activities.. Effective
April 1, 1991, the Company signed a three-year collective bargaining
agreement with the Production, Merchandising and Distribution Employees
Union, Local 210, Affiliated with The International Brotherhood of
Teamsters, Chauffeurs, Warehousemen and Helpers of America, AFL-CIO (the
"Union") covering its manufacturing employees. The agreement contains a
provision for an automatic two-year renewal through April 1, 1996. As of
the date of this filing, the Company and the Union have agreed to extend
the current agreement to December 31, 1998. None of the Company's employees
have been on strike, or threatened to strike since the Company's inception
and the Company believes its relationship with all of its personnel is
satisfactory.
Acquisitions and Strategic Alliances
Part of the Company's long-term plan for growth includes either the
acquisition of or entering into strategic alliances in the decorative
accessories industry to maximize market potential. For this purpose,
pursuant to a March 3, 1996 agreement relating to the capitalization
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of Decor Group, Inc., ("Decor"), an affiliate of the Company, Decor issued
to the Company 250,000 shares of its Series A Convertible Preferred Stock,
which have since been sold by the Company, and an option to purchase
10,000,000 shares of its Series B Non-Convertible Voting Preferred Stock
(the "Option Shares") in exchange for issuance to Decor by the Company of
200,000 shares of its Class A Common Stock, to be registered by this
filing, and 200,000 shares of its Series A Convertible Preferred stock,
also to be registered by this filing, and a guarantee with respect to
certain indebtedness should such indebtedness become necessary. (The Decor
securities are adjusted to reflect a 1-for-2 reverse split effected by
Decor in October 1996.) Also, the Company exercised its option to purchase
the Option Shares in September 1996, for total cash consideration of
$2,000. Concurrent with the exercise of this option, the Company executed
a Voting Agreement (the "Voting Agreement") to vest the power to vote the
Option Shares in a Voting Trust (the "Voting Trust".) The Voting Agreement
will expire upon the earlier of February 7, 2007, or upon the Company's
repayment in full of its obligations to BH Funding, LLC, but not earlier
than December 31, 1997. The Voting Trust comprises three individuals: the
Company's President and Chief Executive Officer (and also the Chairman of
the Board of Decor), and two Directors of Decor who are otherwise
unrelated to the Company. As part of the Company's investment in Decor,
during the months of August and September 1996, the Company purchased
54,934 shares of Decor's Series C Non-Voting, Convertible, Preferred Stock
at a cost of $824,000. In the formation of Decor, the Company's intention
was to create an affiliate with a corporate identity clearly separate and
distinct from that of the Company. Decor was organized for the purpose of
acquiring the business operations of unrelated companies. On November 12,
1996 (the "Effective Date"), a public offering by Decor of certain of its
securities was declared effective by the Securities and Exchange
Commission. Subsequent to the effective date of Decor's initial public
offering, the Company owned approximately 79.6% of the total voting stock
of Decor. In December 1996, Decor declared and issued a dividend on its
common stock payable in the form of two (2) shares of common stock for
each one (1) share of common stock held as of the record date of December
16, 1996. Each share of Decor's Series A and Series C Preferred stock are
convertible into three (3) shares of Decor's common stock effective
December 16, 1996. During February 1997, the Company sold its entire
holdings of Series A Convertible Preferred Stock to BH Funding, LLC.
Assuming conversion of the Series A Convertible Preferred Stock by BH
Funding to common stock, the Company will own approximately 77.5% of the
total voting stock of Decor subsequent to such sale and conversion. As of
March 31, 1997, the holding in Decor is recorded on the Company's
financial statements at the market value on November 12, 1996, the
"Measurement Date" of the Company's trading securities previously
transferred to Decor during March 1996, plus acquisition costs, less the
proportionate value of securities sold during February 1997.
In May 1996, the Company entered into a two year Management Services
Agreement with Decor whereby the Company will advise Decor on the
manufacturing, sale, marketing and distribution of Decor's products as well
as providing Decor with accounting and administrative services and advice
on strategic planning of joint ventures, acquisitions, and other long term
initiatives. Pursuant to this agreement, the Company will be paid on an
annual basis the greater of (1) $75,000 or (2) 1.5% of excess cashflow as
defined in the agreement. The Company and Decor amended this agreement to
increase this payment to $90,000 per annum. Additional transfers of funds
from Decor to the Company will be subject to the attainment by Decor of
excess cash flow totaling $4,000,000 per year through December 31, 1999. At
December 31, 1996, the Company has accrued approximately $57,000 of fees
pursuant to this agreement.
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Decor entered into an asset purchase agreement (the "Agreement") with
Artisan House, Inc. ("Artisan House") to purchase substantially all of the
operating assets, and assume certain liabilities of Artisan House for an
aggregate purchase price of $3,526,400, subject to certain adjustments.
Decor completed the Artisan House acquisition on November 18, 1996.
Artisan House, located in Los Angeles, California and founded in 1964, is
engaged in the design, manufacturing, and marketing of metal wall, table
and freestanding sculptures. Management believes that Artisan House's
products bridge the gap between high priced gallery art and mass produced
decorative pieces. Artisan House products retail from approximately $100
to over $400. The primary goal of Artisan House is to supply a broad
spectrum of design driven sculpture and decorative accessories at moderate
prices. At December 31, 1996, the balance sheet of Artisan House reflected
total assets of approximately $4,500,000. For the period November 19, 1996
to December 31, 1996, Artisan House realized net income of approximately
$41,000 on revenues totaling approximately $635,000.
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 entered into an agreement whereby each entity will guarantee
certain liabilities of the other. Subsequently, LAC disposed of its assets
acquired from Lance, and has finalized the terms of transition with the new
owners and existing secured creditors. (See "The Company - Italia
Collection")
Description of Property
The Company has its principal offices at 320 Washington Street, Mt.
Vernon, New York, where it has sub-leased approximately 56,000 square feet
of administrative offices, manufacturing and warehousing facilities and a
factory showroom. The Company's sublease with Stern Metals expired December
31, 1996. A new five-year lease was executed on January 1, 1997 with 320
Washford LLC, the new owner of the facility. The Company's monthly base
rent payments under the sublease for the first year are approximately
$16,000 per month. Thereafter, annual escalation of the base rent is
provided. For the year ended December 31, 2001, the monthly base rent
payment will total approximately $21,000. As of the date of this filing,
the Company and Stern Metals agree that rent of approximately $190,000 is
accrued at September 30, 1996. The Company and Stern Metals are currently
negotiating terms of the payment of this liability.
The Company also operates three specialty custom frame showrooms, which
are in Mt. Vernon, New York City, and Philadelphia. The Company occupies
approximately 1,800 square feet of showroom and office space at 172 East
75th Street in New York City pursuant to a lease expiring January 31, 2003
between the Company and Francesco Saggese. The lease requires the Company
to pay rent at rates which escalate 4% per year on February 1 and which
rental is currently approximately $6,200 per month. In addition, pursuant
to a five-year lease agreement dated August 31, 1995 between I.R.A.L.,
Inc., a subsidiary of the Company and Hoopskirts Factory Partners, the
Company occupies approximately 5,740 square feet of showroom, warehouse and
office space in "Old Town" Philadelphia, PA. The agreement provides for
minimum rent of $2,500 per month. Under the current lease agreement, the
lease term will expire on August 31, 2000. The Company believes alternate
space is available if the Company
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is required to relocate and that any such relocation would not have a
material adverse effect on the Company. However, there can be no assurance
that the Company will be able to obtain such alternate space on terms
acceptable to the Company.
During April 1996, Italia moved its operations to the premises of The
Lance Acquisition Corporation ("Lance"), a Massachusetts manufacturer and
distributor of various products to the giftware and collectibles market.
Lance operates in a 48,000 square foot facility located at 321 Central
Street, Hudson Massachusetts 01748. Italia had occupied approximately
10,000 square feet of this space on a temporary basis. By July 1996, the
Company has fully vacated Lance's facilities. (See "The Company - Italia
Collection.") Italia had occupied approximately 1,750 square feet of space
at International Home Furnishings Center ("IHFC") in High Point, North
Carolina, pursuant to a lease dated May 1, 1993. The term of the lease was
five years and required rent payments of approximately $2,200 per month.
The Company and the IHFC terminated the Italia lease effective November
1996.
The Company has entered into an agreement with Photo-2-Art ("P-2-A")
whereby P-2-A has agreed to sublease approximately 21,000 square feet of
office and manufacturing space form the Company at an annual rental rate of
$63,000 per year plus rent escalations. The term of the sublease is from
June 1, 1997 to December 31, 2001.
The Company believes all of such facilities are adequate for its
current needs; however, the Company will require approximately 1,500 to
2,000 square feet of space for its contemplated showroom location. Inasmuch
as the Company has not selected the city in which it plans to establish
such showroom, it has no arrangements for such lease and there can be no
assurance that the Company will be able to obtain appropriate facilities on
terms acceptable to the Company.
Legal Proceedings
During April and May of 1995, Hide Tashiro commenced two lawsuits in
the Supreme Court of New York, Manhattan County, totaling $225,000 (plus
interest and attorney's fees) against the Company and others. The complaint
demands payment by the Company for loans made by the plaintiff. The Company
believes it has meritorious defenses against these claims since it believes
that it is owed commissions in excess of the loan payment. In April 1996
the plaintiff's motions for summary judgement were denied and the court
held that there was an issue of fact to be tried. As of the date of this
filing, there has been no further action.
In July 1995, the Company through its attorneys made demand against
Morgan Steel Ltd. The office of which is located on the Isle of Man,
England, for the payment to the Company 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 of collectibility, and ultimate legal liability of Morgan Steel Ltd.
either in the United States or the Isle of Man. As of the date of this
filing, there has been no further action.
In July 1996, Gear Holdings, Inc. brought an action in the Supreme
Court of New York, Manhattan County, against the Company for the alleged
breach of a licensing agreement. The
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Company denies that it was a party to an agreement, or that an agreement
in writing exists with Gear, or that any sum of money is owed. The
complaint demands sums Gear allegedly would have received under an
agreement in a sum to be determined, but not less than $250,000.
In July 1996, certain litigation brought against the Company and its
principals and Directors by Ted Stevens, Ann Stevens and Morris Munn, as
listed below, was settled. The litigation involved the manner in which
control of the Company passed from Morris Munn, the Company's founder, to
Max Munn, his son and the Company's current President and Chief Executive
Officer. Ann Stevens is Morris Munn's daughter, Max Munn's sister, and Ted
Stevens wife. Both Ann and Ted Stevens had been senior executives of the
Company prior to October 1995. At that date, their employment from the
Company was terminated. Thus, the litigation also involved the settlement
between the Company and Ann Stevens of her employment agreement in effect
at the time of her termination from the Company in October 1995. Settlement
of the lawsuits by Ted Stevens and Morris Munn against the Company and its
officers and Directors are subject to Court approval. Request for such
approval was submitted to the Court of Chancery of the State of Delaware in
March 1997. Such approval was received in April 1997.
(a) 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 the Company filed a complaint in the Supreme Court of the
State of New York, County of Westchester, against the Company and its
directors seeking unspecified damages and certain changes in the
composition of the Company's Board.
(b) 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. 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 and on April 17, 1996, the Court dismissed the
action for lack of subject matter jurisdiction.
(c) On December 12, 1995, Ann Stevens filed a complaint in the Supreme
Court of the State of New York, County of Nassau against the Company
and certain Directors seeking, among other things, compensatory and
punitive damages arising out of the alleged breach of Ann Stevens'
Employment Agreement.
(d) On April 23, 1996, Ted Stevens filed a complaint in the Court of
Chancery of the State of Delaware against the Company and certain
Directors, seeking among other things, the recision of a certain stock
sale agreement between the Company and Laurie Munn.
The litigation relating to the termination of the 1995 employment
agreement between Ann Stevens and the Company has been settled by the
execution of an employment severance agreement (the "Agreement"). Pursuant
to the Agreement, the Company paid Ms. Stevens $63,000 for accrued and
unpaid compensation upon execution of the Agreement. Subsequently, for a
period of seven years, the Company will make bi-weekly payments to Ms.
Stevens to total $72,000 for the first year, $70,000 for each of the next
three years, and $50,000 for each of the
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final three years. As additional compensation, the Company will pay Ms.
Stevens for reimbursement for certain expenses, $50,000 in various
installments during the four months ending December 1996. The Company also
entered into a non-compete agreement with Ms. Stevens for which the
Company will make bi-weekly payments to Ms. Stevens to total $25,000 per
year for seven years, plus automobile and insurance costs for five years.
As of June 30, 1996, the Company issued to Ms. Stevens 50,000 shares of
the Company's Class A Common Shares, which were previously committed to
Ms. Stevens pursuant to her 1995 employment agreement. The purpose of this
filing, among other things, is to register these 50,000 Class A Common
Shares with the Securities and Exchange Commission. The 50,000 Class A
Common Shares are subject to a "lock-up" agreement with VTR Capital
Corporation, the Company's investment bankers. As of June 30, 1996, the
Company placed into escrow 1,250,000 shares of its Class B Common Shares
(the "Escrow Shares") with Michael Levine, Esq., attorney of Ms. Stevens,
as escrow agent (the "Escrow Agent"). The Escrow Agent shall abstain from
voting the Escrow Shares for any purpose, except in the event of either
the failure by the Company to adhere to the payment provisions noted above
or the financial insolvency of the Company. If either event occurs, Ms.
Stevens will be in a position to elect replacement Directors. Once the
payment provisions in the severance and non-compete agreements are
satisfied, the Escrow Agent shall return the Escrow Shares to the Company.
In February 1997, the terms of the agreement with Ms. Stevens were
modified to provide for additional payments of $500 per month over 16
months, and to provide for $6,000 as reimbursement for legal expenses. The
terms described above are the basis for the settlement of certain
litigation brought against the Company and its principals and Directors by
Ted Stevens, Ann Stevens and Morris Munn.
In August 1996, The Munn Trust of 1975, Sol Munn and Evelyn A. Munn,
Co-Trustees commenced an action in the Supreme Court of New York, County
of Suffolk against the Company as well as Max Munn, the Company's President
and Chief Executive Officer and Laurie Munn, his wife for non-payment of
$150,000 plus interest. The Company claims that any obligation that it had
pursuant to this matter has been satisfied by the Company in the prior
fiscal year and that any amounts that may be unpaid are due solely by Mr.
and Mrs. Munn. The Company has not guaranteed such liabilities. This matter
has been settled.
In August 1996, SJP Contractors of New York, Inc. commenced an action
in the Supreme Court of New York, County of Westchester against the
predecessor entity of the Company, A.P.F. Holdings, Inc., and others for
$208,165 for work, labor, and services allegedly performed in January 1991
for the renovation of the Company's premises. The Company's answer pleads
that payment was made for the amount owed.
In June 1996, Artagraph Reproduction Technology, Inc., a Canadian
company, brought an action in the Supreme Court of New York, County of
Westchester against the Company demanding the sum of $27,838.08 plus
attorney's fees, alleging that the Company was obligated to deliver a
confession of judgement in connection with the sale of merchandise.
Artagraph seeks injunctive relief; the Company is not aware of a
determination of this motion by the Court and denies any obligation to
Artagraph.
In September 1991, without admitting or denying the allegations, Max
Munn, the Company's President and Chief Executive Officer agreed with the
Federal Trade Commission ("FTC") to
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the entry of a Consent Order in an action brought against Mr. Munn and
others; which action arose out of the advertising of certain lithographs
of original works of art as regards to whether or not the artist had
played a substantial role in the production of the lithographs. The case
was settled before trial or discovery solely with entry of the above
Consent Order; which enjoins Mr. Munn from making certain representations
in connection with the sale of any works of art. The Consent Order also
requires Mr. Munn for a period of five years (which expired as of
September 1996) as to the maintenance of certain records as they concern
the sale of certain lithographs.
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 the Company's financial position or its results of operations.
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MANAGEMENT
The names and ages of the Directors, executive officers and key
personnel of the Company are as follows:
Name Age Position(s) Held with the Company
---- --- ---------------------------------
Max Munn 53 President, Chief Executive Officer,
Chief Financial and Accounting Officer,
Treasurer and Director
Roger Lourie 52 Director
Richard Josephberg 50 Director
Management Biographies
Brief biographies of the Directors, executive officers, and key
personnel of the Company are set forth below. All Directors hold office
until their resignation, retirement, removal, disqualification, death or
until their successors have been elected and qualified. Vacancies in the
existing Board of Directors are filled by majority vote of the remaining
Directors. Officers of the Company serve at the will of the Board of
Directors.
Max Munn has been President and Chief Executive Officer since
September 1995. In June 1996 Mr. Munn was named Chairman of the Board of
Decor Group, Inc. (See "Recent Developments.") He served as Executive Vice
President, Operations and Secretary of the Company between February 1994
and September 1995, and a Director thereof since March 1994. He served as
Vice President of A.P.F. from May 1993 until the A.P.F. merger with the
Company. From November 1990 to May 1993, he was a consultant to the
Company, as well as a consultant directly and indirectly to Imperial
Enterprises, Inc., a catalog company in Japan, and the IEI Corporation, a
direct marketer, in Princeton, New Jersey. From 1981 to February 1990 he
was Chairman, President and Chief Executive Officer of Collectors' Guild
International Inc. In June 1990 Collectors' Guild filed a petition for
relief under the U.S. Bankruptcy Code and was subsequently liquidated. Mr.
Munn is subject to a Consent Order entered by the FTC in September 1991.
See "Management - Consent Order." Mr. Munn holds a Bachelor of Architecture
degree from The Massachusetts Institute of Technology and subsequently did
graduate level study in Art History at Columbia University.
Roger Lourie was named as a Director on May 4, 1995. He is an
engineer and book publisher. He has over twenty years of experience with
Procter and Gamble, Time Inc., Mead Paper, and Grolier Inc. He was Senior
Vice President of Marketing of Grolier Inc. Currently, he is a General
Partner of Tremon Associates and President of Misty Ridge Associates, which
are equity investment firms. He is also Chairman of the Board of two
Connecticut-based manufacturing concerns. He has a B.S. degree in
Engineering from Rensselaer Polytechnic Institute and M.B.A. and M.I.A.
degrees from Columbia University in New York.
51
<PAGE>
Richard Josephberg was named as a Director in October 1995. Since
1986, he has been the Chairman of Josephberg Grosz & Co., Inc., a New York
based investment banking firm. Josephberg Grosz specializes in providing
private institutional capital to emerging growth companies. Mr. Josephberg
has a B.B.A. degree from the University of Cincinnati, and attended Bernard
Baruch Graduate School of Business in New York.
On February 19, 1997, the employment of Michael J. Amore as the
Company's Vice President and Chief Financial Officer was terminated. As of
that date, Mr. Amore's service as a director of the Company also
terminated. This termination was necessitated by the Company's need to
restructure its administrative organization, particularly in light of the
need for cost reductions. Mr. Amore did not have an employment contract. It
is not anticipated that his termination will result in any significant
charges against earnings.
On January 31, 1997, Donald Feldman resigned from the Company's
Board of Directors to devote his time exclusively to the business
activities of Decor Group, Inc. On February 28, 1997, Mr. Feldman's
employment with Decor was terminated. The Company has no obligation to make
severance payments to Mr. Feldman pursuant to his separation from the
Company. All severance payments to Mr. Feldman are to be made by either
Decor or its subsidiary Artisan House, Inc.
Consent Order
In September 1991 Mr. Munn, without admitting or denying the
allegations, agreed with the FTC to the entry of a Consent Order for
Permanent Injunction for Defendant Max Munn (previously defined as the
"Consent Order") in an action brought in the U.S. District Court for the
Southern District of New York (90 CIV. 2554 (LMM)) against Collectors'
Guild Ltd, Inc., Collectors' Guild, Mr. Munn and J. Robert Leshufy which
action arose out of the sale of certain lithographs of original works of
art. The Consent Order arose out of a complaint alleging that Collectors
Guild, and its officer, Mr. Munn, had made advertising representations
implying that the artist had played a substantial role in the creation and
production of the lithographs. Collectors Guild and Mr. Munn denied the
allegations. The case was settled before trial or discovery, solely with
entry of the above Consent Order. The Consent Order permanently enjoins Mr.
Munn from making certain false representations in connection with the
promotion, sale or offering for sale of any art works, from removing
certain mandated disclosures on certain art, and, for a period of five
years, from destroying, mutilating, altering, or disposing of any books,
records, tapes, checks, and other business records enumerated in the
Consent Order in his possession or the possession of any business entities
directly or indirectly under Mr. Munn's control for a period of three years
after creation or receipt of such documents. Mr. Munn is also required for
a period of five years to notify the FTC of any change in his residence or
employment within 30 days of any change and must permit FTC officials
access to his office upon five days notice for inspection purposes. The
Consent Order extends to Mr. Munn, his successors, assigns, agents,
servants and employees, and all persons or entities in active concert or
participation with him who receive actual notice of the Consent Order and,
in part, to any business entities directly or indirectly under his control
or in which he owns a controlling interest, directly or indirectly.
52
<PAGE>
There are no material proceedings to which any director, officer
or affiliate of the Company, any owner of record or beneficially of more
than five percent of any class of voting securities of the Company, or any
associate of any such director, officer, affiliate of the Company or
security holder is a party adverse to the Company or any of its
subsidiaries or has a material interest adverse the Company or any of its
subsidiaries.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons
who own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission and
Nasdaq. Officers, directors and greater-than-ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms that they file.
Based solely upon a review of Forms 3, Forms 4, and Form 5 furnished to
the Company pursuant to Rule 16a-3 under the Exchange Act, the Company
believes that all such forms required to be filed pursuant to Section 16(a)
of the Exchange Act were timely filed, as necessary, by the officers,
directors and securityholders required to file the same.
53
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three fiscal years by the
Company's Executive Officers.
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------
Annual Compensation (1) Awards Payouts
------------------------------------------------------- -------------------------- ----------------------------
Other Restricted
Name and Annual Stock All Other
Principal Fiscal Compensation Awards Options/ LTIP Compen-
Position Year Salary ($) Bonus ($) ($) ($) SARs () Payouts() sation ($)
--------- ------ ---------- --------- ------------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Max Munn 1996 144,230 10,000
President, Chief 1995 151,127 10,000
Executive Officer 1994 147,126 7,000 25,000
Michael J. Amore 1996 58,558
Vice President, 1995 --0--
Chief Financial 1994 --0--
Officer (to Feb
19, 1997)
Donald Feldman 1996 117,500
Vice President, 1995 5,423
Sales and 1994 --0--
Marketing (to Feb
28, 1997)
Theodore Stevens 1996 78,115 16,000
Director (to June 1995 81,000
21,1996) 1994 74,800
Ann Stevens 1996 80,769
Executive Vice 1995
President (to Sept 1994 144,230
1995)
</TABLE>
- ------------------
(1) Does not include certain automobile expenses and other perquisites which in
the aggregate do not exceed the lesser of $50,000 or 10% of the named executive
officer's compensation.
See "Executive Compensation - Employment Arrangements" for a
description of the Company's employment agreements with Messrs. Munn and
Feldman.
54
<PAGE>
The following table sets forth certain information with respect to options
granted during the last fiscal year to the Company's Executive Officers named in
the above Summary Compensation Table.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Securities
Underlying Percent of Total Options/SARS Exercise or
Options/SARS Granted Granted to Employees in Base Price
Name (#)(1) Fiscal Year ($/Sh) Expiration Date
- ---- ------ ----------- ------ ---------------
<S> <C> <C> <C> <C>
Max Munn 10,000 10,000 1995 10,000 FMV
10,000 10,000 1996 10,000 FMV
</TABLE>
- -------------------
(1) The Company's Director Plan provides for the granting of options to
Directors to purchase 10,000 of the Company's Class A Common Shares at Fair
Market Value at date of grant. Options are granted to Directors as of the second
Monday in May of each year. As of the date of this filing, the only unexercised
options pursuant to the Director Plan are as presented in this schedule.
Aggregate Option/SAR Exercises In Last Fiscal Year And Fiscal
Year-End Option/SAR Values
The following table sets forth certain information with respect to options
exercised during the fiscal year ended June 30, 1995, by the Company's Executive
Officers named in the Summary Compensation Table, and with respect to
unexercised options held by such person at the end of the fiscal year ended June
30, 1995.
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised in the
Acquired on Value Realized Underlying Unexercised Money Options/SARs at
Name Exercise (#)(1) $ Options/SARS at FY-End (#) FY-End ($) (2)
---- --------------- - -------------------------- --------------
<S> <C> <C> <C> <C>
None.
