INTERIORS INC, 10KSB/A, 1997-07-15

INTERIORS INC
10KSB/A, 1997-07-15
LUMBER & WOOD PRODUCTS (NO FURNITURE)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-KSB/A-NO. 2

(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR FISCAL YEAR ENDED JUNE 30, 1996 OR

|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934

Commission File No. 0-24352

INTERIORS, INC.
---------------
(Doing Business in New York under the name A.P.F. Master Framemakers)
(Exact name of small business issuer as specified in its charter)

Delaware 13-3590047
----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

320 Washington Street, Mt. Vernon, New York 10553 (914) 665-5400
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code) (Telephone Number)

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Class A
Common Stock, $0.001 par value ("Class A Shares"); Redeemable Class WA Warrants;
redeemable Class WB Warrant; Preferred Series A Stock, $.01 par; and Redeemable
WC Warrants.

Check whether the issuer (1) filed all reports required to be filled by Section
13 or 15(d) of the Exchange Act during the past twelve 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 |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-KSB or any
amendment to the Form 10-KSB. |_|

The Registrant's revenues for the fiscal year ended June 30, 1996 totaled
$5,379,000.

As of October 9, 1996, the aggregate market value of the voting stock held by
non-affiliates of the Registrant (assuming for the purpose that only directors

and officers of the Registrant are affiliates of the Registrant), based on the
average of the closing bid and asked price of the Class A Shares on that date,
was approximately $9,500,000.

As of October 10, 1996, the Registrant has outstanding 4,048,247 Class A Shares.

Transitional Small Business Disclosure Format (check one). Yes |_| No |X|

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PART I

Item 1. Description of Business

General

During the year ended June 30, 1996, the Company has taken certain significant
steps to reposition itself for growth and profitability in subsequent periods.
These steps, although necessary, led to significant charges against earnings
during the year ended June 30, 1996. A summary of the major steps follows:

o The Company's discontinuation of its catalog operations (See "Description
of Business") led to charges against earnings totaling $2,936,000,
including losses from discontinued operations of $789,000, during the year
ended June 30, 1996. Major items in this charge are settlement of
significant related party lawsuits requiring charges against earnings
totaling $431,000; reserves against inventory of $945,000 and reserves
against other catalog assets of $354,000.

o The Company has included $140,000 in selling, general and administrative
expenses related to issuances of stock for services.

o The Company experienced higher than normal ($180,000) financing charges
upon reduction in certain debt outstanding

The Company's management believes that these charges were necessary and will set
the stage for growth and profitability in subsequent periods. The Company is now
identifying and finalizing new business ventures to achieve this goal. Three
important activities currently in progress are summarized below:

o The Company has made a major investment in Decor Group, Inc. ("Decor") as
fully disclosed in the "Description of Business."

o On September 17, 1996, the Company announced that it has signed an
exclusive licensing agreement to reproduce the artwork of James Rizzi, a
noted contemporary artist, for decorative accessories in ceramic and
related materials.

o The Company has reached an agreement in principle with a "party plan"
marketer of custom photo enlargements for a five-year exclusive
manufacturing agreement.

Although the Company believes that these initiatives will lead to improved
financial results, no assurances can be provided that this will be the case.

The Company was incorporated in October 1990 under the name A.P.F.
Holdings, Inc., a New York corporation ("A.P.F.") and merged with and into
Interiors, Inc., a Delaware corporation in March 1994. It has been engaged since
1990, through its A.P.F. Master Framemakers and Conservators Division ("A.P.F.
Master Framemakers"), in the manufacturing and marketing of museum quality
traditional and contemporary picture and mirror frames to museums, art
galleries, decorators, collectors and frame retailers. The Company is qualified

to do business in New York under the name A.P.F. Master Framemakers.

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The Company operates three showrooms, one at 75th Street in Manhattan, one
in "Old City" in Philadelphia and one at the Company's Mt. Vernon location. The
sales generated from the Manhattan showroom were approximately $2,920,000 and
$2,107,000 for the fiscal years ended June 30, 1996 and 1995, respectively. The
Philadelphia showroom generated sales of approximately $218,000 and $308,000 for
the years ended June 30, 1996 and 1995, respectively. The Company's showroom in
Mt. Vernon, New York, conducts business with upscale custom picture frame shops
located throughout the country. Sales generated from the Mt. Vernon showroom
were approximately $806,000 and $1,108,000 for the year ending June 30, 1996 and
June 30, 1995, respectively.

In February 1992 the Company began distributing, through its Interiors
Catalog division, a direct-to-consumer catalog, which offers a variety of
decorative accessories for the home, approximately 60% of which are currently
manufactured by the Company. Sales generated by the Interiors Catalog division
were approximately $871,000 and $2,600,000 for the years ended June 30, 1996 and
1995, respectively. The decreased revenues for the current period versus the
prior period was largely due to a decrease in the quantity of catalogs mailed as
well as an increase in operating costs, primarily postage and paper charges,
associated with catalog operations. It is for this reason that this business
activity will be discontinued. (See "Discontinuation of operations of Interiors
Catalog.")

The Company believes that the decorative accessory supply industry will
consolidate as major retailers attempt to increase their "single-sourcing" in
order to reduce distribution and related expenses. The Company intends to
capitalize on the fragmented nature of the supply side of the home decorative
accessory industry and the consolidation of such industry through either
strategic alliances or the acquisition of manufacturers and distributors of
art-related decorative accessories. Through such means, the Company intends to
increase the number and nature of products manufactured by the Company, thereby
expanding its presence in the decorative accessories market. Such products will
be offered for sale by the Company through its Italia unit or other newly
created units. Management believes that increasing the number and kinds of
products it manufactures will enhance its ability to expand its wholesale
operations as the Company develops the ability to market "whole room" packages
of accessories to furniture and department stores.

A.P.F. Master Framemakers

The Company's custom picture frames are marketed primarily to museums,
better art galleries, upscale frame shops and decorators, as well as collectors
of important works of art under the trade name "A.P.F. Master Framemakers and
Conservators" (previously defined and hereinafter referred to as "A.P.F. Master
Framemakers"). A.P.F. Master Framemakers' customers have included nationally
known museums, art institutes and galleries.

There are approximately 15,000 picture frame retailers in the United States

alone. In management's opinion, approximately 3,000 of these serve markets which
the Company believes may be sufficiently affluent to support the Company's
product line. The A.P.F. Master Framemakers division now conducts business with
only approximately 300 of these retailers, or about 10% of this market segment.
The Company plans to expand its sales to the "high-end" of this industry.

Prices on individual custom-made frames range from $100 to well over
$10,000 with the majority under $5,000. The Company has crafted several single
frames in excess of $20,000 each during the last

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three years. The Company utilizes varying discount and pricing structures for
its different market segments, with frame retailers receiving the largest price
discount and art collectors receiving minimal price reductions depending on the
level of aggregate annual purchases and the degree of customization requested.
Historically, The A.P.F. Master Framemakers division has not experienced
significant returns since its business is generated from orders for custom-made
products.

Italia Collection

On October 21, 1994 (the "Closing Date") the Company, through its
newly-formed wholly-owned subsidiary, Italia, acquired all of the issued and
outstanding stock of Murano Crystal Corp. ("Murano"), a Florida corporation
doing business under the name "Italia Collection," pursuant to the terms of a
certain stock purchase agreement dated October 21, 1994 (the "Murano Purchase
Agreement") between Italia and Murano and Stephen M. Tucker, the sole
stockholder and acquired all of the issued and outstanding capital stock of
Ceramic Productions Corp., a Florida corporation ("Ceramic") pursuant to the
terms of a certain stock purchase agreement dated as of such date (the "Ceramic
Purchase Agreement") between Italia and Ceramic and Stephen M. Tucker and
Michael D. Tucker, the sole stockholders. The Company agreed to pay such
respective stockholders an "allocated portion" of three times the combined
"after-tax earnings" of Murano and Ceramic, net of intercompany transactions for
the third fiscal year following the Closing date. One-third of the purchase
price is payable on or before each of September 28, 1997, 1998, and 1999 and, at
the sole election of Italia, up to two-thirds of the purchase price is payable
by the delivery of Class A Common Stock of the Company but in no event shall
more than an aggregate of 300,000 shares of Class A Common Stock be issuable in
payment of the purchase price under the Murano and Ceramic Purchase Agreements.
Italia further agreed that in the event that it elects to pay a portion of the
purchase price in shares of Class A Common Stock, that it will grant to the
stockholders a one-time "piggy-back" registration right for the inclusion for
registration of such securities in a registration statement filed under the
Securities Act at such time as other securities are registered following the
fifth anniversary of the Closing Date provided that the respective stockholder
is at the time of such registration an employee of the Purchaser. As of the date
of this filing, no payments have been made to the seller for this acquisition,
nor have any liabilities for such payment been recorded on the Company's books.
The parties are currently in dispute regarding the nature and amount, if any, of
the consideration necessary. Discussions are currently in progress. In the

opinion of management, there will not be any material adjustment to the
Company's financial position or results of operations as a result of the outcome
of such discussion. In connection with the Italia transaction, the Company
entered into an employment agreement with one of such stockholders and a
consulting agreement with a relative of such stockholders. In July 1995, both
the employment and consulting agreements were terminated by the Company.

During April 1996, the Company moved the operations of Italia Collection to
The Lance Acquisition Corporation (Lance), a Massachusetts manufacturer and
distributor of various products to the giftware and collectibles market.
Subsequent to this move, the ownership of Lance and its business operations
changed. Because of this, Company management believes that the operations of
Italia Collection will be best served by a lower cost, independent manufacturer.
The Company is accordingly conducting discussions with a Mexican company to
finalize terms under which this entity will manufacture and support the entire
product line of Italia Collection, which largely consists of ceramic and
porcelain collectibles, mirrors, and other decorative accessories for the home.

Discontinuation of operations of Interiors Catalog

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On March 31, 1996, Board of Directors decided to discontinue the Company's
catalog operations because of declining revenues and high operating costs, As a
result, a charge against earnings of approximately $2,100,000 was recorded
at June 30, 1996. For the twelve months ended June 30, 1996, losses from
continuing catalog operations totaled $789,332. The Company plans to fully carry
out the discontinuation of the catalog operation within one year from March 31,
1996. The Company plans to wind down operations by filling existing orders and
possibly mailing one final catalog as a "close-out sale" to liquidate inventory.
As of March 1997, no catalog related assets or liabilities are expected to
remain on the Company's balance sheet. The financial statements included with
this filing have reclassified the results of operations for the year ended June
30, 1995 as if the Company's catalog operations had been discontinued in the
year ended June 30, 1995.

Manufacturing

The Company's manufacturing operations include specialized woodworking
systems using unique and customized proprietary equipment, tools, dies and molds
especially created for the Company. Production also includes frame finishing,
which involves gold leaf application, antiquing and painting.

The Company maintains an inventory of metal and wood molding, composite
resins and other materials for use in its manufacturing processes. The Company's
mold and steel die inventory allows reproduction of frames from the 14th Century
(gothic) to the present day. These tools can be used to produce over 1500 styles
of picture and mirror frames. The Company has an extensive collection of tools,
molds and dies and has been unable to locate any other manufacturer of picture
frames which casts glass and urethane composite reproductions of decorative
frames to the extent and type that the Company does.

No single outside manufacturer supplies five percent or more of the Company's
products, and the Company's management is not aware at this time of any product
or manufacturer that the Company cannot replace with a comparable product from
an alternative manufacturer.

Products

Custom Frames. Each frame manufactured by the Company's A.P.F. Master
Framemakers division is individually made to the customer's size and finish
"coloration" specifications. In approximately 40% of the orders received by this
division, the customer also specifies a customized decorative element or carving
change to the basic design of the frame. The A.P.F. Master Framemakers division
uses primarily fine domestic hardwoods and other traditional materials to hand
carve a "museum" quality frame. The Company's custom frames include styles as
follows: (a) Gothic through the Renaissance and various Italian styles; (b) a
product range of 15th through 17th Century Spanish designs; (c) a variety of
French designs from the stylistic periods between Louis 13th through Louis 16th,
as well as French "Regency" and "Empire" styles; (d) Dutch and Northern European
designs, generally 17th Century styles; (e) various English designs, including
Queen Anne and Georgian; (f) a broad range of American styles, including
Colonial, Federal, Empire, Late 19th Century Hudson River School type frames,
turn-of-the-century designs, including designs by the artists Whistler,
Prendergast, and others; and (g) contemporary designs utilizing hardwoods and
welded brass and aluminum. The Company has selected the most popular segments of
some of these periods, and has incorporated them into brochures which picture
the actual designs.

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Ceramic accessories and collectibles. The Company's Italia Collections Inc.
subsidiary ("Italia") manufactures and markets ceramic and hydrocal sculptures,
resin framed mirrors, and other decorative accessories for the home.

Organization

Interiors, Inc. (the "Company" or "Interiors" known formally as A.P.F.
Holdings, Inc. or "A.P.F.") was incorporated pursuant to the laws of Delaware in
February 1994. A.P.F. was incorporated pursuant to the laws of New York in
October 1990. A.P.F. was incorporated in order to reincorporate in the State of
Delaware. Effective March 1994, A.P.F. merged with and into the Company. In
October 1994, the Company purchased "Ceramic Production Corp." and "Murano
Crystal" to form a wholly-owned subsidiary, "Italia Collection, Inc.".

After giving effect to the discontinuance of the Catalog operations, the
Company has two operating divisions: 1) the Custom Framing Division which is
engaged in the manufacture of antinue and contemporary picture frames for
museums, art galleries, designers, collectors and frame retailers; and 2) the
Wholesale Division, which manufactures and markets a line of high-end
traditional and contemporary mirrors through upscale retail furniture and
department stores. The wholesale division wholly owned subsidiary which
manufactures and markets ceramic vases and bowls, sculpture and lamps to upscale
furniture stores, furniture galleries, department stores, catalog and other

decorative accessory retailers. The majority of the Company's sales are domestic
and there is no individual customers that represent more than 10% of sales.

Marketing

The Company currently markets its custom picture frames to art galleries,
museums, custom frame retailers, art consultants, artists, corporations and
private collectors.

Typically, sales for the picture frame division are generated through the
following activities:

o Sales of "high-end" custom-made picture and mirror frames through the
Company's three showrooms.

o Sales to retail picture framers. These sales generally require that
the Company supply samples or "corners," consisting of two short sides
of the frame, to the retailers who use the "corners" to promote the
sales of the Company's frames.

The Company has established an unwritten arrangement with an art gallery in
Manhattan at 231 E. 60th Street to allow one of the Company's employees to work
from that location to assist the gallery in the sale of custom picture frames to
gallery clients and other customers. The Company operates from such location
without a lease or any cost or obligation of any kind and has done so since the
Company's inception. Less than 4% of the Company's revenues are generated
through that location. While the Company believes that the relationship is
mutually beneficial to both the Company and such gallery, there can be no
assurance that the art gallery will allow the relationship to continue.

The Company markets its corners to the retail framer through direct mail
brochures and through advertising in trade publications. The Company believes
these corners aid the retail framer in the sale of

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custom framing to the consumer. The retail framers' investment in new corners is
made significantly easier by both the Company's extended payment terms for
corners and its coupon redemption program. The Company offers the retailer the
opportunity to extend payments for corners over several months. The coupon
redemption program encourages utilization of the corners by affording the retail
framer credit on his first order of that particular style of frame from the
Company. The Company intends to expand its distribution of such corners through
the increase in its advertising expenditures and by offering more liberal
payment terms. To the extent retail framers accept such extended payment terms,
the Company expects that its levels of accounts receivable will increase.

The Company plans to add an additional showroom in a key market on the West
Coast of the United States during the next fiscal year. The Company has not
identified the exact location of such showroom facility and there can be no
assurance that the Company will be able to select locations which are suitable
or be able to lease showroom space on acceptable terms or be able to attract and

hire qualified personnel for such facility. The possibility exists that the
Company will not adequately forecast the time, costs, management and capital
needed to expand its A.P.F. Master Framemakers segment.

Suppliers

Substantially all of the picture and mirror frames sold by the Company are
manufactured by the Company in its facility in Mt. Vernon, New York. The Company
purchases wood, composite resins, gold leaf, plexiglass, matboards and other
materials from a wide variety of sources, and has at least two, and often more,
suppliers for each item used in its manufacturing process, and is not dependent
upon any one supplier. The Company currently purchases from a vendor base of
more than 300 suppliers. While there are many suppliers of most materials, the
Company has chosen to limit the majority of its purchases to the one or two
vendors with whom it has developed long-term relationships. The Company
generally does not need to enter into contracts with its suppliers as most
merchandise is readily available from multiple sources.

Competition

The custom framing industry in the United States is highly fragmented and
consists primarily of small, local framing retailers. Only a few companies are
basic manufacturers of higher priced picture frames, which frames are selected
for valuable works of art owned by museums, galleries and collectors. Custom
framing of the type produced by the Company is not in competition with local
frame stores. Management of the Company believes that its A.P.F. Master
Framemakers division is one of the largest custom framers of its type in the
country. However, there can be no assurance that the Company's position in this
industry will continue.

Management believes that the sale of decorative accessories in the
wholesale market is also highly fragmented, with thousands of small, specialized
manufacturers and distributors and management is not aware of a manufacturer of
upscale decorative accessories similar to those distributed by Italia.

The Company believes that its competitive advantage lies in its ownership
of a substantial number of models, tools, dies and molds developed from
museum-quality antiques and its continuing ability to manufacture quality
reproductions of those antiques. Management also believes that the Company is
further protected by what the Company considers to be its excellent reputation
with its customer base and

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management's estimation that the cost today (i.e., the difficulty) of obtaining
antiques to reproduce, as well as the costs to build tools, dies and molds, make
the entry of meaningful competition extremely difficult. Management believes
that it would be difficult to build such a collection of tools, dies and molds
because of the cost of acquiring antiques and the reluctance of museums and
collectors to lend or dispose of irreplaceable antiques and the difficulty in
establishing a trained work force of skilled crafts people. However, there can
be no assurance that such assets will continue to afford the Company any

competitive advantage. See "Manufacturing."

Backlog and Backorders

The Company has no backlog in its A.P.F. Master Framemakers division since
the nature of custom framemaking requires that frames be constructed only after
receipt of an order. Such custom orders are generally filled approximately
thirty days after receipt of the order. At June 30, 1996, open orders total
$768,500.

As of June 30, 1996, the Company's Italia Collections, Inc. (Italia)
subsidiary has a backlog of approximately $65,000. During the month of April
1996, the Company moved Italia's operations from Florida to Massachusetts. Soon
thereafter, it became apparent that operational restrictions at this new
location would prevent Italia from providing a reliable and ongoing supply of
merchandise. Accordingly, the Company has temporarily halted the acceptance of
new orders for Italia products and is arranging for product sourcing from an
established, third-party manufacturer. The Company expects to resume full Italia
operations during the month of November 1996.

Patents and Trademarks

The Company believes that its future success does not depend significantly
upon patents. Instead, the Company depends, to a large extent, upon the
technical competence and creative skills of its personnel and on its significant
unpatented proprietary technology as well as its collection of tools, dies and
molds. The Company believes that it owns or has the right to use all proprietary
technology necessary to manufacture and market its existing and planned
products. The Company has no knowledge that it is infringing on any existing
patent such that it would be liable for material damages or be prevented from
manufacturing or marketing its products. In fact, most of the Company's
technology is process-related and may not be patentable. The decorative
accessory manufacturing industry is generally not technology driven, but is more
design and marketing driven; consequently there are few applicable patents in
this industry. In the event the Company's right to market any of its products
were to be successfully challenged, the Company may be required to discontinue
certain products and the Company's business and prospects may be adversely
affected if acceptable alternative products were not available.

The Company owns the registered trademarks: "Interiors" and "A.P.F." The
name "Italia Collection" was registered by the former owner of this business
with the Secretary of State of Florida. Pursuant to the acquisition of this
business by the Company, it also owns this trademark.

The Company does not own any other patents, copyrights or other
intellectual property. The Company relies upon trade secrets, a substantial
quantity of tools, dies and molds and continuing design and marketing innovation
to maintain its competitive position.

