<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997.
-------------
COMMISSION FILE NO. 0-24352
---------
INTERIORS, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3590047
(STATE OF OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
320 WASHINGTON STREET
MT. VERNON, NEW YORK 10553
---------------------- ----------
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 665-5400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
----
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
---------------------------------------
(TITLE OF CLASS)
SERIES A 10% CUMULATIVE CONVERTIBLE PREFERRED STOCK, PAR VALUE $.01 PER SHARE
-----------------------------------------------------------------------------
(TITLE OF CLASS)
CLASS WA REDEEMABLE COMMON STOCK PURCHASE WARRANT
-------------------------------------------------
(TITLE OF CLASS)
CLASS WB REDEEMABLE COMMON STOCK PURCHASE WARRANT
-------------------------------------------------
(TITLE OF CLASS)
CLASS WC REDEEMABLE PREFERRED STOCK PURCHASE WARRANT
----------------------------------------------------
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF THE REGULATION S-B IS NOT CONTAINED IN THIS FORM, AND NO
DISCLOSURE WILL BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN
DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART
III OF THIS FORM 10-KSB OR ANY AMENDMENT TO THIS FORM 10-KSB. [ ]
ISSUER'S REVENUES FOR ITS MOST RECENT FISCAL YEAR WERE $4,796,000
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT, COMPUTED BY REFERENCE TO THE CLOSING PRICE OF SUCH STOCK AS
OF OCTOBER 10, 1997, WAS APPROXIMATELY $2,102.943
NUMBER OF SHARES OUTSTANDING OF THE ISSUERS COMMON STOCK AS OF OCTOBER 10,
1997, WAS 5,117,491 SHARES.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
NONE.
<PAGE>
PART I
- ------------------------------------------------------------------------------
ITEM 1 BUSINESS
- ------------------------------------------------------------------------------
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 Division ("A.P.F. Master Framemakers"),
in the manufacturing and marketing of traditional and contemporary picture and
mirror frames to fashion retailers, museums, art galleries, decorators,
collectors and frame retailers. The Company is qualified to do business in New
York under the name A.P.F. Master Framemakers.
The Company operates two showrooms, one at 75th Street in Manhattan, and one
at the Company's Mt. Vernon location. The sales generated from the Manhattan
showroom were approximately $2,804,000 and $2,920,000 for the year ended June
30, 1997 and 1996, respectively. A Philadelphia showroom which closed in June,
1997 generated sales of approximately $107,000 and $218,000 for the year ended
June 30, 1997 and 1996, respectively. Sales generated from the Mt. Vernon
showroom were approximately $1,735,000 and $806,000 for the year ended June
30, 1997 and 1996, respectively. These amounts include approximately $1.2
million in sales to a major fashion retailer, which constitutes approximately
25% of the Company's revenues for fiscal year 1997.
The Company believes that the decorative accessory supply industry will
consolidate as major retailers attempt to increase their "single-sourcing" in
order to reduce distribution and related expenses. The Company intends to
capitalize on the fragmented nature of the supply side of the home decorative
accessory industry and the consolidation of such industry through either
strategic alliances or the acquisition of manufacturers and distributors of
art-related decorative accessories. Through such means, the Company intends to
increase the number and nature of products manufactured by the Company,
thereby expanding its presence in the decorative accessories market. Such
products will be offered for sale by the Company through its existing
divisions 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,
fashion retailers, 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
There are approximately 15,000 picture frame retailers in the United States.
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 approximately $10,000 each during the last 3 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.
3
<PAGE>
ITALIA COLLECTION
On October 21, 1994 (the "Closing Date") the Company, through its then
newly-formed wholly-owned subsidiary, Italia Collection, Inc. ("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. 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 Stockholder. In July 1995, both the employment and consulting
agreements were terminated by the Company.
During April 1996, the Company moved the operations of Italia to the Lance
Corporation ("Lance") (a Delaware corporation), a Massachusetts manufacturer
and distributor of various products to the giftware and collectibles market.