</TABLE>
- -------------------
Directors' Compensation
Directors receive no cash compensation for their services to the Company as
directors, but are reimbursed for any expenses actually incurred in connection
with attending meetings of the Board of Directors In addition, each outside
Director is entitled to receive 10,000 Shares per year of Common Stock of the
Company pursuant to the Directors Stock Option Plan. See "Stock Option Plans".
55
<PAGE>
Employment Arrangements
On February 15, 1996, the Company's Board of Directors agreed in principle
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 consent of the Company's investment
banking firm. The agreement will also contain a "non-compete" clause and provide
the President and Chief Executive Officer with 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 period. Presently,
the President and Chief Executive Officer draws an annual salary of $150,000 and
has the use of an automobile provided by the Company.
In August 1995 the Company entered into a four year employment agreement
with Ann Stevens, then Executive Vice President, with an annual salary of
$150,000. In addition, on or about September 30, 1995, the agreement provides
for Ms. Stevens to receive a one time payment of either, at the Company's
option, $50,000 or 50,000 shares of Class A Common Stock. Pursuant to this
agreement, Ms. Stevens was also entitled to receive stock options, stock bonuses
and other equity instruments in an amount equal to that received by Max Munn or
members of his immediate family. In June 1996, the Company executed an
employment severance agreement with Ms. Stevens which terminated the provisions
of the August 1995 employment agreement. The employment severance agreement
stipulated that the Company will pay to Ms. Stevens an initial payment of
$63,000, and make various periodic payments over seven years. In addition, the
Company agreed to issue to Ms. Stevens 50,000 shares of the Company's Class A
Common Shares. Such shares were issued on July 25, 1996. (See "Legal
Proceedings.") The purpose of this filing, among other things, is to register
these 50,000 Class A Common Shares with the Securities and Exchange Commission.
The 50,000 Class A Common Shares are subject to a "lock-up" agreement with VTR
Capital Corporation, the Company's investment bankers.
On October 27, 1995 the Company entered into a one-year employment
agreement with Robert Schildkraut, then Vice President, Operations with an
annual base salary of $120,000. The Agreement could 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 resigned from the
Company. The Agreement also provided for the employee to be granted certain
stock options to purchase an aggregate of 100,000 Class A Shares, 50,000 of
which are 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 provided 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 settled its obligations to the employee
during the subsequent quarter. This settlement took the form of severance
payments totaling approximately $27,000. No securities have been issued to the
employee as part of the settlement.
On May 8, 1995, the Company entered into an Employment Agreement with
Donald Feldman, Vice President of Sales and Marketing of the Company. The
Agreement was for a term of four years beginning June 1995 and was terminable by
the Company after the first year with payment of 80% of the employee's salary,
reduced by the employee's other income. The Agreement provided for a base salary
of $117,500 plus sales incentives Mr. Feldman was granted an option to purchase
10,000 shares of the Company's Class A Common Stock for every full year under
the employment agreement at a price of $2.50 per share. Concurrent with the
Effective Date of Decor Group, Inc.'s ("Decor") initial public offering (See
"Acquisitions and Strategic Alliances."), the Company and Mr. Feldman planned to
terminate Mr. Feldman's Employment
56
<PAGE>
Agreement with the Company. Mr. Feldman and Decor had planned to enter into a
three (3) year employment agreement with Decor at such Effective Date. Mr.
Feldman resigned from the Company's Board of Directors effective January 31,
1997. On April 17, 1997, Mr. Feldman resigned from the Company and
simultaneously resigned from Decor entering into a Severance Agreement with
Decor.
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.
Consulting Arrangements
Effective as of January 4, 1994, the Company entered into a two year
Marketing and Organizational Agreement (the "Marketing Agreement") with Robert
M. Leopold. Pursuant to the Marketing Agreement, Mr. Leopold will consult with
and advise the Company concerning its marketing plans, business operations,
organization, management, strategic planning, products and services,
acquisitions, mergers, and other matters. Mr. Leopold will be paid $9,375 each
quarter in advance together with reimbursement for expenses incurred not to
exceed $200 per month. In August 1995, the Company agreed to issue, at a future
date, 60,000 Class A Common Shares to Mr. Leopold in settlement of all current
and future liabilities, under this agreement. These shares, which bear a
restrictive legend, were approved by the Company's Board of Directors in
November 1995. In conjunction with the issuance of these shares, approximately
$55,000 was charged against earnings during the year ending June 30, 1996.
On April 1, 1995, the Company entered into a Consulting Agreement with
Morris Munn, father of Max Munn, the Company's President and Chief Executive
Officer under which he will provide the Company with: design and fabrication of
new molds for sculpture; recommend, and implement improvements in antiquing,
woodworking, gilding and carving processes; and attend trade shows for frame
making and mold making. Fees under the agreement are payable at $54,000 per
annum for one year renewable at the Company's option. On June 30, 1996, Morris
Munn's Consulting Agreement was extended for five (5) years. Pursuant to the
terms of this new agreement, the Company agreed to issue to Morris Munn an
option to purchase up to 350,000 shares of the Company's Preferred Shares at a
net exercise price of $2.25 per share. The Preferred Shares issuable upon the
exercise of the Option were registered for sale to the public under a
Registration Statement in Form S-8 filed with the Securities and Exchange
Commission on July 3, 1996. The Option was fully exercised during July to
September 1996 generating net proceeds to the Company totaling $787,500. (See
"Liquidity and Capital Resources.") Subsequent to Morris Munn's exercise of
these shares, the Company's investment banking firm arranged for the sale of all
350,000 shares to independent investors at a price per share of $2.50. In
conjunction with the issuance of the Option, the Company recorded charges
against earnings of $87,500 at June 30, 1996. In addition, the new agreement
provides for bi-weekly payments to Morris Munn totaling $54,000 per year for
five years. In exchange, Morris Munn has agreed to assist the Company with
marketing, acquisitions, divestitures, joint ventures and other strategic
initiatives. Morris Munn has previously spent up to 10 to 15 hours per month in
consulting activities for the Company , primarily on product development and
assisting Max Munn in analyzing potential acquisitions. Morris Munn has ceased
performing consulting or any other services for the Company.
From time-to-time during prior periods, Sol Munn, uncle of Max Munn,
President and Chief Executive Officer of the Company has provided various
consulting services to the Company with respect to the marketing of custom
picture frames. 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 these services. The shares, which bear a restrictive legend,
were issued on April 12, 1996. In conjunction with the issuance of these shares,
approximately $54,000 of charges against earnings were recorded during the year
ended June 30, 1996. This filing is meant, among other things, to register these
150,000 Class A Common Shares with the Securities and Exchange Commission. The
150,000 Class A Common Shares are subject to a "lock-up" agreement with VTR
Capital Corporation, the Company's investment bankers.
57
<PAGE>
Other than services provided by the Company's investment banking firm, no
services have been provided at the Company's direction by any consultant or
advisor with respect to the issuance or sale of the Company's equity securities.
Stock Option Plans
The 1994 Plan. On June 20, 1994, the Company adopted the Interiors, Inc.
1994 Stock Option and Appreciation Rights Plan (the "1994 Plan"), which provides
for the granting of options to officers, employees and consultants to purchase
not more than an aggregate of 250,000 Class A Shares. Directors of the Company
are not eligible to participate in the 1994 Plan. The 1994 Plan provides for the
grant of options intended to qualify as "incentive stock options" under the
Internal Revenue Code of 1986, as amended (the "Code") as well as options which
do not so qualify.
Pursuant to the 1994 Plan, the Board of Directors or a stock option
committee established by the Board to administer the 1994 Plan determines the
persons to whom options are granted, the number of Class A Shares subject to
option, the period during which the options may be exercised and the option
exercise price. With respect to incentive stock options, no option may be
granted more than ten years after the effective date of the 1994 Plan or
exercised more than ten years after the date of grant (five years if the
optionee owns more than ten percent of the Class A Shares of the Company at the
time of grant). Additionally, with respect to incentive stock options, the
option price may not be less than 100% of the fair market value of the Class A
Shares on the date of the grant (110% if the optionee owns more than ten percent
of the Class A Shares of the Company at the time of grant). The fair market
value of the Class A Shares will be determined by the Board or the Committee in
accordance with the 1994 Plan as follows: If the Class A Shares are not listed
and traded upon a recognized securities exchange, on the basis of recent
purchases and sales of Class A Shares in arms-length transactions or based on
the last reported sale or transaction price for such stock on the date of grant
or, if the shares are traded on a recognized securities exchange or quoted on
the Nasdaq National Market System upon the basis of the last reported sale or
transaction price on the date of grant or, if the shares were not traded on such
date, on the date nearest preceding that date. Subject to certain limited
exceptions, options may not be exercised unless, at the time of exercise, the
optionee is in the service of the Company.
The Board of Directors or the Committee may, in its discretion, at any time
prior to the exercise of any option, grant in connection with such option the
right to surrender part or all of such option to the extent the option is
exercisable, and receive an amount (payable in cash, Class A Shares or
combination thereof as determined by the Board or the Committee) equal to the
difference between the then fair market value of the shares issuable upon the
exercise of the option (or portions thereof surrendered) and the exercise price
of the option or portion thereof surrendered.
On September 16, 1994, the Board of Directors granted Incentive Options to
purchase an aggregate of 159,000 Class A Shares under the 1994 Plan at an
exercise price equal to the fair market value of the shares on the date of
grant, or $3.50 per share, to 23 employees and Incentive Options to purchase
25,000 Class A Shares to Ann Stevens, then Executive Vice President of the
Company and wife of then Company President, Theodore Stevens, at 110% of the
fair market value or $3.85 per share. Of such options, options to purchase
75,000 Class A Shares were granted to Max Munn, now President and Chief
Executive Officer of the Company, and Ann Stevens, then Executive Vice President
of the Company, and Mr. Munn's sister. In addition, on October 5, 1994 the Board
of Directors granted Incentive Options to two employees to purchase an aggregate
of 20,000 Class A Shares at exercise prices equal to the fair market value of
the shares or $3.38 per share. With respect to each such grant, 25% of such
options will vest each year commencing on the first anniversary of the grant.
The Director Plan. On June 20, 1994 the Board of Directors approved
the 1994 Director Stock Option and Appreciation Rights Plan (the "Director
Plan"). The Director Plan was adopted to provide an incentive to Directors
through automatic and discretionary grants of stock options. The Director Plan
provides for the
58
<PAGE>
grant of options intended to qualify as "incentive stock options" under the Code
as well as options which do not so qualify.
The Director Plan may be administered by a committee appointed by the Board
of Directors of the Company (the "Committee"). Options under the Director Plan
may be granted to each person who is a Director of the Company on the date of
grant. All Directors of the Company are eligible to receive options under the
Director Plan.
The Director Plan provides for the granting of options to Directors in such
amount and, subject to the terms of the Director Plan, upon such terms as the
Board or Committee determines in its discretion in order to reward the recipient
director for extraordinary service to the Company. In addition, on the second
Monday of May of each year each person who is then a director of the Company
shall be automatically granted an option to purchase 10,000 of the Company's
Class A Shares, subject to adjustment as provided for in the Director Plan. The
aggregate number of shares for which options may be issued pursuant to the
Director Plan is 250,000 shares. The exercise price for options granted under
the Director Plan must be equal to the fair market value per Class A Share on
the date of grant. The fair market value of the Class A Shares will be
determined by the Board or the Committee in accordance with the Director Plan as
follows: If the Class A Shares are not listed and traded upon a recognized
securities exchange, on the basis of recent purchases and sales of Class A
Shares in arms-length transactions or based on the last reported sale or
transaction price for such stock on the date of grant or, if the shares are
traded on a recognized securities exchange or quoted on the Nasdaq National
Market System upon the last reported sale or transaction price on the date of
grant or, if the shares were not traded on such date, on the date nearest
preceding that date. Each option granted under the Director Plan expires ten
years after the date of grant, unless a lesser period is specified by the
Committee.
In the event an optionee ceases to be a Director of the Company for any
reason at a time when he holds an option, he may exercise only such options as
are exercisable at the time he ceases to be a Director, within the original term
of the option. Options which are not exercisable at the time an optionee ceases
to be a Director shall terminate. In the event an optionee dies, the Director
Plan provides for the exercise of an option on behalf of the deceased Director.
On September 16, 1994, the Board of Directors granted Incentive Options to
purchase 25,000 Class A Shares to each of Theodore Stevens, then President and
Max Munn, President and Chief Executive Officer and then Executive Vice
President-Operations under the Director Plan at an exercise price equal to 110%
of the fair market value of the shares on the date of grant, or $3.85 per share,
all of which options immediately vested. As of the date of this filing, with Mr.
Stevens no longer an officer or Director of the Company, the Company does not
plan to issue to Mr. Stevens any additional shares pursuant to any agreement
currently in effect, except that Mr. Stevens currently holds 269,750 shares of
the Company's Class B Common shares each of which are convertible into one Class
A Common share at Mr. Stevens option.
59
<PAGE>
Profit Sharing and Deferred Compensation Plans
In July 1991 the Company adopted a Qualified Profit Sharing Plan for all
nonunion employees and a nonqualified Deferred Compensation Plan for certain key
employees. The Company has not made any contributions to the Qualified Profit
Sharing Plan or the Deferred Compensation Plan since its initial contribution
during the fiscal year ended June 30, 1992.
Principal Stockholders
Each Class A Share is entitled to one vote and each Class B Share is
entitled to five votes. The Company has no other voting securities outstanding.
It does, however, have certain securities outstanding that are convertible into
Class A Common Shares. As of the date of this filing, such securities are: (1)
1,147,060 shares of Series A Preferred Stock, each convertible into 3 shares of
Class A Common stock commencing September 18, 1996, (2) 3,055,588 Class WA
Warrants, each exercisable into one Class A Common share and one Class WB
Warrant, and (3) 845,150 Class WB Warrants, each exercisable into one Common A
share, and (4) 2,270,000 Class WC Warrants, each exercisable into one share of
Series A Preferred Stock (subject to the filing with the Securities and Exchange
Commission of a post-effective amendment to the Company's September 18, 1995
Registration Statement whereby such Class WC Warrants were registered with the
Commission.)
The following table sets forth certain information as of the date hereof
with respect to: (1) each executive officer and director; (2) all executive
officers and directors of the Company as a group; and (3) all persons known by
the Company to be the beneficial owners of five percent or more of the Company's
Class A or Class B Shares of Common Stock. The table below also sets forth as to
each holder the percent of voting power represented by the Class A Shares (with
one vote per share) and the Class B Shares (with five votes per share) voting as
a single class prior to conversion of the Class B Shares to Class A Shares and
after giving effect to the conversion of such Class B Shares and assuming no
exercise of outstanding Warrants.
<TABLE>
<CAPTION>
Percent of Votes (2)
-----------------------------
Prior to After
Conversion of Conversion
Name and Address of Percent of all Class B of all
Beneficial Owner (1) Title of Class Number of Shares Class (2) Shares (3) Class B
-------------------- -------------- ----------------- ---------- ---------- Shares (4)
----------
<S> <C> <C> <C> <C> <C>
Theodore Stevens Class A Shares 319,250 (5) 6.4% 2.3% 4.7%
Class B Shares -0- -0-
Max Munn Class A Shares 45,000 (7)(8)(9) 0.9% * *
Class B Shares -0- (8) -0-
Laurie Munn Class A Shares 519,750 (9)(10) 10.48% 22.6% 15.44%
Class B Shares 519,750 (10) 29.4%
Michael Levine Class A Shares -0- -0- 9.05% 18.6%
as escrow agent Class B Shares 1,250,000 (6) 70.6%
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Percent of Votes (2)
-----------------------------
Prior to After
Conversion of Conversion
Name and Address of Percent of all Class B of all
Beneficial Owner (1) Title of Class Number of Shares Class (2) Shares (3) Class B
-------------------- -------------- ----------------- ---------- ---------- Shares (4)
----------
<S> <C> <C> <C> <C> <C>
Decor Group, Inc. Class A Shares 200,000 4.03% 1.5% (11) 2.9% (11)
320 Washington St. Class B Shares -0- -0- 0% (11)
Mt. Vernon, NY 10553 Series A Preferred 200,000 17.4%
Roger Laurie Class A Shares 20,000(14) .4% * *
Class B Shares -0- -0-
Richard Josephberg Class A Shares 20,000(14) .4% * *
Class B Shares -0- -0-
All Executive Officers and Class A Shares 85,000 (12) 1.7% 0.61% 1.2%
Directors as a Group Class B Shares -0- -0-
(3 persons) (Note 13.)
</TABLE>
* Less than 1%.
(1) Mr. Munn is the President and Chief Executive Officer and a Director of
the Company and can be contacted at the Company's principal executive
office s at 320 Washington Street, Mt. Vernon, NY 10553. Mr. Stevens is
marri ed to Mr. Munn's sister, Ann Stevens; and Max Munn and Laurie Munn
are husband and wife. Such person's percentage ownership is determined by
assuming that the options that are held by such person which are
exercisable within 60 days from the date hereof have been exercised.
During March 1997, Mr. Stevens converted 269.750 shares of Series A
Preferred Stock into 269,750 shares of Class A Common Stock.
(2) Does not give effect to the exercise of the Warrants, the Underwriters or
prior underwriters Warrants or stock options granted under the Plans other
than as noted.
(3) Reflects the percentage of the votes to which the voting Common Stock
owned is entitled to vote if the Class A Shares and Class B Shares vote as
one class. Assumes that the 1,769,750 outstanding Class B Shares have not
been converted to Class A Shares and, consequently, have five votes per
share (aggregating 8,848,750 votes).
(4) Reflects the percentage of the votes to which the voting Common Stock
owned is entitled to vote if the Class A Shares and Class B Shares vote as
one class. Assumes the 1,769,750 Class B Shares have been converted to
1,769,750 Class A Shares and, consequently, have one vote per share rather
than five votes per share.
(5) Includes 269,750 Class A Shares converted from Class B shares during March
1997. Does not include 50,000 Class A Shares issued to Ann Stevens, wife
of Mr. Stevens, pursuant to her settlement agreement with the Company,
such 50,000 Class A Common Shares being registered with the Securities and
Exchange Commission as part of this filing. (See Legal Proceedings.)
(6) Includes 1,250,000 Class B Shares (the "Escrow Shares") issued to Mr.
Levine as escrow agent pursuant to the settlement reached by the Company
and Ann Stevens with respect to a prior employment agreement. Ann Stevens,
a former executive of the Company is the beneficial owner of the escrow
shares. The escrow agent may vote the escrow shares only in the event of
the Company's default of its obligations pursuant to the settlement
agreement between the Company and Ms. Stevens. (See Legal Proceedings.)
(7) Represents Class A Shares issuable to Mr. Munn upon exercise of an
Incentive Stock Option issued pursuant to the Director Plan established on
June 20, 1994, and a grant provided on Sept. 16, 1994.
(8) Does not include 519,750 Class B Shares (convertible into 519,750 Class A
Shares) held by Mr. Munn's wife. Mr. Munn disclaims ownership of any such
shares.
(9) Pursuant to an agreement between Laurie Munn, Interiors, Inc. and VTR
Capital, Inc., entered into in July 1996, if the Company does not meet
certain net profit targets, Ms. Munn is required to forfeit her shares of
the Company's Common Stock back to the Company.
(10) Includes 519,750 shares of Class B Shares (convertible into 519,750 Class
A Shares).
(11) Includes 200,000 shares of Class A Common Shares. In addition, Decor owns
200,000 Shares of Series A Preferred shares issued pursuant to the
Company's investment in Decor Group, Inc. (See Acquisitions and Strategic
Alliances.) Each Series A Preferred share is convertible into three shares
of Class A Common Stock. If Decor Group, Inc. were to convert its Series A
Preferred Shares into Class A Common Shares, it would have
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potential voting rights of 8.7%, assuming conversion of the Class B
shares into Common A Shares. Decor's 200,000 Class A Common shares
and 200,000 Series A Preferred Shares are being registered with this
filing.
(12) Includes 45,000 Shares of Class A Common Stock issuable upon the exercise
of options pursuant to existing stock option plans.
(13) Represents the following Class A Common shares for each of three (3)
directors: 45,000 shares issuable to Max Munn, the Company's President and
Chief Executive Officer upon exercise of options pursuant to a grant
issued on September 16, 1994 and the Company's Director Plan, 10,000
shares issued to Roger Lourie under the Company's Director Plan, and
20,000 shares issued to Richard Josephberg under the Company's Director
Plan.
(14) Includes 20,000 Shares of Class A Common Stock issuable upon the exercise
of options pursuant to existing stock option plans.
There are no agreements or other arrangements or understandings known
to the Company concerning the voting of the Common Stock of the Company or
otherwise concerning control of the Company which are not disclosed herein.
There are no pre-emptive rights applicable to the Company's securities.
CERTAIN TRANSACTIONS
In October 1990 A.P.F. issued 100 shares of its Common Stock, no par
value, to Theodore Stevens, then President and a former Director of the Company,
for aggregate consideration of $225,000 and in October 1990 A.P.F. issued 165
shares of its Preferred Stock, $1,000 par value per share, to Theodore Stevens
in consideration for the payment of $165,000. As a result of the Company's
recapitalization, the Company issued 1,000,000 Class B Shares (constituting all
of the then issued and outstanding Class B Shares of the Company) to Theodore
Stevens in exchange for all of the issued and outstanding Common Stock of
A.P.F., the predecessor to the Company.
In August 1995, Theodore Stevens, a Director of the Company, and Laurie
Munn, wife of Max Munn, President and Chief Executive Officer and a Director of
the Company, entered into an agreement whereby Mr. Stevens sold to Mrs. Munn
269,750 shares of Class B Common Stock for $150,000 payable by an initial
installment of $15,000 and a promissory note for the balance of the purchase
price payable in 15 years with interest at the rate of 6.6% per annum.
During the fiscal year ended June 30, 1992, the Company borrowed the
sum of $75,000 from Sol Munn, the uncle of Max Munn, President and Chief
Executive Officer of the Company and borrowed an additional $75,000 in fiscal
1993. The aggregate amount due in the amount of $150,000 was evidenced by a
promissory note dated September 1, 1993, payable to The Munn Trust of
1975-Trustee: Sol Munn and Evelyn Munn and bore interest at the rate of 12% per
annum. The note was payable September 1, 1996, subject to the right of Sol Munn
to extend the term for an additional one year period upon 60 days notice. In
March 1994 the bearer of the note agreed to purchase certain works of art at 58%
above the Company's cost in full satisfaction of the above note. The Company
recorded approximately $87,000 credit to earnings pursuant to this transaction.
On August 13, 1996, The Munn Trust of 1975, Sol Munn and Evelyn A. Munn,
co-trustees, commenced action in the Supreme Court of the State of New York,
County of Suffolk against Laurie Munn, Max Munn, and the Company pursuant to
this transaction, seeking monetary damages for the sum of $111,000. (See "Legal
Proceedings.")
On July 7, 1994, Theodore Stevens, Max Munn and Ann Stevens, then
respectively President, Executive Vice President and Executive Vice President of
the Company, personally guaranteed the obligations of the Company under a
Promissory Note dated July 7, 1994 in the amount of $950,000 at an interest rate
of prime plus one percent (9.25% as of the date of this filing) to a New York
bank. Pursuant to terms of settlement involving various issues (See "Legal
Proceedings"), in the event that the Company's debt to the Bank is not repaid in
full prior to March 31, 1997, the Company will pay Ann Stevens, who is married
to Mr. Stevens,
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.2083% of the outstanding balance per month as compensation for her personal
guarantee. As of March 31, 1997, the outstanding balance of this note totals
$745,000.
On February 15, 1996, the Company's then Italia Collection subsidiary
entered into a Financing Arrangement with a New York corporation whereby Italia
Collection borrowed pursuant to an asset-related formula. This Financing
Arrangement has been personally guaranteed by Max Munn, the Company's President
and Chief Executive Officer and his wife.
For the years ended June 30, 1996 and June 30, 1995, the Company paid
approximately $30,000 and $46,000, respectively, to the father of the President,
and Chief Executive Officer for consulting services. See "Executive Compensation
- - Consulting Arrangements."
In October 1994, the Company borrowed the sum of $33,000 from the Vice
President and Chief Financial Officer of the Company. The amount due is
evidenced by two promissory notes dated October 27, 1994 and October 28, 1994
for $8,000 and $25,000, respectively, which bore interest rates of 18% and 12%
per annum, respectively. The principal and interest were initially due November
17, 1994 and November 18, 1994, respectively, and have been extended to February
15, 1995. Unpaid sums bear interest at the rate of 18% per annum plus $160. In
April, 1995, the Company paid all principal and interest due on both promissory
notes.