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Research and Development

The Company continually seeks to develop additional design and related
molds for picture and mirror frames and capitalizes the cost thereof over a five
year period. The Company estimates that it has expended approximately $38,000
and $62,000 on such activities during the fiscal years ended June 30, 1996 and
1995, respectively. The Company expects to continue to increase its expenditures
for product development as it expands its "in-house" manufacturing for its
Italia Collection Subsidiary and its A.P.F. Master Framemakers Division.
However, there can be no assurance that such product development will yield
profitable growth.

Government Regulation

The Company must comply with federal, state and local laws affecting
companies in the manufacturing and catalog business. To date, such government
regulations have not had a material adverse effect on the Company. Prior to the
date of this filing, the New York Environment Conservation Department has
requested the Company to provide operation plans with regard to the management
of chemical and waste material currently stored on the Company's premises. The
Company has complied with this request. No other requirements or requests are
currently pending from any agency or representative of any governmental
authority.

Employees

As of the date of this filing, the Company had a total of approximately 82
full-time employees. Effective April 1, 1991, the Company signed a three-year
collective bargaining agreement with the Production, Merchandising and
Distribution Employees Union, Local 210, Affiliated with The International
Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America,
AFL-CIO (the "Union") covering its manufacturing employees. The agreement
contains a provision for an automatic two-year renewal through April 1, 1996. As
of the date of this filing, the Company is currently negotiating the renewal of
its Union contract. None of the Company's employees have been on strike, or
threatened to strike since the Company's inception and the Company believes its
relationship with all of its personnel is satisfactory.

Acquisitions and Strategic Alliances

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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. Conversion of the
500,000 shares of Series A Convertible Preferred stock into common stock would
give the Company approximately 88.6% of the voting stock of Decor. Decor is
planning a public offering of certain of its securities during October 1996.
After this public offering is effective, the Company will own approximately
86.6% of the total voting stock of Decor. The holding in Decor will be recorded
on the Company's financial statements under the equity method of accounting
until such time the Company obtains unconditional and effective control of
Decor, which is expected to occur upon the expiration of the Voting Agreement.

Decor has entered into an asset purchase agreement (the "Agreement") with
Artisan House, Inc. ("Artisan House") to purchase substantially all of the
operating assets, and assume certain liabilities, of Artisan House for an
aggregate purchase price of $3,626,400, subject to certain adjustments. Decor
expects to close on the Agreement prior to, or contemporaneously with, its
public offering. Artisan House, located in Los Angeles, California and founded
in 1964, is engaged in the design, manufacturing, and marketing of metal wall,
table and freestanding sculptures. Management believes that Artisan House's
products bridge the gap between high priced gallery art and mass produced
decorative pieces. Artisan House products retail from approximately $100 to over
$400. The primary goal of Artisan House is to supply a broad spectrum of design
driven sculpture and decorative accessories at moderate prices.

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 the
date of this filing, Ms. Munn was issued 200,000 shares of the outstanding
2,625,000 common shares of Decor. Also, the Company has executed a management
agreement with Decor, whereby the Company will provide management and
administrative support for the companies acquired by Decor. At June 30, 1996,
approximately $19,000 of fees were accrued by the Company for such services.

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As of the date of this filing, Laurie Munn, wife of the Company's President
and Chief Executive Officer, was issued 9 of the outstanding 100 Common shares
of Lance Acquisition Corp. ("LAC") which on March 3, 1996 acquired the assets of
The Lance Corporation ("Lance") a Massachusetts manufacturer and distributor of
various products for the giftware and collectibles marketplace. The Company and
LAC entered into an agreement whereby each entity will guarantee certain
liabilities of the other. Subsequently, LAC disposed of its interest in Lance,

and has finalized the terms of transition with the new owners and existing
secured creditors. LAC will be dissolved during the subsequent period.

Item 2. Description of Property

The Company has its principal offices at 320 Washington Street, Mt. Vernon,
New York, where it has sub-leased approximately 56,000 square feet of
administrative offices, manufacturing and warehousing facilities and a factory
showroom. The Company's sublease with Stern Metals expires December 31, 1996.
The Company's monthly base rent payments under the sublease are approximately
$20,000 per month. As of the date of this filing, the Company and Stern Metals
agree that rent of approximately $134,000 is accrued at June 30, 1996. The
Company and Stern Metals are currently negotiating terms of both the payment of
this liability and the extension of the lease. The Company has determined that
there is substantial manufacturing and warehousing space available in its
present vicinity if the Company were required to expand or relocate some or all
of its current facilities. However, there can be no assurances that when the
current sublease for the Company's principal facility expires that the Company
will be able to negotiate a renewal thereof on acceptable terms or obtain
alternative manufacturing and warehousing space on terms acceptable to the
Company.

The Company also operates three specialty custom frame showrooms, which are
in Mt. Vernon, New York City and Philadelphia. The Company occupies
approximately 1,800 square feet of showroom and office space at 172 East 75th
Street in New York City pursuant to a lease expiring January 31, 2003 between
the Company and Francisco Saggese. The lease requires the Company to pay rent at
rates which escalate 4% per year on February 1 and which rental is currently
approximately $6,200 per month. In addition, pursuant to a five-year lease
agreement dated August 31, 1995 between I.R.A.L., Inc., a subsidiary of the
Company and Hoopskirts Factory Partners, the Company occupies approximately
5,740 square feet of showroom, warehouse and office space in "Old Town"
Philadelphia, PA. The agreement provides for minimum rent of $2,500 per month.
Under the current lease agreement, the lease term will expire on August 31,
2000. The Company believes alternate space is available if the Company is
required to relocate and that any such relocation would not have a material
adverse effect on the Company. However, there can be no assurance that the
Company will be able to obtain such alternate space on terms acceptable to the
Company.

During April 1996, Italia moved its operations to the premises of The Lance
Acquisition Corporation (Lance), a Massachusetts manufacturer and distributor of
various products to the giftware and collectibles market. Lance operates in a
48,000 square foot facility located at 321 Central Street, Hudson Massachusetts
01748. Italia occupies approximately 10,000 square feet of this space on a
temporary basis. As of the date of this filing, the Company is arranging for the
sourcing of Italia products from an established, third-party manufacturer. The
Company expects to fully complete such arrangements, and entirely vacate the
premises of The Lance Acquisition Corporation, during October 1996. Italia also
occupies approximately 1,750 square feet of space at International Home
Furnishings Center in High Point, North Carolina, pursuant to a lease dated May
1, 1993. The term of the lease is five years and requires rent payments of
approximately $2,200 per month.

10
<PAGE>

The Company believes all of such facilities are adequate for its current
needs; however, the Company will require approximately 1,500 to 2,000 square
feet of space for its contemplated showroom location. Inasmuch as the Company
has not selected the city in which it plans to establish such showroom, it has
no arrangements for such lease and there can be no assurance that the Company
will be able to obtain appropriate facilities on terms acceptable to the
Company.

Item 3. Legal Proceedings

On or about December 28, 1994, Merrill Corp. filed a complaint in the
Supreme Court of the State of New York, county of New York against the Company
seeking payment for goods sold and delivered to the Company. The matter was
settled in July 1996.

In July 1995, the Company through its attorneys made demand against Morgan
Steel Ltd. the office of which is located on the Isle of Man, England, for the
payment to the Company of $362,507 on account of a perceived violation of
Section 16 (b) of the Securities and Exchange Act. No response to said demand
for payment has been made to date. On May 23, 1996, the Company's Board of
Directors resolved that the Company and its officers and directors undertake no
action given the uncertainty of the cost of collectibility, and ultimate legal
liability of Morgan Steel Ltd. either in the United States or the Isle of Man.

Gear Holdings, Inc. brought an action against the Company for the alleged
breach of a licensing agreement. The Company denies that it was a party to an
agreement with Gear, or that any sum of money is owed. The complaint demands
sums Gear allegedly would have received under the agreement in a sum to be
determined, but not less than $250,000.

On October 13, 1995, Ted Stevens, individually, as a Shareholder and
Director and Morris Munn, individually and as a Director and on behalf of
themselves and all other similarly situated Shareholders and Directors of the
Company filed a complaint in the Supreme Court of the State of New York, County
of Westchester, against the Company and its directors seeking unspecified
damages and certain changes in the composition of the Company's Board.

On December 1, 1995, Ted Stevens 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
recission 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
recission and denied Mr. Stevens' motion for a preliminary injunction and on
April 17, 1996, the Court dismissed the action for lack of subject matter

jurisdiction.

On December 12, 1995, Ann Stevens filed a complaint in the Supreme Court of
the State of New York, County of Nassau against the Company and certain
Directors seeking, among other things, compensatory and punitive damages arising
out of the alleged breach of Ann Stevens' Employment Agreement.

11
<PAGE>

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 recission of a certain stock sale agreement between the
Company and Laurie Munn.

In July 1996, all litigation brought against the Company and its principals
and Directors by Ted Stevens, Ann Stevens and Morris Munn was settled.
Settlement of the lawsuits by Ted Stevens and Morris Munn against the Company
and its officers and Directors are subject to Court approval.

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 of certain expenses, $50,000 in various installments
during the four months ending December 1996. The Company also entered into a
non-compete agreement with Ms. Stevens for which the Company will make bi-weekly
payments to Ms. Stevens to total $25,000 per year for seven years, plus
automobile and insurance costs for five years. As of June 30, 1996, the
Company issued to Ms. Stevens 50,000 shares of the Company's Class A Common
Shares, which were previously committed to Ms. Stevens pursuant to her 1995
employment agreement. As of June 30, 1996, the Company issued 1,250,000 shares
of its Class B Common Shares (the "Escrow Shares") to Michael Levine, Esq.,
attorney of Ms. Stevens, as escrow agent (the "Escrow Agent"). The Escrow Agent
shall abstain from voting the Escrow Shares for any purpose, except in the event
of either the failure by the Company to adhere to the payment provisions noted
above or the financial insolvency of the Company. If either event occurs, Ms.
Stevens will be in a position to elect replacement Directors. Once the payment
provisions in the severance and non-compete agreements are satisfied, the Escrow
Agent shall return the Escrow Shares to the Company.

The Munn Trust of 1975, Sol Munn and Evelyn A. Munn, Co-Trustees commenced
an action against the Company as well as Max Munn, the Company's President and
Chief Executive Officer and Laurie Munn, his wife.

SJP Contractors of New York, Inc. commenced an action in September 1996
against the predecessor entity of the Company, A.P.F. Holdings, Inc. , and
others for $208,165 for work, labor and services allegedly performed in January
1991 for the renovation of the Company's premises. The Company's answer pleads

that payment was made for the amount owed.

Artagraph Reproduction Technology, Inc., a Canadian company, brought an
action 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 judgment 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.

12
<PAGE>

role in the production of lithographs. The case was settled before trial or
discovery solely with entry of the above Consent Order; which enjoins Mr. Munn
from making certain representations in connection with the sale of any works of
art. The Consent Order also requires Mr. Munn for a period of five years (which
expired as of September 1996) as to the maintenance of certain records as they
concern the sale of certain lithographs.

The Company is subject to other claims and litigation in the ordinary
course of business. In management's opinion, such claims are not material to the
Company's financial position or its results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

During the year ended June 30, 1996, certain matters were placed before the
stockholders of the Company for a vote. On August 28, 1995, the Company's
Stockholders voted their approval to amend the Certificate of Incorporation
increasing the authorized Class A Shares to 30,000,000 Shares and Preferred
Stock to 5,300,000 Shares. The proposal was approved at a meeting of
Stockholders on August 28, 1995, with 930,000 Class A shares in favor, 67,815
Class A shares against and 20,100 Class A shares abstaining. On June 21, 1996,
the Company held its Annual Meeting of Shareholders. At this meeting or by
proxy, the Company's Shareholders voted to elect the Board of Directors
nominated by the Company. An average of 2,430,755 Class A shares voted in favor
of the Directors so nominated, while an average of 74,394 Class A shares voted
against. For this same purpose, 269,750 Class B shares voted in favor of the
Directors so nominated while 269,750 Class B shares voted against. Also at this
meeting, the Company's Shareholders voted to ratify the appointment of Arthur
Andersen, LLP as the Company's independent auditors. A total of 2,478,057 Class
A shares voted in favor of this appointment while 2,704 voted against and 24,388
abstained. For this same purpose, 269,750 Class B shares voted in favor of such
appointment while 269,750 Class B shares voted against.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

The Class A Shares and Class WA Warrants commenced quotation on The NASDAQ
Small Cap Market ("NASDAQ") on June 23, 1994 under the symbols INTXA and INTXW
and the Class WB Warrants commenced quotation on June 24, 1994 under the symbol
INTXZ. The series A Convertible Preferred Shares and Class WC Warrants commenced
quotation on September 19, 1995 under the symbols INTXP and INTXL, respectively.
The following table sets forth the reported high and low bid quotations of the
Class A Shares, Class WA Warrants, Class WB Warrants, Series A Preferred and
Class WC Warrants for the period indicated. Such quotations reflect inter-dealer
prices without retail markup, markdown or commission and may not necessarily
represent actual transactions.

<TABLE>
<CAPTION>
Year Ended Class Class Class Series Class
A Shares WA Warrants WB Warrants A Preferred WC Warrants
High Low High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1994* 8.25 5.00 2.875 1.00 1.25 0.875 N/A N/A N/A N/A
September 30, 1994 6.69 2.75 2.50 1.12 0.94 0.25 N/A N/A N/A N/A
December 31, 1994 4.00 2.00 1.19 0.50 0.56 0.38 N/A N/A N/A N/A
March 31, 1995 2.88 1.75 1.31 .087 0.31 0.19 N/A N/A N/A N/A
</TABLE>

13
<PAGE>

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
June 30, 1995 1.88 1.50 1.00 0.44 0.16 0.07 N/A N/A N/A N/A
September 30, 1995 1.50 1.50 1.25 1.25 0.13 0.13 7.50 7.50 2.50 2.50
June 30, 1996** 4.63 0.88 2.81 0.25 1.38 0.09 8.50 5.00 4.13 1.31
</TABLE>

- ----------
* For the period from June 23, 1994, through June 30, 1994.

** For Series A Preferred and Class WC Warrants - for the period from
September 19, 1995 to June 30, 1996.

As of the date of this filing, there were approximately 1,111 beneficial
owners of Class A Shares and three beneficial owners of Class B Shares. At this
date, there were 4,048,247 Class A Shares 2,039,500 Class B Shares, 3,182,000
Class WA Warrants, 836,750 Class WB Warrants 1,140,000 Series A Preferred Shares
and 2.270,000 Class WC Warrants outstanding. The closing bid and ask prices of
the Class A Shares, Class WA Warrants, Class WB Warrants, Series A Preferred and
WC Warrants on NASDAQ on October 10, 1996, were $2.563 and $2.75 per Class A
Share, respectively; $1.81 and $2.00 per Class WA Warrant, respectively; $0.84
and $0.94 per Class WB Warrant, respectively, $7.69 and $8.00 per Series A
Preferred, respectively, and $1.38 and $2.13 per Class WC Warrants,
respectively.

The Company has not paid and does not anticipate paying any cash dividends
on its Class A Shares, Class B Shares, or Series A Preferred Shares in the
foreseeable future, but instead intends to retain all working capital and
earnings, if any, for use in the Company's business operations, and in the
expansion of its business. In February 1996, the Company's Board of Directors
declared a stock dividend equivalent to $0.25 per share to its Series A 10%
Cumulative Convertible Preferred Stockholders of record as of the close of
business on February 23, 1996 (the "Record Date".) Payment was made on March 1,
1996 by the issuance of 0.10231 of a share of the Company's Class A Common Stock
for each share of Series A Preferred Stock held of record on the Record Date.
Accordingly, 55,247 shares of the Company's Class A Common Stock was issued for
this purpose. Retained earnings was charged $165,741 in March 1996 in
conjunction with the issuance of these shares. On September 17, 1996, the
Company issued a press release announcing that it will postpone for
approximately one month the Record Date for the dividend payable on its Series A
10% Cumulative Convertible Preferred Stock.

Item 6. Management's Discussion and Analysis or Plan of Operation

General

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.
These referenced financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in the Auditors' report on page
F-1 and footnote 1 to the accompanying financial statements, the Company has
incurred losses from operations, and has a working capital and net capital
deficiency which raises substantial doubt its ability to continue as a going
concern. This section contains forward looking statements which involve risks
and uncertainties. The Company's actual results may differ significantly from
the results discussed in the forward looking statements.

Results of Operations

Year Ended June 30, 1996 as Compared to Year Ended June 30, 1995

14
<PAGE>

As disclosed in the "Description of Business", during the year ended June
30, 1996, the Company decided to discontinue its catalog operations. Prior year
financial statements were reclassified to disclose the results of catalog
operations as if they were discontinued at the beginning of the year ending June
30, 1996.

The Company's net sales from continuing operations for the fiscal year
ended June 30, 1996, increased by $224,000 or 4.4% to $5,379,000 from $5,155,000
for the fiscal year ended June 30, 1995.

Net sales for the A.P.F. Master Framemakers division for the fiscal year
ended June 30, 1996 decreased by $154,000 or 4.4% to 3,369,000 from $3,523,000
for the fiscal year ended June 30, 1995. The average selling price per order for

the A.P.F. Master Framemakers division remained relatively unchanged for the
fiscal years ended June 30, 1996 and 1995.

With the acquisition by the Company of Italia Collections Inc. ("Italia")
in October 1994 (See "Description of Business"), the Company began to conduct
its wholesale business through Italia. During the transition from the Company's
prior wholesale business to Italia, the Company generated revenues of $528,000
from this wholesale business during the year ended June 30, 1995. Italia
revenues for this same period totaled $1,104,000. Thus, for the year ended June
30, 1995, the Company's wholesale based revenues totaled $1,632,000. Net sales
for Italia for the fiscal year ended June 30, 1996 totaled $2,010,000, which is
an increase of $378,000 or 23.2% over total wholesale business for the prior
year. During the year ended June 30, 1996, as disclosed in the "Description of
Business", Italia has been undergoing disruption due to efforts to relocate
Italia operations to a suitable location. Because of this disruption, the
revenues for the year ended June 30, 1996 have been negatively affected. Also,
additional expenses pursuant to relocation efforts totaling some $235,000 have
been incurred. Although the Company believes that it has identified acceptable
product sourcing and base-of-operations, no assurances can be given that this
will be the case.

The Company's cost of goods sold from continuing operations as a percentage
of net sales increased to 66.1% for the fiscal year ended June 30, 1996, from
59.7% for the fiscal year ended June 30, 1995. This increase is due to larger
fourth quarter book to physical adjustments as compared to the prior year
recorded by the Company during the year ended June 30, 1996. Gross margins for
the year ended June 30, 1996 are largely consistent with those of the prior
year.

Selling, general and administrative expenses from continuing operations
increased $1,791,000 or approximately 98% over the comparable amount in the
prior year. Such increase included additional costs relating to the relocation
of Italia in the amount of approximately $763,000, additional reserves against
certain assets of $310,000, additional facilities charges of approximately
$120,000, with the balance relating to various other costs associated with the
implementation of the Company's strategic plan.

Interest expense for the year ended June 30, 1996 increased approximately
$302,000 to $538,000 versus the year ended June 30, 1995. Italia's revenues are
financed with a New York based secured lender pursuant to an asset-related
formula. (See Liquidity and Capital Resources.) Italia's revenues have increased
$906,000 during the year ended June 30, 1996 versus the June 30, 1995. This is
the basis for approximately $122,000 of the current year increase. The balance
relates to financing costs related to certain third-party loans obtained during
the prior year.

15
<PAGE>

Because of the Company's decision to discontinue its catalog operations, it
incurred charges during the year ended June 30, 1996 for such discontinuation
totaling $2,935,633. These charges relate primarily to a loss for the current
year's operations of approximately $789,000, inventory reserves of approximately
$954,000, reserves against other assets of approximately $354,000, charges for

the settlement of related party lawsuits of approximately $519,000, with the
balance primarily relating to estimated charges for operating losses.

The Company believes that the charges recorded during the year ended June
30, 1996 are sufficient. The Company will wind down its catalog business by
March 31, 1997, and may possibly mail one final clearance catalog. The Company's
management believes that no additional charges will be necessary from such
efforts.

