<PAGE>
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 Nine Month Period Ended March 31, 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.
---------------
(Doing Business in New York under the name A.P.F. MasterFramemakers)
(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 May 15, 1997 was 4,861,241 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 March 31, 1997..................2
Consolidated Statements of Operations -
For the Three Months Ended March 31, 1997 and 1996..........3
Consolidated Statements of Operations -
For the Nine Months Ended March 31, 1997 and 1996...........4
Consolidated Statement Changes in Stockholders' Equity -
For the Nine Months Ended March 31, 1997....................5
Consolidated Statements of Cash Flows-
For the Nine Months Ended March 31, 1997 and 1996...........6
Notes to Consolidated Financial Statements.......................7
Item 2. Management's Discussion and Analysis................................16
PART II - OTHER INFORMATION
Item 1. Legal Proceeding....................................................21
Item 2. Changes in Securities...............................................24
Item 3. Defaults Upon Senior Securities.....................................24
Item 4. Submission of Matters to a Vote of Security Holders.................24
Item 5. Other Information...................................................24
Item 6. Exhibits and Reports on Form 8-K....................................24
1
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PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements included herein have been prepared
by Interiors, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
statements include all adjustments necessary to present fairly the financial
condition of the Company as of March 31, 1997 and the results of operations for
the three and nine month periods ended March 31, 1997 and 1996.
The Company's results of operations during the three and nine months
ended March 31, 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, 1996.
1
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INTERIORS, INC.
---------------------
BALANCE SHEET
---------------------
(unaudited)
March 31,
ASSETS 1997
---------------------
CURRENT ASSETS:
Cash $172,804
Accounts receivables -
Trade, net allowance of $112,000 707,256
Inventories 2,197,625
Prepaid expenses and other current assets 367,744
---------------------
Total current assets 3,445,429
---------------------
INVESTMENT IN AFFILIATE 2,435,922
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 271,229
---------------------
Total assets $7,072,200
=====================
March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997
--------------------
CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt $2,646,130
Accounts payable and accrued liabilities 1,132,776
Capital lease obligations 0
--------------------
Total current liabilities 3,778,906
--------------------
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,
1,047,060 shares issued and outstanding 10,471
Class A common stock, $.001 par value,
30,000,000 shares authorized,
4,861,241 shares issued and outstanding 4,861
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 12,394,213
Retained deficit (8,703,203)
Treasury Stock (600)
Note receivable (437,500)
--------------------
Total stockholders' equity 3,270,012
--------------------
Total liabilities and stockholders' equity $7,072,200
====================
The accompanying notes are an integral part of this balance sheet
2
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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 208,839 821,741
PROVISION - ISSUANCE OF STOCK OPTIONS 0 (6,800)
------------------- -----------------
Operating expenses 208,839 814,941
Income from continuing operations 39,246 77,228
GAIN ON SALE OF SECURITIES 281,900 0
RESERVE FOR DISSOLUTION OF ITALIA COLLECTION, INC. (Note 6) (56,000) 0
INTEREST EXPENSE (including financing charges) (68,152) (73,714)
------------------- -----------------
Income (loss) from continuing operations
before provision for taxes 196,994 3,514
PROVISION FOR INCOME TAXES 0 0
------------------- -----------------
Income (loss) from continuing operations 196,994 3,514
DISCONTINUED OPERATIONS
Loss from operations of discontinued operations 0 862,647
------------------- -----------------
Loss from discontinued operations 0 862,647
NET INCOME (LOSS) $196,994 ($859,133)
=================== =================
NET EARNINGS (LOSS) PER COMMON STOCK
CONTINUING OPERATIONS $0.04 $0.00
DISCONTINUED OPERATIONS $0.00 ($0.33)
------------------- -----------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $0.04 ($0.33)
=================== =================
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 4,389,210 2,604,869
=================== =================
</TABLE>
the accompanying notes are an integral part of these financial statements
3
<PAGE>
INTERIORS, INC.