Lance was acquired by the Lance Acquisition Corporation, owned by several
investors, some of which are investors of the Company. On December 16, 1996,
the Board of Directors decided to dissolve and discontinue Italia. On December
27, 1996, a Notice of Public Auction was distributed by the Company, advising
all interested parties that a public auction of all of the assets of Italia
consisting of molds, equipment, models, and inventory listed in a Security
Agreement entered into between Italia, as debtor, and United Credit
Corporation, as secured party, was to occur. The auction took place on January
10, 1997 and the Company was the successful bidder, thereby acquiring all of
the assets of Italia in consideration of a payment of $2,000 and the
assumption by the Company of the liabilities of Italia to United Credit
Corporation, which as of December 31, 1996 totaled approximately $806,000.
Pursuant to this debt assumption agreement the Company is obligated to issue
up to 100,000 shares of the Company's Class A Stock to the lender. To date, no
shares have been issued. Since the financial statements of Italia are
consolidated into those of the Company, Italia's liabilities have already been
reflected on the Company's Consolidated Financial Statements.
DISCONTINUATION OF OPERATIONS OF INTERIORS CATALOG
On March 31, 1996, the Company's Board of Directors decided to discontinue the
Company's catalog operations because of declining revenues and high operating
costs. As a result, a charge against earnings of approximately $2,100,000 was
recorded at June 30, 1996. For the twelve months ended June 30, 1996, losses
from continuing catalog operations totaled $789,332. The discontinuation of
the catalog operation was substantially completed by June 30, 1997. The
Company wound down operations by filling existing orders and commenced mailing
one final catalog as a "close-out sale" to liquidate inventory. Approximately
$319,000 of catalog related inventory was bartered for advertising credits.
The Company has not realized a gain related to this transaction.
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.
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)
4
<PAGE>
Gothic through the Renaissance and various Italian styles; (b) a product range
of 15th through 17th Century Spanish designs; (c) a variety of French "Empire"
styles; (d) Dutch and Northern European designs, generally 17th Century
styles; (e) various English designs, including Queen Anne and Georgian; (f) a
broad range of American styles, including 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.
ORGANIZATION
Interiors, Inc. (the "Company" or "Interiors" formally known as A.P.F.
Holdings, Inc. ("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. Interiors, Inc. was incorporated in order to reincorporate
in the State of Delaware. Effective March 1994, A.P.F. merged with and into
the Company. In October 1994, the Company purchased "Ceramic Production
Corp." and "Murano Crystal" to form a wholly-owned subsidiary, "Italia
Collections, Inc." During December, 1996, Italia Collections, Inc. was
dissolved.
After giving effect to the discontinuance of the Catalog operations, the
Company has two operating divisions: 1) the Custom Framing Division which is
engaged in the manufacture of antique and contemporary picture frames for
museums, art galleries, designers, collectors and frame retailers; and 2) the
Wholesale Division, which manufactures and markets a line of high-end
traditional and contemporary mirrors through upscale retail furniture and
department stores. The majority of the Company's sales are domestic. Sales to
the largest customer totaled approximately $1,175,000, or 25% of total
revenues for the year ended June 30, 1997.
MARKETING
The Company currently markets its custom picture frames to art galleries,
museums, fashion retailers, 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 two 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.
o The Company markets high-end frames for photographs as well as framed
mirrors to better fashion retailer, including several divisions of The
Limited.
SUPPLIERS
Substantially all of the picture and mirror frames sold by the Company are
manufactured by the Company in its facility in Mt. Vernon, New York. The
Company purchases wood, composite resins, gold leaf, Plexiglas, matboards and
other materials from a wide variety of sources, and has at least two, and
often more, suppliers for each item used in its manufacturing process, and is
not dependent upon any one supplier. The Company currently purchases from a
vendor base of more than 300 suppliers. While there are many suppliers of most
materials, the Company has chosen to limit the majority of its purchases to
the one or two vendors with whom it has developed long-term relationships. The
Company generally does not need to enter into contracts with its suppliers as
most merchandise is readily available from multiple sources.
5
<PAGE>
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 frame manufacturers 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 the Company.