Liquidity and Capital Resources

Management believes that cash flow from operations as they currently exist
are not sufficient to support such operations. Accordingly, Company management
is now identifying and implementing the corrective changes deemed necessary.
Three important actions as disclosed elsewhere in this filing are the search for
new business opportunities and alliances, the discontinuation of the Company's
catalog business, and the relocation of its Italia operation. The Company began
to reduce staff during the quarter ended March 31, 1996 to generate payroll cost
savings. In addition, the Company is actively pursuing additional financing to
provide immediate benefit. Although management believes that its current efforts
will enable the Company to generate positive cash flow from operations in
subsequent periods, no assurances can be given that this result will occur.

Cash balances of approximately $4,000 were recorded as of June 30, 1996, as
compared to approximately $2,000 at June 30, 1995, representing an increase of
approximately $2,000. Net cash used in operating activities was $1,144,000 at
June 30, 1996, as compared to net cash used in operating activities of
approximately $2,287,000 at June 30, 1995. The decrease in net cash used in
operating activities was primarily due to the net loss of $5,284,000 offset by a
non-cash provision for discontinued operation totaling $2,236,000, and also
offset by the following changes from continuing operations: non-cash charges for
depreciation of $680,000, and for stock issuance's of $141,000, increases in;
accounts payable and accrued expenses of $1,113,000, inventories of $346,000,
and a decrease in accounts receivable of $179,000. The decrease in accounts
receivable was primarily due to the Company's adherence to established credit
policies while at the same time successfully pursuing the collection of past due
balances. Although total inventories decreased during the current period,
inventories from continuing operations increased due largely to support the
growing Italia business. The increase in accounts payable and accrued expenses
was due largely to increased operating expenses incurred during the current
year. (See "Results of Operations".)

Net cash used in investing activities was $543,000 for the year ended June
30, 1996, versus $591,000 for the year ended June 30, 1995.

Net cash provided by financing activities was $1,689,000 for the year ended
June 30, 1996, compared to $1,839,000 for the year ended June 30, 1995. The
primary source of the current year's financing was the Company's Preferred Stock
Offering in September 1995 generating proceeds of $1,633,000. During fiscal
1995, the Company sold 3,000,000 Class WA Warrants to raise net proceeds of
approximately $372,000 in additional working capital in part to support the
acquired operations, sale of

<PAGE>

500,000 registered Class A Common shares to raise net proceeds of approximately
$438,000, and the sale of 235,000 Class A Common shares pursuant to Regulation S
under the Securities Act of 1933 ("Regulation S") to raise net proceeds of
approximately $283,000.

As of June 30, 1996, working capital was ($2,512,000), as compared to
($15,000) as of June 30, 1995. As of June 30, 1996, trade accounts receivable
decreased $179,000 and inventories decreased $346,000 versus the prior period.
Notes payable and current maturities of long-term debt reduced $369,000 during
this same period. The changes from these specific accounts produce a reduction
to working capital of $536,000. Additionally, in connection with plans to
discontinue its catalog operations, the Company recorded reserves totaling
approximately $2,200,000, which is the substantial cause of the decrease of
working capital during the year ended June 30, 1996. The Company's Management
believes that this working capital reduction will be isolated to the year ended
June 30, 1996, and that positive working capital will be generated during
subsequent periods. As disclosed at the beginning of "Results of Operations" the
negative working capital changes during the year ended June 30, 1996 are
consistent with the Company's intentions to reposition itself for growth and
profitability in subsequent periods. No assurances can be given, however, that
the Company's expectations of improved results in subsequent periods will occur.

In July 1994, The Company replaced its existing financing agreement with a
line of credit of up to $950,000 with a New York Bank following the Company's
Initial Public Offering in June 1994. Such borrowings are based on trade
receivables and inventory. The borrowings under such line of credit are secured
by a lien on all personal property and fixtures of the Company and personally
guaranteed by the President and Chief Executive Officer of the Company. In March
1996, the Company agreed with the bank to reduce the line of credit by $10,000
per month. As of the date of this filing, the line of credit has been reduced to
$870,000. This line of credit bears interest at a rate of prime plus 1% (9.25%
as of the date of this filing.) The Company is also seeking alternative sources
of financing to ultimately replace the current line of credit, but there can be
no assurance it will be able to do so.

In connection with the Company's plan to restructure its wholesale
business, the Company, through its wholly owned subsidiary, Italia Collection,
Inc. ("Italia"), acquired the businesses of two privately held Florida-based
companies, Murano Crystal Corp. ("Murano") and Ceramic Productions, Corp.
("CPC"), which manufacture and market upscale decorative ceramic accessories to
the home furnishings industry through a showroom in High Point, North Carolina
and a network of sales representatives. Closing on such acquisitions occurred on
October 21, 1994. These acquisitions were accounted for under the purchase
method of accounting. In connection therewith, the Company agreed to pay the
seller on the basis of a formula purchase price computed as a factor of future
earnings from continuing operations, subject to certain adjustments and offsets
in cash and/or Class A Shares. As of the date of this filing, based on the
results of operations of these acquisition, the Company's Management believes
that no liabilities are due to the seller, nor have any liabilities for such
payment been recorded on the Company's financial statements. The parties are
currently in dispute regarding the nature and amount, if any, of the
consideration necessary. The parties are discussing a resolution to this matter

and in the opinion of management, there will not be any material adjustment to
the Company's financial position or results of operations as a result of the
outcome of such discussions. Upon resolution of these discussions, appropriate
payments, if any, will be made and recorded on the Company's books.

On February 15, 1995, Italia Collection entered into a Financing Agreement
with a New York based secured lender whereby Italia Collection may borrow
pursuant to an asset-related formula. The

<PAGE>

agreement remains in effect as of the date of this filing, and may be terminated
by either party upon notice to the other and payment of the commitment fee for
the unexpired term of this agreement. Although the Company is currently pursuing
alternative financing agreements, as of the date of this filing, no such
arrangements have been finalized. According to the current agreement, the
lender, upon confirmation of shipments, will advance Italia Collection 70% of
the receivable. Upon collection of the receivable, the lender remits the balance
of 30%. Interest is calculated on the daily cash balance at the rate of prime
plus 9% per annum (17.25% as of the date of this filing) or a minimum of 18% per
annum against a minimum monthly defined compensation of $3,000. As of the date
of this filing, the amount due to the lender was approximately $750,000. In
addition, the secured lender received personal guarantees from Max Munn,
President and Chief Executive Officer of the Company, and his spouse. During
February 1996, the Company's President and Chief Executive Officer arranged for
$160,000 additional financing from this lender at the rates in effect for
existing loans. The President and Chief Executive Officer, and his spouse, have
provided personal guarantees for this additional funding, in addition to a
security interest in certain real estate and Company stock owned by his spouse.
Of these proceeds, approximately $121,000 was used to pay outstanding tax
liabilities. The balance of the proceeds was loaned by the Company to the
President and Chief Executive Officer. A $38,000 demand loan dated February 8,
1996, bearing an annual rate of interest of 18% was executed by the President
and Chief Executive Officer, and countersigned by the Chief Financial Officer.
On May 13, 1996, the Company's Board of Directors affirmed by majority vote the
loan by the Company to its President and Chief Executive Officer. The principal
balance of the loan will be partially offset by unreimbursed business expenses
generated by the President and Chief Executive Officer. The remaining loan
balance will be repaid by the President and Chief Executive Officer to the
Company, with interest as provided above, during the year ended September 1997.

In March 1996, the Company executed an agreement with the Internal Revenue
Service (the "Service") for the payment of then outstanding payroll tax
liabilities totaling approximately $100,000. The agreement will require the
Company to pay approximately $9,000 per month for approximately 14 months.

principal amount of said Note and entered into a revised note for the $200,000
balance with such revised note providing for payment of principal on October 20,
1995, having an interest rate of 14% per annum and being convertible into 80,000
shares of Preferred Stock and 40,000 Class WC Warrants. On December 15, 1995,
this conversion took place. The 80,000 Preferred Shares and 40,000 WC Warrants
were registered in a Registration Statement declared effective September 18,
1996.

In August 1995, the Company agreed to issue, at a future date, 60,000 Class
A Common shares in settlement of all current and future liabilities under a
two-year Marketing and Organizational Agreement (the "Marketing Agreement") with
a consulting firm dated January 4, 1994. 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 in during the year ended June 30, 1996.

18
<PAGE>

In June and July 1995, the Company delivered to unaffiliated parties
promissory notes in the aggregate amount of $300,000 with interest at the rate
of 10% per annum (the "10% Notes") and promissory notes in the principal amount
of $100,000 with interest at the rate of 6% per annum (the "6% Notes".) The 10%
Notes and 6% Notes were each payable in June and July 1996 or the closing of the
sale by the Company of an issue of Preferred Stock, whichever is earlier. The 6%
Notes were convertible, in whole or in part, at the option of the holder, into a
maximum of 2,000,000 WC Warrants entitling the holders for a period of five
years to purchase one share of Preferred Stock per Class WC Warrant at a price
of $5.50 per share. These Warrants are redeemable by the Company. The Notes were
secured by a lien on the Company's assets. In September 1995 the Company repaid
all 10% Notes in full, plus all accrued interest for both the 10% Notes and 6%
Notes. All holders of 6% Notes have converted in full, into a total of 2,000,000
Class WC Warrants, which were registered in a Registration Statement declared
effective by the Securities and Exchange Commission on September 18, 1995.

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.

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. During August
and September 1996, 578,000 of the Company's Class WA Warrants were exercised at
$1.50 per warrant, generating proceeds to the Company totaling $867,000. Of

these proceeds, $811,500 was used to purchase 108,200 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.

On October 16, 1995, the Company entered into an agreement to restructure a
promissory note dated May 1995, with the principal amount of $500,000 bearing
interest at the rate of 18% per annum with the principal which was due and
payable in full on September 30, 1995 and a $150,000 note dated May 12, 1995,
bearing interest at the rate of 18% payable monthly with 135% of the principal
which was also due and payable in full on September 30, 1995 with a Nevis, BWI
Corporation. As of October 16, 1995 the parties agreed the Company owes the
lender, including interest and monthly extension fees of approximately $102,500
through December 15, 1995, an aggregate amount of approximately $805,000.
Pursuant to the new agreement, the Company paid $405,000 to the Nevis
Corporation upon acceptance of the agreement. The Company also delivered a
Promissory Note in the principal amount of approximately $400,000, in extension
and replacement of the remaining balance due and payable of $180,000 on or
before December 15, 1995 and $220,000 on July 31, 1996. The new agreement also
stipulates that the lender shall sell the 180,000 shares of the Company's Class
A Common Stock, held in escrow by the lender, for $180,000 to an unaffiliated
third party. The proceeds of such sale will be applied against the note during
January 1996. In addition, during December 1995, the Company issued to the
lender 35,000 unregistered

19
<PAGE>

shares of Class A Common Stock. Such shares shall be afforded a piggyback
registration right for all registration statements filed by the Company before
July 31, 1996 and a one time demand registration right commencing after July 31,
1996. Approximately $25,000 was charged against earnings during the quarter
ended December 31, 1995 in conjunction with the issuance of these shares. The
promissory note is also guaranteed by Max Munn, President and Chief Executive
Officer of the Company. The note is collateralized by 600,000 shares of the
Company's Class A Common Stock owned by the Company's Italia Collections Inc.
subsidiary. The Company has reached a general agreement with this lender to
restructure the repayment schedule of approximately $245,000 of outstanding
principal and interest payable.

In December 1995, in consideration for certain services rendered, 10,000
shares of the Company's Class A Common Stock were issued to various individuals
related to Richard Josephberg, an outside Director of the Company. Approximately
$7,000 was charged against earnings during the quarter ended December 31, 1995
in conjunction with the issuance of these shares.

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.

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. To date, the Company has not
declared or established a record date for a dividend for its Series A 10%
Cumulative Convertible Preferred Stock for September 1996.

In February 1996, the Company's Board of Directors approved the issuance to
Sol Munn of 150,000 shares of the Company's Class A Common Stock, in
consideration for past consulting services provided. These shares, which bear a
restrictive legend, were issued on April 12, 1996. In conjunction with the
issuance of these shares, approximately $54,000 of charges were recorded against
earnings during the year ended June 30, 1996.

On March 3, 1996, the Company acquired 500,000 shares of Series A
Convertible Preferred Stock and an option to purchase 20,000,000 shares (the
"Option Shares") of Series B Non-Convertible Voting Preferred Stock of Decor
Group, Inc., ("Decor") in exchange for issuance to Decor by the Company of
200,000 shares of its Class A Common stock and 200,000 shares of its Series A
Convertible Preferred stock and a guarantee with respect to certain indebtedness
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 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. Conversion of the 500,000 shares of Series A
Convertible Preferred stock into common stock would give the Company
approximately 88.6% of the voting stock of Decor as of the date of this filing.
Decor is

20
<PAGE>

planning a public offering of certain of its securities during October 1996.
After this public offering is effective, the Company will own approximately
86.5% of the total voting stock of Decor. The holding in Decor will be recorded
on the Company's financial statements under the equity method of accounting
until such time the Company obtains unconditional and effective control of
Decor, which is expected to occur upon the expiration of the Voting Agreement.
Initially this will be approximately 85% on the equity method.

liabilities. Commencing thirty (30) days following the date of the close of the
private placement, any of the Investors had the right to demand in writing (the
"Demand Notice") that the Company file a registration statement with the
Securities and Exchange Commission (the "Commission") which shall cover the
shares and allow the Investor to sell the shares to the public. Within fifteen
(15) days following receipt of the Demand Notice, the Company is required to
file such registration statement and use its best efforts to have such
registration statement declared effective by the Commission and such state
securities regulators as reasonably requested by the Investor. The Company also
agreed to include the shares in its next registration statement.

On April 4, 1996, the Company's Board of Directors resolved to issue
250,000 shares of the Company's Class B Common Stock to Laurie Munn, wife of the
Company's President and Chief Executive Officer. This issuance is in
consideration for a down payment of $250, Ms. Munn's 6.6% note to the Company
providing for principal of $437,500 to be paid to the Company in five equal
annual installments of $105,561.90, and Ms. Munn's guarantee and pledge of her
assets for certain Company debt. The shares were issued to Ms. Munn on April 8,
1996. Ms. Munn has executed a Promissory Note and Security Agreement in
conjunction with the issuance of these shares. The Company obtained an appraisal
to determine the fair market values of this transaction.

Effective June 30, 1996, the Company entered into a consulting agreement
with Morris Munn, father of the Company's President and Chief Executive Officer,
in exchange for certain services. As part of this agreement, over the subsequent
five-years, the Company will pay Mr. Munn $54,000 per annum in equal bi-weekly
installments, and issue to Mr. Munn options to purchase up to 350,000 shares of
the Company's Series A Preferred stock. These options were fully exercised
during July to September 1996, generating net proceeds to the Company totaling
$787,500. Of these proceeds, approximately $127,000 was used pursuant to the
Company's June 30, 1996 settlement with Ann Stevens, a former Company executive
(See "Legal Proceedings."), and $12,500 was used to purchase 1,667 shares of
Decor Group, Inc.'s Series C Non-Voting, Convertible, Preferred Stock. The
balance of proceeds was retained by the Company to support working capital
needs. In conjunction with the issuance of the options to Mr. Munn, the Company
recorded charges against earnings totaling $87,500 at June 30, 1996.

21
<PAGE>

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.

As part of the Company's investment in Decor, during the months of August
and September 1996, the Company purchased 109,867 shares of Decor's Series C
Non-Voting, Convertible, Preferred Stock at a cost of $824,000. As disclosed
above, the funds for this investment were generated from two sources: 1)
$811,500 of the $867,000 proceeds generated by the Company from the exercise of
578,000 of its Class WA Warrants through the date of this filing were so used,
and 2) $12,500 of the $787,500 proceeds generated by the Company from the
exercise by Morris Munn, father of the Company's President and Chief Executive
Officer, of an option to purchase 350,000 shares of the Company's Series A
Preferred Shares were also so used.

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.

Impact of Inflation

The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in supplies
and other operating costs could adversely affect the Company's operations.
However, the Company believes it could increase prices to offset increases in
cost of goods sold or other operating costs.

Sales Variations

Although the Company's net sales are not subject to seasonality
fluctuations experienced by certain retailers, the Company experiences some
minor variations in the level of sales by quarter. The first quarter of the
fiscal year (i.e., July 1 through September 30) is generally the Company's
slowest sales period due to the fact that the summer period is typically the
period when art galleries are at their slowest purchasing period and the
Company's catalog mailings are reduced. During this period, the Company's
warehouse and factory closes for three to five days to take the annual physical
inventory and to consolidate vacation periods for the Company's employees.

<PAGE>

Item 7. Financial Statements

INDEX TO FINANCIAL STATEMENTS

Report of Independent Public Accountants ................................. F-1

Consolidated Balance Sheet as of June 30, 1996 .......................... F-2

Consolidated Statements of Operations for the Years Ended
June 30, 1996 and 1995 ................................................. F-3

Consolidates Statements of Changes in Stockholders'
Equity for the Years Ended June 30, 1996, and 1995 ..................... F-4

Consolidated Statements of Cash Flows for the Years
Ended June 30, 1996 and 1995 ........................................... F-5

Notes to Consolidated Financial Statements ............................... F-6

<PAGE>

PART III

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.

None.

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.

The names and ages of the Directors, executive officers and key personnel
of the Company are as follows:

Name Age Position(s) Held with the Company

Max Munn 52 President, Chief Executive Officer,
Treasurer and Director
Michael J. Amore 48 Vice President, Chief Financial Officer and
Director
Roger Lourie 52 Director
Richard Josephberg 50 Director
Donald Feldman 58 Vice President, Sales and Marketing and Director

Management Biographies

Brief biographies of the Directors, executive officers, and key personnel
of the Company are set forth below. All Directors hold office until their
resignation, retirement, removal, disqualification, death or until their
successors have been elected and qualified. Vacancies in the existing Board of
Directors are filled by majority vote of the remaining Directors. Officers of
the Company serve at the will of the Board of Directors.

Max Munn has been President and Chief Executive Officer since September
1995. In June 1996, Mr. Munn was named Chairman of the Board of Decor Group,
Inc. He served as Executive Vice President, Operations and Secretary of the
Company between February 1994 and September 1995, and a Director thereof since
March 1994. He served as Vice President of A.P.F. from May 1993 until the A.P.F.
merger with the Company. From November 1990 to May 1993, he was a consultant to
the Company, as well as a consultant directly and indirectly to Imperial
Enterprises, Inc., a catalog company in Japan, and the IEI Corporation, a direct
marketer, in Princeton, New Jersey. From 1981 to February 1990 he was Chairman,
President and Chief Executive Officer of Collectors' Guild International Inc. In
June 1990 Collectors' Guild filed a petition for relief under the U.S.
Bankruptcy Code and was subsequently liquidated. Mr. Munn holds a Bachelor of
Architecture degree from The Massachusetts Institute of Technology and
subsequently did graduate level study in Art History at Columbia University.

Michael J. Amore has been Vice President and Chief Financial Officer of the
Company since November 1995. He was appointed to the Company's Board of
Directors in January 1996. Prior to joining the Company, Mr. Amore served as
Director, Administration; Director, Corporate Finance, and as Controller from
1979 to 1995 at Olympus USA, Inc., a wholly-owned subsidiary of Olympus Optical

Co., Ltd., a multinational manufacturer and distributor of photographic,
medical, optical and precision instruments. Mr. Amore is a certified public
accountant in the State of New York. He earned a B.S.

24
<PAGE>

degree in Accounting from St. John's University in New York, and an M.B.A.
degree in Investments, Banking, and Finance from Hofstra University in New York.

Roger Lourie was named as a Director on May 4, 1995. He is an engineer and
book publisher. He has over twenty-years of experience with Procter and Gamble,
Time, Inc., Mead Paper and Grolier, Inc. He was Senior Vice President, Marketing
of Grolier, Inc. Currently he is a General Partner of Tremon Associates and
President of Misty Ridge Associates, which are equity investment firms. He is
also Chairman of the Board of two Connecticut based manufacturing concerns. He
has a B.S. in Engineering from Rensselaer Polytechnic Institute and MBA and MIA
degrees from Columbia University in New York.