In October 1994, the Company borrowed the sum of $8,000 from the
President of the Company. The amount due was evidenced by a promissory note
dated October 27, 1994, which bore interest at a rate of 12% per annum. The
principal and interest were due November 17, 1994. In November 1994, the Company
repaid the loan. In addition, in November and December 1994, the Company
advanced an aggregate amount of $13,000 to the then Executive Vice
President-Operations of the Company, and now its President and Chief Executive
Officer. This amount will be repaid by the President and Chief Executive Officer
to the Company during the twelve months ended October 1997 at an 18% annual rate
of interest.
On February 8, 1996, the Company entered into a demand loan for
approximately $38,000, bearing 18% interest, with the President and Chief
Executive Officer of the Company. This note will be repaid by the President and
Chief Executive Officer to the Company during the twelve months ended October
1997, with interest as specified above.
In February 1996, the Company's Board of Directors approved the
issuance to Sol Munn, uncle of the President and Chief Executive Officer of the
Company, 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 $54,000 of charges were recorded against
earnings during the year ended June 30, 1996. This filing is meant, among other
things, to register these 150,000 Class A Common Shares with the Securities and
Exchange Commission. The 150,000 Class A Common Shares are subject to a
"lock-up" agreement with VTR Capital Corporation, the Company's investment
bankers.
On April 1, 1995, the Company entered into a Consulting Agreement with
Morris Munn, father of Max Munn, the Company's President and Chief Executive
Officer under which he will provide the Company with: design and fabrication of
new molds for sculpture; recommend, and implement improvements in antiquing,
woodworking, gilding and carving processes; and attend trade shows for frame
making and mold making. Fees under the agreement are payable at $54,000 per
annum for one year renewable at the Company's option. On June 30, 1996, Morris
Munn's Consulting Agreement was extended for five (5) years. Pursuant to the
terms of this new agreement, the Company agreed to issue to Morris Munn an
option to purchase up to 350,000 shares of the Company's Preferred Shares at a
net exercise price of $2.25 per share. The Preferred Shares issuable upon the
exercise of the Option were registered for sale to the public under a
Registration Statement in Form S-8 filed with the Securities and Exchange
Commission on July 3, 1996. The Option was fully exercised during July to
September 1996 generating net proceeds to the Company totaling $787,500.
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(See "Liquidity and Capital Resources.") In addition, the new agreement
provides for bi-weekly payments to Morris Munn totaling $54,000 per year for
five years. In exchange, Morris Munn has agreed to assist the Company with
marketing, acquisitions, divestitures, joint ventures and other strategic
initiatives. In conjunction with the issuance of the Option, the Company
recorded charges against earnings of $87,500 at June 30, 1996.
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 guarantee 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. The first annual installment is
due to be paid on June 30, 1997. The Company obtained an appraisal at that time
to determine the fair market value of this transaction.
Pursuant to the Company's June 30, 1996 settlement with Ann Stevens
(the "Settlement"), a former executive of the Company, the Company issued to Ms.
Stevens 50,000 shares of the Company's Class A Common Stock. This filing is
meant, among other things, to register these 50,000 Class A Common Shares with
the Securities and Exchange Commission. The 50,000 Class A Common Shares are
subject to a "lock-up" agreement with VTR Capital Corporation, the Company's
investment bankers. In conjunction with the issuance of the Company's shares to
Ms. Stevens, the Company recorded charges against earnings totaling $71,400 at
June 30, 1996.
The Company will not permit loans or other transactions among the
Company and the officers, directors, principal shareholders, or affiliates of
any of them for other than bona fide business purposes or on terms less
favorable than could be obtained from third parties, unless approved by a
majority of the disinterested directors and the independent directors, if any,
of the Company.
See "Executive Compensation - Employment Arrangements" and "Executive
Compensation - Consulting Arrangements" for descriptions of the present
employment agreement and previous consulting arrangement with Max Munn,
President and Chief Executive Officer of the Company and certain other related
and unrelated parties.
Max Munn may be deemed to be a "parent" or "promoter" of the Company,
as that term is defined in the Securities Act.
DESCRIPTION OF SECURITIES
Common Stock
The Certificate of Incorporation of the Company authorizes the
issuance of up to (i) 30,000,000 shares of Class A Common Stock, par value $.001
per share, (previously defined as "Class A Shares") of which 4,961,241 Class A
Shares are issued and outstanding as of the date hereof and (ii) 2,500,000
shares of Class B Common Stock, par value $.001 per share (previously defined as
"Class B Shares") of which 1,769,750 Class B Shares are issued and outstanding
as of the date hereof. The holders of shares of Common Stock: (i) have equal
ratable rights to dividends from funds legally available therefor, when, as and
if declared by the Board of Directors of the Company; (ii) are entitled to share
ratably in all of the assets of the Company available for distribution to
holders of Common Stock, upon liquidation, dissolution or winding up of the
affairs of the Company; and (iii) do not have preemptive or subscription rights
and there are no redemption or sinking fund provisions applicable thereto. All
shares of Common Stock issued and outstanding are duly authorized, fully paid
and nonassessable.
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Class A Shares. Each Class A Share is entitled to one non-cumulative
vote per share on all matters on which stockholders may vote at meetings of
stockholders. The Class A Shares are not convertible into any other securities
of the Company.
Class B Shares. Each Class B Share is entitled to five non-cumulative
votes per share on all matters on which stockholders may vote at all meetings of
stockholders. The Class B Shares are convertible on a one-for-one basis at any
time after issuance at the option of the holder into Class A Shares. Issuance of
additional Class B Shares could, under certain circumstances, have the effect of
delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Class A Shares.
Except as otherwise required by law, the holders of the Common Stock
shall vote together as a single class on all matters.
Preferred Stock
The Certificate of Incorporation of the Company authorizes the issuance
of up to 5,300,000 shares of Preferred Stock, $.01 par value per share. Prior to
September 18, 1995, none of such Preferred Stock had been designated or issued.
On September 18, 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. The Board
of Directors is authorized to issue shares of Preferred Stock from time to time
in one or more series and, subject to the limitations contained in the
Certificate of Incorporation and any limitations prescribed by law, to establish
and designate any such series and to fix the number of shares and the relative
conversion rights, voting rights and terms of redemption (including sinking fund
provisions) and liquidation preferences. If shares of Preferred Stock are issued
with voting rights, such issuance could affect the voting rights of the holders
of the Company's Class A Shares and Class B Shares by increasing the number of
outstanding shares having voting rights, and by the creation of class or series
voting rights. Shares of Preferred Stock with conversion rights could
potentially increase the number of shares of Common Stock outstanding. Issuance
of Preferred Stock could, under certain circumstances, have the effect of
delaying or preventing a change in control of the Company and may adversely
affect the rights of holders of Class A Shares. Also, Preferred Stock could have
preferences over the Class A Shares (and other series of stock) with respect to
dividends and liquidation rights. As of the date of this filing, the Company has
1,147,060 shares of Series A Preferred Stock outstanding, all of which are
currently convertible into three shares of Common A shares.
Series A 10% Cumulative Convertible Preferred Stock
The Series A Preferred Stock consists of 2,870,000 shares of which
1,147,060 shares are currently issued and outstanding. Each share of Series A
Preferred Stock is currently convertible into 3 shares of Class A Common Stock.
After September 17, 2000, it is redeemable by the Company in whole or in part at
$5.50 per share upon 30 days prior written notice. The Series A Preferred Stock
is entitled to a dividend, prior to any payment of dividends on the Class A or
Class B Common Stock, of $0.50 per share per annum payable in semi-annual
installments of $0.25 per share. If the Series A Preferred stock dividend is not
paid, it accumulates until paid in full to date. The Company may elect to pay
the Series A Preferred Stock dividend either in cash or in shares of Class A
Common Stock shall be issued for such purposes on the basis of the average
closing prices of the Class A Common Stock for the ten business days prior to
the date of declaration of the Series A Preferred Stock dividend. The Series A
Preferred Stock shall not have any right to vote except to the extent, if any,
required by Delaware Law. Upon liquidation of the Company, the Series A
Preferred Stock is entitled to receive $5.00 per share plus accrued and unpaid
dividends before any payment is made to the holders of Class A and Class B
Common Stock.
Redeemable Warrants
Class WA Warrants. Each Class WA Warrant entitles the registered holder
thereof to purchase one Class A Share and one Class WB Warrant at a combined
exercise price of $1.50 until June 23, 1998. The combined exercise price of the
Class WA Warrants as originally issued was $6.00. On March 29, 1995 the Company
announced that because of certain sales of Class A Shares by the Company, the
combined exercise price of each
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Class WA Warrant had been reduced to $5.17 and each Class WA Warrant now
entitled the holder to purchase 1.1 Class A Shares and 1.1 WB Warrants; and
that the exercise price of each WB Warrant had been reduced from $7.00 to $6.03
(subsequently reduced to $2.00 - see below) and each Class WB Warrant now
entitles the holder to purchase 1.1 Class A Shares. On April 13, 1995 the Board
of Directors, as permitted by the terms of the Warrant Agreements, reduced the
combined exercise price of each of the Class WA Warrants to $1.50 for one share
of Class A Stock and for one Class WB Warrant in order to facilitate the sale
of 300,000 shares of Class A Stock by the Company. The exercise price of the
Class WA Warrants is subject to adjustment under certain circumstances.
Fractional Class A Shares will not be issued upon exercise of the Class WA
Warrants and, in lieu thereof, a cash adjustment based on the market value of
the Class A Shares immediately prior to the date of exercise will be made.
The Class WA Warrants are redeemable by the Company at any time after
June 22, 1995, and prior to their exercise upon notice of redemption in writing
to the Class WA Warrant holders of record, giving a 30-day notice of such
redemption. The redemption price of the Class WA Warrants is $0.01 per Warrant
if the closing bid price per Class A Share has equaled or exceeded 120% of the
then exercise price of the Class WA Warrants for 20 consecutive trading days
prior to any such call for redemption. Any Class WA Warrants so redeemed, and
not exercised by the end of the date specified in the notice of redemption, will
expire on the books of the Company and cannot be exercised. On May 7, 1997, the
Company announced that it has extended the exercise period of its Class WA
Warrant to June 22, 1998.
Class WB Warrants. Each Class WB Warrant entitles the registered holder
thereof to purchase one Class A Share at a purchase price of $2.00 until June
22, 1999. The exercise price of the Class WB Warrant was previously $6.03. In
January 1996, the Company announced that the exercise price of the Class WB
Warrant is reduced to $2.00 per Class A Common share. The exercise price of the
Class WB Warrants is subject to adjustment under certain circumstances.
Fractional Class A Shares will not be issued upon exercise of the Class WB
Warrants and, in lieu thereof, a cash adjustment based on the market value of
the Class A Shares immediately prior to the date of exercise will be made.
The Class WB Warrants are redeemable by the Company at any time prior
to their exercise after June 22, 1995, and upon notice of redemption in writing
to the Warrant holders of record, giving a 30-day notice of such redemption. The
redemption price of the Class WB Warrants is $0.01 per Warrant if the closing
bid price per Class A Share has equaled or exceeded 120% of the then exercise
price of the Class WB Warrants for 20 consecutive trading days prior to any such
call for redemption. Any Class WB Warrants so redeemed, and not exercised by the
end of the date specified in the notice of redemption, will expire on the books
of the Company and cannot be exercised.
Class WC Warrants. Each Class WC Warrant entitles the holder to
purchase one share of Preferred Stock during the five year period commencing
September 18, 1995 at a purchase price of $5.50, subject to the maintenance by
the Company of a current registration statement filed with the Securities and
Exchange Commission. Commencing one year from the date of issuance, each Class
WC Warrant shall be redeemable by the Company at a redemption price of $.05 per
Warrant upon thirty days prior written notice to holders; provided, however,
that the closing average bid price of the Preferred Stock in the
over-the-counter market, for a period of twenty consecutive trading days prior
to such call for redemption, shall have been 110% or more of the then effective
exercise price of the Class WC Warrants.
The Warrants are exercisable by tendering to American Stock Transfer &
Trust Company, New York (the "Warrant Agent") the appropriate exercise price
along with the Warrant certificate (with the election to purchase section on the
reverse side of the certificate properly filled out.) The Company shall then
issue and sell such fully paid and nonassessable Class A Shares, Class WB
Warrants, and Series A Preferred Shares, as applicable, to the Warrant holder as
specified on the certificate so tendered. Payment of the exercise price shall be
made in cash or by certified check or bank draft made payable to the order of
the Company. For further information, reference is made to the Warrant
Agreements which has been filed as exhibits to the Registration Statement of
which this Prospectus is a part.
The Warrants pursuant to their terms are subject to adjustment upon the
occurrence of certain events including subdivisions or combinations of the Class
A Shares or Preferred Stock, as the case may be. The Company may at any time,
and from time to time, extend the exercise period of the Warrants, provided that
written notice of such extension is given to the Warrant holders prior to the
expiration date then in effect. Also, the
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Company may reduce the exercise price of the Warrants for limited periods or
through the end of the exercise period if deemed appropriate by the Board of
Directors of the Company. Notice of any reduction of the exercise price will be
given to the Warrant holders. Prior to any such extension or modification of
the exercise price of such Warrants, the Company may be required to amend the
Registration Statement covering such securities or to file a new registration
statement.
Representative's Warrants
In connection with the June 1994 Initial Public Offering, the Company sold to
the Representative's designees for nominal consideration, the Representative's
Warrants to purchase up to an aggregate of 45,000 Class A Shares, 40,000 Class
WA Warrants and 22,500 Class WB Warrants. The Representative's Warrants are
exercisable through June 22, 1999 at exercise prices of $1.50, $0.12 and $0.12
as to the Class A Shares, Class WA Warrants and Class WB Warrants, respectively,
subject to certain adjustments. In October 1994 the Company repurchased
Representative's Warrants to purchase 30,015 Class A Shares, 40,000 Class WA
Warrants and 22,500 Class WB Warrants from the holder thereof. The holders of
the remaining outstanding Representative's Warrants have the opportunity to
profit from a rise in the market price of the securities, if any, without
assuming the risk of ownership, with a resulting dilution in the interest of
other shareholders. The Company may find it more difficult to raise additional
equity capital if it should be needed for the business of the Company while the
Representative's Warrants are outstanding. At any time at which the holder
thereof might be expected to exercise them, the Company would probably be able
to obtain additional capital on terms more favorable than those provided by the
Representative's Warrants. See "Risk Factors."
In connection with the Preferred Stock offering in September 1995, the
Company sold to VTR, Underwriters Warrants, for an aggregate purchase price of
$20.00, entitling the Holders to purchase 40,000 shares of Series A Preferred
Stock and 20,000 Class WC Warrants. These Warrants shall not be exercisable
until September 17, 1996. Such Warrants shall be exercisable for a period of
four years commencing September 17, 1996. The exercise price for each Warrant to
purchase Series A Preferred Stock shall be $6.00 per share, and the exercise
price to purchase WC Warrants is $.06 each. The Company has agreed that, while
the VTR Warrants are outstanding, it will not enter into any merger or
reorganize or to take any other action which would terminate the VTR Warrants.
The Warrants contain anti-dilution adjustment provisions.
Business Combination Provisions
The Company is subject to a Delaware statute ("Section 203") regulating
"business combinations," defined to include a broad range of transactions
between Delaware corporations and "interested stockholders," defined as persons
who have acquired at least 15% of a corporation's outstanding voting stock.
Under the law, a corporation which is subject to Section 203 may not engage in
any business combination with any interested stockholder for a period of three
years from the date such person became an interested stockholder unless certain
conditions are satisfied. Section 203 contains provisions enabling a corporation
to avoid the statute's restrictions.
Anti-Takeover Measures
The Company's Certificate of Incorporation and By-Laws contain
provisions that could discourage potential takeover attempts and prevent
shareholders from changing the Company's management. The existence of such
anti-takeover provisions could, among other things; (1) result in the Company
being less attractive to a potential acquirer and (2) result in shareholders
receiving less for their shares than otherwise might be available in the event
of a take-over attempt. The By-Laws provide that certain vacancies on the Board
of Directors shall be filled by a majority of the remaining Directors then in
office.
In addition, the Company's By-Laws limit the ability to call a special
meeting of shareholders to the president or any executive vice president upon
the request in writing of two-thirds of the Board of Directors or upon the
written request of shareholders of the Company owning two-thirds of each class
of stock issued and outstanding and entitled to vote. The By-Laws also provide
that no proposal by a shareholder shall be presented for vote at a special or
annual meeting of shareholders unless such shareholder, not later than the close
of business on the fifth day following the date on which notice of the meeting
is first given to shareholders, shall provide the Board of Directors or the
secretary of the Company with written notice of intention to present a proposal
for action at the forthcoming meeting of shareholders, which notice shall
include the name and address of such shareholder,
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the number of voting securities held of record and held beneficially, the text
of the proposal to be presented at the meeting and a statement in support of
the proposal. Any shareholder may make any other proper proposal at an annual
or special meeting of shareholders and the same may be discussed and
considered, but unless stated in writing and filed with the Board of Directors
or the secretary prior to the date set forth hereinabove, such proposal shall
be laid over for action at an adjourned, special or annual meeting of the
shareholders taking place 60 days or more thereafter. This provision shall not
prevent the consideration and approval or disapproval at the annual meeting of
reports of officers, directors, and committees; but in connection with such
reports, no new business shall be acted upon at such annual meeting unless
stated and filed as described above.
Transfer and Warrant Agent
The Transfer Agent for the Class A and Class B Common Stock, the Series
A Preferred Stock, and the Warrant Agent for all classes of Warrants is American
Stock Transfer & Trust Company, New York, New York.
Registration Rights
The holders of the remaining Representative's Warrants and VTR Warrants
have demand and piggy-back registration rights with respect to the
Representative's Warrants and VTR Warrants and the securities underlying the
Representative's Warrants and VTR Warrants for a period of five years. Any
exercise of such registration rights may result in dilution in the interest of
the Company's shareholders, hinder efforts by the Company to arrange future
financings of the Company and/or have an adverse effect on the market price of
the Company's Class A Shares and/or Warrants.
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MARKET FOR THE COMPANY'S SECURITIESMARKET FOR THE COMPANY'S SECURITIES
AND RELATED STOCKHOLDER MATTERS
Prior to the Initial Public Offering, there existed no public trading
market for any of the Company's securities. In connection with the Initial
Public Offering, the Company applied for and was granted inclusion of its
securities for quotation on The Nasdaq SmallCap Market. The Class A Shares and
the Class WA Warrants commenced quotation on The Nasdaq SmallCap Market on June
23, 1994 under the symbols "INTXA and INTXW", respectively, and the Class WB
Warrants commenced quotation on June 24, 1994 under the symbol "INTXZ." On
September 18, 1995, the Company's Series A Preferred Shares and Class WC
Warrants commenced quotation under the symbols "INTXP" and "INTXL" respectively.
While the Company's securities are currently listed for quotation on The Nasdaq
SmallCap Market, there can be no assurance given that the Company will be able
to satisfy the requirements for continued quotation on The Nasdaq SmallCap
Market or that such quotation will otherwise continue; nor can there be any
assurance given that any market for the Company's securities that has developed
since completion of the Initial Public Offering or the Preferred Stock Offering
will continue or be sustained. See "Risk Factors - No Assurance of Public Market
or Continued Nasdaq Listing."
The following table sets forth, for the periods indicated, the average
closing bid prices, reported by The Nasdaq SmallCap Market, for the Class A
Shares, the Class A Warrants the Class B Warrants the Series A Preferred Shares,
and the Class WC Warrants for the periods such securities have been trading on
The Nasdaq SmallCap Market.,
<TABLE>
<CAPTION>
Class A Com Class WA Wt Class WB Wt Series A Pfd Class WC Wt
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal year - June 1995
Quarter ended - Sept 94 4.72 1.81 0.60 N/A N/A
Quarter ended - Dec 94 3.00 0.85 0.47 N/A N/A
Quarter ended - Mar 95 2.32 1.09 0.25 N/A N/A
Quarter ended - June 95 1.69 0.72 0.12 N/A N/A
Fiscal year - June 1996
Quarter ended - Sept 95 1.50 1.25 0.13 7.50 2.50
Quarter ended - Dec 95 1.25 1.12 0.20 7.13 3.00
Quarter ended - Mar 96 2.59 1.33 0.61 6.17 2.38
Quarter ended - June 96 3.55 1.39 0.83 6.00 1.93
Fiscal year - June 1997
Quarter ended - Sept 96 2.86 2.11 1.09 6.29 1.79
Quarter ended - Dec 96 2.41 1.81 0.75 7.31 1.54
Quarter ended - Mar 97 1.42 0.88 0.50 4.63 1.33
</TABLE>
As of the date of this filing, there were approximately 1,111
beneficial owners of Class A Shares and three beneficial owners of Class B
Shares. At this date, there were 4,961,241 Class A Shares, 1,769,750 Class B
Shares, 3,055,588 Class WA Warrants, 845,150 Class WB Warrants, 1,147,060 Series
A Preferred Shares and 2,270,000 Class WC Warrants outstanding. The closing bid
and ask prices of the Class A Shares, Class WA Warrants, Class WB Warrants,
Series A Preferred and WC Warrants on Nasdaq on January , 1997, were $ and $ per
Class A Share, respectively; $ and $ per Class WA Warrant, respectively; $ and $
per Class WB Warrant, respectively, $ and $ per Series A Preferred Share,
respectively, and $ and $ per Class WC Warrant, respectively.
The Company has never paid and does not anticipate paying any cash
dividends on its Class A or Class B Shares in the foreseeable future, but
instead intends to retain all working capital and earnings, if any, for use
69
<PAGE>
in the Company's business operations, and in the expansion of its business. 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. As of the date of this filing, dividends relating to
the Company's Series A Preferred Shares are in arrears for September 1996 and
March 1997, and total approximately $524,000. The Company expects to declare and
issue this dividend in the form of Class A Common shares during the subsequent
period. See "Risk Factors - Lack of Dividends."
70
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this filing, there are 4,961,241 Class A Shares
outstanding, 1,769,750 Class B Shares outstanding, and 1,147,060 Series A
Preferred Shares outstanding. All except 1,270,000 of such Class A Shares are
presently fully tradeable without restriction or further registration under the
Securities Act, except that any such shares owned by affiliates of the Company
will be subject to the limitations of Rule 144 under the Securities Act. As of
the date of this filing, Laurie Munn, wife of the Company's President and Chief
Executive Officer owns 519,750 shares of the Company's Class B Common shares,
and Michael Levine, Esq. as Escrow Agent owns 1,250,000 of such Class B shares.
(See "Legal Proceedings".) These holdings comprise all of the Company's
outstanding Class B Common shares as of the date of this filing. Pursuant to
agreements with the Company's investment banking firm, and in connection with
the Company's September 18, 1995 offering of preferred stock and warrants, the
outstanding Class B shares may not be sold or otherwise disposed before March
17, 1997 without the prior consent of the Company's investment banking firm. See
"Certain Transactions." In the event any shares not currently salable become
salable by means of registration, exemption from registration or eligibility for
sale under Rule 144 and the holders of such shares elect to sell such shares in
the public market, there may be a negative effect on the market price of the
Company's securities and on the ability of the Company to obtain additional
equity financing.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated), including persons who may be deemed to be
"affiliates" of the Company as that term is defined under the Securities Act, is
entitled to sell within any three-month period a number of restricted shares
beneficially owned for at least one year that does not exceed the greater of (i)
one percent of the then outstanding Class A Shares (49,622 Class A Shares as of
the date hereof) or (ii) the average weekly trading volume in the Class A Shares
during the four calendar weeks preceding such sale. Sales under Rule 144 are
also subject to certain requirements as to the manner of sale, notice and the
availability of current public information about the Company. However, a person
who is not an affiliate and who has beneficially owned such shares for at least
two years is entitled to sell such shares without regard to the volume or other
resale requirements.
The Company has granted to the holders of the Representative's Warrants
and VTR Warrants the right, subject to certain terms and conditions, to register
at the Company's expense at the holder's demand, all or any part of such
Representative's Warrants and VTR Warrants or any securities underlying such
Representative's Warrants and VTR Warrants under the Securities Act or in
connection with registrations of any securities by the Company.
The Company also has 3,055,588 Class WA Warrants 845,150 Class WB
Warrants, and 2,270,000 Class WC Warrants outstanding. The outstanding Class WA
Warrants are exercisable to purchase 3,055,588 Class A Shares and 3,055,588
Class WB Warrants which Class WB Warrants are exercisable to purchase an
additional 3,055,588 Class A Shares and the outstanding Class WB Warrants are
exercisable to purchase 845,150 Class A Shares. On July 19, 1996, the Company's
Registration Statement enabling the exercise of Class WA and Class WB Warrants
became effective.
No predictions can be made of the effect, if any, that sales of any
class of the Company's Shares or the availability thereof for sale will have on
the market price of such securities prevailing from time to time.
Nevertheless, the foregoing could adversely affect prevailing market prices.
