1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For Three Month Period Ended September 30, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to .
Commission File No. 0-24352
INTERIORS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3590047
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 Washington Street, Mt. Vernon, New York 10553
(Address of principal executive offices) (zip code)
Issuer's Telephone Number: (914) 665-5400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
The number of shares outstanding of the issuer's Class A Common Stock and Class
B Common Stock as of November 12, 1997 was 5,261,241 and 1,769,750,
respectively.
Transitional Small Business Disclosure Format (check one). Yes . No X .
<PAGE>
INTERIORS, INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Consolidated Balance Sheet as of September 30, 1997.............2
Consolidated Statements of Operations -
For the Three Months Ended September 30, 1997 and 1996.....3
Consolidated Statement Changes in Stockholders' Equity -
For the Three Months Ended September 30, 1997..............4
Consolidated Statements of Cash Flows -
For the Three Months Ended September 30, 1997 and 1996.....5
Notes to Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis.................................13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................19
Item 2. Changes in Securities................................................21
Item 3. Defaults Upon Senior Securities......................................21
Item 4. Submission of Matters to a Vote of Security Holders..................21
Item 5. Other Information....................................................21
Item 6. Exhibits and Reports on Form 8-K.....................................21
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements included herein have been prepared by
Interiors, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
statements include all adjustments necessary to present fairly the financial
condition of the Company as of September 30, 1997 and the results of operations
for the three month period ended September 30, 1997 and 1996.
The Company's results of operations during the three months ended
September 30, 1997 are not necessarily indicative of any future results. It is
suggested that the financial statements included in this report be read in
conjunction with the financial statements and notes thereto in the Company's
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1997.
<PAGE>
INTERIORS, INC.
BALANCE SHEET
(unaudited)
September 30,
1997
CURRENT ASSETS:
Cash $ 194,195
Accounts receivable
Trade, net allowance of $268,000 962,537
Inventories 1,622,546
Prepaid expenses and other current assets 918,967
----------
Total current assets 3,698,245
----------
INVESTMENTS
Investments 3,976,679
----------
Total investments 3,976,679
----------
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 1,576,346
Furniture and fixtures 144,297
Leasehold improvements 213,010
----------
Total property and equipment, at cost 1,933,653
Less- Accumulated depreciation and
amortization 1,148,790
----------
Net property and equipment 784,863
----------
OTHER ASSETS 246,520
----------
Total assets $8,706,307
==========
<PAGE>
September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997
CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt $1,596,923
Accounts payable and accrued liabilities 1,954,671
----------
Total current liabilities 3,551,594
----------
NON-CURRENT LIABILITIES:
Notes Payable 890,000
Loan Payable 17,954
----------
Total noncurrent liabilities 907,954
----------
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,
5,261,241 shares issued and outstanding 5,261
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 13,237,657
Accumulated deficit (8,571,300)
Treasury Stock (600)
Note receivable (437,500)
----------
Total stockholders' equity 4,246,759
----------
Total liabilities and stockholders' equity $8,706,307
==========
The accompanying notes are an integral part of this balance sheet
<PAGE>
INTERIORS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
<TABLE>
1997 1996
---- ----
<S> <C> <C>
NET SALES $1,517,782 $1,179,170
COST OF GOODS SOLD 956,203 621,453
------------ ----------
Gross profit from continuing operations 561,579 557,717
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 341,169 488,071
------------ ----------
Operating expenses 341,169 488,071
Income (loss) from continuing operations
before interest and provision for taxes 220,410 69,646
INTEREST EXPENSE (including financing charges) 112,502 77,240
------------ ----------
Income (loss) from continuing operations
before provision for taxes 107,908 (7,594)
PROVISION FOR INCOME TAXES 0 0
------------ ----------
Income (loss) from continuing operations 107,908 (7,594)
DISCONTINUED OPERATIONS (Note 3)
Loss from operations of discontinued
operations 0 0
------------ ----------
Loss from discontinued operations 0 0
NET INCOME (LOSS) $107,908 ($7,594)
============ ==========
NET EARNINGS PER COMMON STOCK
CONTINUING OPERATIONS $0.02 $0.00
DISCONTINUED OPERATIONS $0.00 $0.00
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $0.02 $0.00
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 4,780,991 3,927,116
========= =========
</TABLE>
the accompanying notes are an integral part of these financial statements
<PAGE>
<TABLE>
INTERIORS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(unaudited)
Series A Class A Class B Additional Retained
Preferred Stock Common Stock Common Stock Paid-In Earnings Treasury Note
Shares Amount Shares Amount Shares Amount Capital (Deficit) Stock Receivable Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE-June 30, 1997 1,147,060 $11,471 5,261,241 $5,261 1,769,750 $1,770 $13,216,636 ($8,679,208) ($600) ($437,500) $4,117,830
Reduction of legal fees
in connection with
investment $21,021 $21,021
Net income through
September 30, 1997 $107,908 $107,908
--------- ------- --------- ------ --------- ------ ----------- ----------- ----- --------- ----------
BALANCE-September 30,1997 1,147,060 $11,471 5,261,241 $5,261 1,769,750 $1,770 $13,237,657 ($8,571,300) ($600) ($437,500) $4,246,759
========= ======= ========= ====== ========= ====== =========== =========== ===== ========= ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
INTERIORS, INC.