The Company believes that its competitive advantage lies in its ownership of a
substantial number of models, tools, dies and molds developed from
museum-quality antiques and its continuing ability to manufacture quality
reproductions of those antiques. Management also believes that the Company is
further protected by what the Company considers to be its excellent reputation
with its customer base and management's estimation that the cost today (i.e. -
the difficulty) of obtaining antiques to reproduce, as well as the costs to
build tools, dies and molds, make the entry of meaningful competition
extremely difficult. Management believes that it would be difficult to build
such a collection of tools, dies and molds because of the cost of acquiring
antiques and the reluctance of museums and collectors to loan or dispose of
irreplaceable antiques and the difficulty in establishing a trained work force
of skilled crafts people.
However, there can be no assurance that such assets will continue to afford
the Company any competitive advantage. See "Manufacturing."
BACKLOG AND BACKORDERS
The Company has no backlog in its A.P.F. Master Framemakers division since the
nature of custom framemaking requires that frames be constructed only after
receipt of an order. Such custom orders are generally filled approximately
thirty days after receipt of the order. Wholesale orders to major national
accounts are filled in approximately 90 - 120 days. At June 30, 1997, open
orders totaled approximately $1,800,000.
PATENTS AND TRADEMARKS
The Company believes that its future success does not depend upon patents.
Instead, the Company depends, to a large extent, upon the technical competence
and creative skills of its personnel and on its unpatented proprietary
technology as well as its collection of tools, dies and molds. The Company
believes that it owns or has the right to use all proprietary technology
necessary to manufacture and market its existing and planned products. The
Company has no knowledge that it is infringing on any existing patent such
that it would be liable for material damages or be prevented from
manufacturing or marketing its products. In fact, most of the Company's
technology is process-related and may not be patentable. The decorative
accessory manufacturing industry is generally not technology driven, but is
more design and marketing driven; consequently there are few applicable
patents in this industry. In the event the Company's right to market any of
its products were to be successfully challenged, the Company 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 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.
6
<PAGE>
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. No current
requirements or requests are currently pending from any agency or
representative or any governmental authority.
EMPLOYEES
As of September 30, 1997, the Company had a total of 110 full-time employees,
of whom 90 are engaged in manufacturing activities. Effective April 1, 1996,
the Company extended a two-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 Company and the Union have agreed to extend the
current agreement to December 31, 1998. None of the Company's employees have
been on strike, or threatened to strike since the Company's inception and the
Company believes its relationship with all of its personnel is satisfactory.
ACQUISITIONS AND STRATEGIC ALLIANCES
Part of the Company's long-term plan for growth includes either the
acquisition of or entering into strategic alliances in the decorative
accessories industry to maximize market potential. For this purpose, pursuant
to a March 3, 1996 agreement relating to the capitalization of Decor Group,
Inc., ("Decor"), an affiliate of the Company, Decor issued to the Company
250,000 shares of its Series A Convertible Preferred Stock, which have since
been sold by the Company, and an option to purchase 10,000,000 shares of its
Series B Non-Convertible Voting Preferred Stock (the "Option Shares") in
exchange for issuance to Decor by the Company of 200,000 shares of its Class A
Common Stock and 200,000 shares of its Series A Convertible Preferred stock,
which has since been sold by Decor. Also, the Company exercised its option to
purchase the Option Shares in September 1996, for total cash consideration of
$2,000. Concurrent with the exercise of this option, the Company executed a
Voting Agreement (the "Voting Agreement") to vest the power to vote the Option
Shares in a Voting Trust (the "Voting Trust".) The Voting Agreement will
expire upon the earlier of February 7, 2007, or upon the Company's repayment
in full of its obligations to BH Funding, LLC, but not earlier than December
31, 1997. The Voting Trust comprises three individuals: the Company's
President and Chief Executive Officer (and also the Chairman of the Board of
Decor), and two Directors of Decor who are otherwise unrelated to the Company.
As part of the Company's investment in Decor, during the months of August and
September 1996, the Company purchased 54,934 shares of Decor's Series C
Non-Voting, Convertible, Preferred Stock at a cost of $824,000. In the
formation of Decor, the Company's intention was to create an affiliate with a
corporate identity clearly separate and distinct from that of the Company.