Richard Josephberg was named as a Director in October 1995. Since 1986, he
has been the Chairman of Josephberg Grosz & Co., Inc., a New York based
investment banking firm. Josephberg Grosz specializes in providing private
institutional capital to emerging growth companies. Mr. Josephberg has a B.B.A.
degree from the University of Cincinnati, and attended Bernard Baruch Graduate
School of Business in New York.

Donald Feldman became Vice President, Sales and Marketing on June 1, 1995,
and was named a Director in February 1996. In June 1996, Mr. Feldman was named
President of Decor Group, Inc. ("Decor"). From April 1990 to May 1995 he served
as Vice President of Sales and Marketing of Toyo Trading Co. in Los Angeles,
California, a major importer and marketer of decorative accessories. He also has
a strong merchandising background working with Sears Roebuck as Corporate
Merchandising Manager for Decorative Accessories. Concurrent with the Effective
Date of Decor's initial public offering (See "Acquisitions and Strategic
Alliances"), Mr. Feldman will resign from the Company's Board of Directors. His
replacement on the Company's Board of Directors will be selected and appointed
soon thereafter.

There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse the Company or any of its subsidiaries.

Compliance with Section 16(a) of the Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission and
NASDAQ. Officers, directors and great-than-ten-percent shareholders are required

by SEC regulation to furnish the Company with copies of all section 16(a) forms
that they file.

Based solely upon a review of Forms 3, Forms 4 and Form 5 furnished to the
Company pursuant to Rule 16a-3 under the Exchange Act, the Company believes that
all such forms required to be filed pursuant to Section 16(a) of the Exchange
Act were timely filed, as necessary, by the officers, directors and
securityholders required to file the same.

25
<PAGE>

Item 10. Executive Compensation

Summary Compensation Table

The following table sets forth the aggregate cash compensation paid for
services rendered to the Company during the last three fiscal years by the
Company's Executive Officers.

<TABLE>
<CAPTION>
Long-Term Compensation
------------------------------------------------------------------------------------------------
Annual Compensation (1) Awards Payouts
------------------------------------------------------------------------------------------------

Other Restricted All Other
Name and Fiscal Annual Stock Options/ LTIP Compen-
Principal Position Year Salary ($) Bonus ($) Compensation Awards ($) SARs () Payouts() sation ($)
------------------ ---- ---------- --------- ------------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Max Munn 1996 144,230
President, Chief 1995 151,127
Executive Officer 1994 147,126 7,000 25,000
Michael J. Amore 1996 58,558
Vice President, Chief 1995 --0--
Financial Officer 1994 --0--
Donald Feldman 1996 117,500
Vice President, Sales 1995 5,423
and Marketing 1994 --0--
Theodore Stevens 1996 78,115 16,000 (2)
Director (to June 1995 81,000 (2)
21, 1996) 1994 74,800 (2)
Ann Stevens 1996 80,769
Executive Vice 1995
President (to September 1994 144,230
1995)
</TABLE>
- ----------
(1) Does not include certain automobile expenses and other perquisites which in
the aggregate do not exceed the lesser of $50,000 or 10% of the named executive
officer's compensation.

See "Executive Compensation - Employment Arrangements" for a description of
the Company's employment agreements with Messrs. Munn and Feldman.

The following table sets forth certain information with respect to options
granted during the last fiscal year to the Company's Executive Officers named in
the above Summary Compensation Table.

26
<PAGE>

Option/SAR Grants in Last Fiscal Year

<TABLE>
<CAPTION>
Percent of Total
Number of Securities Underlying Options/SARS Granted to Exercise or Base
Name Options/SARS Granted Employees in Fiscal Year Price ($/Sh) Expiration Date
- ---- -------------------- ------------------------ ------------ ---------------
<S> <C> <C> <C> <C>

</TABLE>

- ----------

Aggregate Option/SAR Exercises In Last Fiscal Year And
Fiscal Year-End Option/SAR Values

The following table sets forth certain information with respect to options
exercised during the fiscal year ended June 30, 1995, by the Company's Executive
Officers named in the Summary Compensation Table, and with respect to
unexercised options held by such person at the end of the fiscal year ended June
30, 1995.

<TABLE>
<CAPTION>
Number of Securities Underlying Unexercised Value of Unexercised in the Money
Options/SARS Options SARs at
Shares Acquired Value at FY-End() FY-End($)
Name on Exercise () Realized $ Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>

</TABLE>

- ----------

Directors' Compensation

Directors receive no cash compensation for their services to the Company as

directors, but are reimbursed for any expenses actually incurred in connection
with attending meetings of the Board of Directors In addition, each outside
Director is entitled to receive 10,000 Shares per year of Common Stock of the
Company pursuant to the Directors Stock Option Plan. See "Stock Option Plans".

27
<PAGE>

Employment Arrangements

On February 15, 1996, the Company's Board of Directors agreed in principle
to enter into a four-year employment agreement between the Company and its
President and Chief Executive Officer. The agreement will provide an annual base
salary of $150,000, with annual increases of 10%. Such increases will be subject
to the attainment of profitable results of operations by the Company. In
addition, the agreement will grant the President and Chief Executive Officer an
option to purchase at any time 150,000 shares of the Company's Series A, 10%
Cumulative Convertible Preferred Stock at a price of $2.50 per share. The
exercise of this option, as well as any subsequent conversion to the Company's
Class A Common Stock, will require the prior consent of the Company's investment
banking firm. The agreement will also contain a "non-compete" clause and provide
the President and Chief Executive Officer with life insurance and the use of an
automobile. As of the date of this filing, the document for this agreement has
not been finalized or executed. This is expected to occur during the subsequent
period. Presently, the President and Chief Executive Officer draws an annual
salary of $150,000 and has the use of an automobile provided by the Company.

In August 1995 the Company entered into a four year employment agreement
with Ann Stevens, then Executive Vice President, with an annual salary of
$150,000. In addition, on or about September 30, 1995, the agreement provides
for Ms. Stevens to receive a one time payment of either, at the Company's
option, $50,000 or 50,000 shares of Class A Common Stock. Pursuant to this
agreement, Ms. Stevens was also entitled to receive stock options, stock bonuses
and other equity instruments in an amount equal to that received by Max Munn or
members of his immediate family. In June 1996, the Company executed an
employment severance agreement with Ms. Stevens which terminated the provisions
of the August 1995 employment agreement. The employment severance agreement
stipulated that the Company will pay to Ms. Stevens an initial payment of
$63,000, and make various periodic payments over seven years. In addition, the
Company agreed to issue to Ms. Stevens 50,000 shares of the Company's Class A
Common Shares. Such shares were issued on July 25, 1996. (See "Legal
Proceedings.")

September 16, 1994; options to purchase 25,000 shares at a price of $4.00 per
share to be granted on the second anniversary; and options to purchase 25,000
shares at a price of $5.00 per share to be granted on the third anniversary. The
Agreement also provides for a bonus program based on the Company meeting certain
minimum profit goals. In April 1996, the employment of the Vice President,
Operations was terminated. The Company settled its obligations to the employee
during the subsequent quarter. This settlement took the form of severance
payments totaling approximately $27,000. No securities have been issued to the
employee as part of the settlement.

On May 8, 1995, the Company entered into an Employment Agreement with
Donald Feldman, Vice President of Sales and Marketing of the Company. The
Agreement is for a term of four years beginning June 1995 and may be terminated
by the Company after the first year with payment of 80% of the employee's
salary, reduced by the employee's other income. The Agreement provides that the
Vice President

28
<PAGE>

of Sales and Marketing will be employed at a base salary of $117,500 plus a
sales commission structure based on increases in net sales for the Company and
for Italia. Mr. Feldman will be granted an option to purchase 10,000 shares of
the Company's Class A Common Stock for every full year under the employment
agreement at a price of $2.50 per share. Concurrent with the Effective Date of
Decor Group, Inc.'s ("Decor") initial public offering (See "Acquisitions and
Strategic Alliances."), the Company and Mr. Feldman plan to terminate Mr.
Feldman's Employment Agreement. Mr. Feldman will enter into a three (3) year
employment agreement with Decor at such Effective Date. Mr. Feldman, who is
President of Decor, will receive a salary of $117,500 per annum and an annual
bonus equal to two percent (2%) of the amount by which Decor's net sales exceed
the sales recorded by Decor for the year ending June 30, 1997. In addition, Mr.
Feldman will be granted options to purchase 10,000 shares of Common Stock of
Decor at an exercise price of $2.50 per share for each full year of employment
under the agreement. Decor will also reimburse Mr. Feldman for bona fide
business expenses including up to $400 per month for the use of an automobile
and $200 per month for insurance.

As part of the Italia acquisition during fiscal year ended June 30, 1995,
the Company entered into various consulting and employment agreements
aggregating $176,000 per annum. The agreements were subject to termination at
any time by Italia for reasons specified in the agreements. In July 1995, the
employment agreement for the President of Italia, as well as all other
agreements, were terminated by the Company.

Consulting Arrangements

Effective as of January 4, 1994, the Company entered into a two year
Marketing and Organizational Agreement (the "Marketing Agreement") with Robert
M. Leopold. Pursuant to the Marketing Agreement, Mr. Leopold will consult with
and advise the Company concerning its marketing plans, business operations,
organization, management, strategic planning, products and services,
acquisitions, mergers, and other matters. Mr. Leopold will be paid $9,375 each

quarter in advance together with reimbursement for expenses incurred not to
exceed $200 per month. In August 1995, the Company agreed to issue, at a future
date, 60,000 Class A Common Shares to Mr. Leopold in settlement of all current
and future liabilities, under this agreement. These shares, which bear a
restrictive legend, were approved by the Company's Board of Directors in
November 1995. In conjunction with the issuance of these shares, approximately
$55,000 was charged against earnings during the year ending June 30, 1996.

On April 1, 1995, the Company entered into a Consulting Agreement with
Morris Munn, father of Max Munn, the Company's President and Chief Executive
Officer under which he will provide the Company with: design and fabrication of
new molds for sculpture; recommend, and implement improvements in antiquing,
woodworking, gilding and carving processes; and attend trade shows for frame
making and mold making. Fees under the agreement are payable at $54,000 per
annum for one year renewable at the Company's option. On June 30, 1996, Morris
Munn's Consulting Agreement was extended for five (5) years. Pursuant to the
terms of this new agreement, the Company agreed to issue to Morris Munn an
option to purchase up to 350,000 shares of the Company's Preferred Shares at a
net exercise price of $2.25 per share. The Preferred Shares issuable upon the
exercise of the Option were registered for sale to the public under a
Registration Statement in Form S-8 filed with the Securities and Exchange
Commission on July 3, 1996. The Option was fully exercised during July to
September 1996 generating net proceeds to the Company totaling $787,500. (See
"Liquidity and Capital Resources.") 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

29
<PAGE>

other strategic initiatives. In conjunction with the issuance of the Option, the
Company recorded charges against earnings of $87,500 at June 30, 1996.

From time-to-time during prior periods, Sol Munn, uncle of Max Munn,
President and Chief Executive Officer of the Company has provided various
consulting services to the Company with respect to the marketing of custom
picture frames. In February 1996, the Company's Board of Directors approved the
issuance to Sol Munn of 150,000 shares of the Company's Class A Common Stock, in
consideration for these services. The shares, which bear a restrictive legend,
were issued on April 12, 1996. In conjunction with the issuance of these shares,
approximately $54,000 of charges against earnings were recorded during the year
ended June 30, 1996.

Other than services provided by the Company's investment banking firm, no
services have been provided at the Company's direction by any consultant or
advisor with respect to the issuance or sale of the Company's equity securities.

Stock Option Plans

not more than an aggregate of 250,000 Class A Shares. Directors of the Company
are not eligible to participate in the 1994 Plan. The 1994 Plan provides for the
grant of options intended to qualify as "incentive stock options" under the
Internal Revenue Code of 1986, as amended (the "Code") as well as options which
do not so qualify.

Pursuant to the 1994 Plan, the Board of Directors or a stock option
committee established by the Board to administer the 1994 Plan determines the
persons to whom options are granted, the number of Class A Shares subject to
option, the period during which the options may be exercised and the option
exercise price. With respect to incentive stock options, no option may be
granted more than ten years after the effective date of the 1994 Plan or
exercised more than ten years after the date of grant (five years if the
optionee owns more than ten percent of the Class A Shares of the Company at the
time of grant). Additionally, with respect to incentive stock options, the
option price may not be less than 100% of the fair market value of the Class A
Shares on the date of the grant (110% if the optionee owns more than ten percent
of the Class A Shares of the Company at the time of grant). The fair market
value of the Class A Shares will be determined by the Board or the Committee in
accordance with the 1994 Plan as follows: If the Class A Shares are not listed
and traded upon a recognized securities exchange, on the basis of recent
purchases and sales of Class A Shares in arms-length transactions or based on
the last reported sale or transaction price for such stock on the date of grant
or, if the shares are traded on a recognized securities exchange or quoted on
the NASDAQ National Market System upon the basis of the last reported sale or
transaction price on the date of grant or, if the shares were not traded on such
date, on the date nearest preceding that date. Subject to certain limited
exceptions, options may not be exercised unless, at the time of exercise, the
optionee is in the service of the Company.

The Board of Directors or the Committee may, in its discretion, at any time
prior to the exercise of any option, grant in connection with such option the
right to surrender part or all of such option to the extent the option is
exercisable, and receive an amount (payable in cash, Class A Shares or
combination thereof as determined by the Board or the Committee) equal to the
difference between the then fair market value of the

30
<PAGE>

shares issuable upon the exercise of the option (or portions thereof
surrendered) and the exercise price of the option or portion thereof
surrendered.

of the Company, and Mr. Munn's sister. In addition, on October 5, 1994 the Board
of Directors granted Incentive Options to two employees to purchase an aggregate
of 20,000 Class A Shares at exercise prices equal to the fair market value of
the shares or $3.38 per share. With respect to each such grant, 25% of such
options will vest each year commencing on the first anniversary of the grant.

The Director Plan. On June 20, 1994 the Board of Directors approved the
1994 Director Stock Option and Appreciation Rights Plan (the "Director Plan").
The Director Plan was adopted to provide an incentive to Directors through
automatic and discretionary grants of stock options. The Director Plan provides
for the grant of options intended to qualify as "incentive stock options" under
the Code as well as options which do not so qualify.

The Director Plan may be administered by a committee appointed by the Board
of Directors of the Company (the "Committee"). Options under the Director Plan
may be granted to each person who is a Director of the Company on the date of
grant. All Directors of the Company are eligible to receive options under the
Director Plan.

The Director Plan provides for the granting of options to Directors in such
amount and, subject to the terms of the Director Plan, upon such terms as the
Board or Committee determines in its discretion in order to reward the recipient
director for extraordinary service to the Company. In addition, on the second
Monday of May of each year each person who is then a director of the Company
shall be automatically granted an option to purchase 10,000 of the Company's
Class A Shares, subject to adjustment as provided for in the Director Plan. The
aggregate number of shares for which options may be issued pursuant to the
Director Plan is 250,000 shares. The exercise price for options granted under
the Director Plan must be equal to the fair market value per Class A Share on
the date of grant. The fair market value of the Class A Shares will be
determined by the Board or the Committee in accordance with the Director Plan as
follows: If the Class A Shares are not listed and traded upon a recognized
securities exchange, on the basis of recent purchases and sales of Class A
Shares in arms-length transactions or based on the last reported sale or
transaction price for such stock on the date of grant or, if the shares are
traded on a recognized securities exchange or quoted on the NASDAQ National
Market System upon the last reported sale or transaction price on the date of
grant or, if the shares were not traded on such date, on the date nearest
preceding that date. Each option granted under the Director Plan expires ten
years after the date of grant, unless a lesser period is specified by the
Committee.

31
<PAGE>

Director shall terminate. In the event an optionee dies, the Director Plan
provides for the exercise of an option on behalf of the deceased Director.

On September 16, 1994, the Board of Directors granted Incentive Options to
purchase 25,000 Class A Shares to each of Theodore Stevens, then President and
Max Munn, President and Chief Executive Officer and then Executive Vice
President-Operations under the Director Plan at an exercise price equal to 110%
of the fair market value of the shares on the date of grant, or $3.85 per share,
all of which options immediately vested. As of the date of this filing, with Mr.
Stevens no longer an officer or Director of the Company, the Company does not
plan to issue to Mr. Stevens any additional shares pursuant to any agreement
currently in effect, except that Mr. Stevens currently holds 269,750 shares of
the Company's Class B Common shares each of which are convertible into one Class
A Common share at Mr. Stevens option.

Profit Sharing and Deferred Compensation Plans

In July 1991 the Company adopted a Qualified Profit Sharing Plan for all
nonunion employees and a nonqualified Deferred Compensation Plan for certain key
employees. The Company has not made any contributions to the Qualified Profit
Sharing Plan or the Deferred Compensation Plan since its initial contribution
during the fiscal year ended June 30, 1992.

Item 11. Security Ownership of Certain Beneficial Owners and Management

Each Class A Share is entitled to one vote and each Class B Share is
entitled to five votes. The Company has no other voting securities outstanding.
It does, however, have certain securities outstanding that are convertible into
Class A Common Shares. As of the date of this filing, such securities are: (1)
1,140,000 shares of Series A Preferred Stock, each convertible into 3 shares of
Class A Common stock commencing September 18, 1996 (subject to the filing with
the Securities and Exchange Commission of a post-effective amendment to the
Company's September 18, 1995 Registration Statement whereby such Preferred
Shares were registered with the Commission), (2) 3,182,000 Class WA Warrants,
each exercisable into one Class A Common share and one Class WB Warrant, and (3)
836,750 Class WB Warrants, each exercisable into one Common A share, and (4)
2,270,000 Class WC Warrants, each exercisable into one share of Series A
Preferred Stock (subject to the filing with the Securities and Exchange
Commission of a post-effective amendment to the Company's September 18, 1995
Registration Statement whereby such Class WC Warrants were registered with the
Commission.)

The following table sets forth certain information as of the date hereof
with respect to: (1) each executive officer and director; (2) all executive
officers and directors of the Company as a group; and (3) all persons known by
the Company to be the beneficial owners of five percent or more of the Company's
Class A or Class B Shares of Common Stock. The table below also sets forth as to
each holder the percent of voting power represented by the Class A Shares (with
one vote per share) and the Class B Shares (with five votes per share) voting as
a single class prior to conversion of the Class B Shares to Class A Shares and
after giving effect to the conversion of such Class B Shares and assuming no
exercise of outstanding Warrants.

32
<PAGE>

<TABLE>
<CAPTION>
Percent of Votes (2)
---------------------------
After
Prior to Conversion
Conversion of of all
Name and Address of Percent of all Class B Class B
Beneficial Owner (1) Title of Class Number of Shares Class (2) Shares (3) Shares (4)
- -------------------- -------------- ---------------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Theodore Stevens Class A Shares 319,250 (5) 5.8% 10.2% 5.8%
Class B Shares 269,750 (6) 13.2%

Max Munn Class A Shares 45,000 (7)(8) 0.8% * *
Class B Shares -0- (8) -0-

Laurie Munn Class A Shares 519,750 (9) 9.4% 19.0% 9.4%
Class B Shares 519,750 (9) 25.5%

Michael Levine Class A Shares -0- -0- 45.6% 22.5%
as escrow agent Class B Shares 250,000 22.5%
(10)

Decor Group, Inc. Class A Shares 200,000 3.6% 1.5% (11) 3.6% (11)
320 Washington St. Class B Shares -0- -0- 0% (11) 0% (11)
Mt. Vernon, NY 10553 Series A Preferred 200,000 17.5%

All Executive Officers Class A Shares 614,750 (12) 11.1% 19.7% 11.1%
and Directors as a Group Class B Shares 519,750 (13) 25.5%
(5 persons)
</TABLE>

* Less than 1%.
(1) Mr. Munn is the President and Chief Executive Officer and a Director of the
Company and can be contacted at the Company's principal executive offices
at 320 Washington Street, Mt. Vernon, NY 10553. Mr. Stevens is married to
Mr. Munn's sister, Ann Stevens and Max Munn and Laurie Munn are husband and
wife. Such person's percentage ownership is determined by assuming that the
options or convertible securities that are held by such person which are
exercisable within 60 days from the date hereof have been exercised or
converted, as the case may be.
(2) Does not give effect to the exercise of the Warrants, the Underwriters or
prior underwriters Warrants or stock options granted under the Plans other
than as noted.
(3) Reflects the percentage of the votes to which the voting Common Stock owned
is entitled to vote if the Class A Shares and Class B Shares vote as one
class. Assumes that the 2,039,500 Class B Shares have not been converted to
Class A Shares and, consequently, have five votes per share (aggregating
10,197,500 votes).
(4) Reflects the percentage of the votes to which the voting Common Stock owned
is entitled to vote if the Class A Shares and Class B Shares vote as one
class. Assumes the 2,039,500 Class B Shares have been converted to

2,039,500 Class A Shares and, consequently, have one vote per share rather
than five votes per share.
(5) Includes 269,750 Class A Shares into which the 269,750 Class B Shares are
convertible. Does not include 50,000 Class A Shares issued to Ann Stevens,
wife of Mr. Stevens, pursuant to her settlement agreement with the Company.
(See Legal Proceedings.)