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 1,066,012 2,121,320
PROVISION - ISSUANCE OF STOCK OPTIONS 15,000 193,200
------------------- -------------------
Operating expenses 1,081,012 2,314,520
Income from continuing operations 94,404 220,766
GAIN ON SALE OF SECURITIES 281,900 0
RESERVE FOR DISSOLUTION OF ITALIA COLLECTION, INC. (Note 6) (56,000) 0
INTEREST EXPENSE (including financing charges) (228,402) (321,240)
------------------- -------------------
Income (loss) from continuing operations
before provision for taxes 91,902 (100,474)
PROVISION FOR INCOME TAXES 9,973 5,998
------------------- -------------------
Income (loss) from continuing operations 81,929 (106,472)
DISCONTINUED OPERATIONS
Loss from operations of discontinued operations 0 1,523,714
------------------- -----------------
Loss from discontinued operations 0 1,523,714
NET INCOME (LOSS) $81,929 ($1,630,186)
=================== ===================
NET EARNINGS (LOSS) PER COMMON STOCK
CONTINUING OPERATIONS $0.02 ($0.04)
DISCONTINUED OPERATIONS $0.00 ($0.59)
------------------- -------------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $0.02 ($0.63)
=================== ===================
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 4,389,210 2,604,869
=================== ===================
</TABLE>
the accompanying notes are an integral part of these financial statements
4
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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)
Net income through March 31, 1997
-----------------------------------------------------------------
BALANCE, March 31, 1997 1,047,060 $10,471 4,861,241 $4,861 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.
Net income through March 31, 1997 $81,929 $81,929
------------------------------------------------------------
BALANCE, March 31, 1997 $12,394,213 ($8,703,203) ($600) ($437,500) $3,270,012
============================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<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) $81,929 ($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 75,000 33,766
Non-cash write off of non-productive assets 698,712
Non-cash reduction of liabilities from extinguishment of debt (661,853)
Gain from sale of investment securities (281,900)
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 (54,479) (149,669)
Increase (decrease) in accounts payable and accrued expenses (941,241) (317,114)
Increase (decrease) in net liabilities and accrued expenses of discontinued operations (90,557)
Increase (decrease) in prepaid sales & customer deposits 3,415
--------------- ----------------
Net cash used in operating activities (1,124,570) (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 600,000
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 2,619,699 1,391,066
--------------- ----------------
Net Increase (decrease) in cash 168,662 (2,114)
CASH, beginning of period 4,142 2,114
--------------- ----------------
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
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the
Company without audit, in accordance with generally accepted accounting
principles, and pursuant to the rules and regulations of the Securities and
Exchange Commission. Reference should be made to the Company's financial
statements for the year ended June 30, 1996 for a description of the accounting
policies which have been applied consistently. Also, reference should be made to
the notes to the Company's June 30, 1996 financial statements contained in the
Company's Form 10-KSB for the fiscal year ended June 30, 1996, for additional
details of the Company's financial condition, results of operations and cash
flows. The details in those notes have not changed except as a result of normal
transactions in the interim. All adjustments (of normal recurring nature) which
are, in the opinion of management, necessary for a fair presentation of the
results of the interim period have been included. The results of operations for
the three and nine months ended March 31, 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
7
<PAGE>
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 and 200,000 shares of its Series A
Convertible Preferred stock 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 on December 31, 1997. The Voting Trust shall
comprise 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. 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, 1997. 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 20,000,000 shares of
Series B Non-Convertible Voting Preferred Stock and 54,934 shares of Series C
Convertible Preferred Stock, or approximately 77.5% of the total voting stock of
Decor subsequent to such sale, assuming conversion by the Company of its Series
C Preferred Stock into 164,802 shares of Common Stock. 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, less the
proportionate value of the securities sold during February 1997.
8
<PAGE>
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.