71
<PAGE>
SELLING SECURITYHOLDERS
The Registration Statement of which this Prospectus is a part, relates to
654,000 shares of Class A Common Stock and 324,400 shares of Series A Preferred
Stock held by the Selling securityholders.
Certain Stockholders
Preferred Stock
The following chart summarizes the securities held by, the shares of
Preferred Stock registered on behalf of, and percentage of Preferred Stock held
beneficially before and after the offering by, certain Selling Securityholders:
<TABLE>
<CAPTION>
Name and Address of Number of Percentage Number of Number of
Beneficial Owner Shares of of Shares Shares of Beneficially
Preferred Stock Before Preferred Owned Shares
Beneficially Owned Offering Stock Registered after Offering
<S> <C> <C> <C>
H. Ronald Levin and 17,400 1.51% 17,400 ---
Stuart M. Herman
Joint Tenants in Common
2315 Miller Oaks Drive, N.
Jacksonville, FL 32207
J.C. Pruitt 7,000 .61% 7,000 ---
2453 Ruth Mason Drive
Blairsville, GA 0512
BH Funding, LLC 100,000 8.7% 100,000 ---
750 Lexington Avenue
New York, NY 10022
Decor Group, Inc 200,000 17.43% 200,000 ---
320 Washington St.
Mt. Vernon, NY 10553
</TABLE>
72
<PAGE>
The following chart summarizes the securities held by, the shares of
Common Stock registered on behalf of, and percentage of Common Stock held
beneficially before and after the offering by, certain Selling Securityholders:
<TABLE>
<CAPTION>
Name and Address of Number of Percentage Number of Number of Percentage
Beneficial Owner Shares of of Shares Shares of Beneficially of Shares
Common Stock Before Common Owned Shares After
Beneficially Owned Offering Stock Registered after Offering Offering
<S> <C> <C> <C> <C> <C>
Sharon B. Gaff Trust 15,100 .30% 15,100 ---
James E. Gaff Trustee
5470 Clifton Road
Jacksonville, FL 32211
David J. Hunter, Jr. 50,000 1.00% 50,000 --- ---
6150 Walnut Creek Court
Amherst, New York 14051
Howard L. Knight 14,315 .28% 14,315 --- ---
6718 Oakwood Drive
Jacksonville, FL 32211
H. Ronald Levin and (2) 18,000 .36% 18,000 --- ---
Stuart M. Herman
Joint Tenants in Common
2315 Miller Oaks Drive, N.
Jacksonville, FL 32207
F. Bartow McDonald IV 14,285 .28% 14,285 --- ---
1137 Miramar Avenue
Jacksonville, FL 32207
J.C. Pruitt (3) 7,000 .14% 7,000 --- ---
2453 Ruth Mason Drive
Blairsville, GA 0512
G. Brian Wheeler 14,300 .28% 14,300 --- ---
25045 Marsh landing Pkwy.
Ponte Verda Beach, FL 32082
Karen and Michael 15,000 .30% 15,000 --- ---
Williamson
8240 Planters Grove
Cordova, TN 38018
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Number of Percentage Number of Number of Percentage
Beneficial Owner Shares of of Shares Shares of Beneficially of Shares
Common Stock Before Common Owned Shares After
Beneficially Owned Offering Stock Registered after Offering Offering
<S> <C> <C> <C> <C> <C>
Ann Stevens 50,000 1.00% 50,000 --- ---
8575 E. Davenport Dr.
Scottsdale, AZ 85260
Sol Munn 150,000 3.02% 150,000 --- ---
7663 Silver Wells Rd.
Las Vegas, NV 89129
BH Funding, LLC 100,000 2.01% 100,000 --- ---
750 Lexington Avenue
New York, NY 10022
Decor Group, Inc. 200,000 4.03% 200,000 --- ---
320 Washington St.
Mt. Vernon, NY 10553
</TABLE>
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by
the Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. The Selling Securityholders
and intermediaries through whom such securities are sold may be deemed
"underwriters" within the meaning of the Act with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of securities is made by or on behalf of
the Selling Securityholders, to the extent required, a Prospectus will be
distributed which will set forth the number of shares being offered and the
terms of the Offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for sales
purchased from the Selling Securityholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers and the proposed selling
price to the public.
LEGAL MATTERS
74
<PAGE>
Certain legal matters in connection with the securities offered hereby
are being passed upon for the Company by Bernstein & Wasserman, LLP, New York.
75
<PAGE>
EXPERTS
The audited financial statements included in this Prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report. Reference is made to said report which includes
an explanatory paragraph that addresses a going concern issue discussed in Note
1 to the financial statements.
76
<PAGE>
FINANCIAL STATEMENT INDEX
<TABLE>
<S> <C>
Balance Sheet as of March 31, 1997 (unaudited)....................... F-1
Statements of Operations-
For the Three Months Ended March 31, 1997 and 1996 (unaudited).. F-2
Statements of Operations-
For the Nine Months Ended March 31, 1997 and 1996 (unaudited).... F-4
Statement of Changes in Stockholders' Equity-
For the Nine Months Ended March 31, 1997 and 1996 (unaudited).. F-6
Consolidated Statement of Cash Flows-
For the Nine Months Ended March 31, 1997 and 1996 (unaudited).. F-9
Notes to Consolidated Financial Statements........................... F-11 - F-17
Report of Independent Public Accountants............................. F-18
Consolidated Balance Sheet as of June 30, 1996....................... F-19
Consolidated Statements of Operations-
For the Years Ended June 30, 1996 and 1995...................... F-20
Consolidated Statement Changes in Stockholders' Equity-
For the Years Ended June 30, 1996............................... F-21
Consolidated Statement of Cash Flows-
For the Years Ended June 30, 1996 and 1995...................... F-22
Notes to Consolidated Financial Statements........................... F-23 - F-44
77
<PAGE>
INTERIORS, INC.
BALANCE SHEET
(unaudited)
</TABLE>
<TABLE>
<CAPTION>
March 31,
ASSETS 1997
---------------------
<S> <C>
CURRENT ASSETS:
Cash $172,804
Accounts receivables -
Trade, net of allowance of $287,000 532,256
Inventories 2,197,625
Prepaid expenses and other current assets 521,970
---------------------
Total current assets 3,424,655
---------------------
INVESTMENT IN AFFILIATE 2,772,967
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 1,484,725
Furniture and fixtures 144,297
Leasehold improvements 213,010
---------------------
Total property and equipment, at cost 1,842,032
Less - Accumulated depreciation and
amortization 922,412
---------------------
Net property and equipment 919,620
OTHER ASSETS 398,941
---------------------
Total assets $7,516,183
=====================
<CAPTION>
March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997
---------------------
<S> <C>
CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt $2,646,130
Accounts payable and accrued liabilities 1,264,776
---------------------
Total current liabilities 3,910,906
---------------------
NON-CURRENT LIABILITIES:
Capital lease obligations 23,282
---------------------
Total noncurrent liabilities 23,282
---------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,300,000 shares authorized,
1,147,060 shares issued and outstanding 11,471
Class A common stock, $.001 par value,
30,000,000 shares authorized,
4,961,241 shares issued and outstanding 4,961
Class B common stock, $.001 par value,
2,500,000 shares authorized,
1,769,750 shares issued and outstanding 1,770
Additional paid-in-capital 13,193,457
Retained deficit (9,191,564)
Treasury Stock (600)
Note receivable (437,500)
---------------------
Total stockholders' equity 3,581,995
---------------------
Total liabilities and stockholders' equity $7,516,183
=====================
</TABLE>
The accompanying notes are an integral part of this balance sheet
F-1
<PAGE>
INTERIORS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NET SALES $905,132 $1,756,106
COST OF GOODS SOLD
(incl. write-down in 1997 of $225,969
of Italia collection obsolete inventory) (Note 6) 657,047 863,937
-------- ----------
Gross profit from continuing operations 248,085 892,169
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 573,245 821,741
PROVISION - ISSUANCE OF STOCK OPTIONS 0 (6,800)
-------- ----------
Operating expenses 573,245 814,941
Loss from continuing operations (325,160) 77,228
GAIN ON SALE OF SECURITIES 243,945 0
RESERVE FOR DISSOLUTION OF
ITALIA COLLECTION, INC. (Note 6) (56,000) 0
INTEREST EXPENSE (including financing charges) (154,152) (73,714)
-------- ----------
Income (loss) from continuing operations
before provision for taxes (291,367) 3,514
PROVISION FOR INCOME TAXES 0 0
-------- ----------
Income (loss) from continuing operations (291,367) 3,514
DISCONTINUED OPERATIONS
Loss from operations of discontinued operations 0 862,647
-------- ----------
Loss from discontinued operations 0 862,647
NET INCOME (LOSS) $(291,367) ($859,133)
========= ==========
NET EARNINGS (LOSS) PER COMMON STOCK
CONTINUING OPERATIONS ($0.07) $0.00
DISCONTINUED OPERATIONS $0.00 ($0.33)
--------- ----------
F-2
<PAGE>
NET (LOSS) PER SHARE OF COMMON STOCK ($0.07) ($0.33)
========= ==========
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 4,408,553 2,604,869
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
NET SALES $2,958,167 $5,032,906
COST OF GOODS SOLD ( incl. write-down in 1997
of $225,969 of Italia Collection obsolete
inventory) (Note 6) 1,782,751 2,497,620
--------- ---------
Gross profit from continuing operations 1,175,416 2,535,286
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,430,418 2,121,320
PROVISION - ISSUANCE OF STOCK OPTIONS 15,000 193,200
--------- ---------
Operating expenses 1,445,418 2,314,520
Loss from continuing operations (270,002) 220,766
GAIN ON SALE OF SECURITIES 243,945 0
RESERVE FOR DISSOLUTION OF
ITALIA COLLECTION, INC. (Note 6) (56,000) 0
INTEREST EXPENSE (including financing charges) (314,402) (321,240)
--------- ---------
(Loss) from continuing operations
before provision for taxes (396,459) (100,474)
PROVISION FOR INCOME TAXES 9,973 5,998
--------- ---------
(Loss) from continuing operations (406,432) (106,472)
DISCONTINUED OPERATIONS
Loss from operations of discontinued operations 0 1,523,714
--------- ---------
Loss from discontinued operations 0 1,523,714
NET LOSS ($406,432) ($1,630,186)
========= ===========
NET LOSS PER COMMON STOCK
CONTINUING OPERATIONS ($0.09) ($0.04)
DISCONTINUED OPERATIONS ($0.00) ($0.59)
--------- ---------
</TABLE>
F-4
<PAGE>
<TABLE>
<S> <C> <C>
NET LOSS PER SHARE OF COMMON STOCK ($0.09) ($0.63)
========= ===========
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 4,408,553 2,604,869
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1997
(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, 1996 790,000 $7,900 3,470,247 $3,470 2,039,500 $2,040
Proceeds from the exercise of common stock warrants 822,424 $822
Proceeds from the exercise of pfd. stock options 350,000 $3,500
Common stock issued to directors 20,000 $20
Conversion of preferred stock to common stock (92,940) ($929) 278,820 $279
Increase in valuation of investment in affiliate
Conversion of Class B Com sh. into Class A Com sh. 269,750 $270 (269,750) ($270)
Common and preferred stock issued to BH Funding 100,000 $1,000 100,000 $100
Assumption of payroll tax liabilties - dissolution
Net income through March 31, 1997
-----------------------------------------------------------------------
BALANCE, March 31, 1997 1,147,060 $11,471 4,961,241 $4,961 1,769,750 $1,770
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional Retained
Paid-In Earnings Treasury Note
Capital (Deficit) Stock Receivable Total
---------- --------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1996 $8,564,741 ($8,785,132) ($600) ($437,500) ($645,081)
Proceeds from the exercise of common stock warrants $1,291,820 $1,292,642
Proceeds from the exercise of pfd. stock options $821,500 $825,000
Common stock issued to directors $14,980 $15,000
Conversion of preferred stock to common stock $650
Increase in valuation of investment in affiliate $1,700,522 $1,700,522
Conversion of Class B Com sh. into Class A Com sh.
Common and preferred stock issued to BH Funding $723,900 $725,000
Assumption of payroll tax liabilties - dissolution $75,344 $75,344
Net income through March 31, 1997 ($406,432) ($406,432)
-----------------------------------------------------------------
BALANCE, March 31, 1997 $13,193,457 ($9,191,564) ($600) ($437,500) $3,581,995
=================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INTERIORS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
-------------------------------
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(406,432) $(1,630,186)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 508,796 666,937
Provision for losses on accounts receivable 250,000 33,766
write off of non-productive assets 698,712
Non-cash financing charge 50,000
Reduction of liabilities from dissolution of subsidiary (586,509)
Gain from sale of investment securities (243,945)
Non-cash provision for discontinued catalog operations 1,100,000
Provision for dissolution of Italia 56,000
Provision for issuance of stock 15,000 193,200
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, trade 2,344 (147,616)
Decrease (increase) in inventories (532,321) (560,484)
Decrease (increase) in prepaid expenses and other current assets 91,295 (149,669)
Decrease (increase) in other assets (127,712) (317,114)
Increase (decrease) in accounts payable and accrued expenses (909,241)
Increase (decrease) in net liabilities and accrued expenses of (90,557)
discontinued operations
Increase (decrease) in prepaid sales & customer deposits 3,415
----------- ---------
Net cash used in operating activities (1,224,570) (807,751)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (500,467) (483,234)
Decrease (increase) in other assets (99,995)
Investment in Decor Group, Inc. (826,000) (2,200)
----------- ---------
Net cash used in investing activities (1,326,467) (585,429)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 700,000
Proceeds from sale of investment securities 372,500
Repayments of debt and capitalized lease obligations (470,443) (275,626)
Proceeds from sale of Series A preferred stock and warrants 1,666,692
Proceeds from exercise of common stock warrants 1,292,642
Proceeds from exercise of preferred stock options 825,000
----------- ---------
Net cash provided by financing activities 2,719,699 1,391,066
----------- ---------
Net Increase (decrease) in cash 168,662 (2,114)
CASH, beginning of period 4,142 2,114
----------- ---------
</TABLE>
F-7
<PAGE>
<TABLE>
<S> <C> <C>
Cash, end of period $172,804 $0
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $177,500 $366,118
Taxes $5,973 $5,998
NON-CASH FINANCING ACTIVITIES:
Conversion of convertible debt into Class WC Warrants $100,000
Conversion of convertible debt into Class A Preferred Stock $200,000
Conversion of Series A Preferred Stock to Class A Common Stock $650
Stock Issuance for Prepaid Financing Charges $300,000
Stock Issuance for Consulting Series in connection with Decor $350,000
Acquisition
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<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. 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, 1997 are not necessarily indicative of those to
be expected for the entire year. The Company, for the three and nine months
ended March 31, 1997 and 1996, 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 250,000 shares of its
Series A Non-Voting Convertible Preferred Stock and an option to purchase
10,000,000 shares of its Series B Non-Convertible Voting Preferred Stock (the
"Option Shares") in exchange for issuance to Decor by the Company of 200,000
shares of its Class A Common stock, (being registered as part of this filing)
and 200,000 shares of its Series A Convertible Preferred stock (also being
registered as part of this filing) and a guarantee with respect to certain
indebtedness should such indebtedness become necessary. (The Decor securities
are adjusted to reflect a 1-for-two reverse split effected by Decor in October
1996.) Also, the Company exercised its option to purchase the Option Shares in
September 1996, for total cash consideration of $2,000. Concurrent with the
exercise of this option, the Company executed a Voting Agreement (the "Voting
Agreement") to vest the power to vote the Option Shares in a Voting Trust (the
"Voting Trust".) The Voting Agreement will expire upon the earlier of February
7, 2007 or upon the Company's repayment in full of its obligations to BH
Funding, LLC (Note 3), but in no event earlier than December 31, 1997. The
Voting Trust comprises three individuals: the Company's President and Chief
Executive Officer (and also the Chairman of the Board of Decor), and two
Directors of Decor who are otherwise unrelated to the Company. As part of the
Company's investment in Decor, during the months of August and September 1996,
the Company purchased 54,934 shares of Decor's Series C Non-Voting, Convertible,
Preferred Stock at a cost of $824,000. In the formation of Decor, the Company's
intention was to create an affiliate with a corporate identity clearly separate
and distinct from that of the Company. Decor was organized for the purpose of
acquiring the business operations of unrelated companies. On November 12, 1996,
(the "Effective Date") a public offering by Decor of certain of its securities
was declared effective by the Securities and Exchange Commission. Subsequent to
the effective date of Decor's initial public offering, the Company owned
approximately 79.6% of the total voting stock of Decor. In December 1996, Decor
declared and issued a dividend on its common stock payable in the form of two
(2) shares of common stock for each one (1) share of common stock held as of the
record date of December 16, 1996. Each share of Decor's Series A and Series C
Preferred stock are convertible into three (3) shares of Decor's common stock
effective December 16, 1996. During February 1997, the Company sold its entire
holdings of Series A Convertible Preferred Stock to an independent investor.
Assuming conversion by the subsequent holder to common stock, the Company will
own approximately 77.5% of the total voting stock of Decor subsequent to such
sale and conversion.
F-9
<PAGE>
As of March 31, 1997, the holding in Decor is recorded on the
Company's financial statements at the market value on November 12, 1996, the
"Measurement Date" of the Company's trading securities previously transferred to
Decor during March 1996 plus acquisition costs, less the proportionate value of
the securities sold during February 1997.
In May 1996, the Company entered into a two year Management Services
Agreement with Decor whereby the Company will advise Decor on the manufacturing,
sale, marketing and distribution of Decor's products as well as providing Decor
with accounting and administrative services and advice on strategic planning of
joint ventures, acquisitions, and other long term initiatives. Pursuant to this
agreement, the Company will be paid on an annual basis the greater of (1)
$75,000 or (2) 1.5% of excess cashflow as defined in the agreement. The Company
and Decor amended this agreement to increase this payment to $90,000 per annum.
Additional transfers of funds from Decor to the Company will be subject to the
attainment by Decor of excess cash flow totaling $4,000,000 per year through
December 31, 1999. At March 31, 1997, the Company has accrued approximately
$60,000 of fees pursuant to this agreement.
Decor entered into an asset purchase agreement (the "Agreement") with
Artisan House, Inc. ("Artisan House") to purchase substantially all of the
operating assets, and assume certain liabilities of Artisan House for an
aggregate purchase price of $3,526,400, subject to certain adjustments.
Decor completed the Artisan House acquisition on November 18, 1996.
Artisan House, located in Los Angeles, California and founded in 1964, is
engaged in the design, manufacturing, and marketing of metal wall, table and
freestanding sculptures. Management believes that Artisan House's products
bridge the gap between high priced gallery art and mass produced decorative
pieces. Artisan House products retail from approximately $100 to over $400. The
primary goal of Artisan House is to supply a broad spectrum of design driven
sculpture and decorative accessories at moderate prices.
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 purchased and was issued certain shares of the Common Stock of Decor. As
of March 31, 1997, Ms. Munn was issued 300,000 shares of the outstanding common
shares of Decor, adjusted to reflect a 1-for-2 reverse split effected by Decor
in October 1996, and a stock dividend of two (2) common shares for each common
share owned as of December 16, 1996.
3. NOTES PAYABLE
The Company has outstanding secured financing with United Credit
Corporation totaling approximately $700,000 at March 31, 1997. Interest is
determined at an annual rate of 16%. The Company signed an
F-10
<PAGE>
agreement in February 1997, whereby it agreed to issue 100,000 shares of Class A
Common Stock to this debtor. To date, no shares have been issued.
The Company received $600,000 of loans from BH Funding in February
1997. This loan is to be repaid with interest on April 28, 1998. Interest is
determined at an annual rate of 15%. The Company in order to collateralize the
loan to BH pledged and assigned to BH and granted to BH a continuing security
interest in the Company's 20,000,000 shares of Series B Non-Convertible
Preferred Stock of Decor, and the Company's 54,934 shares of Series C
Convertible Preferred Stock of Decor. See Notes for discussion of equity
instruments issued to B.H. Funding, partially in connection with this financing
agreement.
The Company has outstanding secured financing with Infinity Investors,
Ltd. totaling approximately $181,000 at March 31, 1997. The Company paid $40,000
of this balance during April 1997 and will subsequently pay principal of $7,500
per month plus interest calculated at an annual rate of 15% against the unpaid
principal balance, until the full balance is repaid for 12 months plus a balloon
payment comprising all remaining interest and principal on March 15, 1998. In
connection with the settlement of terms agreement (March 1996), the Company also
issued 25,000 Warrants purchase Common Stock at $2.50 per share. This lender
also continues to hold 600,000 common shares as collateral.
The Company received $100,000 of demand loans from Laurie Munn, wife of
the Company's President and Chief Executive Officer during March 1997, at an
annual interest rate of 6%.
4. COMMITMENTS AND CONTINGENCIES
Operating Leases
On January 16, 1991, the Company entered into a sublease agreement that
provides for the leasing of a site which serves as the Company's principal
office and manufacturing facility. The term of the sublease expires December 31,
1996. This lease requires minimum annual lease payments of approximately
$265,000. The Company has not renewed this lease. The site has been purchased by
a new owner on December 31, 1996. On April 14, 1997, the Company entered into a
new five year lease of this facility with the new owner. The new lease commenced
January 1, 1997, and requires monthly rent payments totaling $192,000 for the
first year, $236,400 for the second year, $227,136 for the third year, $245,670
for the fourth year, any $255,497 for the fifth year.
The Company entered into a lease on February 1, 1993 for a 1,800 square
foot Manhattan, New York showroom. The lease expires January 3, 2003, and
requires rent payments of approximately $78,000 per annum.
The Company entered into a lease on August 31, 1995 for a 5,739 square
foot Philadelphia, Pennsylvania showroom. The lease expires on August 31, 2000,
and requires rent payments of approximately $30, 000 per annum.
Italia occupies approximately 1,750 square feet at International Home
Furnishings Center in High Point, North Carolina, pursuant to a lease dated May
1, 1993. The term of the lease is five years and requires minimum annual rent
payments of approximately $26,500. The Company terminated this lease on October
31, 1996. In full settlement of outstanding rent liabilities and subsequent
cancellation of the lease, the owner of the facility agreed to the Company's
offer of certain sample merchandise maintained by the Company at this facility.
In addition, on March 28, 1996 the Company's Italia operation was
closed in Hialeah Gardens, Florida and the product line was out-sourced to Lance
Corporation in Hudson, Massachusetts. During July 1996, Italia's assets were
returned to the Company's principal office and manufacturing facility. During
December 1996 the operations of Italia were discontinued.
Future minimum lease payments under operating leases are as follows:
<TABLE>
<S> <C>
1997 $ 300,000
1998 344,400
1999 335,136
2000 343,670
2001 333,497
Thereafter 78,000
----------
$1,734,703
==========
</TABLE>
F-11
<PAGE>
Union Agreement
Effective April 1, 1991, the Company signed a three-year (with an
additional two-year automatic renewal) union contract for its union members
under the terms of a collective bargaining agreement. The Company has received
notice that the two-year automatic renewal and the existing union contract will
remain in effect through April 1, 1996. The Company is currently negotiating the
renewal of its union contract. None of the Company's employees have been on
strike, or threatened to strike since the Company's inception and the Company
believes its relationship with all of its personnel is satisfactory.
Employment Agreements
The litigation relating to the termination of the 1995 employment
agreement between Ann Stevens and the Company has been settled by the execution
of an employment severance agreement (the "Agreement"). Pursuant to the
Agreement, the Company paid Ms. Stevens $63,000 for accrued and unpaid
compensation upon execution of the Agreement. Subsequently, for a period of
seven years, the Company will make bi-weekly payments to Ms. Stevens to total
$72,000 for the first year, $70,000 for each of the next three years, and
$50,000 for each of the final three years. As additional compensation, the
Company paid Ms. Stevens for reimbursement of certain expenses, $50,000 in
various installments during the four months ending December 1996. The Company
also entered into a non-compete agreement with Ms. Stevens for which the Company
will make bi-weekly payments to Ms. Stevens to total $25,000 per year for seven
years, plus automobile and insurance costs for five years. As of June 30, 1996,
the Company issued to Ms. Stevens 50,000 shares of the Company's Class A Common
Shares, which were previously committed to Ms. Stevens pursuant to her 1995
employment agreement. As of June 30, 1996, the Company issued 1,250,000 shares
of its Class B Common Shares (the "Escrow Shares") to Michael Levine, Esq.,
attorney of Ms. Stevens, as escrow agent (the "Escrow Agent"). The Escrow Agent
shall abstain from voting the Escrow Shares for any purpose, except in the event
of either the failure by the Company to adhere to the payment provisions noted
above or the financial insolvency of the Company. If either event occurs, Ms.