33
<PAGE>

(6) Each Class B Share entitles the holder to five votes per share and is
convertible at any time into one Class A Share with one vote per Class A
Share.
(7) Represents Class A Shares issuable to Mr. Munn upon exercise of an
Incentive Stock Option issued pursuant to the Director Plan established on
June 20, 1994, and a grant provided on Sept. 16, 1994.
(8) Does not include 519,750 Class B Shares (convertible into 519,750 Class A
Shares) held by Mr. Munn's wife. Mr. Munn disclaims ownership of any such
shares.
(9) Includes 519,750 shares of Class B Shares (convertible into 519,750 Class A
Shares).
(10) Includes 1,250,000 Class B Shares issued to Mr. Levine as escrow agent
pursuant to the settlement reached by the Company and Ann Stevens with
respect to a prior employment agreement. (See Legal Proceedings.)
(11) Includes 200,000 shares of Class A Common Shares and 200,000 Shares of
Series A Preferred shares issued pursuant to the Company's investment in
Decor Group, Inc. (See Acquisitions and Strategic Alliances.) Each Series A
Preferred share is convertible into three shares of Class A Common Stock.
If Decor Group, Inc. were to convert its Series A Preferred Shares into
Class A Common Shares, it would have potential voting rights of 8.9%,
assuming conversion of the Class B shares into Common A Shares.
(12) Includes 519,750 Class B Shares owned by Laurie Munn, wife of Max Munn,
President and Chief Executive Officer, which are convertible into 519,750
Class A Shares, and 85,000 Shares of Class A Common Stock issuable upon the
exercise of options pursuant to existing stock option plans.
(13) Represents 519,750 Class B Shares owned by Laurie Munn, wife of Max Munn,
President and Chief Executive Officer.

There are no agreements or other arrangements or understandings known to the
Company concerning the voting of the Common Stock of the Company or otherwise
concerning control of the Company which are not disclosed herein. There are no
pre-emptive rights applicable to the Company's securities.

Item 12. Certain Relationships and Related Transactions

In October 1990 A.P.F. issued 100 shares of its Common Stock, no par value,
to Theodore Stevens, then President and a former Director of the Company, for
aggregate consideration of $225,000 and in October 1990 A.P.F. issued 165 shares
of its Preferred Stock, $1,000 par value per share, to Theodore Stevens in
consideration for the payment of $165,000. On June 30, 1992, A.P.F. converted
certain indebtedness arising from services rendered and loans provided by Decor
Holdings, Inc, a company controlled by Theodore Stevens, to A.P.F. in the amount
of $114,000 to 114 shares of Preferred Stock of A.P.F. In March 1994 such shares

were transferred by Decor to Theodore Stevens and all of such 279 shares of
Preferred Stock were converted by Mr. Stevens into 124 shares of A.P.F. Common
Stock. As a result of the Company's recapitalization, the Company issued
1,000,000 Class B Shares (constituting all of the then issued and outstanding
Class B Shares of the Company) to Theodore Stevens in exchange for all of the
issued and outstanding Common Stock of A.P.F., the predecessor to the Company.

34
<PAGE>

for the balance of the purchase price payable in 15 years with interest at the
rate of 6.6% per annum. On December 1, 1995, Mr. Stevens filed a complaint in
United States District Court, Southern District of New York against Ms. Munn
seeking, among other things, the recission of this stock sale. In June 1996, the
parties agreed to a settlement without either the resission of the stock sale or
the need for additional payments by any party to the transaction. (See "Legal
Proceedings.")

During the fiscal year ended June 30, 1992, the Company borrowed the sum of
$75,000 from Sol Munn, the uncle of Max Munn, President and Chief Executive
Officer of the Company and borrowed an additional $75,000 in fiscal 1993. The
aggregate amount due in the amount of $150,000 was evidenced by a promissory
note dated September 1, 1993, payable to The Munn Trust of 1975-Trustee: Sol
Munn and Evelyn Munn and bore interest at the rate of 12% per annum. The note
was payable September 1, 1996, subject to the right of Sol Munn to extend the
term for an additional one year period upon 60 days notice. In March 1994 the
bearer of the note agreed to purchase certain works of art at 58% above the
Company's cost in full satisfaction of the above note. The Company recorded
approximately $87,000 credit to earnings pursuant to this transaction. On August
13, 1996, The Munn Trust of 1975, Sol Munn and Evelyn A. Munn, co-trustees,
commenced action in the Supreme Court of the State of New York, County of
Suffolk against Laurie Munn, Max Munn, and the Company pursuant to this
transaction, seeking monetary damages for the sum of $111,000. (See "Legal
Proceedings.")

On July 7, 1994, Theodore Stevens, Max Munn and Ann Stevens, then
respectively President, Executive Vice President and Executive Vice President of
the Company, personally guaranteed the obligations of the Company under a
Promissory Note dated July 7, 1994 in the amount of $950,000 at an interest rate
of prime plus one percent (9.75% as of the date of this filing) to a New York
bank. Pursuant to terms of settlement involving various issues (See "Legal
Proceedings"), in the event that the Company's debt to the Bank is not repaid in
full prior to March 31, 1997, the Company will pay Ann Stevens, who is married
to Mr. Stevens, .2083% of the outstanding balance per month as compensation for
her personal guarantee. As of the date of this filing, the outstanding balance

of this note totals $870,000.

On February 15, 1996, the Company's Italia Collection subsidiary entered
into a Financing Arrangement with a New York corporation whereby Italia
Collection may borrow pursuant to an asset-related formula. The agreement
remains in effect as of the date of this filing and may be terminated by either
party upon notice to the other and payment of the commitment fee for the
unexpired term of this agreement. Interest is calculated on the daily cash
balance at the rate of prime plus 9% per annum (17.25% as of the date of this
filing) or a minimum of 18% per annum against a minimum monthly defined
compensation of $3,000. As of the date of this filing, the amount due to the
lender was approximately $738,000. (See "Liquidity and Capital Resources.") This
Financing Arrangement has been personally guaranteed by Max Munn, the Company's
President and Chief Executive Officer and his wife.

For the years ended June 30, 1996 and June 30, 1995, the Company paid
approximately $30,000 and $46,000, respectively, to the father of the President,
and Chief Executive Officer for consulting services. See "Executive Compensation
- - Consulting Arrangements."

In October 1994, the Company borrowed the sum of $33,000 from the Vice
President and Chief Financial Officer of the Company. The amount due is
evidenced by two promissory notes dated October 27, 1994 and October 28, 1994
for $8,000 and $25,000, respectively, which bore interest rates of 18% and 12%
per annum, respectively. The principal and interest were initially due November
17, 1994 and November 18, 1994, respectively, and have been extended to February
15, 1995. Unpaid sums bear

35
<PAGE>

interest at the rate of 18% per annum plus $160. In April, 1995, the Company
paid all principal and interest due on both promissory notes.

In October 1994, the Company borrowed the sum of $8,000 from the President
of the Company. The amount due was evidenced by a promissory note dated October
27, 1994, which bore interest at a rate of 12% per annum. The principal and
interest were due November 17, 1994. In November 1994, the Company repaid the
loan. In addition, in November and December 1994, the Company advanced an
aggregate amount of $13,000 to the then Executive Vice President-Operations of
the Company, and now its President and Chief Executive Officer. This amount will
be repaid to the Company during the year ended June 30, 1997.

On February 8, 1996, the Company entered into a demand loan, for
approximately $38,000, bearing 18% interest, with the President 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 From 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 Option, the Company recorded charges
against earnings of $87,500 at June 30, 1996.

36
<PAGE>

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 plans
to register these securities with the Securities and Exchange Commission no
later than November 1996. Also pursuant to the Settlement, the Company issued to
Michael Levine as escrow agent (the "Escrow Agent") 1,250,000 unregistered
shares of the Company's Class B Common shares (the "Escrow Shares".) The Escrow
Shares shall not be voted by the Escrow Agent, unless the Company defaults on
its obligations under the agreement. Upon satisfaction of such obligations, the
Escrow Shares shall be returned by the Escrow Agent to the Company. (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.

The Company will not permit loans or other transactions among the Company
and the officers, directors, principal shareholders, or affiliates of any of
them for other than bona fide business purposes or on terms less favorable than

could be obtained from third parties, unless approved by a majority of the
disinterested directors and the independent directors, if any, of the Company.

See "Executive Compensation - Employment Arrangements" and "Executive
Compensation - Consulting Arrangements" for descriptions of the present
employment agreement and previous consulting arrangement with Max Munn,
President and Chief Executive Officer of the Company and certain other related
and unrelated parties.

Max Munn may be deemed to be a "parent" or "promoter" of the Company, as
that term is defined in the Securities Act.

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit
Number Title of Exhibit
- ------ ----------------

1.1 Revised form of Underwriting Agreement by and between the Company and
J. Gregory & Company, Inc.(2)

1.2 Form of Agreement Among Underwriters.(1)

1.3 Form of Selected Dealer Agreement.(1)

2.01 Stock Purchase Agreement, dated October 21, 1994, among the Company
and Murano Crystal Corp. and Stephen M. Tucker.(6)

2.02 Stock Purchase Agreement, dated October 21, 1994, among the Company
and Ceramic Productions Corp. and Stephen M. Tucker and Michael D.
Tucker.(2)

3.1 Certificate of Incorporation of the Company.(1)

37
<PAGE>

3.2 By-Laws of the Company.(1)

3.3 Restated Certificate of Incorporation of A.P.F. Holdings, Inc.(1)

3.4 Certificate of Ownership and Merger between Interiors, Inc. and A.P.F.
Holdings, Inc.(1)

3.5 Articles of Incorporation of Italia Collection, Inc.(7)

3.6 By-Laws of Italia Collection, Inc.(7)

4.1 Forms of Representative's Warrants to Purchase Class A Common Stock,
Class WA Warrants and Class WB Warrant.(2)

4.2 Form of Warrant Agreement by and between the Company, J. Gregory &
Company, Inc., and Transfer Agent.(3)

4.3 Specimen Class A Common Stock Certificate.(2)

4.4 Specimen Class B Common Stock Certificate.(2)

4.5 Specimen Class WA Warrant Certificate.(2)

4.6 Specimen Class WB Warrant Certificate.(2)

4.7 First amendment to Warrant Agreement

5.1 Opinion of Bernstein & Wasserman, LLP, securities counsel for
Registrant.

10.1 Sublease Agreement dated January 16, 1991 between Stern Metals and the
Company.(1)

10.2 Lease dated August 11, 1992 between Hoopskirt Factory Partners and
I.R.A.L., Inc.(2)

10.3 Lease dated February 1, 1993 between Arglo Realty Company and the
Company.(1)

10.4 Security Agreement dated November 13, 1990 between the Company and
United Credit Corporation and the amendments thereto dated November
13, 1990, January 7, 1992, October 11, 1991, December 15, 1992, and
June 23, 1993.(1)

10.5 Promissory note dated June 27, 1991 for $75,000 to Mount Vernon Urban
Renewal Agency.(1)

10.6 Mount Vernon Small and Minority Business Loan Agreement dated June 27,
1991.(1)

10.7 Security Agreement between Mount Vernon Urban Renewal Agency and the
Company dated June 27, 1991.(1)

10.8 Intercreditor Agreement dated June 27, 1991 between United Credit
Corporation and Mount Vernon Urban Renewal Agency.(1)

38
<PAGE>

10.9 Promissory Note dated April 2, 1992 in favor of Hide Tashiro, in
principal amount of $150,000.(1)

10.10 Promissory Note dated April 2, 1992 in favor of Takehisa Nishijima, in
principal amount of $150,000.(1)

10.11 Promissory Note Dated June 8, 1992 in Favor of Roger Laurie, in
principal amount of $15,000. (1)

10.12 Promissory Note dated September 19, 1992 in favor of Howard
Morganstein, in principal amount of $50,000.(1)

10.13 Promissory Note dated September 1, 1993 in favor of The Munn Trust of
1975 - Trustee: Sol Munn and Evelyn Munn, in the principal amount of
$15,000.(1)

10.14 Agreement dated April 1, 1991 between Production, Merchandising,
Distribution Employees Union, Local 210, Affiliated with The
International Brotherhood of Teamsters, Chauffeurs, Warehousemen and
Helpers of America, AFL-CIO and the Company.(1)

10.15 Form of Security Agreement between the Company and the Bridge
Lenders.(1)

10.16 Form of Non-Negotiable 6% Convertible Promissory Note.(1)

10.17 Form of Non-Negotiable 10% Promissory Note.(1)

10.18* Employment Agreement dated March 8, 1994 between A.P.F. Holdings, Inc.
and Max Munn.(1)

10.19* Marketing and Organizational Agreement between the Company and Robert
M. Leopold dated as of January 4, 1994.(1)

10.20 Promissory Note dated March 16, 1994 in favor of William Evenchick, in
the principal amount of $100,000.(1)

10.21 Pledge and Security Agreement between Ted Stevens and Stern Metals,
Inc. dated January 16, 1991.(1)

10.22 Promissory Note dated January 16, 1991 in favor of Stern Metals, Inc.
in the principal amount of $125,000.(1)

10.23 1994 Stock Option and Appreciation Rights Plan, as amended on
September 16, 1994.(5)

10.24 1994 Director Stock Option and Appreciation Rights Plan, as amended on
September 16, 1994.(4)

10.25 Revised form of Warrant Exercise Fee Agreement.(5)

10.26 Revised form of Consulting Agreement between the Company and J.
Gregory & Company, Inc.(2)

10.27 General Loan and Security Agreement dated July 7, 1994 between the
Company and The Bank of New York.(5)

39
<PAGE>

10.28 Promissory Note dated July 7, 1994 in the amount of $950,000.(5)

10.29 General Guarantees dated July 7, 1994 of Ann Stevens, Theodore Stevens
and Max Munn to the Bank of New York.(5)

10.30 Lease Agreement dated July 15, 1994 between the Company and Robert
Schildkraut.(5)

10.31 Promissory Note dated June 30, 1994 in the amount of $100,000 issued
to Ted Stevens.(5)

10.32 Agreement dated October 6, 1994 among the Company, J. Gregory &
Company, Inc. and Vincent Mongo.(5)

10.33 Consulting agreement between Morris Munn and the Company dated October
1, 1993.(5)

10.34 Consulting agreement between M & E Company and the Company dated
October 1, 1993.(5)

10.35 Promissory Note dated October 25, 1994 in the amount of $100,000
issued to Nybor Group, Inc. together with Affidavit of Confession of
Judgment relating thereto.(7)

10.36 Employment Agreement dated October 21, 1994, between Murano Crystal
Corp. and Stephen M. Tucker.(6)

10.37 Consulting Agreement dated October 21, 1994, between Murano Crystal
Corp. and Jean Tucker.(6)

10.38 Guarantee issued by the Company to Stephen M. Tucker and Jean Tucker.
(6)

10.39 Guarantee issued by the Company to Stephen M. Tucker and Michael D.
Tucker.(6)

10.40 Non-Competition and Confidentiality Agreement entered into between
Murano Crystal Crop. and Michael D. Tucker.(6)

10.41 Non-Competition and Confidentiality Agreement entered into between
Murano Crystal Corp. and Lisette Tucker.(6)

10.42 Promissory Note dated October 27, 1994 in the amount of $8,000 issued
to Max Munn.(7)

10.43 Promissory Notes dated October 27 and October 28, 1994 in the amounts
of $8,000 and $25,000, respectively, issued to Robert M. Schildkraut
together with Affidavits of Confession of Judgment relating thereto.
(7)

40
<PAGE>

10.44 Promissory Note dated November 23, 1994 in the amount of $225,000

issued to Ekistics Corp.(7)

10.45 Guarantees dated November 23, 1994 of Theodore Stevens, Max Munn,
Laurie Munn, and Ann Stevens.(7)

10.46 General Loan and Security Agreement dated November 22, 1994 from the
Company to Ekistics Corp.(7)

10.47 Rollover Promissory Notes issued to Robert Schildkraut in the amounts
of $25,000 and $8,000.

10.48 Rorm of Subscription Agreement for Private Placement of Series A 10%
Convertible Preferred Stock.(8)

10.49 Form of Subscription Agreement for Offering, by Decor Group, Inc.(11)

10.50 Demand note between the Company and Max Munn dated February 8,
1996.(9)

10.51 Non-negotiable Promissory Note between Laurie Munn and the Company
dated April 8, 1996, and Security Agreement relating thereto.(10)

21.1 Subsidiaries of the Registrant.(5)

99.1 U.S. Patent and Trademark Office Trademark Reg. No. 1,736,623.(1)

99.2 U.S. Patent and Trademark Office mark Reg. No. 1,783,694.(1)

99.3 Consent Order for Permanent injunction for Defendant Max Munn issued
by the Federal Trade Commission in September 1991.(1)

99.4 Satisfaction of Judgment in the matter of A.P.F. Holdings, Inc. vs.
Max Munn.(2)

(1) Previously filed as an exhibit to the Registration Statement
(Registration No. 33-77288-NY), which exhibit is incorporated herein
by reference.

(2) Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement (Registration No. 33-77288-NY), which exhibit is
incorporated herein by reference.

(3) Previously filed as an exhibit to Amendment No. 2 to the Registration
Statement (Registration No. 33-77288-NY), which exhibit is
incorporated herein by reference.

(4) Previously filed as an exhibit to Amendment No. 3 to the Registration
Statement (Registration No. 33-77288-NY), which exhibit is
incorporated herein by reference.

41
<PAGE>

(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1994 (File No. 0-24352), which exhibit
is incorporated herein by this reference.

(6) Filed as an exhibit to the Company's Current Report on Form 8-K filed
November 3, 1994 (File No. 0-24352), which exhibit is incorporated
herein by this reference.

(7) Previously filed as an exhibit to the Registration Statement
(Registration No. 33-86296) and which exhibit is incorporated herein
by this reference.

(8) Previously filed as an exhibit to the Registration Statement
(Registration No. 33- _____________) and which exhibit is incorporated
herein by this reference.

(9) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995 and which such
exhibit is incorporated herein by this reference.

(10) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1996 and which such
exhibit is incorporated herein by this reference.

(11) Attached hereto as an Exhibit.