In March 1997, Decor signed a letter of intent to acquire a California
based manufacturer of framed pictures and other wall decor. Annual revenues of
this manufacurer total approximately $11 million. Decor expects to complete this
acquisition during June 1997. The purchase price for this manufacturer will be
approximately $7 million, payable to the seller in cash and stock.
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 December 31, 1996, Ms. Munn was issued 300,000 shares of the outstanding
5,122,500 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. These shares are not
included in the Company's determination of its voting interest in Decor.
3. NOTES PAYABLE
At March 31, 1997, the Company has incurred notes payable of
approximately $2,600,000. The components of these notes are discussed below.
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%.
9
<PAGE>
The Company has outstanding secured financing with the Bank of New York
totaling approximately $745,000 at March 31, 1997. Interest is determined at an
annual rate of prime plus 1%, (9.25% as of the date of this filing.) The Company
has agreed to reduce the outstanding principal by $30,000 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%.
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.
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%.
As part of the Company's settlement with Ann Stevens (See "Legal
Proceedings") the Company has an outstanding liability of $20,000 with Mortgage
Resources, Inc. This loan is scheduled for payment in May 1997.
The Company has recorded outstanding loans of $300,000 with Messrs.
Tashiro and Nishijima. These loans have been the subject of legal proceedings.
(See "Legal Proceedings.)
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
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. The Company filed a registration statement with the
Securities and Exchange Commission (the "Commission") on January 14, 1997 to
register these, as well as other shares as disclosed elsewhere in this filing.
As of the date of this filing, this registration statement has not been declared
effective by the Commission. 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
10
<PAGE>
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.
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. 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.
On May 8, 1995, the Company entered into an Employment Agreement with
Donald Feldman, Vice President of Sales and Marketing of the Company, as well as
a member of its Board of Directors. Mr. Feldman had been President and Chief
Financial Officer of Decor, whose initial public offering was declared effective
by the Securities and Exchange Commission on November 12, 1996. By mutual
agreement, in February 1997 the Company, Decor, and Mr. Feldman terminated Mr.
Feldman's Employment Agreement as well as his status as a director of 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. (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
11
<PAGE>
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 has
provided consulting services to the Company subsequent to February 19, 1997.
Beginning May 6, 1997, the Company will provide Mr. Amore with severance
payments totaling approximately $10,000 over five weeks. No other liabilities
exist regarding 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
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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 $50,238. On May
7, 1997, the Company announced that it will extend the exercise period of its
Class WA Warrant to June 22, 1997.
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 on 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.
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. The Company included these
shares in a registration statement filed with the Securities and Exchange
Commission (the "Commission") on January 14, 1997. As of the date of this
filing, the Commission has not declared this registration statement to be
effective. In conjunction with the issuance of these shares, approximately
$54,000 of charges were recorded against earnings during the year ended June 30,
1996.
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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. The Company
included these shares in a registration statement filed with the Securities and
Exchange Commission (the "Commission") on January 14, 1997. As of the date of
this filing, the Commission has not declared this registration statement to be
effective.
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 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. (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. The Company
included these shares in a registration statement filed with the Securities and
Exchange Commission (the "Commission") on January 14, 1997. As of the date of
this filing, the Commission has not declared this registration statement to be
effective. 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
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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, 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.
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
January 10, 1997 totaled approximately $806,000. Since the financial statements
of Italia are consolidated into those of the Company, such liabilities had
already been reflected on the Company's historical consolidated financial
statements. At March 31, 1997, the Company made a determination of the
realizability of Italia's assets and liabilities recorded on its financial
statements. Accordingly, 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. Thus, for both the three and nine
months ended March 31, 1997, the Company's statements of earnings reflect a gain
of approximately $74,000 pursuant to these adjustments. (See "Liquidity and
Capital Resources.")
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.
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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.
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, 1996, which discussion
is incorporated herein by reference.