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(unaudited)
<TABLE>
YEARS ENDED
SEPT. 30
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (loss) $107,908 ($7,594)
-------- -------
Adjustments to reconcile net Income (loss) to net cash used in operating
activities:
Depreciation and amortization 155,092 158,875
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, trade (15,709) (26,444)
Decrease (increase) in inventories (101,717) (228,261)
Decrease (increase) in prepaid expenses and other current asset (20,576) (36,300)
Decrease (increase) in other assets 16,720
Increase (decrease) in notes payable and current maturities of
long term debt (20,936) 67,013
Increase (decrease) in accounts payable and accrued expenses (145,063) (616,024)
Increase (decrease) in net liabilities and accrued expenses of discontinued
operations (90,557)
-------- --------
Net cash used in operating activities (24,281) (779,292)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (59,850)
Investment in Decor Group, Inc. (824,000)
--------
Net cash used in investing activities (883,850)
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 61,051
Repayments of debt and capitalized lease obligations (113,983)
Net proceeds from sale of Series A preferred stock, common stocks,
and warrants
Net proceeds from exercise of common stock warrants 834,000
Net proceeds from exercise of preferred stock options 825,000
-------- ---------
Net cash provided by financing activities (52,932) 1,659,000
-------- ---------
Net Increase (decrease) in cash (77,213) (4,142)
CASH, beginning of period 271,408 4,142
-------- ---------
CASH, end of period $194,195 $0
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for-
Interest $20,725 $21,157
Taxes $300 $5,566
NON-CASH FINANCING ACTIVITIES:
The accompanying notes are an integral part of these financial statements
</TABLE>
<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 months ended
September 30, 1997 are not necessarily indicative of those to be expected for
the entire year. The Company, for the three months ended September 30, 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, (registered in 1997) and 200,000 shares of
its Series A Convertible Preferred stock (also registered in 1997) 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. 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. 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. After the conversion by
the subsequent holder to common stock, the Company owned approximately 77.5% of
the total voting stock of Decor. During 1997, Decor reverse split its common
stock issuing one new common share in exchange for three prior owned common
shares. As of September 30, 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. On November 5, 1997, two of the Voting
Trustees (the Company's CEO remains the sole Voting Trustee) resigned from
Voting Trust.
On October 20, 1997, the Company issued a letter of intent whereby it
will acquire the remaining shares of Decor Group, Inc. it does not currently
own. Interiors, Inc. would be the surviving corporation and all the
outstanding shares of Decor would be canceled. The merger consideration to
be delivered by Interiors, Inc. to the stockholders of Decor Group, Inc. for
the shares of common stock outstanding at the date of closing of the proposed
transaction will be an aggregate $10 million of common stock of Interiors,
Inc. subject to a fair market value adjustment. There can be no assurance
that the proposed transaction will be completed.
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 September 30, 1997, the Company has accrued approximately
$99,000 of fees pursuant to this agreement.