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Interiors, Inc.:

We have audited the accompanying consolidated balance sheet of Interiors, Inc.
(a Delaware corporation) (known formerly as A.P.F. Holdings, Inc., a New York
corporation) and subsidiary as of June 30, 1996 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for each of the two years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interiors, Inc. and subsidiary
as of June 30, 1996 and the results of operations and cash flows for each of the
two years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital and a net capital deficiency which raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

New York, New York
October 4, 1996

F-1

<PAGE>

INTERIORS, INC.
CONSOLIDATED
BALANCE SHEET

June 30
ASSETS 1996
-----------
CURRENT ASSETS:
Cash $ 4,142
Accounts receivables -
Trade, net of allowance of $40,000 784,600
Inventories 1,721,304
Prepaid expenses and other current assets 313,265
-----------
Total current assets 2,823,311

PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 1,808,915
Furniture and fixtures 156,179
Leasehold improvements 259,405
-----------
Total property and equipment, at cost 2,224,499

Less- Accumulated depreciation and
amortization 961,797
-----------
Net property and equipment 1,262,702

OTHER ASSETS 635,188
-----------
Total assets $ 4,721,201
===========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt $ 2,516,573
Accounts payable and accrued liabilities 2,706,388
Net liabilities and accrued expenses
of discontinued operations 90,557

Capital lease obligations 22,112
-----------
Total current liabilities 5,335,630

NON-CURRENT LIABILITIES:

Capital lease obligations 30,652
-----------
Total noncurrent liabilities 30,652
-----------

COMMITMENTS AND CONTINGENCIES (Note 10)

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,300,000 shares authorized,
790,000 issued and outstanding 7,900
Class A common stock, $.001 par value,
30,000,000 shares authorized, 3,470,247
shares issued and outstanding 3,470
Class B common stock, $.001 par value,
2,500,000 shares authorized,
2,039,500 shares issued and outstanding 2,040
Additional paid-in-capital 8,564,741
Retained deficit (8,785,132)
Treasury Stock (600)
Note receivable (437,500)
-----------
Total stockholders' equity (645,081)
-----------
Total liabilities and stockholders' equity $ 4,721,201
===========

The accompanying notes are an integral part of this balance sheet.

F-2

<PAGE>

INTERIORS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995

1996 1995
----------- -----------
NET SALES $ 5,378,761 $ 5,155,275

COST OF GOODS SOLD 3,558,733 3,076,950
----------- -----------

Gross profit from continuing operations 1,820,028 2,078,325

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,611,812 1,820,545
----------- -----------

Operating expenses 3,611,812 1,820,545
----------- -----------

Income (loss) from continuing operations
before interest and provision for taxes (1,791,784) 257,780

INTEREST EXPENSE (including financing charges) 538,497 236,988
----------- -----------

Income (loss) from continuing operations
before provision for taxes (2,330,281) 20,792

PROVISION FOR (BENEFIT FROM) INCOME TAXES 17,859 (100,000)
----------- -----------

Income (loss) from continuing operations (2,348,140) 120,792

DISCONTINUED OPERATIONS (Note 3)
Loss from operations of discontinued operations 789,332 938,546
Provision for disposal of discontinued operations 2,146,301
----------- -----------
Loss from discontinued operations 2,935,633 938,546

NET LOSS $(5,283,773) $ (817,754)
=========== ===========

NET LOSS PER COMMON STOCK

CONTINUING OPERATIONS $ (0.83) $ 0.06
DISCONTINUED OPERATIONS $ (1.03) $ (0.47)
----------- -----------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $ (1.86) $ (0.41)
=========== ===========

WEIGHTED AVERAGE NUMBER OF SHARES USED IN
COMPUTATION 2,837,293 1,977,158
=========== ===========

The accompanying notes are an integral part of these financial statements.

F-3

<PAGE>

INTERIORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995

<TABLE>
<CAPTION>
Series A Class A Class B
Preferred Stock Common Stock Common Stock Additional
---------------------------------------------------------------- Paid-In
Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994 817,500 $ 818 1,000,000 $1,000 $4,778,484
Proceeds from issuance of warrants $ 372,211
Conversion of Class B Shares 117,500 $ 117 (117,500) $ (117)
Purchase of warrants and related costs $ (46,425)
Proceeds from sale of Class A Common Stock 635,000 $ 635 $ 491,493

Treasury stock
Net loss
------------------------------------------------------------------------------
BALANCE, June 30, 1995 1,570,000 $1,570 882,500 $ 883 $5,595,763
Proceeds from issuance of Series A Preferred 460,000 $4,600 $1,553,032
Conversion of Class B Shares 330,000 $ 330 (330,000) $ (330)
Conversion of convertible debt into Class
WC Warrants $ 100,000
Issuance of Series A Common Stock for services 360,000 $ 360 $ 299,500
Conversion of Convertible Debt into Series
A Preferred 80,000 $800 $ 199,200
Issuance of shares to Italia - in Treasury 600,000 $ 600
Preferred stock dividend 55,247 $ 55 $ 165,686
Issuance to Decor Group, Inc. 200,000 $2,000 200,000 $ 200 $ (2,200)
Issuance to Laurie Munn 250,000 $ 250 $ 437,500
Private placement 50,000 $500 175,000 $ 175 $ 307,934
Other (13,000) $ (13) $ 13
Sale of treasury stock 180,000 $ 180 $ (90,437)
Escrow shares 1,250,000 $1,250 $ (1,250)
Net loss through June 30, 1996
------------------------------------------------------------------------------
BALANCE, June 30, 1996 790,000 $7,900 3,470,247 $3,470 2,039,500 $2,040 $8,564,741
==============================================================================

<CAPTION>
Retained
Earnings Treasury Note
(Deficit) Stock Receivable Total
--------- ----- ---------- -----

<S> <C> <C> <C> <C>
BALANCE, June 30, 1994 $(2,517,864) $ 2,262,437
Proceeds from issuance of warrants $ 372,211
Conversion of Class B Shares
Purchase of warrants and related costs $ (46,425)
Proceeds from sale of Class A Common Stock $ 492,128
Treasury stock $(270,257) $ (270,257)
Net loss (817,754) $ (817,754)
----------------------------------------------------------------
BALANCE, June 30, 1995 $(3,335,618) $(270,257) $ 1,992,341
Proceeds from issuance of Series A Preferred $ 1,557,632
Conversion of Class B Shares
Conversion of convertible debt into Class
WC Warrants $ 100,000
Issuance of Series A Common Stock for services $ 299,860
Conversion of Convertible Debt into Series
A Preferred $ 200,000
Issuance of shares to Italia - in Treasury $ (600)
Preferred stock dividend $ (165,741)
Issuance to Decor Group, Inc.
Issuance to Laurie Munn $ (437,500) $ 250
Private placement $ 308,609
Other

Sale of treasury stock $ 270,257 $ 180,000
Escrow shares
Net loss through June 30, 1996 $(5,283,773) $(5,283,773)
----------------------------------------------------------------
BALANCE, June 30, 1996 $(8,785,132) $ (600) $ (437,500) $ (645,081)
================================================================

</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>

INTERIORS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1996 AND 1995

<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(5,283,773) $ (817,754)

Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 680,137 630,670
Provision for losses on accounts receivable 63,244 35,000
Deferred income taxes (100,000)
Restructuring costs (76,000)
Non-cash provision for discontinued catalog operations 2,235,835
Non-cash satisfaction of debt (63,000)
Provision for issuance of stock 140,960
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, trade 178,743 (545,599)
Decrease (increase) in inventories (346,275) (516,990)
Decrease (increase) in prepaid catalog costs, prepaid
expenses and other current assets (47,512) (176,439)
Decrease (increase) in other assets 162,891 (489,606)
Increase (decrease) in accounts payable and accrued expenses 1,112,556 (169,600)
Increase (decrease) in prepaid sales & customer deposits (40,800) 1,996
----------- -----------
Net cash used in operating activities (1,143,994) (2,287,322)
including discontinued activities

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (543,272) (591,041)
----------- -----------
Net cash used in investing activities (543,272) (591,041)

----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 3,652,100
Repayments of debt and capitalized lease obligations (357,197) (2,630,535)
Net proceeds from sale of Series A preferred stock,
common stocks, and warrants 2,046,491 863,704
Purchase of warrants and related costs -- (46,425)
----------- -----------
Net cash provided by financing activities 1,689,294 1,838,844
----------- -----------
Net Increase (decrease) in cash 2,028 (1,039,519)
CASH, beginning of period 2,114 1,041,633
----------- -----------
CASH, end of period $ 4,142 $ 2,114
=========== ===========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 366,119 $ 283,904
Taxes $ 8,344 $ 5,283
NON-CASH FINANCING ACTIVITIES:
Conversion of convertible debt into Class WC Warrants $ 100,000 $ 0
Conversion of convertible debt into Class A Preferred Stock $ 200,000 $ 0
Issuance of Common Stock for a note receivable $ 437,500
Decor Acquisition $ 2,200
Other non-cash satisfaction of debt $ 63,000
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>

INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996 AND 1995

1. DESCRIPTION OF BUSINESS AND ORGANIZATION

Business Activity

The Company has experienced continuing operating losses and has a working
capital and net capital deficiency as of and for the year ended June 30, 1996.
As a result, the Company has taken certain significant steps to reposition
itself for growth and profitability in subsequent periods. These steps, although
necessary, led to significant charges against earnings during the year ended
June 30, 1996. A summary of the major steps follows:

aggregating $431,000; reserves against catalog inventory of $945,000 and
reserves against other catalog assets of $354,000.

o The Company has included in Selling, General and Administrative expenses
$140,000 for certain non-cash issuances of stock for services.

o The Company incurred increased financing charges aggregating $180,000 in
connection with extinguishment of certain debt.

The Company's management believes that these charges were necessary and will set
the stage for growth and profitability in subsequent periods. Management,
however, believes cash flows from operations may not be sufficient to support
future operations. Accordingly, the Company has identified action steps aimed at
improving cash flows and profitability. Such actions include a major investment
in Decor Group, Inc., an exclusive licensing agreement, staff reductions and
discontinuance of its catalog. (See Notes 3 & 4)

The Company is currently renegotiating its lease with the landlord for its
current facility. In addition the company is currently negotiating a collective
bargaining agreement covering substantially all its employees. Although
management believes that the outcome of these negotiations will not have a
material impact on its operation over the next year, there can be no assurance
that such deliberations will result in arrangements consistent with those
discussed elsewhere.

Although the Company believes that these initiatives will lead to improved
financial results, and positive cash flows no assurances can be provided that
this will be the case.

Organization

Interiors, Inc. and subsidiary (the "Company" or "Interiors" known formally as
A.P.F. Holdings, Inc. or " A.P.F.") was incorporated pursuant to the laws of
Delaware in February 1994. A.P.F. was incorporated pursuant to the laws of New
York in October 1990. A.P.F. was incorporated in order to reincorporate in the
State of Delaware. Effective March 1994, A.P.F. merged with and into the
Company. In October 1994, the Company purchased " Ceramic Production Corp." and
" Murano Crystal" to form a wholly-owned subsidiary, " Italia Collection, Inc."
("Italia").

F-6
<PAGE>

After giving effect to the discontinuance of the Catalog operation, the Company
has two operating divisions: 1) the Custom Framing Division which is engaged in
the manufacture of antique and contemporary picture frames for museums, art
galleries, designers, collectors, and frame retailers; and 2) the Wholesale
Division, which manufactures and markets a line of high-end traditional and
contemporary mirrors through upscale retail furniture and department stores. The
Wholesale Division is operated through a wholly owned subsidiary which
manufactures and markets ceramic vases and bowls, sculpture and lamps to upscale
furniture stores, furniture galleries, department stores, catalog and other
decorative accessory retailers.

Sales to the largest two customers totalled $801,000 and $652,000, or
15% and 12% respectively, of net sales for the year ended June 30, 1996.
Accounts receivable to these customers totalled $119,000 as of June.

The Company from time to time entered into transactions with related parties
(See Note 11). To the extent that the Company is unable to attract and retain
qualified independent persons to serve on its board of directors, conflicts of
interest may arise due to these relationships.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated Financial Statements include the accounts of the Company and
its wholly-owned subsidiary, ("Italia Collection, Inc."). All intercompany
transactions have been eliminated.

Revenue Recognition

Revenue is recognized at the time custom work, wholesale, or catalog merchandise
is shipped or acceptance is acknowledged by the customer. Payments received for
merchandise not yet shipped or accepted are reflected within prepaid sales and
customer deposits, a current liability.

Prepaid Catalog Costs

Prepaid catalog costs consist primarily of production and mailing costs, which
are deferred and amortized over the period of expected revenue stream (estimated
based upon historical results for similar catalogs and circulation levels) of
the related catalog from the date the catalog is mailed, not exceeding one year.
The prepaid catalog asset was fully written off in the amount of $486,000, as
part of the discontinuance of the Catalog Division. Catalog costs expensed are
included in the loss from discontinued operations for the years ended June 30,
1996 and 1995 in the amount of $529,000 and $1,106,000, respectively.

Inventories

Inventory is valued at the lower of cost or market, with cost determined using
the first-in, first-out method. Finished goods consist of those items available
for shipping through the Wholesale Division. Bartered inventory acquired is
valued at the original cost of the inventory to the Company, which is determined
to be the lower of cost or market.

Property and Equipment

Property and equipment is stated at cost. The cost of additions and improvements
and the costs incurred in the construction of castings and the related master
molds are capitalized and expenditures for repairs and maintenance are expensed
in the period incurred. Depreciation and amortization of property and equipment
is provided utilizing straight-line and accelerated methods over the estimated
useful lives of the respective assets as follows:

Years
-----
Machinery and equipment 3 - 10

F-7
<PAGE>

Furniture and fixtures 7 - 10

Leasehold improvements are amortized over the shorter of the remaining term of
the lease or the useful life of the improvement utilizing the straight-line
method.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this
method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax bases of exiting
assets and liabilities. Deferred income taxes have been provided for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities (See Note 13).

Goodwill

In connection with the acquisition of Italia, amounts were paid in excess of the
fair market value of the assets acquired. These amounts have been recorded as
goodwill and are being amortized over 10 years. It is the Company's policy to
evaluate the life and amount of goodwill annually. Such evaluations are based on
current market conditions and expected future cash flows.

Use of Estimates in Preparation of the Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires of management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from changes in these estimates.

Net Loss Per Share of Common Stock

Net loss per share of common stock was computed based on the weighted average
number of Class A and Class B shares outstanding. For the two years in the
period ended June 30, 1996, no common stock equivalents were included in the
computation since the effect would be antidilutive.

Fourth Quarter Adjustments

The Company recorded approximately $3,654,000 in losses during the fourth
quarter of fiscal 1996. The losses were primarily attributable to the
discontinuance of the Catalog Division ($2,935,633), the write down of inventory
based on the physical count ($1,093,000), and write-off of certain other assets
($79,200).

3. DISCONTINUATION OF OPERATIONS OF INTERIORS CATALOG DIVISION

On March 31, 1996, the Board of Directors, decided to discontinue the Company's
catalog operations because of declining revenues and high operating costs. As a
result, a charge against earnings of approximately $2,200,000, was recorded at
June 30, 1996. For the year ended June 30, 1996, losses from the discontinued
catalog operations totaled $789,000. The Company plans to fully carry out its
plan to discontinue the catalog operation within one year from March 31, 1996.
As of June 30, 1996, the Company has assets and accrued expenses totaling
$319,000 and $410,000 respectively. The Company plans to wind down operations by
filling existing orders and possibly mailing one final catalog as a "close-out
sale" to liquidate inventory. The statement of operations for the year ended
June 30, 1995 has been restated as if the Company's catalog operations had been
discontinued at the beginning of year ended June 30, 1995.

F-8
<PAGE>

The following is a detail of income from discontinued operations for the year
ended June 30, 1996 and 1995:
June 30, 1996 June 30,1995
------------- ------------
Revenue $ 742,640 $ 1,895,011
Cost of Goods Sold 408,452 703,458
----------- -----------
Gross Margin 334,188 1,191,553

Selling, General & Admin. 1,078,642 2,055,773
Interest Expense 44,878 74,326
----------- -----------
Net Loss from Discontinued Operations $ (789,332) $ (938,546)
=========== ===========

4. ACQUISITIONS, DISPOSITIONS AND STRATEGIC ALLIANCES

1996 Transactions

Part of the Company's long-term plan for growth includes either the acquisition
of or entering into strategic alliances with unrelated companies in the
decorative accessories industry to maximize market potential. For this purpose,
pursuant to a March 3, 1996 agreement relating to the capitalization of Decor
Group, Inc., ("Decor"), Decor issued to the Company 500,000 shares of its Series
A Convertible Preferred Stock and an option to purchase 20,000,000 shares of its
Series B Non-Convertible Voting Preferred Stock (the "Option Shares") in
exchange for issuance to Decor by the Company of 200,000 shares of its Class A
Common Stock and 200,000 shares of its Series A Convertible Preferred Stock and
a guarantee with respect to certain indebtedness should such indebtedness become
necessary. Decor has entered into an asset purchase agreement (the "Agreement")
with Artisan House, Inc. ("Artisan House") to purchase substantially all of the
operating assets, and assume certain liabilities, of Artisan House for an
aggregate purchase price of $3,526,400, subject to certain adjustments. Decor
expects to close on the Agreement prior to, or contemporaneously with, its
public offering. Artisan House, located in Los Angeles, California and founded
in 1964, is engaged in the design, manufacturing, and marketing of metal wall,
table and freestanding sculptures. Management believes that Artisan House's
products bridge the gap between high priced gallery art and mass produced

decorative pieces. Artisan House products retail from approximately $100 to over
$400. The primary goal of Artisan House is to supply a broad spectrum of design
driven sculpture and decorative accessories at moderate prices. The measurement
date for the shares provided and received has not been determined at this time
because at the time of issuance there was no assurance that the transactions
contemplated by either Company (i.e., acquisition of Artisan by Decor, public
funding for Decor) could be executed. Accordingly, the shares issued and
received have been reflected in the accompaning financial statements at par
value. Upon completion of Decor's public offering and acquisition of Artisan,
the Company will establish its investment in Decor at the then fair market value
of the shares invested.

The Company exercised its option to purchase the Option Shares in September
1996, for total cash consideration of $2,000. Concurrent with the exercise of
this option, the Company executed a Voting Agreement (the "Voting Agreement") to
vest the power to vote the Option Shares in a Voting Trust (the "Voting Trust").
The Voting Agreement will expire on December 31, 1997. The Voting Trust 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. Conversion of the 500,000 shares of
Series A Convertible Preferred Stock into common stock would give the Company
approximately 88.6% of the voting stock of Decor as of the date of this filing.
Decor is planning a public offering of certain of its securities during October
1996. After this public offering is effective, the Company will own
approximately 86.6% of the total voting stock of Decor. The holding in Decor
will be recorded on the Company's financial statements under the equity method
of accounting until such time the Company obtains unconditional and effective
control of Decor, which is expected to occur upon the expiration of the Voting
Agreement.

F-9
<PAGE>

Pursuant to a March 31, 1996 agreement relating to the capitalization of Decor,
Laurie Munn, wife of the Company's President and Chief Executive Officer
purchased and was issued certain shares of the Common Stock of Decor for $8,000
representing less than 1% of outstanding stock after Decor's proposed public
offering. Ms. Munn was issued 200,000 common shares of Decor.

The Company has executed a management agreement with Decor, whereby the Company
will provide management and administrative support for the companies acquired by
Decor. At June 30, 1996, approximately $19,000 of fees were accrued by the
Company for such services.

During March 1996, Laurie Munn, wife of the Company's President and Chief
Executive Officer, was issued 9 of the outstanding 100 Common shares of Lance
Acquisition Corp. ("LAC") which acquired the assets of The Lance Corporation
("Lance") a Massachusetts manufacturer and distributor of various products for

the giftware and collectibles marketplace. The Company and LAC entered into an
agreement whereby each entity will guarantee certain liabilities of the other.
As of June 30, 1996, the Company guaranteed $631,000 of LAC debt which was
collateralized by $971,000 of accounts receivable. Subsequently, LAC disposed of
its interest in Lance, and has finalized the terms of transition with the new
owners and existing secured creditors. LAC will be dissolved subsequent to June
30, 1996.

During April 1996, Italia moved its operations to the premises of The Lance
Acquisition Corporation (Lance). Italia occupied approximately 10,000 square
feet of space on a temporary basis. The Company is arranging for the sourcing of
Italia products from an established, third-party manufacturer. The Company
expects to fully complete such arrangements, and entirely vacate the premises of
The Lance Acquisition Corporation, during November 1996.