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 delays until the subsequent quarter of shipments to
large customers, partially offset by approximately $241,000 of revenues realized
by a new relationship with a major party plan marketer. (See "Liquidity and
Capital Resources.") 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. 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 "Recent Developments.")
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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
(See "Recent Developments"), 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 36.5% for the nine months ended March 31, 1997,
versus 42.1% for the nine months ended March 31, 1996. 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 sales
totaled approximately 7.7% 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 $93,000 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 net income
of approximately $197,000 ($.04 per share), versus net income from continuing
operations of approximately $4,000 ($.00 per share), and a loss from
discontinued operations of approximately $863,000 ($.33 per share) for the
quarter ended March 31, 1996. For the nine months ended March 31, 1997, the
Company realized net income of approximately $82,000 ($.02 per share), versus a
net loss from continuing operations of approximately $106,000 ($.04 per share),
and a loss from discontinued operations of approximately $1,524,000 ($.59 per
share) for the nine months ended March 31, 1996.
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Liquidity and Capital Resources
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 $1,125,000 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 is largely a result
of the current period's net income of approximately $82,000, increased by
non-cash charges for depreciation, amortization, bad debts, write-offs of
non-productive assets, dissolution of subsidiary, and stock issuances of
approximately $1,354,000, and reduced by non-cash reduction of liabilities from
extinguishment of debt, and gain on sale of investment securities of
approximately $944,000, and impacted by decreases in trade receivables of
approximately $2,000, increases in inventories of approximately $532,000,
increases in prepaid expenses of approximately $54,000, and decreases in notes
payable, accounts payables and accrued expenses of approximately $1,033,000.
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 provided by financing activities totaled approximately
$2,620,000 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 September 1995, offset by debt repayments totaling approximately $276,000.
As of March 31, 1997, the Company's financial position reflected a
working capital deficit of approximately $333,000, 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 $77,000, inventories
increased
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approximately $476,000, and current liabilities decreased approximately
$1,557,000, due largely to the proceeds received from the equity transactions
described in the preceding paragraph, and to the extinguishment of liabilities
totaling approximately $662,000 during March 1997.
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.
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. The Company
included these shares in a registration statement filed with the Securities and
Exchange Commission (the "Commission") on January 14, 1997. As of the date of
this filing, the Commission has not declared this registration statement to be
effective. 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.
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 December 31, 1996.
Except as otherwise set forth herein, the Company has no material
commitments for capital expenditures other than for ordinary expenses incurred
during the usual course of business. In order to fund growth over the long term,
the Company anticipates possible future issuance of its securities resulting in
further dilution to its security holders.
Management believes that cash flow from operations 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
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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 "Discontinuation of Certain
Operations."), 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
"Recent Developments"), 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 enlargements of photographs. As of
March 31, 1997, approximately $241,000 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 assurances can be given that these measures will generate the
fiscal improvement sought by the Company.
The Company has no current plans to employ financing strategies which
will materially affect the Company's operating results or financial condition,
other than those disclosed herein.
While the Company operates pursuant to a policy that generally
precludes acceptance of goods on a non-cash basis (sometimes known as barter
transactions), the Company does from time to time execute upon goods provided by
a customer in the event of non-payment by that customer.
Impact of Inflation
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in supplies
and other operating costs could adversely affect the Company's operations.
However, the Company believes it could increase prices to offset increases in
cost of goods sold or other operating costs.
Sales Variations
Although the Company's net sales are not subject to seasonality
fluctuations experienced by certain retailers, the Company experiences some
minor variations in the level of sales by quarter. The first quarter of the
fiscal year (i.e., July 1 through September 30) is generally the Company's
slowest sales period due to the fact that the summer period is typically the
period when art galleries are at their slowest purchasing period. 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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PART II
OTHER INFORMATION
Item 1. Legal Proceeding
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 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
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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 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. On January 14, 1997, the Company filed a registration
statement to, among other things, register these 50,000 Class A Common Shares
with the Securities and Exchange Commission. As of the date of this filing, the
Securities and Exchange Commission has not yet declared this registration
statement effective. 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.