Decor entered into an asset purchase agreement (the "Agreement") during
March, 1996, 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 wall, table and
freestanding metal 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
September 30, 1997, Ms. Munn was issued 100,000 shares of the outstanding common
shares of Decor, adjusted to reflect reverse splits and stock dividends as of
this date.
<PAGE>
3. NOTES PAYABLE
At September 30, 1997, the Company has aggregate notes payable of
approximately $2,500,000. The components of these notes are discussed below.
The Company has outstanding secured financing with United Credit
Corporation totaling approximately $1,300,000 at September 30, 1997. Interest is
determined at an annual rate of 16% plus related fees. The Company signed an
agreement in February, 1997, whereby it agreed to issue 100,000 shares of Class
A common stock to this lender. As of this date, these shares have not been
issued. The company has agreed to reduce the outstanding loan by $5,000 per
month.
. The Company has outstanding secured financing with the Bank of New York
totaling approximately $370,000 at September 30, 1997. Interest is determined at
an annual rate of prime plus 1%, (9.50% as of the date of this filing.) The
Company has agreed to reduce the outstanding principal by $5,000 per month.
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%. This loan is secured by all of the
Company's Preferred Stock in Decor.
The Company has outstanding secured financing with Infinity Investors,
Ltd. totaling approximately $186,000 at September 30, 1997. The Company is
currently paying principal and interest of $7,500 per month calculated at an
annual rate of 15% against the unpaid principal balance. This loan is secured by
600,000 shares of the Company's Class A common stock.
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 6.5%. The September 30, 1997 balance due on this loan is
approximately $11,000. This debt was repaid in October 1997.
4. COMMITMENTS AND CONTINGENCIES
The litigation relating to the termination of the 1995 employment
agreement between Ann Stevens and the Company has been settled by the execution
during July 1996, 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 for certain expenses in the
approximate amount of $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. During November 1997 the Company added
2,500,000 Common A shares to the Escrow shares under the same terms and
conditions of the original Escrow shares agreement.
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
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 (50% of which is currently deferred) and has the use of an automobile
provided by the Company.
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 $975 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 had
provided consulting services to the Company subsequent to February 19, 1997.
Beginning May 6, 1997, the Company provided 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.
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
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 92,940 shares of Preferred Stock
have converted such shares into 278,820 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 September 30, 1997, the balance of loans to Decor totals $110,000. On
May 7, 1997, the Company announced that it would 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 $165,741 in March 1996 in
conjunction with the issuance of these shares. The Company has declared a record
date of December 10, 1997 for a dividend on its Series A 10% Cumulative
Convertible Preferred Stock for September 1996, March 1997 or September 1997.
The dividend ($.75 per Preferred Share) will be payable on January 2, 1998 in
the form of the Company's Common A Shares. Cumulative but unpaid dividends on
Series A 10% Cumulative Preferred Stock as of September 30, 1997 totals
approximately $810,000.
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 two
year 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 was 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 guaranty and pledge of her
assets for certain Company debt The Company obtained an appraisal at that time
to determine the fair market values of this transaction. 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. The Promissory Note remains outstanding.
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. (See "Commitments and Contingencies.") As part
of this agreement, the Company issued 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. (See "Liquidity and Capital Resources.") 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. 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 and 2,500,000 Class A 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.
During September 1996 and September 1997, pursuant to the Company's
Director Stock Option Plan, the Company issued (per year): 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 which BH Funding, LLC will
provide certain advisory services to the Company over five years, the Company
agreed to issue to BH Funding 100,000 shares of its Class A Common shares and
100,000 shares of its Series A Preferred shares.
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
Collection, Inc. ("Italia"), a subsidiary of the Company. 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 January 31, 1997
totaled approximately $806,000. Since the financial statements of Italia were
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.
As part of its efforts to refinance business activities, during the month
of February 1997, the Company arranged to obtain $600,000 of new debt financing
at an annual rate of 15% interest, and $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. The loan is to be repaid 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. 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
September 30, 1997, the Company has accrued approximately $99,000 of fees
pursuant to this agreement.