1995 Acquisition

In connection with the Company's plan to restructure its wholesale business, the
Company through its wholly owned subsidiary, Italia, acquired the business of
two privately held Florida-based companies. Murano and CPC, manufacture and
market upscale decorative ceramic accessories to the home furnishings industry
through a showroom in High Point, North Carolina and a network of sales
representatives. Closing on such acquisitions occurred on October 21, 1994.
These acquisitions were accounted for under the purchase method of accounting.
The Company assumed a deficit of approximately $200,000 for all of the
outstanding stock of the acquired companies. Accordingly, the excess of costs
over fair value has been recorded as goodwill and is being amortized over 10
years on a straight line basis. The Company also agreed to pay the seller on the
basis of a formula purchase price computed as a factor of future earnings from
continuing operations, subject to certain adjustments and offsets in cash and or
Class A Shares. This additional consideration will result in an additional
element of cost of the acquisition of Murano and CPC which will be recorded at
the time such payment is calculated. To date, no additional payments have been
made in connection with this transaction, as no amounts are considered to be due
by the Company under the original terms of the purchase agreement. The parties
are currently discussing the situation, and in the opinion of management, there
will no be any material adjustment to the Company's financial position or
results of operations as a result of the outcome of such discussions.

The Company's consolidated net loss for the year ended June 30, 1995 includes
approximately $144,000 of net income from the operations of Murano and CPC for
the period October 21, 1994 to June 30, 1995.

Had the Company acquired Murano and CPC as of July 1, 1994, the Company's net
loss for the year ended June 30, 1995 would have not been materially effected.

F-10
<PAGE>

New Agreements

In September 1996, the Company has entered into an exclusive and worldwide
three-year licensing agreement, expiring September 1999, to represent the

artwork of James Rizzi on ceramics, mirrors, and other decorative accessories
manufactured by the Company. Mr. Rizzi is among the world's best-selling living
artists. The Company expects customer shipments to begin during December 1996.
The licensor will receive a license fee of 15% of net sales proceeds, plus up to
5% of product manufactured for distribution to certain art galleries and picture
framers.

5. INVENTORIES

The components of inventory are as follows:

June 30, 1996
-------------
Raw materials $ 1,095,067
Work in process 395,958
Finished goods 230,279
-----------
$ 1,721,304
-----------

6. OTHER ASSETS

The components of other assets are as follows:

June 30, 1996
-------------
Showroom samples, net of accumulated amortization
of $ 73,158 $ 104,036
Frame mirror molds, net of accumulated amortization
of $ 142,714 69,964
Organizational costs, net of accumulated amortization
of $ 116,724 183,048
Goodwill, net of accumulated amortization of $ 66,707 167,016
Other 111,124
-----------
$ 635,188
-----------

Organizational costs incurred by the Company are being amortized over a five
year period. Frame mirror molds include costs related to the wholesale division
in order to construct prototypes and molds for a product line of antique
reproduction framed mirrors. These costs are amortized over the related product
life or five years, whichever is shorter.

7. ACCRUED LIABILITIES

June 30, 1996
-------------
Payroll and employee benefits $ 420,089
Rent 133,988
Deferred rent 56,472
Insurance 8,667
Union dues and benefits 98,000
Professional fees 190,760

F-11

<PAGE>

Interest 118,222
Other 91,927
-----------
$ 1,118,125

In March 1996, the Company executed an agreement with the Internal Revenue
Service (the "Service") for the payment of then outstanding payroll tax
liabilities totalling approximately $100,000. The agreement will require the
Company to pay approximately $9,000 per month for approximately 14 months.

As of June 30, 1996, the Company has unpaid payroll taxes, including the amounts
pursuant to the Service Agreement in the amount of approximately $ 325,000,
including interest and penalties.

8. NOTES PAYABLE

Notes payable: June 30, 1996
-------------

Bank line of credit(a) $ 910,000
Notes payable, due July 1,1995, to individuals bearing
interest at 16% payable quarterly (See Note 8 legal
matters) 300,000
Notes payable, due May 2016, to U.S. Small
Business Administration, bearing interest at 4%
payable monthly (b) 320,582
Notes payable due September 30, 1995 to
a Nevis, BWI Corporation, bearing interest at 18%,
payable monthly (c) 222,630
Financing Agreement with A Secured Lender (d) 763,361
-----------
$ 2,516,573
-----------

(a) In July 1994, The Company replaced its existing financing agreement with a
line of credit of up to $950,000 with a New York Bank following the Company's
Initial Public Offering in June 1994. Such borrowings are based on trade
receivables and inventory. The borrowings under such line of credit are secured
by a lien on all personal property and fixtures of the Company and personally
guaranteed by the President and Chief Executive Officer of the Company. In March
1996 the Company has agreed with the bank to reduce the line of credit by
$10,000 per month. As of the date of this filing, the line of credit has been
reduced to $870,000. This line of credit bears interest at a rate of prime plus
1% (9.25% as of the date of this filing.) The Company is also seeking
alternative sources of financing to ultimately replace the current line of
credit, but there can be no assurance it will be able to do so.

(b) In May 1993, Murano and CPC, secured Disaster loans from U.S. Small Business

Administration pursuant to promissory notes dated May 20, 1993 and May 21, 1993
in an aggregate amount of $ 339,300, which bears interest at a rate of 4% per
annum, were payable in equal monthly installments including principal and
interest and the balance of which would be due 23 years from the date of the
Notes. Such borrowings are secured by machinery and equipment and are personally
guaranteed by the former President and Vice President of Murano and CPC and
their spouses. On July 29, 1996 the Company received non-payment notification
from the U.S. Small Business Administration requiring full payment with
interest. As a result of the nonpayment notification, the balance of the Note is
classified as current. The Company currently is renegotiating the terms of the
loan with the U.S. Small Business Administration.

(c) On October 16, 1995, the Company entered into an agreement to restructure a
promissory note dated May 1995, with the principal amount of $500,000 bearing
interest at the rate of 18% per annum with the principal which was due and
payable in full on September 30, 1995 and a $150,000 note dated May 12,

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<PAGE>

1995, bearing interest at the rate of 18% payable monthly with 135% of the
principal which was also due and payable in full on September 30, 1995 with a
Nevis, BWI Corporation. On October 16, 1995 the parties agreed the Company owed
the lender, including interest and monthly extension fees of approximately
$155,000 through December 15, 1995, an aggregate amount of approximately
$805,000. Pursuant to the new agreement, the Company paid $405,000 to the Nevis
Corporation upon acceptance of the agreement. The Company also delivered a
Promissory Note in the principal amount of approximately $400,000, in extension
and replacement of the remaining balance due and payable of $180,000 on or
before December 15, 1995 and $220,000 on July 31, 1996. The new agreement also
stipulated that the lender shall sell the 180,000 shares of the Company's Class
A Common Stock, held in escrow by the lender, for $180,000 to an unaffiliated
third party. The proceeds of such sale will be applied against the note. The
stock sale took place during January 1996. In addition, during December 1995,
the Company issued to the lender 35,000 unregistered shares of Class A Common
Stock. Such shares shall be afforded a piggyback registration right for all
registration statements filed by the Company before July 31, 1996 and a one time
demand registration right commencing after July 31, 1996. Approximately $25,000
was charged against earnings during the quarter ended December 31, 1995 in
conjunction with the issuance of these shares. The promissory note is also
guaranteed by Max Munn, President and Chief Executive Officer of the Company.
The note is collateralized by 600,000 shares of the Company's Class A Common
Stock owned by the Company's Italia Collections Inc. subsidiary. The Company is
currently renegotiating the terms of the agreement with the lender to
restructure payment terms of principal and interest outstanding of $245,000.
There can be no assurance that the Company will successfully complete these
discussions.

(d) On February 15, 1995, Italia Collection entered into a Financing Agreement
with a New York based secured lender whereby Italia Collection may borrow
pursuant to an asset-related formula. The agreement remains in effect as of the
date of this filing, and may be terminated by either party upon notice to the
other and payment of the commitment fee for the unexpired term of this

agreement. Although the Company is currently pursuing alternative financing
agreements, as of the date of this filing, no such arrangements have been
finalized. According to the current agreement, the lender, upon confirmation of
shipments, will advance Italia Collection 70% of the receivable. Upon collection
of the receivable, the lender remits the balance of 30%. Interest is calculated
on the daily cash balance at the rate of prime plus 9% per annum (17.25% as of
the date of this filing) or a minimum of 18% per annum against a minimum monthly
defined compensation of $3,000. As of the date of this filing, the amount due to
the lender was approximately $750,000. In addition, the secured lender received
personal guarantees from Max Munn, President and Chief Executive Officer of the
Company, and his spouse. During February 1996, the Company's President and Chief
Executive Officer arranged for $160,000 additional financing from this lender at
the rates in effect for existing loans. The President and Chief Executive
Officer, and his spouse, have provided personal guarantees for this additional
funding, in addition to a security interest in certain real estate and Company
stock owned by his spouse. Of these proceeds, approximately $121,000 was used to
pay outstanding tax liabilities. The balance of the proceeds was loaned by the
Company to the President and Chief Executive Officer. A $38,000 demand loan
dated February 8, 1996, bearing an annual rate of interest of 18% was executed
by the President and Chief Executive Officer, and countersigned by the Chief
Financial Officer. On May 13, 1996, the Company's Board of Directors affirmed by
majority vote the loan by the Company to its President and Chief Executive
Officer. The principal balance of the loan will be partially offset by
unreimbursed business expenses. The remaining loan balance will be repaid by the
President and Chief Executive Officer to the Company, with interest as provided
above, by September 1997.

9. SHAREHOLDER'S EQUITY

Shareholder's equity

The Company's certificate of incorporation authorizes the issuance of 15,000,000
(adjusted to 30,000,000 of August 28, 1995 stockholders meeting) Class A shares,
$.001 par value, 2,500,000 Class B shares,

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<PAGE>

$.001 par value, and 2,500,000 (adjusted to 5,300,000 of August 28, 1995) shares
of Preferred Stock, $.01 par value. Each Class B share entitles the holder
thereof to five noncumulative votes per share on all matters on which
stockholders may vote at meetings of stockholders. The Class A and Class B
shares shall vote together as a single class on all matters. The Class B shares
are convertible on a one-for-one basis at any time after issuance at the option
of the holder into Class A shares. The issuance of additional Class B shares
could, under certain circumstances, have the effect of delaying or preventing a
change in control of the Company and may adversely affect the voting and other
rights of Class A shares. The Preferred Shares are convertible on a three to one
basis at any time after issuance at the option of the holder into Class A
shares.

In June 1994, the Company issued 517,500 shares of Class A Common stock, par
value $.001 per share. 460,000 Class WA warrants to purchase Class A shares and

Class WB warrants, and 258,750 Class WB warrants to purchase Class A shares. The
net proceeds from this Offering were approximately $1,600,000.

In September 1995, the Company issued 460,000 shares of Series A, 10% Cumulative
Convertible Preferred Stock ("Preferred Stock") and 230,000 Redeemable Class WC
Warrants ("Warrants") to purchase Preferred Stock at the exercise price of $5.50
per share. The net proceeds from this Offering were approximately $1,633,000,
including over-allotments. Each share of Preferred Stock is convertible,
commencing one year from the date of issue, subject to adjustment, into three
shares of Class A Common Stock of the Company.

On April 4, 1996, the Company's Board of Directors resolved to issue 250,000
shares of the Company's Class B Common Stock to Laurie Munn, wife of the
Company's President and Chief Executive Officer. This issuance is in
consideration for a down payment of $250, Ms. Munn's 6.6% note to the Company
providing for principal of $437,500 to be paid to the Company in five equal
annual installments of $105,561.90, and Ms. Munn's guaranty and pledge of her
assets for certain Company debt. The shares were issued to Ms. Munn on April 8,
1996. A Promissory Note and Security Agreement, whereby the shares will
collateralize the Promissory Note, was executed by the Company and Ms. Munn
pursuant to these terms.

In April 1996, the Company's investment banking firm arranged for the private
placement of 175,000 shares of the Company's Common A Stock and 50,000 shares of
the Company's Series A Preferred Stock. These shares, all of which bear a
restrictive legend, were issued on April 24, 1996 to various independent
investors (the "Investors") generating gross proceeds of $431,251. The Company
realized net proceeds of $310,609 which was used to pay certain outstanding
liabilities. Commencing thirty (30) days following the date of the close of the
private placement, any of the Investors had the right to demand in writing (the
"Demand Notice") that the Company file a registration statement with the
Securities and Exchange Commission (the "Commission") which shall cover the
shares and allow the Investor to sell the shares to the public. Within fifteen
(15) days following receipt of the Demand Notice, the Company is required to
file such registration statement and use its best efforts to have such
registration statement declared effective by the Commission and such state
securities regulators as reasonably requested by the Investor. The Company also
agreed to include the shares in its next registration statement.

The Company has not paid and does not anticipate paying any cash dividends on
its Class A Shares, Class B Shares, or Series A Preferred Shares in the
foreseeable future, but instead intends to retain all working capital and
earnings, if any, for use in the Company's business operations, and in the
expansion of its business. In February 1996, the Company's Board of Directors
declared a stock dividend equivalent to $0.25 per share to its Series A 10%
Cumulative Convertible Preferred Stockholders of record as of the close of
business on February 23, 1996 (the "Record Date".) Payment was made on March 1,
1996 by the issuance of 0.10231 of a share of the Company's Class A Common Stock
for each share of Series A Preferred Stock held of record on the Record Date.
Accordingly, 55,247 shares of the Company's Class A Common Stock was issued for
this purpose. Retained earnings was charged $165,741 in March 1996 in
conjunction with the issuance of these shares.

Pursuant to a July 1996 agreement (the "Forfeit Agreement") between the
Company's President and CEO's wife and the Company's underwriters ("VTR"), in
consideration for the release of the Company's restrictions on issuing shares of
capital stock, the wife may be required to forfeit her equity holdings (519,750
Class A Shares and 519,750 Class B Shares) to the Company if pre-tax earnings
fall below $300,000 and $366,000 for the years ending June 30, 1997 and 1998
respectively.

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<PAGE>

Conversions and Stock Grants for Services

On November 23, 1994, the Company borrowed the sum of $225,000 from Ekistics
Corp., a Bahamian corporation, pursuant to a promissory note due March 30, 1995,
together with interest at the rate of 14% per annum and a 5% financing charge.
In April 1995, the Company paid $25,000, plus interest on account of the
principal amount of the said Note and entered into a revised note for the
$200,000 balance with such revised Note providing for payment of principal on
October 20, 1995, having an interest rate of 14% per annum and being convertible
into 80,000 shares of Preferred Stock and 40,000 Class WC Warrants. On December
15, 1995, this conversion took place. The 80,000 Preferred Shares and 40,000 WC
Warrants were registered in a Registration Statement declared effective
September 18, 1996.

In June and July 1995, the Company delivered to unaffiliated parties promissory
notes in the aggregate amount of $300,000 with interest at the rate of 10% per
annum (the "10% Notes") and promissory notes in the principal amount of $100,000
with interest at the rate of 6% per annum (the "6% Notes".) The 10% Notes and 6%
Notes were each payable in June and July 1996 or the closing of the sale by the
Company of an issue of Preferred Stock, whichever is earlier. The 6% Notes were
convertible, in whole or in part, at the option of the holder, into a maximum of
2,000,000 WC Warrants entitling the holders for a period of five years to
purchase one share of Preferred Stock per Class WC Warrant at a price of $5.50
per share. These Warrants are redeemable by the Company. The Notes were secured
by a lien on the Company's assets. In September 1995 the Company repaid all 10%
Notes in full, plus all accrued interest for both the 10% Notes and 6% Notes.
All holders of 6% Notes have converted in full, into a total of 2,000,000 Class
WC Warrants, which were registered in a Registration Statement declared
effective by the Securities and Exchange Commission on September 18, 1995.

In February 1996, the Company's Board of Directors approved the issuance to Sol
Munn, Uncle of the President, of 150,000 shares of the Company's Class A Common
Stock, in consideration for past consulting services provided.

Effective June 30, 1996, the Company entered into a consulting agreement with
Morris Munn, father of the Company's President and Chief Executive Officer, in
exchange for certain future services (See Note 10-Consulting Arangements). As
part of this agreement, over the subsequent five-years, the Company will pay Mr.
Munn $54,000 per annum in equal bi-weekly installments, and issue to Mr. Munn
options to purchase up to 350,000 shares of the Company's Series A Preferred
Stock. These options were fully exercised during July to September 1996,
generating net proceeds to the Company totaling $787,500.

Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company and sister of the President and
Chief Executive Officer, the Company issued to Ms. Stevens 50,000 shares of the
Company's Class A Common Stock. The Company plans to register these securities
with the Securities and Exchange Commission no later than November 1996. Also
pursuant to the Settlement, the Company issued to Michael Levine as escrow agent
(the "Escrow Agent") 1,250,000 unregistered shares of the Company's Class B
Common shares (the "Escrow Shares".) The Escrow Shares shall not be voted by the
Escrow Agent, unless the Company defaults on its obligations under the
agreement. Upon satisfaction of such obligations, the Escrow Shares shall be
returned by the Escrow Agent to the Company.

F-15

<PAGE>

An aggregate of $300,000 was recorded by the Company as expense related to the
aforementioned stock issued to consultants and others for services. These
charges were based upon the fair market value of the shares on the respective
dates granted.

See Note 8 and Note 10 for additional issuances of stock for services.

Warrants

In September 1995, the Company lowered the exercise price of the Company's Class
WA Warrant to $1.50 per share and arranged to place 180,000 shares of the
Company's Class A Common shares which were previously sold pursuant to a
"Regulation S" private placement into escrow. These shares were sold in January
1996 to unrelated parties pursuant to a restructuring of a note payable by the
Company to the holder of these shares as discussed below. On July 16, 1996, the
Company filed a Registration Statement with the Securities and Exchange
Commission to register the Class WA Warrants and underlying Class A Common
shares. The Commission declared this Registration Statement effective on July
19, 1996. During August and September 1996, 578,000 of the Company's Class WA
Warrants were exercised at $1.50 per warrant, generating proceeds to the Company
totaling $867,000.

In January 1996, the Company's Board of Directors elected to lower the exercise
price of the Company's Class WB Warrant to $2.00 per Class A Common share,
subject to the filing and effectiveness of a Registration Statement with the
Securities and Exchange Commission. Such Registration Statement was filed with
the Commission on July 16, 1996 and declared effective on July 19, 1996.

Decor Group Inc. Stock Transaction (See Note 4)

Stock Option Plans

The 1994 Plan. On June 20, 1994, the Company adopted the Interiors, Inc. 1994
Stock Option and Appreciation Rights Plan (the "1994 Plan"), which provides for
the granting of options to officers, employees and consultants to purchase not
more than an aggregate of 250,000 Class A Shares. Directors of the Company are
not eligible to participate in the 1994 Plan. The 1994 Plan provides for the
grant of options intended to qualify as "incentive stock options" under the
Internal Revenue Code of 1986, as amended (the "Code") as well as options which
do not so qualify.

F-16
<PAGE>

optionee owns more than ten percent of the Class A Shares of the Company at the
time of grant). Additionally, with respect to incentive stock options, the
option price may not be less than 100% of the fair market value of the Class A
Shares on the date of the grant (110% if the optionee owns more than ten percent
of the Class A Shares of the Company at the time of grant). The fair market
value of the Class A Shares will be determined by the Board or the Committee in
accordance with the 1994 Plan as follows: If the Class A Shares are not listed
and traded upon a recognized securities exchange, on the basis of recent
purchases and sales of Class A Shares in arms-length transactions or based on
the last reported sale or transaction price for such stock on the date of grant
or, if the shares are traded on a recognized securities exchange or quoted on
the NASDAQ National Market System upon the basis of the last reported sale or
transaction price on the date of grant or, if the shares were not traded on such

date, on the date nearest preceding that date. Subject to certain limited
exceptions, options may not be exercised unless, at the time of exercise, the
optionee is in the service of the Company.

On September 16, 1994, the Board of Directors granted Incentive Options to
purchase an aggregate of 159,000 Class A Shares under the 1994 Plan at an
exercise price equal to the fair market value of the shares on the date of
grant, or $3.50 per share, to 23 employees and Incentive Options to purchase
25,000 Class A Shares to Ann Stevens, then Executive Vice President of the
Company and wife of then Company President, Theodore Stevens, at 110% of the
fair market value or $3.85 per share. Of such options, options to purchase
75,000 Class A Shares were granted to Max Munn, now President and Chief
Executive Officer of the Company, and Ann Stevens, then Executive Vice President
of the Company, and Mr. Munn's sister. In addition, on October 5, 1994 the Board
of Directors granted Incentive Options to two employees to purchase an aggregate
of 20,000 Class A Shares at exercise prices equal to the fair market value of
the shares or $3.38 per share. With respect to each such grant, 25% of such
options will vest each year commencing on the first anniversary of the grant.