22
<PAGE>
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.
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 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.
23
<PAGE>
Item 2. Changes in Securities
None in addition to those disclosed herein.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re: computation of per share earnings.
27 Financial data summary.
(b) Reports on Form 8-K
During the three months ended March 31, 1997, the Company filed
reports on Form 8-K on February 6, 1997 with respect to Item 2 for
Discontinuation of operations and dissolution of Italia; on February 14, 1997
with respect to Item 5 for Resignation of Donald Feldman; and on February 28,
1997 with respect to Item 5 for Termination of Employment.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERIORS, INC.
May 16, 1997 By: /s/ Max Munn
-------------------------------
Max Munn, President and
Chief Executive, Financial and
Accounting Officer
<PAGE>
11
25
<PAGE>
Interiors, Inc
Earnings Per Share
March 31, 1997
Exhibit 11
<TABLE>
<CAPTION>
COMMON A SHARES QTY DAYS O/S WEIGHTED
- ------------------------------------------------- ---------------- ---------------- -------------------
<S> <C> <C> <C>
As of IPO 517,500 274/274 517,500
Conversion of Bridge Loan units 300,000 274/274 300,000
Sale to Morgan Steel 2/10/95 200,000 274/274 200,000
Ted Stevens conversion of B shares 117,500 274/274 117,500
Reg S sale to Canillo 3/29/95 55,000 274/274 55,000
Class A sh sold to various 274/274
investors on 4/25/95 300,000 274/274 300,000
Subscription agreement Ekistics 274/274
4/24/95 80,000 274/274 80,000
Conversion B shares 8/95 330,000 274/274 330,000
Iss'd to various investors 7/95 55,000 274/274 55,000
Iss'd to various investors - 12/15/95 10,000 274/274 10,000
Iss'd to Infinity Investors - 12/17/95 30,000 274/274 30,000
Iss'd to Infinity Investors - 12/18/95 5,000 274/274 5,000
Sold by Infinity Investors - 1/8/96 180,000 274/274 180,000
Iss'd to various investors - 3/1/96 1,529 274/274 1,529
Iss'd to Decor - 3/3/96 200,000 274/274 200,000
Iss'd to various investors - 3/4/96 53,718 274/274 53,718
Iss'd to Sol Munn - 4/12/96 150,000 274/274 150,000
Iss'd to R. Leopold - 4/16/96 60,000 274/274 60,000
Private placement - 4/24/96 175,000 274/274 175,000
---------------- -------------------
Com A sh O/S per Form 10K - 6/96 2,820,247 2,820,247
COMMON B SHARES
- -------------------------------------------------
As of IPO 1,000,000 274/274 1,000,000
Ted Stevens conversion of B shares (117,500) 274/274 (117,500)
Conversion B shares 8/95 (330,000) 274/274 (330,000)
Issued to Laurie Munn - 4/12/96 250,000 274/274 250,000
Correct prior period issuance (13,000) 274/274 (13,000)
---------------- -------------------
Com B sh O/S per Form 10K - 6/96 789,500 789,500
---------------- -------------------
Tot Com A & B sh @ June 1996 3,609,747 3,609,747
ACTIVITY - NINE MOS. ENDED 3/97
- -------------------------------------------------
Common A shares
- -------------------------------------------------
Issued to former Company exec. - July 25, 1996 50,000 250/274 45,620
Exercise of 500,000 Cl WA Wts - Aug 6, 1996 500,000 238/274 434,307