Item 2. Management's Discussion
The following discussion should be read in conjunction with the
information contained in the financial statements of the Company (the "Financial
Statements") and the Notes (the "Notes") thereto appearing elsewhere herein and
in conjunction with the Management's Discussion and Analysis set forth in the
Company's Form 10-KSB for the fiscal year ended June 30, 1997, which discussion
is incorporated herein by reference.
Results of Operations
Period Ended September 30, 1997 as Compared to Period Ended September 30, 1996.
The Company's net sales from operations for the quarter ended September
30, 1997 increased by $339,000 or 28.8% to $1,518,000 from $1,179,000 for the
quarter ended September 30, 1996. The growth in revenue was the result of an
increase in sales to a large customer and in it's custom frame division, as well
as the implementation of an approximate 5% price increase initiated in June
1997.
The Company's cost of goods sold as a percentage of net sales increased to
63.0% for the three months ended September 30, 1997, from 52.7% for the three
months ended September 30, 1996. Cost of goods sold for the current period was
approximately $956,000 versus $621,000 for the prior period. This increase in
percentage was due to an increase in labor costs arising from a staff build up
in anticipation of substantial growth in shipments for the subsequent period.
The Company elected to conservatively estimate its current work-in-progress. The
Company used the gross profit method to value inventory during the three months
ended September 30, 1997 and 1996.
The Company's selling, general and administrative expenses as a percentage
of net sales totaled 22.5% for the three months ended September 30, 1997, versus
41.4% for the three months ended September 30, 1996. A substantial portion of
the $147,000 decrease is attributable to a drop in administrative payroll
relating to a reduction in personnel. To achieve this reduction in the ratio of
selling, general, and administrative expenses as a percentage of net sales for
the three months ended September 30, 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. Interest expense as a
percentage of net sales totaled approximately 7.4% for the three months ended
September 30, 1997, versus approximately 6.5% for the three months ended
September 30, 1996. Interest expense increased approximately $35,000 for the
three months ended September 30, 1997 in comparison to the three months ended
September 30, 1996 because of new loans.
For the quarter ended September 30, 1997, the Company realized net income
of approximately $108,000 ($0.02 per share), versus net loss from operations of
approximately $8,000 ($0.00 per share) for the period ended September 30, 1996.
<PAGE>
Liquidity and Capital Resources
Management believes that future cash flow from operations will be
sufficient to support the Company's operations. However, Company management
continues to implement what it believes to be the changes deemed necessary to
further increase positive cash flow and profitability. Specific action taken as
of the date of this filing include seeking either the acquisition of or entering
into strategic alliances with unrelated companies in the decorative accessories
industry. (See "Acquisitions and Strategic Alliances."). On October 20, 1997,
the Company issued a letter of intent whereby it will acquire the remaining
shares of Decor Group, Inc. it does not currently own (See . "Acquisitions and
Strategic Alliances."). The Company has also begun to implement a marketing
program meant to increase revenues of its Master Framemakers Division. No
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 (the "Agreement"),
with P-2-A which amended an earlier supply agreement. The Agreement provides for
the sale of certain manufacturing equipment and related assets, consulting
services, as well as certain contractual reimbursements of General and
Administrative expenses by P-2-A to the Company aggregating $1,140,000. The
Company agreed that the $1,140,000 due to the Company would be used to fund the
purchase from P-2-A of 270,000 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
$1,140,000. The Company effectively owns approximately 4.5% of P-2-A after this
transaction. 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. Prior to this Agreement P-2-A was purchasing certain
stretching and framing services from the Company
As of September 30, 1997, the Company reflected cash balances of approximately
$194,000 as compared to cash balances of approximately $271,000 at June 30,
1997, representing an decrease of $77,000. Net cash used in operating activities
was approximately $24,000 at September 30, 1997, as compared to net cash used in
operating activities of approximately $779,000 at September 30, 1996. The net
cash used in operating activities during the three months ended September 30,
1997 was primarily a result of net income of approximately $108,000 as well as
the following approximate changes from continuing operations: non-cash charges
for depreciation of $155,000, decrease in accounts payable and accrued expenses
of $145,000, an increases in inventories of $102,000, and accounts receivable of
$16,000. Provision for accounts receivable was constant from $268,000 as of June
30, 1997 to $268,000 as of September 30, 1997. (see "Results of Operations").