Stevens will be in a position to elect replacement Directors. Once the payment
provisions in the severance and non-compete agreements are satisfied, the Escrow
Agent shall return the Escrow Shares to the Company.
In February 1997, the terms of the agreement with Ms. Stevens were
modified to provide for additional payments of approximately $550 per month over
18 months, and to provide for approximately $6,000 as reimbursement for legal
expenses.
On February 15, 1996, the Company's Board of Directors agreed in
principle 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 which has not yet been granted, as well as any
subsequent conversion to the Company's Class A Common Stock, will require the
prior consent of the Company's investment banking firm. The agreement will also
contain a "non-compete" clause and provide the President and Chief Executive
Officer with the use of an automobile. As of the date of this filing, the
document for this agreement has not been finalized or executed. Presently, the
President and Chief Executive Officer draws an annual salary of $150,000 and has
the use of an automobile provided by the Company.
F-12
<PAGE>
On April 1, 1995, the Company entered into a Consulting Agreement with
Morris Munn, father of Max Munn, the Company's President and Chief Executive
Officer under which he will provide the Company with: design and fabrication of
new molds for sculpture; recommend, and implement improvements in antiquing,
woodworking, gilding and carving processes; and attend trade shows for frame
making and mold making. Fees under the agreement are payable at $54,000 per
annum for one year renewable at the Company's option. On June 30, 1996, Morris
Munn's Consulting Agreement was extended for five (5) years. Pursuant to the
terms of this new agreement, the Company agreed to issue to Morris Munn an
option to purchase up to 350,000 shares of the Company's Preferred Shares at a
net exercise price of $2.25 per share. The Preferred Shares issuable upon the
exercise of the Option were registered for sale to the public under a
Registration Statement in Form S-8 filed with the Securities and Exchange
Commission on July 3, 1996. The Option was fully exercised during July to
September 1996 generating net proceeds to the Company totaling $787,500. In
addition, the new agreement provides for bi-weekly payments to Morris Munn
totaling $54,000 per year for five years. In exchange, Morris Munn has agreed to
assist the Company with marketing, acquisitions, divestitures, joint ventures
and other strategic initiatives. In conjunction with the issuance of the Option,
the Company recorded charges against earnings of $87,500 at June 30, 1996.
During March 1997, the Company modified its agreement with Morris Munn
to provide additional monthly payments of $950 over two years for the rental of
certain machinery used by the Company in its production processes.
On February 19, 1997, the employment by the Company of Michael J. Amore
as its Vice President and Chief Financial Officer was terminated. Mr. Amore has
provided consulting services to the Company subsequent to February 19, 1997.
Beginning May 6, 1997, the Company began to provide Mr. Amore with severance
payments totaling approximately $10,000 over five weeks. No other liabilities
exist pursuant to Mr. Amore's separation from the Company.
The Company is currently a party in various legal proceedings. (See
"Legal Proceedings"). The Company believes that it has meritorious defenses
against all such proceedings and intends to vigorously assert its rights with
respect thereto. Although the Company cannot predict the outcome of these
proceedings, it is the Company's opinion that all such proceedings, both
individually and in the aggregate, will not have a material adverse effect on
its results of operations, liquidity, or equity. No legal matters have changed
since the Company's Form 10-KSB filed as of and for the year ended June 30,
1996.
Except as otherwise set forth herein, the Company has no material
commitments for capital expenditures.
In order to fund growth over the long term, the Company anticipates
possible future issuance of its securities resulting in further dilution to its
securityholders
F-13
<PAGE>
Disclosure of the Company's current legal matters are reflected at Part
II, Item 1. - Legal Proceedings.
5. SHAREHOLDERS' EQUITY
In August 1995, the Company 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. The Company's Board of Directors
approved the issuance of such shares in November 1995. In conjunction with the
issuance of these shares, approximately $105,000 of charges against earnings
were recorded during the year ended June 30, 1996. On January 14, 1997, these
shares were registered by the Company with the Securities and Exchange
Commission on Form S-8.
In September 1995, the Company issued 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. The net proceeds from this Offering were
approximately $1,633,000, including over-allotments. 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. As of the
date of this filing, independent holders of 81,140 shares of Preferred Stock
have converted such shares into 243,420 shares of the Company's Class A Common
Stock.
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. 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 July 16, 1996, the
Company filed a Registration Statement with the Securities and Exchange
Commission to register the Class WA Warrants and underlying Common A Shares. The
Commission declared this Registration Statement effective on July 19, 1996.
Through the date of this filing, 704,412 of the Company's Class WA Warrants were
exercised at $1.50 per warrant, generating proceeds to the Company totaling
$1,056,618. Of these proceeds, $811,500 was used to purchase 54,100 shares
(adjusted for a 1-for-2 reverse split effected in October 1996) of Decor Group,
Inc.'s Series C Non-Voting, Convertible, Preferred Stock. The balance of the
proceeds was retained by the Company for working capital needs, for the
repayment to Decor of outstanding loans of $50,000, and for the provision of
additional loans to Decor. At March 31, 1997, the balance of loans to Decor
totals $110,000.
On May 7, 1997, the Company announced that it will extend the exercise
period of its Class WA Warrant to June 22, 1998.
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, and pursuant to the terms of another 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 1995 in conjunction with the issuance of these shares.
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. Such Registration Statement was filed
with the Commission on July 16, 1996 and declared effective on July 19, 1996.
Through the date of this filing, 118,012 of the Company's Class WB Warrants were
exercised at an exercise price of $2.00 per option generating proceeds to the
Company of $236,024. These proceeds were used by the Company to support working
capital needs and for the provision of loans to Decor Group, Inc.
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. As of the date of this filing,
the Company has not declared or established a record date for a dividend for its
Series A 10% Cumulative Convertible Preferred Stock for September 1996 or March
1997.
F-14
<PAGE>
Cumulative but unpaid dividends on Series A 10% Cumulative Preferred Stock as of
March 31, 1997 totals approximately $524,000.
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, bearing a
restrictive legend, were issued on April 12, 1996. In conjunction with the
issuance of these shares, approximately $54,000 of charges were recorded against
earnings during the year ended June 30, 1996.
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, all bearing a
restrictive legend, were issued on April 24, 1996 to various independent
investors (the "Investors") generating gross proceeds of $431,251. The Company
realized net proceeds of $310,609 which was used to pay certain outstanding
liabilities. Commencing thirty (30) days following the date of the close of the
private placement, any of the Investors had the right to demand in writing (the
"Demand Notice") that the Company file a registration statement with the
Securities and Exchange Commission (the "Commission") which shall cover the
shares and allow the Investor to sell the shares to the public. Within fifteen
(15) days following receipt of the Demand Notice, the Company is required to
file such registration statement and use its best efforts to have such
registration statement declared effective by the Commission and such state
securities regulators as reasonably requested by the Investor.
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 guarantee 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. The Company obtained an appraisal
at that time to determine the fair market values of this transaction.
Effective June 30, 1996, the Company entered 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,
over the subsequent five-years, the Company will pay Mr. Munn $54,000 per annum
in equal bi-weekly installments, and issue to Mr. Munn options to purchase up to
350,000 shares of the Company's Series A Preferred stock. These options were
fully exercised during July to September 1996, generating net proceeds to the
Company totaling $787,500. Of these proceeds, approximately $127,000 was used
pursuant to the Company's June 30, 1996 settlement with Ann Stevens, a former
Company executive (See "Legal Proceedings."), and $12,500 was used to purchase
834 shares (adjusted for a 1-for-2 reverse split effected in October 1996) of
Decor Group, Inc.'s Series C Non-Voting, Convertible, Preferred Stock. The
balance of proceeds was retained by the Company to support working capital
needs. In conjunction with the issuance of the options to Mr. Munn, the Company
recorded charges against earnings totaling $87,500 at June 30, 1996.
Pursuant to the Company's June 30, 1996 settlement with Ann Stevens
(the "Settlement"), a former executive of the Company, the Company issued to Ms.
Stevens 50,000 shares of the Company's Class A Common Stock. This filing is
meant, among other purposes, to register these 50,000 shares of Class A Common
Stock. Also pursuant to the Settlement, the Company issued to Michael Levine as
escrow agent (the "Escrow Agent") 1,250,000 unregistered shares of the Company's
Class B Common shares (the "Escrow Shares".) The Escrow Shares shall not be
voted by the Escrow Agent, unless the Company defaults on its obligations under
the agreement. Upon satisfaction of such obligations, the Escrow Shares shall be
returned by the Escrow Agent to the Company. (See "Legal Proceedings".) In
conjunction with the issuance of the Company's shares to Ms. Stevens, the
Company recorded charges against earnings totaling $71,400 at June 30, 1996.
F-15
<PAGE>
During September 1996, pursuant to the Company's Director Stock Option
Plan, the Company issued: 10,000 shares of its Class A Common shares to Roger
Lourie, an outside director of the Company, and 10,000 shares of its Class A
Common shares to various individuals named by Richard Josephberg, also an
outside director of the Company. These shares bear a restrictive legend.
Pursuant to the issuance of these shares, $15,000 was charged against earnings
at December 31, 1996.
During February 1997, pursuant to an agreement whereby B.H. Funding
Corp. will provide certain advisory services to the Company over five years,
the Company agreed to issue to B.H. Funding Corp. 100,000 shares of its Class A
Common Shares and 100,000 Shares of its Series A Preferred Shares. See Note 6.--
Pursuant to a July 1996 agreement (the "Forfeit Agreement") between the
Company's President and CEO's wife and the Company's underwriters ("VTR"), in
consideration for the release of the Company's restrictions on issuing capital
stock, the wife may be required to forfeit her equity holdings (519,750 Class A
Shares and 519,750 Class B Shares) to the Company if pre-tax earnings fall below
$300,000 and $366,000 for the years ending June 30, 1997 and 1998 respectively.
Other than services provided by the Company's investment banking firm,
no services have been provided at the Company's direction by any consultant or
advisor with respect to the issuance or sale of the Company's equity securities.
6. RECENT DEVELOPMENTS
Because of declining revenues and high operating costs, on December 16,
1996, the Board of Directors decided to discontinue and dissolve Italia.
On December 27, 1996, a Notice of Public Auction was distributed by Italia,
advising all interested parties that a public auction of all the assets of
Italia consisting of molds, equipment, models, and inventory listed in a
Security Agreement entered into between Italia, as debtor, and United Credit
Corporation, as secured party, was to occur. The auction took place on January
10, 1997 and the Company was the successful bidder, thereby acquiring all of the
assets of Italia in consideration for a payment of $2,000 and the assumption by
the Company of the liabilities of Italia to United Credit Corp., which as of
March 31, 1997 totaled approximately $806,000. Since the financial statements of
Italia are consolidated into those of the Company, Italia's liabilities have
already been reflected on the Company's historical consolidated financial
statements. At March 31, 1997, the Company made the adjustments necessary to
properly restate recorded assets and liabilities, together with a general
reserve of approximately $56,000. These adjustments included approximately
$590,000 write-off of debt recorded based on the advice of the Company's legal
counsel (as the Company is not legally liable for such liabilities).
Further the Company wrote-off approximately $700,000 in assets related
to its Italia subsidiary which were not considered to benefit the Company's
future operations.
In February 1997 the Company received a loan from BH Funding, LLC
("BH") in the aggregate principal amount of $600,000 to be utilized to repay
certain indebtedness of the Company and for continued operating expenses. The
Company in order to collateralize the loan to BH pledged and assigned to BH and
granted to BH a continuing security interest in the Company's 20,000,000 shares
of Series B Non-Convertible Preferred Stock of Decor, and the Company's 54,934
shares of Series C Convertible Preferred Stock of Decor.
In connection with this agreement, the fair market value on these
shares on the date of issuance was allocated as follows: $300,000 as acquisition
consulting on the Decor transaction; $300,000 as interest on the loan (to be
amortized over the life of the loan using the effective interest method); and
$25,000 as additional expense of the Company's sale of its 250,000 Series A
Convertible Preferred Stock holdings in Decor Group, Inc. The Company received
$375,000 of proceeds relating to the sale by the Company of its holdings of
250,000 shares of Series A Convertible Preferred Stock of Decor Group, Inc. to
B.H. Funding. The loan is to be repaid to B.H. Funding, LLC with interest on
April 28, 1998.
In May 1996, the Company entered into a two year Management Services
Agreement with Decor whereby the Company will advise Decor on the manufacturing,
sale, marketing and distribution of Decor's products as well as providing Decor
with accounting and administrative services and advice on strategic planning of
joint ventures, acquisitions, and other long term initiatives. Pursuant to this
agreement, the Company will be paid the greater of (1) $75,000 or (2) 1.5% of
excess cashflow as defined in the agreement. During February 1997, the Company
and Decor will amend this agreement to increase this payment to $95,000 per
annum. Additional transfers of funds from Decor to the Company will be subject
to the attainment by Decor of excess cash flow totaling $4,000,000 per year
through December 31, 1999. At March 31, 1997, the Company has accrued
approximately $60,000 of fees pursuant to this agreement.
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Interiors, Inc.:
We have audited the accompanying consolidated balance sheet of Interiors, Inc.
(a Delaware corporation) (known formerly as A.P.F. Holdings, Inc., a New York
corporation) and subsidiary as of June 30, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity
(deficit), and cash flows for each of the two years in the period ended June 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interiors, Inc. and subsidiary
as of June 30, 1996 and 1995, and the results of operations and cash flows for
each of the two years in the period ended June 30, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital and a net capital deficiency that raises substantial doubt
about is ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
New York, New York ARTHUR ANDERSEN LLP
October 4, 1996
F-17
<PAGE>
INTERIORS, INC.
CONSOLIDATED
BALANCE SHEET
<TABLE>
<CAPTION>
June 30
ASSETS 1996
---------------------
<S> <C>
CURRENT ASSETS:
Cash $4,142
Accounts receivables -
Trade, net of allowance of $40,000 784,600
Inventories 1,172,304
Prepaid expenses and other current assets 313,265
---------------------
Total current assets 2,823,311
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 1,808,915
Furniture and fixtures 156,179
Leasehold improvements 259,405
---------------------
Total property and equipment, at cost 2,224,499
Less- Accumulated depreciation and
amortization 961,797
---------------------
Net property and equipment 1,262,702
OTHER ASSETS 635,188
---------------------
Total assets $4,721,201
=====================
<CAPTION> June 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996
---------------------
<S> <C>
CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt $2,516,573
Accounts payable and accrued liabilities 2,706,388
Net liabilities and accrued expenses
of discontinued operations 90,557
Capital lease obligations 22,122
---------------------
Total current liabilities 5,335,630
---------------------
NON-CURRENT LIABILITIES:
Capital lease obligations 30,652
---------------------
Total noncurrent liabilities 30,652
---------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,300,000 shares authorized,
790,000 shares issued and outstanding 7,900
Class A common stock, $.001 par value,
30,000,000 shares authorized,
3,470,247 shares issued and outstanding 3,470
Class B common stock, $.001 par value,
2,500,000 shares authorized,
2,039,500 shares issued and outstanding 2,040
Additional paid-in-capital 8,564,741
Retained deficit (8,785,132)
Treasury Stock (600)
Note receivable (437,500)
---------------------
Total stockholders' equity (645,081)
---------------------
Total liabilities and stockholders' equity $4,721,201
=====================
</TABLE>
The accompanying notes are an integral part of this balance sheet
F-18
<PAGE>
INTERIORS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
1996 1995
------------ ------------
NET SALES $5,378,761 $5,155,275
COST OF GOOD SOLD 3,558,733 3,076,950
------------ ------------
Gross profit from continuing operations 1,820,028 2,078,325
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,611,812 1,820,545
------------ ------------
Operating expenses 3,611,812 1,820,545
------------ ------------
Income (loss) from continuing operations
before interest and provision for taxes (1,791,784) 257,780
INTEREST EXPENSE (including financing charges) 538,497 236,988
------------ ------------
Income (loss) from continuing operations
before provision for taxes (2,330,281) 20,792
PROVISION FOR (BENEFIT FROM) INCOME TAXES 17,859 (100,000)
------------ ------------
Income (loss) from continuing operations (2,348,140) 120,792
DISCONTINUED OPERATIONS (Note 3)
Loss from operations of discontinued
operations 789,332 938,546
Provision for disposal of discontinued
operations 2,146,301
------------ ------------
Loss from discontinued operations 2,935,633 938,546
NET LOSS ($5,283,773) ($817,754)
------------ ------------
------------ ------------
NET LOSS PER COMMON STOCK
CONTINUING OPERATIONS ($0.83) $0.06
DISCONTINUED OPERATIONS ($1.03) ($0.47)
------------ ------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK ($1.86) ($0.41)
------------ ------------
------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES USED IN
COMPUTATION 2,837,293 1,977,158
------------ ------------
------------ ------------
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 1996 AND 1995
<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, 1994 817,500 $818 1,000,000 $1,000
Proceeds from issuance of warrants
Conversion of Class B Shares 117,500 $117 (117,500) ($117)
Purchase of warrants and related costs
Proceeds from sale of Class A Common Stock 635,000 $635
Treasury Stock
Net loss
-----------------------------------------------------------------------
BALANCE, June 30, 1995 1,570,000 $1,570 822,500 $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 Commmon Stock for services 360,000 $360
Conversion of Convertible Debt into Series A
Preferred 80,000 $800
Issuance of shares to Italia - in Treasury 600,000 $600
Preferred stock dividend 55,247 $55
Issuance to Decor Group, Inc. 200,000 $2,000 200,000 $200
Issuance to Laurie Munn 250,000 $250
Private placement 50,000 $500 175,000 $175
Other (13,000) ($13)
Sale of treasury stock 180,000 $180
Escrow shares 1,250,000 $1,250
Net loss through June 30, 1996
--------------------------------------------------------------------------
BALANCE, June 30, 1996 790,000 $7,900 3,470,247 $3,470 2,039,500 $2,040
==========================================================================
<CAPTION>
Additional Retained
Paid-in Earnings Treasury Note
Capital (Deficit) Stock Receivable Total
-------- ---------- ----- ----------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994 $4,778,484 ($2,517,864) $2,262,437
Proceeds from issuance of warrants $372,211 $372,211
Conversion of Class B Shares
Purchase of warrants and related costs ($46,425) ($46,425)
Proceeds from sale of Class A Common Stock $491,493 $492,128
Treasury Stock ($270,257) ($270,257)
Net loss (817,754) ($817,754)
-----------------------------------------------------------------------
BALANCE, June 30, 1995 $5,595,763 ($3,335,618) ($270,257) $1,992,341
Proceeds from issuance of Series A Preferred $1,553,032 $1,557,632
Conversion of Class B shares
Conversion of convertible debt into Class WC
Warrants $100,000 $100,000
Issuance of Series A Commmon Stock for services $299,500 $299,860
Conversion of Convertible Debt into Series A
Preferred $199,200 $200,000
Issuance of shares to Italia - in Treasury ($600)
Preferred stock dividend $165,686 ($165,741)
Issuance to Decor Group, Inc. ($2,200)
Issuance to Laurie Munn $437,500 ($437,000) $250
Private placement $307,934 $308,609
Other $13
Sale of treasury stock ($90,437) $270,257 $180,000
Escrow shares ($1,250)
Net loss through June 30, 1996 ($5,283,773) ($5,283,773)
-------------------------------------------------------------------------
BALANCE, June 30, 1996 $8,564,741 ($8,785,132) ($600) ($437,500) ($645,081)
=========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
INTERIORS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30
---------------------------
1996 1995
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ($5,283,773) ($817,754)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 680,137 630,670
Provision for losses on accounts receivable 63,244 35,000
Deferred income taxes (100,000)
Restructuring costs (76,000)
Non-cash provision for discontinued catalog operations 2,235,835
Non-cash satisfaction of debt (63,000)
Provision for issuance of stock 140,960
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, trade 178,743 (545,599)
Decrease (increase) in inventories (346,275) (516,990)
Decrease (increase) in prepaid catalog costs, prepaid expenses and other current a (47,512) (176,439)
Decrease (increase) in other assets 162,891 (489,606)
Increase (decrease) in accounts payable accrued expenses 1,112,556 (169,600)
Increase (decrease) in prepaid sales & customer deposits (40,800) 1,996
------------ ------------
Net cash used in operating activities (including discountinued operations) (1,143,994) (2,287,322)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (543,272) (591,041)
------------ ------------
Net cash used in operating activities (543,272) (591,041)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 3,652,100
Repayments of debt and capitalized lease obligations (357,197) (2,630,535)
Net proceeds from sale of Series A preferred stock, common stocks, and warrants 2,046,491 863,704
Purchase of warrants and related costs -- (46,425)
------------ ------------
Net cash provided by financing activities 1,689,294 1,838,844
------------ ------------
Net Increase (decrease) in cash 2,028 (1,039,519)
CASH, beginning of period 2,114 1,041,633
------------ ------------
CASH, end of period $4,142 $2,114
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $366,119 $283,904
Taxes $8,344 $5,283
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
Decor Acquisition $2,200 $0
Issuance of Common Stock for a note receivable $437,500 $0
Other - non cash satisfaction of debt $0 $63,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996 AND 1995
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
Business Activity
The Company has experienced continuing operating losses and has a working
capital and net capital deficiency as of and for the year ended June 30, 1996.
As a result, the Company has taken certain significant steps to reposition
itself for growth and profitability in subsequent periods. These steps, although
necessary, led to significant charges against earnings during the year ended
June 30, 1996. A summary of the major steps follows:
o The Company's discontinuation of its catalog operations (See
"Description of Business") led to charges against earnings totaling
$2,936,000, including losses from discontinued operations of $789,000,
during the year ended June 30, 1996. Major items in this charge are
settlement of significant related party lawsuits requiring charges
against earnings aggregating $431,000; reserves against catalog
inventory of $945,000 and reserves against other catalog assets of
$354,000, reserves for current period losses from discontinued
operations after the measurement date of March 31, 1996 of $276,000,
stock option expense of $60,000, additional compensation expense of
$29,000, and miscellaneous reserves of $52,000.
o The Company has included in Selling, General and Administrative
expenses $140,000 for certain non-cash issuances of stock for
services.
o The Company incurred increased financing charges aggregating $180,000
in connection with extinguishment of certain debt.
The Company's management believes that these charges were necessary and will set
the stage for growth and profitability in subsequent periods. Management,
however, believes cash flows from operations may not be sufficient to support
future operations. Accordingly, the Company has identified action steps aimed at
improving cash flows and profitability. Such actions include a major investment
in Decor Group, Inc., an exclusive licensing agreement, staff reductions and
discontinuance of its catalog. (See Notes 3 & 4)
The Company is currently renegotiating its lease with the landlord for its
current facility. In addition the company is currently negotiating a collective
bargaining agreement covering substantially all its employees. Although
management believes that the outcome of these negotiations will not have a
material impact on its operation over the next year, there can be no assurance
that such deliberations will result in arrangements consistent with those
discussed elsewhere.
Although the Company believes that these initiatives will lead to improved
financial results, and positive cash flows no assurances can be provided that
this will be the case.
F-22
<PAGE>
Organization
Interiors, Inc. and subsidiary ( the "Company" or "Interiors" known formally as
A.P.F. Holdings, Inc. or "A.P.F.") was incorporated pursuant to the laws of
Delaware in February 1994. A.P.F. was incorporated pursuant to the laws of New
York in October 1990. A.P.F. was incorporated in order to reincorporate in the
State of Delaware. Effective March 1994, A.P.F. merged with and into the
Company. In October 1994, the Company purchased "Ceramic Production Corp." and
"Murano Crystal" to form a wholly-owned subsidiary , "Italia Collection, Inc."
("Italia").
After giving effect to the discontinuance of the Catalog operation, the Company
has two operating divisions: 1) the Custom Framing Division which is engaged in
the manufacture of antique and contemporary picture frames for museums, art
galleries, designers, collectors, and frame retailers; and 2) the Wholesale
Division, which manufactures and markets a line of high-end traditional and
contemporary mirrors through upscale retail furniture and department stores. The
Wholesale Division is operated through a wholly owned subsidiary which
manufactures and markets ceramic vases and bowls, sculpture and lamps to upscale
furniture stores, furniture galleries, department stores, catalog and other
decorative accessory retailers. The majority of the Company's sales are
domestic. Sales to the largest customers totaled $801,000 and $652,000, or 15%
and 12% of net sales respectively, for the year ended June 30, 1996. Accounts
receivable to these customers totaled $119,000 as of June 30, 1996.
The Company from time to time entered into transactions with related parties
(See Note 11). To the extent that the Company is unable to attract and retain
qualified independent persons to serve on its board of directors, conflicts of
interest may arise due to these relationships.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated Financial Statements include the accounts of the Company and
its wholly-owned subsidiary, ("Italia Collection, Inc."). All intercompany
transactions have been eliminated.