Exercise of 500 Cl WA Wts - Aug 22, 1996 500 222/274 405
Exercise of 5,500 Cl WA Wts - Sep 5, 1996 5,500 208/274 4,175
Exercise of 35,000 Cl WA Wts - Sep 6, 1996 35,000 207/274 26,442
Exercise of 10,000 Cl WA Wts - Sep 18, 1996 10,000 195/274 7,117
Exercise of 5,000 Cl WA Wts - Sep 25, 1996 5,000 188/274 3,431
Exercise of 10,000 Cl WA Wts - Oct 1, 1996 10,000 182/274 6,642
Exercise of 12,000 Cl WA Wts - Oct 3, 1996 12,000 180/274 7,883
Exercise of 20,000 Cl WA Wts - Oct 10, 1996 20,000 173/274 12,628
Exercise of 12,452 Cl WA Wts - Oct 14, 1996 12,452 169/274 7,680
Exercise of 7,888 Cl WB Wts - Oct 28, 1996 7,888 155/274 4,462
Issued to outside directors - Oct 7, 1996 20,000 176/274 12,847
Exercise of 100 Cl WA Wts - Nov 4, 1996 100 148/274 54
Exercise of 100 Cl WB Wts - Nov 4, 1996 100 148/274 54
Exercise of 24,700 Cl WA Wts - Nov 6, 1996 24,700 146/274 13,161
Exercise of 16,100 Cl WB Wts - Nov 6, 1996 16,100 146/274 8,579
Exercise of 66,548 Cl WB Wts - Nov 8, 1996 66,548 144/274 34,974
Exercise of 10,000 Cl WA Wts - Nov 14, 1996 10,000 138/274 5,036
Exercise of 34,650 Cl WA Wts - Nov 15, 1996 34,650 137/274 17,325
Exercise of 2,000 Cl WA Wts - Nov 15, 1996 2,000 137/274 1,000
Exercise of 4,360 Cl WA Wts - Nov 19, 1996 4,360 133/274 2,116
Exercise of 17,000 Cl WB Wts - Nov 15, 1996 17,000 137/274 8,500
Exercise of 10,376 Cl WB Wts - Nov 19, 1996 10,376 133/274 5,037
Exercise of 10,000 Cl WA Wts - Nov 26, 1996 10,000 126/274 4,599
Exercise of 5,150 Cl WA Wts - Nov 27, 1996 5,150 125/274 2,349
Exercise of 3,000 Cl WA Wts - Dec 4, 1996 3,000 117/274 1,281
Conversion of preferred stock to Common 278,820 100/274 101,759
Conversion of Cl B Com Stk to Cl A Com Stk 269,750 1/274 984
---------------- -------------------
Com A Sh issued - Nine mos. end 3/97 1,440,994 780,447
---------------- -------------------
Total Common A Sh. @ 3/31/97 4,261,241 3,600,694
---------------- -------------------
Common B shares
- -------------------------------------------------
Conversion of Cl B Com Stk to Cl A Com Stk (269,750) 1/274 (984)
----------------
Com B Sh activity - Nine mos. end 3/97 (269,750) (984)
---------------- -------------------
Total Common B Sh. @ 3/31/97 519,750 788,516
---------------- -------------------
Com A & B sh iss'd - Nine mos. end 3/97 1,171,244 779,463
---------------- -------------------
Tot Com A & B sh @ March 31, 1997 4,780,991 4,389,210
================ ===================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 172,804
<SECURITIES> 0
<RECEIVABLES> 819,256
<ALLOWANCES> 112,000
<INVENTORY> 2,197,625
<CURRENT-ASSETS> 3,445,429
<PP&E> 1,842,032
<DEPRECIATION> 922,412
<TOTAL-ASSETS> 7,072,200
<CURRENT-LIABILITIES> 3,778,906
<BONDS> 0
0
10,471
<COMMON> 6,631
<OTHER-SE> (438,100)
<TOTAL-LIABILITY-AND-EQUITY> 7,072,200
<SALES> 905,132
<TOTAL-REVENUES> 905,132
<CGS> 657,047
<TOTAL-COSTS> 657,047
<OTHER-EXPENSES> 208,839
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,152
<INCOME-PRETAX> 196,994
<INCOME-TAX> 0
<INCOME-CONTINUING> 196,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 196,994
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