The inventory and accounts receivable change was due to significant growth of
sales to a large customer.
Net cash used in investing activities during the quarter ended September
30, 1997 totaled $0 versus approximately $884,000 for the quarter ended
September 30, 1996. During the three months ended September 30, 1997, the
Company invested $0 to acquire equipment, versus approximately $60,000 used to
acquire equipment and other assets during the three months ended September 30,
1996.
Net cash utilized by financing activities totaled approximately $(53,000)
during the three months ended September 30, 1997 as debt was paid off, versus
approximately $1,659,000 during the three months ended September 30, 1996.
During the current period, funding was the result of United Credit Corporation
asset based borrowing in the approximate net amount $61,000 The primary source
of the prior year's financing was the conversion of the Company's stock
warrants. Bank of New York debt decreased from $380,000 as of June 30, 1997 to
$370,000 as of September 30, 1997. The debt continues to be amortized at the
rate of $5,000 per month. The liability to Infinity Investors, Ltd. decreased
$22,500 during the current quarter.
As of September 30, 1997, the Company's financial position reflected a
working capital surplus of approximately $147,000, versus a working capital
deficit of approximately $99,000 at June 30, 1997. As of September 30, 1997
versus June 30, 1997, there were increases in trade receivables of approximately
$16,000, inventories of approximately $102,000, and a decrease in current
liabilities of approximately $185,000. These changes were due to increases in
sales and debt repayments.
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 gross proceeds to the
Company totaling $1,056,618 net of costs related to professional fees. 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 May 7, 1997 the Company announced that it had extended the exercise
period of its Class A Warrants to June 22, 1998.
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 gross 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.
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 $165,741 in March 1996 in
conjunction with the issuance of these shares. The Company has declared a record
date of December 10, 1997 for a dividend on its Series A 10% Cumulative
Convertible Preferred Stock for September 1996, March 1997 or September 1997.
The dividend ($.75 per Preferred Share) will be payable on January 2, 1998 in
the form of the Company's Common A Shares. Cumulative but unpaid dividends on
Series A 10% Cumulative Preferred Stock as of September 30, 1997 totals
approximately $810,000.
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. The Company registered
these securities with the Securities and Exchange Commission during July 1997.
These shares, which bear a two-year lock-up restrictive legend pursuant to an
agreement between VCR Capital, Inc. and Sol Munn, were issued on April 12, 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 of which
bore a restrictive legend, were issued on April 24, 1996 to various independent
investors generating gross proceeds of $431,251. The Company realized net
proceeds of $310,609 which was used to pay certain outstanding liabilities.
These shares were registered by the Company with the SEC on August 13, 1997.
During September 1996, 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 June 30, 1997.
The Company has outstanding secured financing with Infinity Investors,
Ltd. totaling approximately $186,000 at September 30, 1997. The Company paid
approximately $30,000 in principal and interest towards this debt during the
three months ending September 30, 1997 and will subsequently pay principal and
interest of $7,500 per month calculated at an annual rate of 15% against the
unpaid principal balance for nine (9) 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 Class A Common shares of the Company 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. The loan is to
be repaid to BH 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 each of the Company's Series A Convertible Preferred stock and Class A
Common stock (the "Consulting Shares").
In connection with this agreement, the fair market value of these shares
on the date of issuance (less the proceeds received) was allocated as follows:
$350,000 as acquisition consulting on the Decor transaction; $350,000 as
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.
As of September 30, 1997, the Company has various unpaid State taxes of
approximately $181,000. In July, 1997, the Company entered into a payout
arrangement with New York State to satisfy $64,890 of back payroll and sales
taxes through twelve monthly payments of $5,407. The Company expects to
negotiate a settlement for the remaining taxes due in the second quarter of
1998.
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 from time to time execute upon goods provided by
a customer in the event of non-payment by that customer.
Refer to the "Legal Proceeding" section for discussion of litigation and
related commitments.
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 during the year. 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.
<PAGE>
PART II
OTHER INFORMATION
Item 1 . Legal Proceedings
The Company and its Chief Executive Officer ("CEO") during fiscal year
1996 were involved in numerous lawsuits with various members of the CEO's
immediate family, certain of whom were Officers and Directors of the Company.