Revenue Recognition
Revenue is recognized at the time custom work, wholesale, or catalog merchandise
is shipped or acceptance is acknowledged by the customer. Payments received for
merchandise not yet shipped or accepted are reflected within prepaid sales and
customer deposits, a current liability.
Prepaid Catalog Costs
Prepaid catalog costs consist primarily of production and mailing costs, which
are deferred and amortized over the period of expected revenue stream (estimated
based upon historical results for similar catalogs and circulation levels) of
the related catalog from the date the catalog is mailed, not exceeding one year.
The prepaid catalog asset was fully written off in the amount of $584,000, as
part of the discontinuance of the Catalog Division. Catalog costs expenses are
included in the loss from discontinued operations for the years ended June 30,
1996 and 1995 in the amount of $408,000 and $1,106,000, respectively.
F-23
<PAGE>
Inventories
Inventory is valued at the lower of cost or market, with cost determined using
the first-in, first-out method. Finished goods consist of those items available
for shipping through the Wholesale Division.
Bartered inventory acquired is valued at the original cost of the inventory to
the Company, which is determined to be the lower of cost or market. If the
Company determines that historical inventory cost exceeds the estimated proceeds
realizable upon sale of such inventory, it would record a reserve for writedown
to market. As of June 30, 1996 and 1995, all inventory related writedowns,
reserves and adjustments are included in the "Fourth Quarter Adjustments"
disclosure below.
Property and Equipment
Property and equipment is stated at cost. The cost of additions and improvements
and the costs incurred in the construction of castings and the related master
molds are capitalized and expenditures for repairs and maintenance are expenses
in the period incurred. Depreciation and amortization of property and equipment
is provided utilizing straight-line and accelerated methods over the estimated
useful lives of the respective assets as follows:
Years
-----
Machinery and equipment 3 - 10
Furniture and fixtures 7 - 10
Leasehold improvements are amortized over the shorter of the remaining term of
the lease or the useful life of the improvement utilizing the straight-line
method.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Deferred income taxes have been provided for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities ( See Note 13).
Goodwill
In connection with the acquisition of Italia, amounts were paid in excess of the
fair market value of the assets acquired. These amounts have been recorded as
goodwill and are being amortized over 10 years. It is the Company's policy to
evaluate the life and amount of goodwill annually. Such evaluations are based on
current market conditions and expected future cash flows.
Use of Estimates in Preparation of the Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires of 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 changes in these estimates.
F-24
<PAGE>
Net Loss Per Share of Common Stock
Net loss per share of common stock was computed based on the weighted average
number of Class A and Class B shares outstanding. For the two years in the
period ended June 30, 1996, no common stock equivalents were included in the
computation since the effect would be antidilutive.
Fourth Quarter Adjustments
The Company recorded approximately $3,654,000 in losses during the fourth
quarter of fiscal 1996. The losses were primarily attributable to the
discontinuance of the Catalog Division ($2,146,000), the write down of inventory
based on the physical count ($1,093,000), and write-off of certain other assets
($79,200).
The Company recorded approximately $700,000 in losses during the fourth quarter
of fiscal year 1995. The losses were attributable to writedowns of inventory
based on the physical count and the acceleration of amortization of the prepaid
catalog costs due to reevaluation of future catalog mailings.
Selling, general, and administrative expenses by major segment
Selling, general, and administrative expenses were generated from continuing
operations as scheduled below:
1996 1995
---- ----
A.P.F. Master Framemakers Division $2,564,779 1,427,151
Italia Collection, Inc. 1,047,033 393,394
Total $3,611,812 1,820,545
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB) issued Statement
No. 121 (SFAS 121) titled "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS 121, which is effective for
financial statements for fiscal years beginning after December 15, 1995,
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. At June 30, 1996, implementation of SFAS 121 would not have a
material effect on the Company's financial statements.
Tn October 1995, the FASB issued SFAS 123 titled "Accounting for Stock-Based
Compensation." SFAS 123, which is effective for transactions entered into in
fiscal years
F-25
<PAGE>
beginning after December 15, 1995, uses a fair value based method of accounting
for stock options and similar equity instruments as contrasted to the intrinsic
valued based method of accounting for such instruments. The Company believes
that the effect against earnings of implementing SFAS 123 is not material
because all unexercised options have been granted prior to the effective date of
SFAS 123. The Company does not expect to adopt the provisions of SFAS for
options granted to employees.
In June 1996, the FASB issued SFAS 125 titled " Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125,
which is effective for such transactions occurring after December 31, 1996.
Earlier application is not allowed. At June 30, 1996, implementation of SFAS 125
would not have a material effect on the Company's financial statements.
3. DISCONTINUATION OF OPERATIONS OF INTERIORS CATALOG DIVISION
On March 31, 1996, the Board of Directors, decided to discontinue the Company's
catalog operations because of declining revenues and high operating costs. As a
result, a charge against earnings of approximately $2,200,000, was recorded at
June 30, 1996. For the year ended June 30, 1996, losses from the discontinued
catalog operations totaled $789,000. The Company plans to fully carry out its
plan to discontinue the catalog operation within one year from March 31, 1996.
As of June 30, 1996, the Company has assets and accrued expenses totaling
$319,000 and $410,000 respectively. 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. The statement of operations for the year ended
June 30, 1995 has been restated as if the Company's catalog operations had been
discontinued at the beginning of year ended June 30, 1995.
The following is a detail of income from discontinued operations for the years
ended June 30, 1996 and 1995:
June 30, 1996 June 30, 1995
------------- -------------
Revenue $ 742,640 $ 1,895,011
Cost of Goods Sold 408,452 703,458
----------- -----------
Gross Margin 334,188 $ 1,191,553
Selling, General & Admin. 1,078,642 2,055,773
Interest Expense 44,878 74,326
----------- -----------
Net Loss from Discontinued Operations $ (789,332) $ (938,546)
=========== ===========
4. ACQUISITIONS, DISPOSITIONS AND STRATEGIC ALLIANCES
1996 Transactions
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 its Series
A Convertible Preferred Stock and an option to
F-26
<PAGE>
purchase 20,000,000 shares of its Series B Non-Convertible Voting Preferred
Stock (the "Option Shares") 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
should such indebtedness become necessary. Decor has entered into an asset
purchase agreement (the "Agreement") with Artisan House, Inc. ("Artisan House")
to purchase substantially all of the operating assets, and assume certain
liabilities, of Artisan House for an aggregate purchase price of $3,526,400,
subject to certain adjustments. Decor expects to close on the Agreement prior
to, or contemporaneously with, its public offering. Artisan House, located in
Los Angeles, California and founded in 1964, is engaged in the design,
manufacturing, and marketing of metal wall, table and freestanding sculptures.
Management believes that Artisan House's products bridge the gap between high
priced gallery art and mass produced decorative pieces. Artisan House products
retail from approximately $100 to over $400. The primary goal of Artisan House
is to supply a broad spectrum of design driven sculpture and decorative
accessories at moderate prices. The measurement date for the shares provided and
received has not been determined at this time because at the time of issuance
there was no assurance that the transactions contemplated by either Company
(i.e., acquisition of Artisan by Decor, public funding for Decor) could be
executed. Accordingly, the shares issued and received have been reflected in the
accompanying financial statements at par value. Upon completion of Decor's
public offering and acquisition of Artisan, the Company will establish its
investment in Decor at the then fair market value of the shares invested.
The Company exercised its option to purchase the Option Shares in September
1996, for total cash consideration of $2,000. Concurrent with the exercise of
this option, the Company executed a Voting Agreement (the "Voting Agreement") to
vest the power to vote the Option Shares in a Voting Trust (the "Voting Trust").
The Voting Agreement will expire on December 31, 1997. The Voting Trust
comprises three individuals; Max Munn, the Company's President and Chief
Executive Officer (and also the Chairman of the Board of Decor), and two
Directors of Decor who are otherwise unrelated to the Company. Conversion of the
500,000 shares of Series A Convertible Preferred Stock into common stock would
give the Company approximately 88.6% of the voting stock of Decor as of the date
of this filing. Decor is planning a public offering of certain of its securities
during October 1996. After this public offering is effective, the Company will
own approximately 86.6% of the total voting stock of Decor. The holding in Decor
will be recorded on the Company's financial statements under the equity method
of accounting until such time the Company obtains unconditional and effective
control of Decor, which is expected to occur upon the expiration of the Voting
Agreement.
As part of the Company's investment in Decor, during the months of August and
September 1996, the Company purchased 109,867 shares of Decor's Series C
Non-Voting, Convertible, Preferred Stock at a cost of $824,000. As of the date
of this filing, Decor has provided the Company with $50,000 of 8% demand loans.
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
purchased and was issued certain shares of the Common Stock of Decor for $8,000
representing less than 1% of outstanding stock after Decor's proposed public
offering. Ms. Munn was issued 200,000 common shares of Decor.
F-27
<PAGE>
The Company has executed a management agreement with Decor, whereby the Company
will provide management and administrative support for the companies acquired by
Decor. At June 30, 1996, approximately $19,000 of fees were accrued by the
Company for such services.
During March 1996, 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 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 entered into an
agreement whereby each entity will guarantee certain liabilities of the other.
As of June 30, 1996 the Company guaranteed $631,000 of LAC debt which was
collateralized by $971,000 of accounts receivable. Subsequently, LAC disposed of
its interest in Lance, and has finalized the terms of transition with the new
owners and existing secured creditors. LAC will be dissolved subsequent to June
30, 1996.
During April 1996, Italia moved its operations to the premises of The Lance
Acquisition Corporation (Lance). Italia occupied approximately 10,000 square
feet of space on a temporary basis. The Company is arranging for the sourcing of
Italia products from an established, third-party manufacturer. The Company
expects to fully complete such arrangements, and entirely vacate the premises of
The Lance Acquisition Corporation, during November 1996.
1995 Acquisition
In connection with the Company's plan to restructure its wholesale business, the
Company through its wholly owned subsidiary Italia acquired the business of two
privately held Florida-based companies. Murano and CPC, 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. Pursuant to these
acquisitions, the Company assumed liabilities in excess of assets acquired for
an amount of approximately $200,000 in consideration for all of the outstanding
stock of the acquired companies. Accordingly, the excess of costs over fair
value has been recorded as goodwill and is being amortized over 10 years on a
straight line basis. The Company also 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. This additional consideration will result in an additional element of
cost of the acquisition of Murano and CPC which will be recorded at the time
such payment is calculated. To date, no additional payments have been made in
connection with this transaction, as no amounts are considered to be due by the
Company under the original terms of the purchase agreement. The parties are
currently discussing the situation, and in the opinion of management, there will
not be any material adjustment to the Company's financial position or results of
operations as a result of the outcome of such discussions.
The Company's consolidated net loss for the year ended June 30, 1995 includes
approximately $144,000 of net income from the operations of Murano and CPC for
the period October 21, 1994 to June 30, 1995.
Had the Company acquired Murano and CPC as of July 1, 1994, the Company's net
loss for the year ended June 30, 1995 would have not been materially effected.
New Agreements
In September 1996, the Company has entered into an exclusive and worldwide
three-year licensing agreement, expiring September 1999, to represent the
artwork of James Rizzi on ceramics, mirrors, and other decorative accessories
manufactured by the Company. Mr. Rizzi is among the world's best-selling living
artists. The Company expects customer
F-28
<PAGE>
shipments to begin during December 1996. The licensor will receive a license fee
of 15% of net sales proceeds, plus up to 5% of product manufactured for
distribution to certain art galleries and picture framers.
5. INVENTORIES
The components of inventory are as follows:
June 30, 1996
-------------
Raw materials $ 1,095,067
Work in process 395,958
Finished goods 549,722
-----------
$ 2,040,747
-----------
6. OTHER ASSETS
The components of other assets are as follows:
June 30, 1996
-------------
Showroom samples, net of accumulated amortization
of $ 73,158 $ 104,036
Frame mirror molds, net of accumulated amortization
of $ 142,714 69,964
Organizational costs, net of accumulated amortization
of $ 116,724 183,048
Goodwill, net of accumulated amortization of $ 66,707 167,016
Other 111,124
---------
$ 635,188
Organizational costs incurred by the Company are being amortized over a five
year period. Frame mirror molds include costs related to the wholesale division
in order to construct prototypes and molds for a product line of antique
reproduction framed mirrors. These costs are amortized over the related product
life or five years, whichever is shorter.
7. ACCRUED LIABILITIES
June 30, 1996
-------------
Payroll and employee benefits $ 420,089
Employee Settlements 360,000
Rent 133,988
Deferred rent 56,472
Insurance 8,667
Union dues and benefits 98,000
Professional fees 190,760
Interest 118,222
Other 141,927
----------
$1,528,125
In March 1996, the Company executed an agreement with the Internal Revenue
Service (the "Service") for the payment of then outstanding payroll tax
liabilities totaling approximately $100,000. The agreement will require the
Company to pay approximately $9,000 per month for approximately 14 months.
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<PAGE>
As of June 30, 1996, the Company has unpaid payroll taxes, including the amounts
pursuant to the Service Agreement in the amount of approximately $ 325,000,
including interest and penalties.
8. NOTES PAYABLE
Notes payable: June 30, 1996
- -------------- -------------
Bank line of credit(a) $ 910,000
Notes payable, due July 1,1995, to individuals bearing
interest at 16% payable quarterly (See Note 8 legal
matters) 300,000
Notes payable, due May 2016, to U.S. Small
Business Administration, bearing interest at 4%
payable monthly (b) 320,582
Notes payable due September 30, 1995 to
a Nevis, BWI Corporation, bearing interest at 18%,
payable monthly (c) 222,630
Financing Agreement with A Secured Lender (d) 763,361
-----------
$2,516,573
(a) In July 1994, The Company replaced its existing financing agreement with a
line of credit of up to $950,000 with a New York bank following the Company's
Initial Public Offering in June 1994. Such borrowings are based on trade
receivables and inventory. The borrowings under such line of credit are secured
by a lien on all personal property and fixtures of the Company and personally
guaranteed by the President and Chief Executive Officer of the Company. In March
1996 the Company has agreed with the bank to reduce the line of credit by
$10,000 per month. As of the date of this filing, the line of credit has been
reduced to $870,000. 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 replace the current line of
credit, but there can be no assurance it will be able to do so.
(b) In May 1993, Murano and CPC, secured Disaster loans from U.S. Small Business
Administration pursuant to promissory notes dated May 20, 1993 and May 21, 1993
in an aggregate amount of $ 339,300, which bears interest at a rate of 4% per
annum, were payable in equal monthly installments including principal and
interest and the balance of which would be due 23 years from the date of the
Notes. Such borrowings are secured by machinery and equipment and are personally
guaranteed by the former President and Vice President of Murano and CPC and
their spouses. On July 29, 1996 the Company received non-payment notification
from the U.S. Small Business Administration requiring full payment with
interest. As a result of the nonpayment notification, the balance of the Note is
classified as current. The Company currently is renegotiating the terms of the
loan with the U.S. Small Business Administration.
(c) 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. On October 16, 1995 the parties agreed the Company owed the lender,
including interest and monthly extension fees of approximately $155,000 through
December 15, 1995, an aggregate amount of approximately $805,000. Pursuant 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 and payable of $180,000 on or before December 15, 1995 and
$220,000 on July 31, 1996. The new agreement also stipulated
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<PAGE>
that the lender shall sell the 180,000 shares of the Company's Class A Common
Stock, held in escrow by the lender, for $180,000 to an unaffiliated third
party. The proceeds of such sale will be applied against the note. The stock
sale took place during 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. Approximately $25,000
was charged against earnings during the quarter ended December 31, 1995 in
conjunction with the issuance of these shares. The promissory note is also
guaranteed by Max Munn, President and Chief Executive Officer of the Company.
The note is collateralized by 600,000 shares of the Company's Class A Common
Stock owned by the Company's Italia Collections Inc. subsidiary. The Company is
currently renegotiating the terms of the agreement with the lender to
restructure payment terms of principal and interest outstanding of $245,000.
There can be no assurance that the Company will successfully complete these
discussions.
(d) 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 alternative financing
agreements, as of the date of this filing, no such arrangements 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 (17.25% 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 the date of this filing, the amount due to
the lender was approximately $750,000. In addition, the secured lender received
personal guarantees from Max Munn, President and Chief Executive Officer 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 $38,000 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 Company's Board of Directors affirmed by
majority vote the loan by the Company to its President and Chief Executive
Officer. The principal balance of the loan will be partially offset by
unreimbursed business expenses. The remaining loan balance will be repaid by the
President and Chief Executive Officer to the Company, with interest as provided
above, by September 1997.
9. SHAREHOLDER'S EQUITY
Shareholder's equity
The Company's certificate of incorporation authorizes the issuance of 15,000,000
(adjusted to 30,000,000 as of August 28, 1995 stockholders meeting) Class A
shares, $.001 par value, 2,500,000 Class B shares, $.001 par value, and
2,500,000 (adjusted to 5,300,000 on August 28, 1995) shares of Preferred Stock,
$.01 par value. Each Class B share entitles the holder thereof to five
noncumulative votes per share on all matters on which stockholders may vote at
meetings of stockholders. The Class A and Class B shares shall vote together as
a single class on all matters. The Class B shares are convertible on a
one-for-one basis at any time after issuance at the option of the holder into
Class A shares. The issuance of additional Class B shares could, under certain
circumstances, have the effect of delaying or preventing a change in control of
the Company and may adversely affect the voting and other rights of
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<PAGE>
Class A shares. The Preferred Shares are convertible on a three to one basis
at any time after issuance at the option of the holder into Class A shares.
In June 1994, the Company issued 517,500 shares of Class A Common stock, par
value $.001 per share. 460,000 Class WA warrants to purchase Class A shares and
Class WB warrants, and 258,750 Class WB warrants to purchase Class A shares. The
net proceeds from this Offering were approximately $1,600,000.
In September 1995, the Company issued 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. The net proceeds from this Offering were approximately $1,633,000,
including over-allotments. 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 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. A Promissory Note and Security Agreement, whereby the shares will
collateralize the Promissory Note, was executed by the Company and Ms. Munn
pursuant to these terms.
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, all of which bear a
restrictive legend, were issued on April 24, 1996 to various independent
investors (the "Investors") generating gross proceeds of $431,251. The Company
realized net proceeds of $310,609 which was used to pay certain outstanding
liabilities. Commencing thirty (30) days following the date of the close of the
private placement, any of the Investors had the right to demand in writing (the
"Demand Notice") that the Company file a registration statement with the
Securities and Exchange Commission (the "Commission") which shall cover the
shares and allow the Investor to sell the shares to the public. Within fifteen
(15) days following receipt of the Demand Notice, the Company is required to
file such registration statement and use its best efforts to have such
registration statement declared effective by the Commission and such state
securities regulators as reasonably requested by the Investor. The Company also
agreed to include the shares in its next registration statement.
The Company has not paid and does not anticipate paying any cash dividends on
its Class A Shares, Class B Shares, or Series A Preferred Shares in the
foreseeable future, but instead intends to retain all working capital and
earnings, if any, for use in the Company's business operations, and in the
expansion of its business. 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.
Pursuant to a July 1996 agreement (the "Forfeit Agreement") between the
Company's President and CEO's wife and the Company's underwriters ("VTR"), in
consideration for the release of the Company's restrictions on issuing shares of
capital stock, the wife may be required to forfeit her equity holdings (519,750
Class A Shares and 519,750 Class B Shares) to the Company if pre-tax earnings
fall below $300,000 and $366,000 for the years ending June 30, 1997 and 1998
respectively.
Conversions and Stock Grants for Services
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 the 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
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<PAGE>
WC Warrants were registered in a Registration Statement declared effective
September 18, 1996.
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 WC 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, 1996.
In August 1995, the Company 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.
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 related
to Richard Josephberg, an outside Director of the Company.
In February 1996, the Company's Board of Directors approved the issuance to Sol
Munn, Uncle of the President, of 150,000 shares of the Company's Class A Common
Stock, in consideration for past consulting services provided.
Effective June 30, 1996, the Company entered into a consulting agreement with
Morris Munn, father of the Company's President and Chief Executive Officer, in
exchange for certain future services (See Note 10-Consulting Arrangements). As
part of this agreement, over the subsequent five-years, the Company will pay Mr.
Munn $54,000 per annum in equal bi-weekly installments, and issue to Mr. Munn
options to purchase up to 350,000 shares of the Company's Series A Preferred
Stock. These options were fully exercised during July to September 1996,
generating net proceeds to the Company totaling $787,500.
Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company and sister of the President and
Chief Executive Officer, the Company issued to Ms. Stevens 50,000 shares of the
Company's Class A Common Stock. The Company plans to register these securities
with the Securities and Exchange Commission no later than November 1996. Also
pursuant to the Settlement, the Company issued to Michael Levine as escrow agent
(the "Escrow Agent") 1,250,000 unregistered shares of the Company's Class B
Common shares (the "Escrow Shares".) The Escrow Shares shall not be voted by the
Escrow Agent, unless the Company defaults on its obligations under the
agreement. Upon satisfaction of such obligations, the Escrow Shares shall be
returned by the Escrow Agent to the Company.
An aggregate of $300,000 was recorded by the Company as expense related to the
aforementioned stock issued to consultants and others for services. These
charges were based upon the fair market value of the shares on the respective
dates granted.
See Note 8 and Note 10 for additional issuances of stock for services.
Warrants
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<PAGE>
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 Common shares which were previously sold pursuant to a
"Regulation S" private placement into escrow. 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 July 16, 1996, the
Company filed a Registration Statement with the Securities and Exchange
Commission to register the Class WA Warrants and underlying Class A Common
shares. The Commission declared this Registration Statement effective on July
19, 1996. During August and September 1996, 578,000 of the Company's Class WA
Warrants were exercised at $1.50 per warrant, generating proceeds to the Company
totaling $867,000.
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. Such Registration Statement was filed with
the Commission on July 16, 1996 and declared effective on July 19, 1996.
Decor Group Inc. Stock Transaction (See Note 4)
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 (the "Option
Shares") of Series B NonConvertible 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 should such
indebtedness become necessary. Also, the Company exercised its option to
purchase the Option Shares in September 1996, for total cash consideration of
$2,000. (See Note 4, Acquisitions, Dispositions and Strategic Alliances.)
As part of the Company's investment in Decor, during the months of August and
September 1996, the Company purchased 109,867 shares of Decor's Series C
Non-Voting, Convertible, Preferred Stock at a cost of $824,000.
Stock Option Plans
The 1994 Plan. On June 20, 1994, the Company adopted the Interiors, Inc. 1994
Stock Option and Appreciation Rights Plan (the "1994 Plan"), which provides for
the granting of options to officers, employees and consultants to purchase not
more than an aggregate of 250,000 Class A Shares. Directors of the Company are
not eligible to participate in the 1994 Plan. The 1994 Plan provides for the
grant of options intended to qualify as "incentive stock options" under the
Internal Revenue Code of 1986, as amended (the "Code") as well as options which
do not so qualify.
Pursuant to the 1994 Plan, the Board of Directors or a stock option committee
established by the Board to administer the 1994 Plan determines the persons to
whom options are granted, the number of Class A Shares subject to option, the
period during which the options may be exercised and the option exercise price.
With respect to incentive stock options, no option may be granted more than ten
years after the effective date of the 1994 Plan or exercised more than ten years
after the date of grant (five years if the optionee owns more than ten percent
of the Class A Shares of the Company at the time of grant). Additionally, with
respect to incentive stock options, the option price may not be less than 100%
of the fair market value of the Class A Shares on the date of the grant (110% if
the optionee owns more than ten percent of the Class A Shares of the Company at
the time of grant). The fair market value of the Class A Shares will be
determined by the Board or the Committee in accordance with the 1994 Plan as
follows: If the Class A Shares are not listed and traded upon a recognized
securities exchange, on the basis of recent purchases and sales of Class A
Shares in arms-length transactions or based on the last reported sale or
transaction price for such stock on the date of grant or, if the shares are
traded on a recognized securities exchange or quoted on the NASDAQ National
Market System upon the basis of the last reported sale or transaction price on
the date of grant or, if the shares were not traded on such date, on the date
nearest preceding that date. Subject to certain limited exceptions, options may
not be exercised unless, at the time of exercise, the optionee is in the service
of the Company.
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<PAGE>
The Board of Directors or the Committee may, in its discretion, at any time
prior to the exercise of any option, grant in connection with such option the
right to surrender part or all of such option to the extent the option is
exercisable, and receive an amount (payable in cash, Class A Shares or
combination thereof as determined by the Board or the Committee) equal to the
difference between the then fair market value of the shares issuable upon the
exercise of the option (or portions thereof surrendered) and the exercise price
of the option or portion thereof surrendered.