The Director Plan. On June 20, 1994 the Board of Directors approved the 1994
Director Stock Option and Appreciation Rights Plan (the "Director Plan"). The
Director Plan was adopted to provide an incentive to Directors through automatic
and discretionary grants of stock options. The Director Plan provides for the
grant of options intended to qualify as "incentive stock options" under the Code
as well as options which do not so qualify.

The Director Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). Options under the Director Plan may
be granted to each person who is a Director of the Company on the date of grant.
All Directors of the Company are eligible to receive options under the Director
Plan.

securities exchange, on the basis of recent purchases and sales of Class A
Shares in arms-length transactions or

F-17
<PAGE>

based on the last reported sale or transaction price for such stock on the date
of grant or, if the shares are traded on a recognized securities exchange or
quoted on the NASDAQ National Market System upon the last reported sale or
transaction price on the date of grant or, if the shares were not traded on such
date, on the date nearest preceding that date. Each option granted under the
Director Plan expires ten years after the date of grant, unless a lesser period
is specified by the Committee.

In the event an optionee ceases to be a Director of the Company for any reason
at a time when he holds an option, he may exercise only such options as are
exercisable at the time he ceases to be a Director, within the original term of
the option. Options which are not exercisable at the time an optionee ceases to
be a Director shall terminate. In the event an optionee dies, the Director Plan
provides for the exercise of an option on behalf of the deceased Director.

At June 30, 1996, pursuant to the execution of a Consulting Agreement between
the Company and Morris Munn, the father of the Company's President and Chief
Executive Officer, the Company granted to Morris Munn an option to purchase up
to 350,000 shares of the Company's Series A Preferred Shares at a net exercise
price of $2.25 per share. The Company recorded charges against earnings of
$87,500 at June 30, 1996 in conjunction with the issuance of these options.
Subsequent to June 30, 1996 all 350,000 of these options were exercised,
generating proceeds to the Company of $787,500.

At June 30, 1996, no other options have been granted. At June 30, 1996, an
aggregate of 209,000 options are exercisable at prices ranging from $3.50 to
$3.85.

At June 30, 1996, certain warrants to acquire Company securities are
outstanding: a) 3,760,000 Class WA Warrants exercisable at $1.50 to acquire one
Class A Common Share and one Class WB Warrant, of which 578,000 such warrants
have been exercised subsequent to June 30, 1996, b) 258,750 Class WB Warrants
exercisable at $2.00 to acquire one Class A Common Share, and c) 2,270,000 Class
WC Warrants exercisable at $5.50 to acquire one Series A Preferred Share.

Except as otherwise set forth herein, the Company has no material commitments
for capital expenditures. In order to fund growth over the long term, the
Company anticipates possible future issuance of its securities resulting in
further dilution to its security holders.

10. COMMITMENTS AND CONTINGENCIES

Operating Leases

On January 16, 1991, the Company entered into a sublease agreement that provides
for the leasing of a site which serves as the Company's principal office and
manufacturing facility. The term of the sublease expires December 31, 1996. This
lease requires minimum annual lease payments of approximately $265,000. The
Company is currently negotiating the renewal of this lease.

F-18
<PAGE>

The Company entered into a lease on February 1, 1993 for a 1,800 square foot
Manhattan, New York showroom. The lease expires January 3, 2003, and requires
rent payments of approximately $78,000 per annum.

The Company entered into a lease on August 31, 1995 for a 5,739 square foot
Philadelphia, Pennsylvania showroom. The lease expires on August 31, 2000, and
requires rent payments of approximately $30,000 per annum.

Italia occupies approximately 1,750 square feet at International Home
Furnishings Center in High Point, North Carolina, pursuant to a lease dated May
1, 1993. The term of the lease is five years and requires minimum annual rent
payments of approximately $26,500.

In addition, on March 28, 1996 the Company's Italia operation was closed in
Hialeah Gardens, Florida and the product line was out-sourced to Lance
Corporation in Hudson, Massachusetts.

Future minimum lease payments under operating leases are as follows:

1997 $ 265,837
1998 130,475
1999 110,299
2000 111,648
2001 89,914
Thereafter 180,154
----------
$ 888,327
----------

Rent expense charged to operations, which includes escalation charges, for the
years ended June 30, 1996 and 1995, amounted to $408,458 and $405,945,
respectively.

Union Agreement

Effective April 1, 1991, the Company signed a three-year (with an additional
two-year automatic renewal) union contract for its union members under the terms
of a collective bargaining agreement. The Company has received notice that the
two-year automatic renewal and the existing union contract will remain in effect
through April 1, 1996. The Company is currently negotiating the renewal of its
union contract. None of the Company's employees have been on strike, or
threatened to strike since the Company's inception and the Company believes its
relationship with all of its personnel is satisfactory.

Employment Arrangements

On October 27, 1995 the Company entered into a one-year employment agreement
with Robert Schildkraut, then Vice President, Operations with an annual base
salary of $120,000. The Agreement may be terminated by the Company with a
payment of 50% of the employee's salary remaining under the agreement or a
payment of six weeks salary in the event the employee resigns from the Company.
The Agreement also provides for the employee to be granted certain stock options
to purchase an aggregate of 100,000 Class A Shares, 50,000 of which were to be
granted and vested immediately at a price of $2.00 per share, exercisable in six
months from the date of grant, and any attempt to exercise these options during
the exercise period will terminate the options granted on September 16, 1994;
options to purchase 25,000 shares at a price of $4.00 per share to be granted on
the second anniversary; and options to purchase 25,000 shares at a price of
$5.00 per share to be granted on the third anniversary. The Agreement also
provides for a bonus program based on the Company meeting certain minimum profit
goals. In April 1996, the employment of the Vice President, Operations was
terminated. The Company settled its obligations to the employee during the
subsequent quarter. This settlement took the form of severance payments totaling
approximately $27,000. No securities have been issued to the employee as part of
the settlement.

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<PAGE>

On May 8, 1995, the Company entered into an employment agreement with Donald
Feldman, Vice President of Sales and Marketing of the Company. The Agreement is
for a term of four years beginning June 1995 and may be terminated by the
Company after the first year with payment of 80% of the employee's salary,
reduced by the employee's other income. The Agreement provides that the Vice
President of Sales and Marketing will be employed at a base salary of $117,500
plus a sales commission structure based on increases in net sales for the
Company. Mr. Feldman will be granted an option to purchase 10,000 shares of the
Company's Class A Common Stock for every full year under the employment
agreement at a price of $2.50 per share. Concurrent with the effective date of
Decor Group, Inc.'s ("Decor") initial public offering (See "Acquisitions and
Strategic Alliances."), the Company and Mr. Feldman plan to terminate Mr.
Feldman's Employment Agreement. Mr. Feldman will enter into a three (3) year
employment agreement with Decor at such effective date.

As part of the Italia acquisition during fiscal year ended June 30, 1995, the
Company entered into various consulting and employment agreements aggregating
$176,000 per annum. The agreements were subject to termination at any time by
Italia for reasons specified in the agreements. In July 1995, the employment

agreement for the President of Italia, as well as all other agreements, were
terminated by the Company.

Refer to Legal Proceeding Section of this Note for additional disclosure.

Consulting Arrangements

Effective January 4, 1994, the Company entered into a two year Marketing and
Organizational Agreement (the "Marketing Agreement") with Robert M. Leopold.
Pursuant to the Marketing Agreement, Mr. Leopold will consult with and advise
the Company concerning its marketing plans, business operations, organization,
management, strategic planning, products and services, acquisitions, mergers,
and other matters. Mr. Leopold will be paid $9,375 each quarter in advance
together with reimbursement for expenses incurred not to exceed $200 per month.
In August 1995, the Company agreed to issue, at a future date, 60,000 Class A
Common Shares to Mr. Leopold in settlement of all current and future
liabilities, under this agreement. These shares, which bear a restrictive
legend, were issued April 16, 1996. In conjunction with the issuance of these
shares, approximately $55,000 was charged against earnings during the year
ending June 30, 1996.

On April 1, 1995, the Company entered into a consulting agreement with Morris
Munn, father of Max Munn, the Company's President and Chief Executive Officer
under which he will provide the Company with the following: design and
fabrication of new molds for sculpture; recommend, and implement improvements in
antiquing, woodworking, gilding and carving processes; and attend trade shows
for frame making and mold making. Fees under the agreement are payable at
$54,000 per annum for one year renewable at the Company's option. On June 30,
1996, Morris Munn's consulting agreement was extended for five (5) years.

Legal Proceedings

During April and May of 1995, Hide Tashiro commenced two law suits totaling
$225,000 (plus interest and attorneys' fees) against the Company and others. The
Company believes it has meritorious defenses against these claims. In April 1996
the plaintiff's motions for summary judgment were denied and the court held that
there was an issue of fact to be tried. The Company believes it has valid
defenses against these claims and is on the opinion the outcome on this matter
will not have a material impact on the Company's financial position or results
of operations.

On or about December 28, 1994, Merrill Corp. filed a complaint in the Supreme
Court of the State of New York, against the Company seeking payment for goods
sold and delivered to the Company. The matter was settled in July 1996.

F-20
<PAGE>

that the Company and its officers and directors undertake no action given the
uncertainty of the cost of collectibility, and ultimate legal liability of
Morgan Steel Ltd. either in the United States or the Isle of Man.

Gear Holdings, Inc. brought an action against the Company for the alleged breach
of a licensing agreement. The Company denies that it was a party to an agreement
with Gear, or that any sum of money is owed. The complaint demands sums Gear
allegedly would have received under the agreement in a sum to be determined, but
not less than $250,000.

In July 1996, all litigation brought against the Company (as itemized in the
four following paragraphs) and its principals and Directors by Ted Stevens, Ann
Stevens and Morris Munn was settled. Settlement of the lawsuits by Ted Stevens
and Morris Munn against the Company and its officers and Directors are subject
to Court approval.

On October 13, 1995, Ted Stevens, individually, as a Shareholder and Director
and Morris Munn, individually and as a Director and on behalf of themselves and
all other similarly situated Shareholders and Directors of the Company filed a
complaint in the Supreme Court of the State of New York, County of Westchester,
against the Company and its directors seeking unspecified damages and certain
changes in the composition of the Company's Board.

On December 1, 1995, Ted Stevens, husband of Ann Stevens, filed a complaint in
United States District Court, Southern District of New York, against Laurie Munn
and American Stock Transfer & Trust Company seeking, among other things, the
equitable recession 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
recession and denied Mr. Stevens' motion for a preliminary injunction and on
April 17, 1996, the Court dismissed the action for lack of subject matter
jurisdiction.

On December 12, 1995, Ann Stevens filed a complaint in the Supreme Court of the
State of New York, County of Nassau against the Company and certain Directors
seeking, among other things, compensatory and punitive damages arising out of
the alleged breach of Ann Stevens' Employment Agreement.

On April 23, 1996, Ted Stevens filed a complaint in the Court of Chancery of the
State of Delaware against the Company and certain Directors, seeking among other
things, the recession of a certain stock sale agreement between the Company and
Laurie Munn.

The litigation relating to the termination of the 1995 employment agreement
between Ann Stevens and the Company was settled by the execution of an
employment severance agreement (the "Agreement"). Pursuant to the Agreement, the
Company paid Ms. Stevens $63,000 for accrued and unpaid compensation upon
execution of the Agreement. Subsequently, for a period of seven years, the
Company will make bi-weekly payments to Ms. Stevens to total $72,000 for the
first year, $70,000 for each of the next three years, and $50,000 for each of
the final three years. As additional compensation, the Company will pay Ms.
Stevens for reimbursement of certain expenses, $50,000 in various installments
during the four months ending December 1996. The Company also entered into a
non-compete agreement with Ms. Stevens for which the Company will make bi-weekly
payments to Ms. Stevens to total $25,000 per year for seven years, plus

automobile and insurance costs for five years. Effective June 30, 1996 the
Company issued to Ms. Stevens 50,000 shares of the Company's Class A Common
Shares, which were previously committed to Ms. Stevens pursuant to her 1995
employment agreement. In connection with the Agreement, the Company issued
1,250,000 shares of its Class B Common Shares (the "Escrow Shares") to Michael
Levine, Esq., attorney of Ms. Stevens, as escrow agent (the "Escrow Agent"). The
Escrow Agent shall abstain from voting the Escrow Shares for any purpose, except
in the event of either the

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failure by the Company to adhere to the payment provisions noted above or the
financial insolvency of the Company. If either event occurs, Ms. Stevens will be
in a position to elect replacement Directors. Once the payment provisions in the
severance and non-compete agreements are satisfied, the Escrow Agent shall
release the Escrow Shares to the Company.

On August 13, 1996, the Munn Trust of 1975, Sol Munn and Evelyn A. Munn,
Co-Trustees commenced an action against the Company as well as Max Munn, the
Company's President and Chief Executive Officer and Laurie Munn, his wife
seeking monetary damages for the sum of $111,000. The Company considers the
complaint to be without merit and will vigorously defend the action

SJP Contractors of New York, Inc. commenced an action in September 1996 against
the predecessor entity of the Company, A.P.F. Holdings, Inc., and others for
$208,165 for work, labor and services allegedly performed in January 1991 for
the renovation of the Company's premises. The Company's answer pleads that
payment was made for the amount owed.

In September 1991, without admitting or denying the allegations, Max Munn, the
Company's President and Chief Executive Officer agreed with the Federal Trade
Commission (FTC) to the entry of a Consent Order in an action brought against
Mr. Munn and others; which action arose out of the advertising of certain
lithographs of original works of art as regards to whether or not the artist had
played a substantial role in the production of lithographs. The case was settled
before trial or discovery solely with entry of the above Consent Order; which
enjoins Mr. Munn from making certain representations in connection with the sale
of any works of art. The Consent Order also requires Mr. Munn for a period of
five years (which expired as of September 1996) as to the maintenance of certain
records as they concern the sale of certain lithographs.

The Company is subject to other claims and litigation in the ordinary course of
business. In management's opinion, such claims are not material to the Company's
financial position or its results of operations.

11. RELATED PARTY TRANSACTIONS

certain indebtedness arising from services rendered and loans provided by Decor
to A.P.F. in the amount of $114,000 to 114 shares of Preferred Stock of A.P.F.
In March 1994 such shares were transferred by Decor to Theodore Stevens and all
of such 279 shares of Preferred Stock were converted by Mr. Stevens into 124
shares of A.P.F. Common Stock. As a result of the Company's recapitalization,
the Company issued 1,000,000 Class B Shares (constituting all of the then issued
and outstanding Class B Shares of the Company) to Theodore Stevens in exchange
for all of the issued and outstanding Common Stock of A.P.F., the predecessor to
the Company.

In August 1995, Theodore Stevens, a Director of the Company, and Laurie Munn,
wife of Max Munn, President and Chief Executive Officer and a Director of the
Company, entered into an agreement whereby an existing option granted by Mr.
Stevens to Mrs. Munn to purchase 500,000 shares of Class B Common Stock at $3.50
per share was canceled and Mr. Stevens sold to Mrs. Munn 269,750 shares of Class
B Common Stock for $150,000 payable by an initial installment of $15,000 and a
promissory note for the balance of the purchase price payable in 15 years with
interest at the rate of 6.6% per annum. On December 1, 1995, Mr. Stevens filed a
complaint in United States District Court, Southern District of New York against
Ms. Munn seeking, among other things, the recession of this stock sale. In June
1996, the parties agreed to a settlement without either the recession of the
stock sale or the need for additional payments by any party to the transaction
(See Note 10).

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On July 7, 1994, Theodore Stevens, Max Munn and Ann Stevens, then respectively
President, Executive Vice President and Executive Vice President of the Company,
personally guaranteed the obligations of the Company under a Promissory Note
dated July 7, 1994 in the amount of $950,000 at an interest rate of prime plus
one percent (9.25% as of the date of this filing) to a New York bank. Pursuant
to terms of settlement involving various issues (See Note 10), in the event that
the Company's debt to the Bank is not repaid in full prior to March 31, 1997,
the Company will pay Ann Stevens, who is married to Mr. Stevens, .2083% of the
outstanding balance per month as compensation for her personal guarantee. As of
September 30, 1996, the outstanding balance of this note totals $870,000.

On February 15, 1996, the Company's Italia Collection subsidiary entered into a
Financing Arrangement with a New York corporation whereby Italia Collection may
borrow pursuant to an asset-related formula. The agreement remains in effect as
of the date of this filing and may be terminated by either party upon notice to
the other and payment of the commitment fee for the unexpired term of this
agreement. Interest is calculated on the daily cash balance at the rate of prime
plus 9% per annum (17.25% as of the date of this filing) or a minimum of 18% per
annum against a minimum monthly defined compensation of $3,000. As of the date
of this filing, the amount due to the lender was approximately $738,000. (See
"Liquidity and Capital Resources.") This Financing Arrangement has been
personally guaranteed by Max Munn, the Company's President and Chief Executive
Officer and his wife.

In October 1994, the Company borrowed the sum of $33,000 from the Vice President
and Chief Financial Officer of the Company. The amount due is evidenced by two
promissory notes dated October 27, 1994 and October 28, 1994 for $8,000 and
$25,000, respectively, which bore interest rates of 18% and 12% per annum,
respectively. The principal and interest were initially due November 17, 1994
and November 18, 1994, respectively, and have been extended to February 15,
1995. Unpaid sums bear interest at the rate of 18% per annum plus $160. In
April, 1995, the Company paid all principal and interest due on both promissory
notes.

In October 1994, the Company borrowed the sum of $8,000 from the President of
the Company. The amount due was evidenced by a promissory note dated October 27,
1994, which bore interest at a rate of 12% per annum. The principal and interest
were due November 17, 1994. In November 1994, the Company repaid the loan. In
addition, in November and December 1994, the Company advanced an aggregate
amount of $13,000 to the then Executive Vice President-Operations of the
Company, and now its President and Chief Executive Officer. This amount will be
repaid to the Company during the year ended June 30, 1997.

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<PAGE>

On February 8, 1996, the Company entered into a demand loan with the President
for $38,000, bearing interest at 18%.

Refer to Note 9, Shareholder's Equity and Note 10, Commitments and Contingencies
for additional related party transactions.

12. PROFIT SHARING AND DEFERRED COMPENSATION PLANS

In July 1991, the Company started a qualified Profit Sharing Plan for all
nonunion employees and a nonqualified Deferred Compensation Plan for certain key
employees. The Company has not made any contributions to the Qualified Profit

Sharing Plan or the Deferred Compensation Plan since its initial contribution
during the fiscal year ended June 30, 1992.

13. PROVISION (BENEFIT) FOR INCOME TAXES

The income tax provision (benefit) consists of:

Year Ended June 30,
-------------------
1996 1995
---- ----
Current income taxes:
Federal $ -- $ --
State and local 17,859 --
-------- ----------
17,859 --
Deferred income tax -- (100,000)
-------- ----------
$ 17,859 $ (100,000)
-------- ----------

The difference between the statutory and effective tax rate for the years ended
June 30, 1996 and 1995 results principally from a full reserve against any
benefit generated in 1996 (state taxes are provided) and immaterial
non-deductible expenses in 1995.

The benefit from the Company's net operating loss carryforward for Federal
income tax purposes in the amount of approximately $5,100,000 (which expire
through 2011) has been fully reserved for because future realization is not
considered to be "more likely than not". In addition, due to the changes in
ownership during the last three years and the future, utilization of the net
operating losses against future taxable income may be severely limited. The
deferred tax asset of approximately $1,800,000 is comprised primarily of net
operating losses and timing differences.

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<PAGE>
SIGNATURES

Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

INTERIORS, INC.

July 15, 1997 By: /s/ Max Munn
-------------------------------
Max Munn, President and
Chief Executive, Financial and
Accounting Officer