All of this litigation has been settled and all resulting charges were reflected
in the fiscal 1996 financial statements. In addition, as a component of the
settlement, the Company entered into various severance and non-compete
agreements discussed in Note 12.
The litigation relating to the termination of the 1995 employment
agreement between Ann Stevens and the Company has been settled during July 1996
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 for certain expenses in the
approximate amount of $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 commencing in July 1996, 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 50,000 Class A Common Shares are subject to a "lock-up" agreement with VTR
Capital Corporation, the Company's investment bankers. The Company placed into
escrow 1,250,000 shares of its Class B Common Shares and 2,500,000 Class A
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. The Company paid $36,707 in the quarter
ended September 30, 1997 to Ms. Stevens in compliance with the various
settlement related Agreements. The status of the Escrow shares remain unchanged.
Related litigation between Ted Stevens, Ms. Steven's husband, and the Company as
well as others was settled simultaneously without payment by either party to the
other. Ted Stevens resigned as an officer and director of the Company in
September 1995.
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.
During April and May of 1995, Hide Tashiro commenced two lawsuits, now
settled, in the Supreme Court of New York, Manhattan County, totaling
approximately $300,000, plus interest and attorney's fees, against the Company
and others. The Company claimed that Mr. Tashiro and his affiliates owed a
greater amount to the Company for earned royalties and commissions. The
complaint demands payment by the Company for loans made by Mr. Tashiro. 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. On June 30, 1997 the Company, Hide
Tashiro, Takehisa Nishijima, and Max Munn, President of the Company, entered
into a settlement agreement (the "Settlement Agreement") whereby the Company
would issue Mr. Tashiro 300,000 shares (the "Shares") of the Company's
unregistered Class A Common Stock in exchange and satisfaction of all amounts
due and from the plaintiffs. The Settlement Agreement contains certain
restrictions on resale of the Shares commencing in 1999.
In July 1996, 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 would have received under the alleged agreement in a
sum to be determined, but not less than $250,000. The suit has remained dormant
since inception. Management believes this matter will be dismissed with no
material impact to the Company's financial position or results of operations.
In August 1996, a lawsuit, now settled, was brought by 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 and releases exchanged without any payment by the
Company or by the Munn Trust.
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. Management believes that all required payments have been
made and no further amounts should be provided for.
In July 1997, an action was brought against the Company and certain of the
Company's officers and directors, by Mary Stewart Lepp, in the United States
District Court for the Southern District of New York. Ms. Lepp, a former
employee of the Company, claims among other things, that she was discharged
because she was pregnant, and seeks compensatory and punitive damages in
unspecified amounts for alleged violations of various federal and state
employment and discrimination laws. Management believes this claim to be wholly
without merit and that the claim will eventually be dismissed or adjudicated in
the Company's favor.
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.
Item 2. Changes in Securities
None in addition to those disclosed herein.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of the Security and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
INTERIORS, INC.
November 17, 1997 By: /s/
-------------------------
Max Munn, President and
Chief Executive,Financial
and Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the consolidated
balance sheet and the consolidated statement of operations and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> jun-30-1997
<PERIOD-END> sep-30-1997
<CASH> 194,195
<SECURITIES> 0
<RECEIVABLES> 1,230,537
<ALLOWANCES> 268,000
<INVENTORY> 1,622,546
<CURRENT-ASSETS> 3,698,245
<PP&E> 1,933,653
<DEPRECIATION> 1,148,790
<TOTAL-ASSETS> 8,706,307
<CURRENT-LIABILITIES> 3,551,594
<BONDS> 0
0
11,471
<COMMON> 7,031
<OTHER-SE> 4,239,728
<TOTAL-LIABILITY-AND-EQUITY> 8,706,307
<SALES> 1,517,782
<TOTAL-REVENUES> 1,517,782
<CGS> 956,203
<TOTAL-COSTS> 341,169
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,502
<INCOME-PRETAX> 107,908
<INCOME-TAX> 0
<INCOME-CONTINUING> 107,908
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</TABLE>