On September 16, 1994, the Board of Directors granted Incentive Options to
purchase an aggregate of 159,000 Class A Shares under the 1994 Plan at an
exercise price equal to the fair market value of the shares on the date of
grant, or $3.50 per share, to 23 employees and Incentive Options to purchase
25,000 Class A Shares to Ann Stevens, then Executive Vice President of the
Company and wife of then Company President, Theodore Stevens, at 110% of the
fair market value or $3.85 per share. Of such options, options to purchase
75,000 Class A Shares were granted to Max Munn, now President and Chief
Executive Officer of the Company, and Ann Stevens, then Executive Vice President
of the Company, and Mr. Munn's sister. In addition, on October 5, 1994 the Board
of Directors granted Incentive Options to two employees to purchase an aggregate
of 20,000 Class A Shares at exercise prices equal to the fair market value of
the shares or $3.38 per share. With respect to each such grant, 25% of such
options will vest each year commencing on the first anniversary of the grant.
The Director Plan. On June 20, 1994 the Board of Directors approved the 1994
Director Stock Option and Appreciation Rights Plan (the "Director Plan"). The
Director Plan was adopted to provide an incentive to Directors through automatic
and discretionary grants of stock options. The Director Plan provides for the
grant of options intended to qualify as "incentive stock options" under the Code
as well as options which do not so qualify.
The Director Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). Options under the Director Plan may
be granted to each person who is a Director of the Company on the date of grant.
All Directors of the Company are eligible to receive options under the Director
Plan.
The Director Plan provides for the granting of options to Directors in such
amount and, subject to the terms of the Director Plan, upon such terms as the
Board or Committee determines in its discretion in order to reward the recipient
director for extraordinary service to the Company. In addition, on the second
Monday of May of each year each person who is then a director of the Company
shall be automatically granted an option to purchase 10,000 of the Company's
Class A Shares, subject to adjustment as provided for in the Director Plan. The
aggregate number of shares for which options may be issued pursuant to the
Director Plan is 250,000 shares. The exercise price for options granted under
the Director Plan must be equal to the fair market value per Class A Share on
the date of grant. The fair market value of the Class A Shares will be
determined by the Board or the Committee in accordance with the Director Plan as
follows: If the Class A Shares are not listed and traded upon a recognized
securities exchange, on the basis of recent purchases and sales of Class A
Shares in arms-length transactions or based on the last reported sale or
transaction price for such stock on the date of grant or, if the shares are
traded on a recognized securities exchange or quoted on the NASDAQ National
Market System upon the last reported sale or transaction price on the date of
grant or, if the shares were not traded on such date, on the date nearest
preceding that date. Each option granted under the Director Plan expires ten
years after the date of grant, unless a lesser period is specified by the
Committee.
In the event an optionee ceases to be a Director of the Company for any reason
at a time when he holds an option, he may exercise only such options as are
exercisable at the time he ceases to be a Director, within the original term of
the option. Options which are not exercisable at the time an optionee ceases to
be a Director shall terminate. In the event an optionee dies, the Director Plan
provides for the exercise of an option on behalf of the deceased Director.
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<PAGE>
On September 16, 1994, the Board of Directors granted Incentive Options to
purchase 25,000 Class A Shares to each of Theodore Stevens, then President and
Max Munn, President and Chief Executive Officer and then Executive Vice
President-Operations under the Director Plan at an exercise price equal to 110%
of the fair market value of the shares on the date of grant, or $3.85 per share,
all of which options immediately vested. As of the date of this filing, with Mr.
Stevens no longer an officer or Director of the Company, the Company does not
plan to issue to Mr. Stevens any additional shares pursuant to any agreement
currently in effect, except that Mr. Stevens currently holds 269,750 shares of
the Company's Class B Common shares each of which are convertible into one Class
A Common share at Mr. Stevens option.
At June 30, 1996, pursuant to the execution of a Consulting Agreement between
the Company and Morris Munn, the father of the Company's President and Chief
Executive Officer, the Company granted to Morris Munn an option to purchase up
to 350,000 shares of the Company's Series A Preferred Shares at a net exercise
price of $2.25 per share. The Company recorded charges against earnings of
$87,500 at June 30, 1996 in conjunction with the issuance of these options.
Subsequent to June 30, 1996 all 350,000 of these options were exercised,
generating proceeds to the Company of $787,500.
At June 30, 1996, no other options have been granted. At June 30, 1996, an
aggregate of 209,000 options are exercisable at prices ranging from $3.50 to
$3.85.
At June 30, 1996, certain warrants to acquire Company securities are
outstanding: a) 3,760,000 Class WA Warrants exercisable at $1.50 to acquire one
Class A Common Share and one Class WB Warrant, of which 578,000 such warrants
have been exercised subsequent to June 30,1996, b) 258,750 Class WB Warrants
exercisable at $2.00 to acquire one Class A Common Share, and c) 2,270,000 Class
WC Warrants exercisable at $5.50 to acquire one Series A Preferred Share.
Except as otherwise set forth herein, the Company has no material commitments
for capital expenditures. 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.
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
On January 16, 1991, the Company entered into a sublease agreement that provides
for the leasing of a site which serves as the Company's principal office and
manufacturing facility. The term of the sublease expires December 31, 1996. This
lease requires minimum annual lease payments of approximately $265,000. The
Company has not renewed this lease. The site has been purchased by a new owner
on December 31, 1996, and the Company is currently negotiating for a new lease.
Interim rent payments are $14,000 per month until a lease is signed.
The Company entered into a lease on February 1, 1993 for a 1,800 square foot
Manhattan, New York showroom. The lease expires January 3,2003, and requires
rent payments of approximately $78,000 per annum.
The Company entered into a lease on August 31, 1995 for a 5,739 square foot
Philadelphia, Pennsylvania showroom. The lease expires on August 31, 2000, and
requires rent payments of approximately $30,000 per annum.
Italia occupies approximately 1,750 square feet at International Home
Furnishings Center in High Point, North Carolina, pursuant to a lease dated May
1, 1993. The term of the lease is five years and requires minimum annual rent
payments of approximately $26,500.
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<PAGE>
In addition, on March 28, 1996 the Company's Italia operation was closed in
Hialeah Gardens, Florida and the product line was out-sourced to Lance
Corporation in Hudson, Massachusetts.
Future minimum lease payments under operating leases are as follows:
1997 $ 265,837
1998 130,475
1999 110,299
2000 111,648
2001 89,914
Thereafter 180,154
---------
$ 888,327
---------
Rent expense charged to operations, which includes escalation charges, for the
years ended June 30, 1996 and 1995, amounted to $408,458 and $405,945,
respectively.
Union Agreement
Effective April 1, 1991, the Company signed a three-year (with an additional
two-year automatic renewal) union contract for its union members under the terms
of a collective bargaining agreement. The Company has received notice that the
two-year automatic renewal and the existing union contract will remain in effect
through April 1, 1996. The Company is currently negotiating the renewal of its
union contract. None of the Company's employees have been on strike, or
threatened to strike since the Company's inception and the Company believes its
relationship with all of its personnel is satisfactory.
Employment Arrangements
On October 27, 1995 the Company entered into a one-year employment agreement
with Robert Schildkraut, then 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 weeks 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 were 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 settled its obligations to the employee during the
subsequent quarter. This settlement took the form of severance payments totaling
approximately $27,000. No securities have been issued to the employee as part of
the settlement.
On May 8, 1995, the Company entered into an employment agreement with Donald
Feldman, Vice President of Sales and Marketing of the Company. The Agreement is
for a term of four years beginning June 1995 and may be terminated by the
Company after the first year with payment of 80% of the employee's salary,
reduced by the employee's other income. The Agreement provides that the Vice
President of Sales and Marketing will be employed at a base salary of $117,500
plus a sales commission structure based on increases in net sales for the
Company. Mr. Feldman will be granted an option to purchase 10,000 shares of the
Company's Class A Common Stock for every full year under the employment
agreement at a price of $2.50 per share. Concurrent with the effective date of
Decor Group, Inc.'s ("Decor") initial public offering (See "Acquisitions and
Strategic Alliances."), the Company and Mr. Feldman plan to terminate Mr.
Feldman's Employment Agreement. Mr. Feldman will enter into a three (3) year
employment agreement with Decor at such effective date.
F-37
<PAGE>
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.
Refer to Legal Proceeding Section of this Note for additional disclosure.
Consulting Arrangements
Effective January 4, 1994, the Company entered into a two year Marketing and
Organizational Agreement (the "Marketing Agreement") with Robert M. Leopold.
Pursuant to the Marketing Agreement, Mr. Leopold will consult with and advise
the Company concerning its marketing plans, business operations, organization,
management, strategic planning, products and services, acquisitions, mergers,
and other matters. Mr. Leopold will be paid $9,375 each quarter in advance
together with reimbursement for expenses incurred not to exceed $200 per month.
In August 1995, the Company agreed to issue, at a future date, 60,000 Class A
Common Shares to Mr. Leopold in settlement of all current and future
liabilities, under this agreement. These shares, which bear a restrictive
legend, were issued April 16, 1996. In conjunction with the issuance of these
shares, approximately $55,000 was charged against earnings during the year
ending June 30, 1996.
On April 1, 1995, the Company entered into a consulting agreement with Morris
Munn, father of Max Munn, the Company's President and Chief Executive Officer
under which he will provide the Company with the following: design and
fabrication of new molds for sculpture; recommend, and implement improvements in
antiquing, woodworking, gilding and carving processes; and attend trade shows
for frame making and mold making. Fees under the agreement are payable at
$54,000 per annum for one year renewable at the Company's option. On June 30,
1996, Morris Munn's consulting agreement was extended for five (5) years.
Legal Proceedings
During April and May of 1995, Hide Tashiro commenced two law suits totaling
$225,000 (plus interest and attorneys' fees) against the Company and others. The
Company believes it has meritorious defenses against these claims. In April 1996
the plaintiff's motions for summary judgment were denied and the court held that
there was an issue of fact to be tried. The Company believes it has valid
defenses against these claims and is of the opinion the outcome on this matter
will not have a material impact on the Company's financial position or results
of operations.
On or about December 28, 1994, Merrill Corp. filed a complaint in the Supreme
Court of the State of New York, against the Company seeking payment for goods
sold and delivered to the Company. The matter was settled in July 1996.
In July 1995, the Company through its attorneys made demand against Morgan Steel
Ltd. the office of which is located on the Isle of Man, England, for the payment
to the Company 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 of collectibility, and ultimate legal liability of
Morgan Steel Ltd. either in the United States or the Isle of Man.
Gear Holdings, Inc. brought an action against the Company for the alleged breach
of a licensing agreement. The Company denies that it was a party to an agreement
with Gear, or that any sum of money is owed. The complaint demands sums Gear
allegedly would have received under the agreement in a sum to be determined, but
not less than $250,000.
In July 1996, all litigation brought against the Company (as itemized in the
four following paragraphs) and its principals and Directors by Ted Stevens, Ann
Stevens and Morris Munn
F-38
<PAGE>
was settled. Settlement of the lawsuits by Ted Stevens and Morris Munn against
the Company and its officers and Directors are subject to Court approval.
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 the Company filed a
complaint in the Supreme Court of the State of New York, County of Westchester,
against the Company and its directors seeking unspecified damages and certain
changes in the composition of the Company's Board.
On December 1, 1995, Ted Stevens, husband of Ann 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 rescission of a stock sale agreement between Mr. Stevens and Ms. Munn.
On February 29, 1996, the Court held that Mr. Stevens did not have the right to
rescission and denied Mr. Stevens' motion for a preliminary injunction and on
April 17, 1996, the Court dismissed the action for lack of subject matter
jurisdiction.
On December 12, 1995, Ann Stevens filed a complaint in the Supreme Court of the
State of New York, County of Nassau against the Company and certain Directors
seeking, among other things, compensatory and punitive damages arising out of
the alleged breach of Ann Stevens' Employment Agreement.
On April 23, 1996, Ted Stevens filed a complaint in the Court of Chancery of the
State of Delaware against the Company and certain Directors, seeking among other
things, the rescission of a certain stock sale agreement between the Company and
Laurie Munn.
The litigation relating to the termination of the 1995 employment agreement
between Ann Stevens and the Company was settled by the execution of an
employment severance agreement (the "Agreement"). Pursuant to the Agreement, the
Company paid Ms. Stevens $63,000 for accrued and unpaid compensation upon
execution of the Agreement. Subsequently, for a period of seven years, the
Company will make bi-weekly payments to Ms. Stevens to total $72,000 for the
first year, $70,000 for each of the next three years, and $50,000 for each of
the final three years. As additional compensation, the Company will pay Ms.
Stevens for reimbursement of certain expenses, $50,000 in various installments
during the four months ending December 1996. The Company also entered into a
non-compete agreement with Ms. Stevens for which the Company will make bi-weekly
payments to Ms. Stevens to total $25,000 per year for seven years, plus
automobile and insurance costs for five years. Effective June 30, 1996 the
Company issued to Ms. Stevens 50,000 shares of the Company's Class A Common
Shares, which were previously committed to Ms. Stevens pursuant to her 1995
employment agreement. In connection with the Agreement, the Company issued
1,250,000 shares of its Class B Common Shares (the "Escrow Shares") to Michael
Levine, Esq., attorney of Ms. Stevens, as escrow agent (the "Escrow Agent"). The
Escrow Agent shall abstain from voting the Escrow Shares for any purpose, except
in the event of either the failure by the Company to adhere to the payment
provisions noted above or the financial insolvency of the Company. If either
event occurs, Ms. Stevens will be in a position to elect replacement Directors.
Once the payment provisions in the severance and non-compete agreements are
satisfied, the Escrow Agent shall release the Escrow Shares to the Company.
On August 13, 1996, the Munn Trust of 1975, Sol Munn and Evelyn A. Munn,
Co-Trustees commenced an action against the Company as well as Max Munn, the
Company's President and Chief Executive Officer and Laurie Munn, his wife
seeking monetary damages for the sum of $111,000. The Company considers the
complaint to be without merit and will vigorously defend the action.
SJP Contractors of New York, Inc. commenced an action in September 1996 against
the predecessor entity of the Company, A.P.F. Holdings, Inc. , and others for
$208,165 for work, labor and services allegedly performed in January 1991 for
the renovation of the Company's premises. The Company's answer pleads that
payment was made for the amount owed.
F-39
<PAGE>
In September 1991, without admitting or denying the allegations, Max Munn, the
Company's President and Chief Executive Officer agreed with the Federal Trade
Commission (FTC) to the entry of a Consent Order in an action brought against
Mr. Munn and others; which action arose out of the advertising of certain
lithographs of original works of art as regards to whether or not the artist had
played a substantial role in the production of lithographs. The case was settled
before trial or discovery solely with entry of the above Consent Order; which
enjoins Mr. Munn from making certain representations in connection with the sale
of any works of art. The Consent Order also requires Mr. Munn for a period of
five years (which expired as of September 1996) as to the maintenance of certain
records as they concern the sale of certain lithographs.
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 the Company's
financial position or its results of operations.
11. RELATED PARTY TRANSACTIONS
In October 1990 A.P.F. issued 100 shares of its Common Stock, no par value, to
Theodore Stevens, then President and a former Director of the Company, for
aggregate consideration of $225,000 and in October 1990 A.P.F. issued 165 shares
of its Preferred Stock, $1,000 par value per share, to Theodore Stevens in
consideration for the payment of $165,000. On June 30, 1992, A.P.F. converted
certain indebtedness arising from services rendered and loans provided by Decor
to A.P.F. in the amount of $114,000 to 114 shares of Preferred Stock of A.P.F.
In March 1994 such shares were transferred by Decor to Theodore Stevens and all
of such 279 shares of Preferred Stock were converted by Mr. Stevens into 124
shares of A.P.F. Common Stock. As a result of the Company's recapitalization,
the Company issued 1,000,000 Class B Shares (constituting all of the then issued
and outstanding Class B Shares of the Company) to Theodore Stevens in exchange
for all of the issued and outstanding Common Stock of A.P.F., the predecessor to
the Company.
In August 1995, Theodore Stevens, a Director of the Company, and Laurie Munn,
wife of Max Munn, President and Chief Executive Officer and a Director of the
Company, entered into an agreement whereby an existing option granted by Mr.
Stevens to Mrs. Munn to purchase 500,000 shares of Class B Common Stock at $3.50
per share was canceled and Mr. Stevens sold to Mrs. Munn 269,750 shares of Class
B Common Stock for $150,000 payable by an initial installment of $15,000 and a
promissory note for the balance of the purchase price payable in 15 years with
interest at the rate of 6.6% per annum. On December 1, 1995, Mr. Stevens filed a
complaint in United States District Court, Southern District of New York against
Ms. Munn seeking, among other things, the rescission of this stock sale. In June
1996, the parties agreed to a settlement without either the rescission of the
stock sale or the need for additional payments by any party to the transaction
(See Note 10).
During the fiscal year ended June 30, 1992, the Company borrowed the sum of
$75,000 from Sol Munn, the uncle of Max Munn, President and Chief Executive
Officer of the Company and borrowed an additional $75,000 in fiscal 1993. The
aggregate amount due, in the amount of $150,000, was evidenced by a promissory
note dated September 1, 1993, payable to The Munn Trust of 1975-Trustee: Sol
Munn and Evelyn Munn and bore interest at the rate of 12% per annum. The note
was payable September 1, 1996, subject to the right of Sol Munn to extend the
term for an additional one year period upon 60 days notice. In March 1994 the
bearer of the note agreed to purchase certain works of art at 58% above the
Company's cost in full satisfaction of the above note. The Company recorded
approximately $87,000 credit to earnings pursuant to this transaction. On August
13, 1996, The Munn Trust of 1975, Sol Munn and Evelyn A. Munn, co-trustees,
commenced action in the Supreme Court of the State of New York, County of
Suffolk against Laurie Munn, Max Munn, and the Company pursuant to this
transaction, seeking monetary damages for the sum of $111,000 (See Note 10).
On July 7, 1994, Theodore Stevens, Max Munn and Ann Stevens, then respectively
President, Executive Vice President and Executive Vice President of the Company,
personally guaranteed the obligations of the Company under a Promissory Note
dated July
F-40
<PAGE>
7, 1994 in the amount of $950,000 at an interest rate of prime plus one percent
(9.25% as of the date of this filing) to a New York bank. Pursuant to terms of
settlement involving various issues (See Note 10), in the event that the
Company's debt to the Bank is not repaid in full prior to March 31, 1997, the
Company will pay Ann Stevens, who is married to Mr. Stevens, .2083% of the
outstanding balance per month as compensation for her personal guarantee. As of
September 30, 1996, the outstanding balance of this note totals $870,000.
On February 15, 1996, the Company's Italia Collection subsidiary entered into a
Financing Arrangement with a New York corporation 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. Interest is calculated on the daily cash balance at the rate of prime
plus 9% per annum (17.25% 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 the date
of this filing, the amount due to the lender was approximately $738,000. (See
"Liquidity and Capital Resources.") This Financing Arrangement has been
personally guaranteed by Max Munn, the Company's President and Chief Executive
Officer and his wife.
For the years ended June 30, 1996 and June 30, 1995, the Company paid
approximately $30,000 and $46,000, respectively, to the father of the President,
and Chief Executive Officer for consulting services. See "Executive Compensation
- - Consulting Arrangements." These amounts are included in capitalized mold costs
on the balance sheet.
In October 1994, the Company borrowed the sum of $33,000 from the Vice President
and Chief Financial Officer of the Company. The amount due is evidenced by two
promissory notes dated October 27, 1994 and October 28, 1994 for $8,000 and
$25,000, respectively, which bore interest rates of 18% and 12% per annum,
respectively. The principal and interest were initially due November 17, 1994
and November 18, 1994, respectively, and have been extended to February 15,
1995. Unpaid sums bear interest at the rate of 18% per annum plus $160. In
April, 1995, the Company paid all principal and interest due on both promissory
notes.
In October 1994, the Company borrowed the sum of $8,000 from the President of
the Company. The amount due was evidenced by a promissory note dated October 27,
1994, which bore interest at a rate of 12% per annum. The principal and interest
were due November 17, 1994. In November 1994, the Company repaid the loan. In
addition, in November and December 1994, the Company advanced an aggregate
amount of $13,000 to the then Executive Vice President-Operations of the
Company, and now its President and Chief Executive Officer. This amount will be
repaid to the Company during the year ended June 30, 1997.
On February 8, 1996, the Company entered into a demand loan with the President
for $38,000, bearing interest at 18%.
Refer to Note 9, Shareholder's Equity and Note 10, Commitments and Contingencies
for additional related party transactions.
12. PROFIT SHARING AND DEFERRED COMPENSATION PLANS
In July 1991, the Company started a qualified Profit Sharing Plan for all
nonunion employees and a nonqualified Deferred Compensation Plan for certain key
employees. The Company has not made any contributions to the Qualified Profit
Sharing Plan or the Deferred Compensation Plan since its initial contribution
during the fiscal year ended June 30, 1992.
13. PROVISION (BENEFIT) FOR INCOME TAXES
The income tax provision (benefit) consists of:
F-41
<PAGE>
Year Ended June 30,
-------------------
1996 1995
---- ----
Current income taxes:
Federal $ -- $ --
State and local 17,859 ______
17,859 --
Deferred income tax -- (100,000)
$17,859 $(100,000)
The difference between the statutory and effective tax rate for the years ended
June 30, 1996 and 1995 results principally from a full reserve against any
benefit generated in 1996 (state taxes are provided) and immaterial
non-deductible expenses in 1995.
The benefit from the Company's net operating loss carry forward for Federal
income tax purposes in the amount of approximately $5,100,000 (which expire
through 2011) has been fully reserved for because future realization is not
considered to be "more likely than not". In addition, due to the changes in
ownership during the last three years and the future, utilization of the net
operating losses against future taxable income may be severely limited. The
deferred tax asset of approximately $1,800,000 is comprised primarily of net
operating losses and temporary differences.
F-42
<PAGE>
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this Prospectus and if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or any Underwriter. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date hereof. This Prospectus does not constitute an offer of any securities
other than the securities to which it relates or an offer to any person in any
jurisdiction in which such an offer would be unlawful.
TABLE OF CONTENTS
Page
Available Information.......................................................3
Prospectus Summary..........................................................4
The Company.................................................................4
The Offering................................................................8
Summary Financial Information..............................................10
Risk Factors...............................................................12
Use of Proceeds............................................................20
Dividend Policy............................................................21
Selected Financial Data....................................................22
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................24
Business...................................................................37
Management.................................................................50
Principal Stockholders.....................................................58
Certain Transactions.......................................................60
Description of Securities..................................................62
Selling Securityholders....................................................70
Legal Matters..............................................................73
Experts....................................................................73
Financial Statements......................................................F-1
654,000 Shares of Class A Common Stock
and
324,400 Shares of Series A 10% Cumulative
Convertible Preferred Stock
INTERIORS, INC.
PROSPECTUS
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
II-1
<PAGE>
Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law empowers a
corporation to indemnity its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers provided that this provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) arising under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of shareholders or otherwise.
Article Seven of the Company's Certificate of Incorporation eliminates
the personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to indemnity the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES ACT OF
1933 MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING THE COMPANY
PURSUANT TO THE FOREGOING PROVISIONS, THE COMPANY HAS BEEN INFORMED THAT IN THE
OPINION OF THE SECURITIES AND EXCHANGE COMMISSION, SUCH INDEMNIFICATION IS
AGAINST PUBLIC POLICY AS EXPRESSED IN THE ACT AND IS THEREFORE UNENFORCEABLE.
Item 25. Other Expenses of Issuance and Distribution
The following is a statement of estimated expenses in connection with
the securities being registered, other than selling discounts and
commissions:
Securities and Exchange Commission Registration Fee $ 690
Accounting Fees and Expenses to Auditor and Consultant $15,000
Legal Fees and Expenses $50,000
Miscellaneous Expenses $ 5,000
-------
Total Estimated Expenses $70,328
=======
All such expenses will be borne by the Company.
Item 26. Recent Sales of Unregistered Securities.
II-2
<PAGE>
The following shares of unregistered securities have been issued by the
Registrant since its inception. There were no underwriting discounts or
commissions paid in connection with the issuance of any of said securities,
except as noted below. In all instances where the Company has sold unregistered
securities to investors, such investors were deemed to be accredited investors.
In October 1990 A.P.F. issued 100 shares of its Common Stock, no par
value, to Theodore Stevens, President and a Director of the Company, for
aggregate consideration of $225,000. In October 1990 A.P.F. issued 165 shares of
its Preferred Stock, $1,000 per value per share to Theodore Stevens in
consideration for the payment of $165,000. On June 30, 1992 A.P.F. converted
certain indebtedness of A.P.F. to Decor in the amount of $114,000 to 114 shares
of Preferred Stock of A.P.F. In March 1994 such shares were transferred by Decor
to Theodore Stevens and the 279 shares of Preferred Stock were converted by Mr.
Stevens into 124 shares of A.P.F. Common Stock. As a result of the Company's
recapitalization, the Company issued 1,000,000 shares of the Company's Class B
Shares to Theodore Stevens in exchange for all of the issued and outstanding
Common Stock of A.P.F.
In March 1994 as part of a bridge financing, the Company issued to two
persons 10% Notes in the aggregate principal amount of $270,000 and Convertible
Notes in the aggregate principal amount of $30,000, all in consideration of
loans to the Company in the aggregate principal amount of $300,000. See "Bridge
Financing."
In November 1994 Theodore Stevens converted 49,500 Class B Shares to
49,500 Class A Shares.
In November 1994 the Company sold 3,000,000 Class WA Warrants to nine
individuals and/or entities for aggregate consideration of $480,000.
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.
In August 1995, the Company 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 $105,000 of charges against earnings
were recorded during the year ended June 30, 1996.
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 related to Richard Josephberg, an outside Director of the Company.
Approximately $7,000 was charged against earnings during the quarter ended
December 31, 1995 in conjunction with the issuance of these shares.
II-3
<PAGE>
In December 1995, the Company issued 35,000 shares of its Class A
Common Stock to Infinity Investors, Ltd. As part of a restructuring of a certain
note payable by the Company to Infinity Investors, Ltd.
In March 1996, the Company acquired 250,000 shares of Series A
Convertible Preferred Stock and an option to purchase 10,000,000 shares (the
"Option 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, all of which bear a restrictive legend. (See
"Liquidity and Capital Resources".)
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. This filing is meant, among other things for
the purpose of registering these securities with the Securities and Exchange
Commission.
In April 1996, the Company's Board of Directors resolved to issue
250,000 shares of the Company's Class B Common Stock, all of which are
restricted, 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 $437,000 to be paid
to the Company in five equal annual installments of $105,561.90, and Ms. Munn's
guarantee 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. The Company
obtained an appraisal to determine the fair market value of this transaction.
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 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 $54,000 of charges against earnings were
recorded during the year ended June 30, 1996. This filing is meant, among other
things, to register these 150,000 Class A Common Shares with the Securities and
Exchange Commission. The Corporation, the Company's investment bankers.
Pursuant to the Company's June 30, 1996 settlement with Ann Stevens
(the "Settlement"), a former executive of the Company, the Company issued to Ms.
Stevens 50,000 restricted shares of the Company's Class A Common Stock. This
filing is meant, among other things, to register these 50,000 Class A Common
Shares with the Securities and Exchange Commission. The 50,000 Class A Common
Shares are subject to a "lockup" agreement with VTR Capital Corporation, the
Company's investment bankers. Also pursuant to the Settlement, the Company
issued to Michael Levine as escrow agent (the "Escrow Agent") 1,250,000
unregistered shares of the Company's Class B Common Shares (the "Escrow
Shares".) The Escrow Shares shall not be voted by the Escrow Agent, unless the
Company defaults on its obligations under the agreement. Upon satisfaction of
such obligations, the Escrow Shares shall be returned by the Escrow Agent to the
Company. (See "Legal Proceedings".) In conjunction with the issuance of the
Company's shares to Ms. Stevens, the Company recorded charges against earnings
totaling $71,400 at June 30, 1996.
In September 1996, pursuant to the Company's Director Stock Option
Plan, the Company issued: 10,000 of its Class A Common Shares to Roger Lourie,
an outside Director of the Company, and 10,000 of its Class A Common Shares to
various individuals at the instruction of Richard Josephberg, an outside
Director of the Company.
II-4
<PAGE>
The Company believes that the transactions set forth above were exempt
from registration with the Commission pursuant to Section 4(2) of the Securities
Act -as transactions by an issuer not involving any public offering. No
broker-dealer or underwriter was involved in the foregoing transactions. All
certificates representing the securities issued and currently outstanding by the
Registrant herein have been or will be appropriately legended.
II-5
<PAGE>
Item 27. Exhibits.
Exhibit No. Item
- ----------- ----
1.1 Form of Amended Underwriting Agreement..2/
1.2 Form of Agreement Among Underwaters.1/
1.3 Form of Selected Dealer Agreement.1/
1.4 ____________________ Form of Management Agreement between the
Company and Decor Group, Inc.
2.01 Stock Purchase Agreement, dated October 21, 1994, among the
Company and Murano Crystal Corp. and Stephen M. Tucker.6/
2.02 Stock Purchase Agreement, dated October 21, 1994, among the
Company and Cemmic Productions Corp. and Stephen M. Tucker and
Michael D. Tucker.2/
3.1 Certificate of Incorporation of the Company.1/
3.1(a) Amendment to the Certificate of Incorporation.2/
3.1(b) Certificate of Designations, Rights and Preferences of Series
A Preferred Stock.2/
3.2 By-Laws of the Company.1/
3.3 Restated Certificate of Incorporation of A.P.F. Holdings,
Inc.1/
3.4 Certificate of Ownership and Merger between Interiors, Inc.
and A.P.F. Holdings, Inc.1/
3.5 Articles of Incorporation of Italia Collection, Inc. 7/
3.6 By-laws of Italia Collection, Inc.7/
4.1 Forms of Representative's Warrants to Purchase Class A Common
Stock, Class WA Warrants and Class WB Warrants.2/
4.1(a) Consulting Agreement between the Company and VTR Capital,
Inc.2/.
4.1(b) Form of Warrant Exercise Fee Agreement by and between the
Company, VTR Capital, Inc., and the Transfer Agent.2/.
4.2 Form of Warrant Agreement by and between the Company, J.
Gregory & Company, Inc., and Transfer Agent.3/
4.3(a) Specimen Class A Preferred Stock Certificate.2/.
II-6
<PAGE>
4.3(b) Specimen Class WC Warrant Certificate.2/
4.3(c) Specimen Class A Common Stock Certificate.2/
4.4 Specimen Class B Common Stock Certificate.2/
4.5 Specimen Class WA Warrant Certificate.2/
4.6 Specimen Class WB Warrant Certificate.2/
4.7 First Amendment to Warrant Agreement.3/
5.1 Opinion of Bernstein & Wasserman, LLP, securities counsel for
Registrant.*
10.1 Sublease Agreement dated January 16, 1991 between Stern Metals
and the Company.1/
10.2 Lease dated August 11, 1992 between Hoopskirt Factory Partners
and I.R.A.L., Inc.2/
10.3 Lease dated February 1, 1993 between Arglo Realty Company and
the Company.1/
10.4 Security Agreement dated November 13, 1990 between the Company
and United Credit Corporation and amendments thereto dated
November 13, 1990, January 7, 1992, October 11, 1991,
December 15, 1992 and June 23, 1993.1/
10.5 Promissory note dated June 27, 1991 for $75,000 to Mount
Vernon Urban Renewal Agency.1/
10.6 Mount Vernon Small and Minority Business Loan Agreement dated
June 27, 1991.1/
10.7 Security Agreement between Mount Vernon Urban Renewal Agency
and the Company dated June 27, 1991.1/
10.8 Intercreditor Agreement dated June 27, 1991 between United
Credit Corporation and Mount Vernon Urban Renewal Agency.1/
10.9 Promissory note dated April 2, 1992 in favor of Hide Tashiro,
in principal amount Of $150,000.1/
10.10 Promissory note dated April 2, 1992 in favor of Takehisa
Nishijima, in principal amount of $150,000.1/
10.11 Promissory note dated June 8, 1992 in favor of Roger Lourie,
in principal amount of $15,000.1/
II-7
<PAGE>
10.12 Promissory note dated September 19, 1992 in favor of Howard
Morganstein, in principal amount of $50,000.1/
10.13 Promissory note dated September 1, 1993 in favor of The Munn
Trust of 1975 Trustee: Sol Munn and Evelyn Munn, in the
principal amount of $150,000.1/
10.14 Agreement dated April 1, 1991 between Production,
Merchandising & Distribution Employees Union, Local 210,
affiliated with The International Brotherhood of Teamsters,
Chauffeurs, Warehouseman and Helpers of America, AFL-CIO and
the Company.1/
10.15 Form of Security Agreement between the Company and the Bridge
Lenders.1/
10.16 Form of Non-Negotiable 6% Convertible Promissory Note.1/
10.17 Form of Non-Negotiable 10% Promissory Note.1/
10.18 Employment Agreement dated March 8, 1994 between A.P.F.
Holdings, Inc. and Max Munn.1/
10.19 Marketing and Organizational Agreement between the Company and
Robert M. Leopold dated as of January 4, 1994.1/
10.20 Promissory Note dated March 16, 1994 in favor of William
Evenchick, in the principal amount of $100,000.1/
10.21 Pledge and Security Agreement between Ted Stevens and Stern
Metals, Inc. dated January 16, 1991.1/
10.22 Promissory Note dated January 16, 1991 in favor of Stern
Metals, Inc. in the principal amount of $125,000.1/
10.23 1994 Stock Option and Appreciation Rights Plan.5/
10.24 1994 Director Stock Option and Appreciation Rights Plan.4/
10.25 Revised form of Warrant Exercise Fee Agreement.5/
10.26 Revised form of Consulting Agreement between the Company and
J. Gregory & Company, Inc.2/
10.27 General Loan and Security Agreement dated July 7, 1994 between
the Company and The Bank of New York.5/
10.28 Promissory Note dated July 7, 1994 in the amount of
$950,000.5/
10.29 General Guarantees dated July 7, 1994 of Ann Stevens, Theodore
Stevens and Max Munn to The Bank of New York.5/
10.30 Lease Agreement dated July 15, 1994 between the Company and
Robert Schildkraut.5/
II-8
<PAGE>
10.31 Promissory Note dated June 30, 1994 in the amount of $100,000
issued to Ted Stevens.5/
10.32 Agreement dated October 6, 1994 among the Company, J. Gregory
& Company, Inc. and Vincent Mongo.5/
10.33 Consulting agreement between Morris Munn and the Company dated
October 1, 1993.5/
10.34 Consulting agreement between M & E Company and the Company
dated October 1, 1993.5/
10.35 Promissory Note dated October 25, 1994 in the amount of
$100,000 issued to Nybor Group, Inc. together with Affidavit
of Confession of Judgment relating thereto.7/
10.36 Employment Agreement dated October 21, 1994, between Murano
Crystal Corp. and Stephen M. Tucker.6/
10.37 Consulting Agreement dated October 21, 1994, between Murano
Crystal Corp. and Jean Tucker.6/
10.38 Guaranty issued by the Company to Stephen M. Tucker and Jean
Tucker.6/
10.39 Guaranty issued by the Company to Stephen M. Tucker and
Michael D. Tucker.6/
10.40 Non-Competition and Confidentiality Agreement entered into
between Murano Crystal Corp. and Michael D. Tucker.6/
10.41 Non-Competition and Confidentiality Agreement entered into
between Murano Crystal Corp. and Lisette Tucker.6/
10.42 Promissory Note dated October 27, 1994 in the amount of $8,000
issued to Max Munn.7/
10.43 Promissory Notes dated October 27 and October 28, 1994 in the
amounts of $8,000 and $25,000, respectively, issued to Robert
M. Schildkraut together with Affidavits of Confession of
Judgment relating thereto.7/
10.44 Promissory Note dated November 23, 1994 in the amount of
$225,000 issued to Ekistics Corp.7/
10.45 Guarantees dated November 23, 1994 of Theodore Stevens, Max
Munn, Laurie Munn, and Ann Stevens.7/
10.46 General Loan and Security Agreement dated November 22, 1994
from the Company to Ekistics Corp.7/
10.47 Rollover Promissory Notes issued to Robert Schildkraut in the
amounts of $25,000 and $8,000.
II-9
<PAGE>
10.48 Form of Subscription Agreement for Private Placement of Series
A 10% ______________ Convertible Preferred Stock. 8/
10.49 ______________ Letter Agreement dated march 15, 1995 between
the Company and Chatham Capital Partners, Ltd. 3/.
10.49(a) Form of Subscription Agreement for Offering by Decor Group,
Inc. 11/
10.50 Demand note between the Company and Max Munn dated February 8,
1996. 9/
10.51 ______________ Non-negotiable Promissory Note between Laurie
Munn and the Company dated ________________ April 8, 1996, and
Security Agreement relating thereto. 10/
10.51(a) ______________ Letter dated March 28, 1995 between Reynders,
Gray & Co. Incorporated to Theodore Stevens.3/.
11.0 Statement re: computation of per share earnings as of December
31, 1997.
21.1 Subsidiaries of the Registrant.5/
23.1 Consent of Arthur Andersen LLP, independent Public
accountants.
23.2 Consent of Bernstein & Wasserman, LLP - such consent is
contained in the opinion contained in Exhibit 5. 1.
99.1 U.S. Patent and Trademark office Trademark Reg- No.
1,736,623.1/
99.2 U.S. Patent and Trademark Office Service mark Reg. No.
1,783,694.1/
99.3 Consent Order for Permanent injunction for Defendant Max Munn
issued by the Federal Trade Commission in September 1991.1/
99.4 Satisfaction of Judgement in the matter of A.P.F. Holdings,
Inc. vs. Max Munn.2/
- -----------------
1/ Previously filed as an exhibit to the Registration Statement
(Registration No. 33-77288-NY), which exhibit is incorporated
herein by reference.
2/ Previously filed as an exhibit to Amendment No. 1 to the
Registration Statement (Registration No. 33-77288-NY), which
exhibit is incorporated herein by reference.
3/ Previously filed as an exhibit to Amendment No. 2 to the
Registration Statement (Registration No. 33-77288-NY), which
exhibit is incorporated herein by reference.
II-10
<PAGE>
4/ Previously filed as an exhibit to Amendment No. 3 to the
Registration Statement (Registration No. 33-7728-NY), which
exhibit is incorporated by reference.
5/ Filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1994 (File No.
0-24352), which exhibit is incorporated herein by this
reference.
6/ Filed as an exhibit to the Company's Current Report on Form
8-K filed November 3, 1994 (File No. 0-24352), which exhibit
is incorporated herein by this reference.
7/ Previously filed as an exhibit to the Registration Statement
(Registration No. 33-86296) and which exhibit is incorporated
herein by reference.
8/ ____________ Previously filed as an exhibit to the
Registration Statement (Registration No. 33-08215) and which
____________ exhibit is incorporated herein by this reference.
9/ Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-QSB _____________ for the quarter ended
December 31, 1995 and which such exhibit is incorporated
______________ herein by this reference.
10/ Previously filed as an exhibit to the Company's Quarterly
Report on Form 10-QSB ____________ for the quarter ended March
31, 1996 and which such exhibit is incorporated herein
_____________ by this reference.
11/ Previously filed as an exhibit to the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1996 (File
No. 0-24352), which exhibit is ______________ incorporated
herein by this reference.
12/ Previously filed as an exhibit to the Registration Statement
(Registration No. 33-94404), which exhibit is incorporated
herein by reference.
* To be filed by Amendment.
Item 28. Undertakings
(a) Rule 415 Offering.
The undersigned registrant will:
(1) File, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act;
II-11
<PAGE>
(ii) Reflect in the prospectus any facts or
events which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement; and
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act treat
each post-effective amendment as a new registration statement
of the securities offered, and the offering of the securities
at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the
end of the offering.
(b) Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 28 of this
Registration Statement, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(d) Rule 430A.
The undersigned Registrant will:
(1) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the
small business issuer under Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration
Statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities
offered in the Registration Statement, and that offering of
the securities at that time as the initial bona fide offering
of those securities.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of Mt.
Vernon, State of New York, on July 17, 1997.
INTERIORS, INC.
By: /s/ Max Munn
-----------------------------
Max Munn, President
Chief Executive Officer and
Treasurer
In accordance with the requirements of the Securities Act of 1933, as
amended, this amendment to Registration Statement on Form SB-2 was signed by the
following persons in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Max Munn President, Chief Executive, Financial July 17, 1997
- ---------------------------- And Accounting Officer,
Max Munn Treasurer and Director
/s/ Roger Lourie Director July 17, 1997
- ----------------------------
Roger Lourie
/s/ Richard A. Josephberg Director July 17, 1997
- ----------------------------
Richard A. Josephberg
</TABLE>
<PAGE>
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT (the "Agreement") is entered into
as of this day of May 1996, by and between Decor Group, Inc, a Delaware
corporation, having an office at 320 Washington Street, Mt. Vernon, New York
10553 (hereinafter "Decor"), and Interiors, Inc. , a Delaware corporation,
having offices at 320 Washington Street, Mt. Vernon, New York 10553 (hereinafter
"Interiors").
NOW, THEREFORE, in consideration of the mutual promises of the
parties hereinafter set forth, Decor and Interiors hereto agree as follows:
1.Retention as Management Advisor. Subject to each of the terms,
conditions and provisions of this Agreement, Decor hereby retains Interiors and
Interiors hereby agrees to be retained by Decor to perform those managerial
functions set forth in Section 4 of this Agreement.
2. Term. Subject to the provisions for termination set forth herein,
this Agreement shall be from the date of this Agreement through the second
anniversary hereof, and automatically renewable annually thereafter unless the
non-terminating party receives written notice from the terminating party of
termination at least sixty (60) days prior to the renewal date.
3. Compensation. As compensation to Interiors for its management and
advisory services to Decor under this Agreement, Decor agrees to pay to
Interiors an annual fee (the "Management Fee") equal to the greater of (i)
$75,000 or (ii) 1 1/2% of Excess Cashflow of Artisan Acquisition Corporation.
"Excess Cashflow" shall mean operating cashflow as defined by generally accepted
accounting principles (a) less (i) principal and interest payable with respect
to indebtedness, (ii) taxes, and (iii) capital expenditures, and (b) adjusted to
reflect changes in working capital. The Management Fee shall be paid annually
within 90 days following the end of the relevant fiscal year.
4. Duties as Management Advisor. Interior's shall provide assistance
in the design, manufacturing marketing and distribution of Decor's products, as
well as providing accounting and administrative services and strategic planning
with regard to joint ventures, acquisitions and other long term business
initiatives (the "Services"). The Services shall be rendered upon the reasonable
request of Decor, and Interiors shall devote as much time as reasonably
necessary to complete its management services obligations to Decor.
5. Decisions. Decor reserves the right to make all decisions
<PAGE>
with regard to any matter upon which Interiors has rendered its advice and
consultation, and there shall be no liability to Interiors for any such advice
accepted by Decor pursuant to the provisions of this Agreement, unless such
advice was the result of willful misconduct or gross negligence on the part of
Decor.
6. Authority of Management Advisor. Interiors shall have authority
only to act as a consultant and advisor to Decor. Interiors shall have no
authority to enter into any agreement or to make any representation, commitment
or warranty binding upon Decor or to obtain or incur any right, obligation or
liability on behalf of Decor.
7. Independent Contractor. Except as may be expressly provided
elsewhere in this Agreement, Interiors shall act as an independent contractor
and shall have complete charge of its personnel engaged in the performance of
the Services.
8. Books and Records. Interior's books and records with respect to
the Services and any reimbursable costs ("Books and Records") shall be kept at
Interior's offices located at 320 Washington Street, Mt. Vernon, New York. The
Books and Records shall be kept in accordance with recognized accounting
principles and practices, consistently applied, and shall be made available for
Decor or Decor's representatives, with inspection and copying at all times being
made available during regular office hours. Interiors shall not be required to
maintain the Books and Records for more than three (3) years after termination
of this Agreement.
9. Confidential Information.
9.1 The parties acknowledge that during the course of provision of
the Services, Decor may disclose information to Interiors or its affiliated
companies. Interiors shall treat such information as Decor's confidential
property and safeguard and keep secret all such information about Decor,
including reports and records, customer lists, trade lists, trade practices, and
prices pertaining to Decor's business.
9.2 Interiors shall exercise its best efforts and shall cause any of
its affiliated companies to exercise their best efforts to prevent any
confidential information from being disclosed to third parties, except as
necessarily required in the performance of the Services and except under terms
of confidentiality satisfactory to Decor. This obligation shall remain in effect
until Decor shall release Interiors or its affiliated companies from their
obligations under this paragraph 9, but in no event later than three (3) years
after the completion of the
2
<PAGE>
Services. Interiors shall not use any of Decor's confidential information in any
way that is or may be detrimental to the interests of Decor, directly or
indirectly, either during the term of this Agreement or at any time thereafter.
10. Indemnification. Decor agrees to indemnify and hold Interiors
and its officers, directors and agents harmless from damages, losses or
expenses, including, without limitation, reasonable attorneys' fees and
expenses, incurred or paid directly or indirectly, by Interiors as a result of
or arising out of any actions taken by Interiors in connection with the
performance of the Services under this Agreement. Interiors agrees to indemnify
and hold Decor and its officers, directors and agents harmless from damages,
losses or expenses, including, without limitation, reasonable attorneys' fees
and expenses, incurred or paid directly or indirectly, by Decor as a result of
or arising out of any actions taken by Interiors in connection with the
performance of the Services under this Agreement.
11. Notices and Communications.
11.1 All communications relating to the day-today activities
necessary to render the Services shall be exchanged between the respective
representatives of Decor and Interiors, who will be designated by the parties
promptly upon commencement of the Services.
11.2 All other notices, demands, and communications required or
permitted hereunder shall be in writing and shall be delivered personally to the
respective representatives of Decor and Interiors set forth below or shall be
sent by a nationally recognized overnight courier or mailed by registered mail,
postage prepaid, return receipt requested. Notices, demands and communications
hereunder shall be effective: (i) if delivered personally, on delivery; or (ii)
if mailed, forty-eight (48) hours after deposit thereof in the United States
mail addressed to the party to whom such notice, demand, or communication is
given. Until changed by written notice, all such notices, demands and
communications shall be addressed as follows:
If to Decor:
320 Washington Street
Mt. Vernon, New York 10553
Attn: Donald Feldman
President
If to Interiors:
3
<PAGE>
320 Washington Street
Mt. Vernon, New York 10553
Attn: Max Munn
President
12. Assignments. Interiors shall not assign this Agreement in whole
or in part without the prior written consent of Decor.
13. Applicable Law and Severability. This document shall, in all
respects, be governed by the laws of the State of New York applicable to
agreements executed and to be wholly performed within the State of New York.
Nothing contained herein shall be construed so as to require the commission of
any act contrary to law, and wherever there is any conflict between any
provisions contained herein and any contrary present or future statute, law,
ordinance or regulation, the latter shall prevail, but the provision of this
document which is affected shall be curtailed and limited only to the extent
necessary to bring it within the requirements of the law.
14. Further Assurances. Each of the parties hereto shall execute and
deliver any and all additional papers, documents and other assurances, and shall
do any and all acts and things reasonably necessary in connection with the
performance of their obligations hereunder and to carry out the intent of the
parties hereto.
15. Attorneys' Fees. In the event any action is instituted by a
party to enforce any of the terms and provisions contained herein, the
prevailing party in such action shall be entitled to such reasonable attorneys'
fees, costs and expenses as may be fixed by the court.
16. Successors and Assigns. Subject to the foregoing, all the terms
and conditions contained herein shall inure to the benefit of and shall be
binding upon the parties hereto and their respective heirs, personal
representatives, successors and assigns.
17. Captions. The captions appearing at the commencement of the
paragraphs hereof are descriptive only and for convenience and reference. Should
there be any conflicts between any such caption and the paragraph at the head of
which it appears, the paragraph and not such caption shall control and govern in
the construction of this document.
18. Modifications or Amendments. No amendment, change
4
<PAGE>
or modification of this document shall be valid unless it is in writing and
signed by all the parties hereto and expressly states that it is an amendment,
change or modification of this Agreement is intended.
19. Separate Counterparts. This document may be executed in one or
more separate counterparts, each of which, when so executed, shall be deemed to
be an original. Such counterparts shall, together, constitute and be one and the
same.
20. Entire Agreement. This Agreement shall constitute the entire
understanding and agreement between the parties hereto and shall supersede any
and all letters of intent, whether written or oral, pertaining to the subject
matter of this Agreement.
5
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers on the date first appearing above.
DECOR GROUP, INC.
By /s/ Donald Feldman
______________________________________
Donald Feldman,
President
INTERIORS, INC.
By /s/ Max Munn
______________________________________
Max Munn
President
6
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
included in or made a part of this Registration Statement File No. 333-17671 on
Form SB-2 registering 654,000 shares of Class A Common Stock and 324,400 shares
of Series A, 10% Cumulative Convertible Preferred Stock.
ARTHUR ANDERSEN LLP
New York, New York
July 11, 1997