Decor was organized for the purpose of acquiring the business operations of
unrelated companies. On November 12, 1996 (the "Effective Date"), a public
offering by Decor of certain of its securities was declared effective by the
Securities and Exchange Commission. Subsequent to the effective date of
Decor's initial public offering, the Company owned approximately 79.6% of the
total voting stock of Decor. In December 1996, Decor declared and issued a
dividend on its common stock payable in the form of two (2) shares of common
stock for each one (1) share of common stock held as of the record date of
December 16, 1996. Each share of Decor's Series A and Series C Preferred stock
are convertible into three (3) shares of Decor's common stock effective
December 16, 1996. During February 1997, the Company sold its entire holdings
of Series A Convertible Preferred Stock to BH Funding, LLC. Assuming
conversion of the Series A Convertible Preferred Stock by BH Funding to common
stock, the Company will own approximately 77.5% of the total voting stock of
Decor subsequent to such sale and conversion. As of June 30, 1997, the holding
in Decor is recorded on the Company's financial statements at the market value
on November 12, 1996, the "Measurement Date" of the Company's trading
securities previously transferred to Decor during March 1996, plus acquisition
costs, less the proportionate value of securities sold during February 1997.
As of and effective on October 7, 1997, Decor declared a reverse stock split
of one new share of common stock for each 3 shares held.
In March 1996, Decor entered into an asset purchase agreement (the
"Agreement") with Artisan House, Inc. ("Artisan House") to purchase
substantially all of the operating assets, and assume certain liabilities of
Artisan House for an aggregate purchase price of $3,526,400, subject to
certain adjustments. Decor completed the Artisan House acquisition on November
18, 1996. Artisan House, located in Los Angeles, California and founded in
1964, is
7
<PAGE>
engaged in the design, manufacturing, and marketing of metal wall, table
and freestanding sculptures. Management believes that Artisan House's products
bridge the gap between high priced gallery art and mass produced decorative
pieces. Artisan House products retail from approximately $100 to over $400.
The primary goal of Artisan House is to supply a broad spectrum of design
driven sculpture and decorative accessories at moderate prices.
In May 1996, the Company entered into a two year Management Services Agreement
with Decor whereby the Company will advise Decor on the manufacturing, sale,
marketing and distribution of Decor's products as well as providing Decor with
accounting and administrative services and advice on strategic planning of
joint ventures, acquisitions, and other long term initiatives. Pursuant to
this agreement, the Company will be paid on an annual basis the greater of (1)
$75,000 or (2) 1.5% of excess cashflow as defined in the agreement. The
Company and Decor amended this agreement to increase this payment to $90,000
per annum. Additional transfers of funds from Decor to the Company will be
subject to the attainment by Decor of excess cash flow totaling $4,000,000 per
year through December 31, 1999. At June 30, 1997, the Company has a receivable
of approximately $76,000 associated with these fees.
The Company entered into an agreement effective June 1, 1997, with
Photo-2-Art, Ltd. ("P-2-A") a company which converts photographs into
large-scale canvas oil paintings, whereby the Company agreed to provide
consulting services and sell its canvas stretching division as well as related
assets to P-2-A in exchange for $600,000 in equity securities of P-2-A and
$50,000 in cash. This agreement was amended as of June 30, 1997 to reflect an
increase in value to $1,140,000. The Company now owns 270,000 shares of P-2-A
stock and 120,000 warrants to purchase additional stock at $4.50 per share.
The compensation received by the Company in this transaction is comparable to
the values received by unrelated investors in a recent private placement
transactions between those investors and P-2-A. In addition, P-2-A has agreed
to sublease approximately 21,000 square feet of office and manufacturing space
form the Company at an annual rental rate of $63,000 per year plus rent
escalations. The term of the sublease is from June 1, 1997 to December 31,
2001. In addition, the then current supply contract between the Company and
P-2-A has been amended and will continue for a term of seven (7) years. The
Company sold approximately $241,000 of frames and related services to P-2-A
during the period between January 1, 1997 through June 30, 1997. The sales to
P-2-A for the period prior to January 1, 1997 are neglicable.
- ------------------------------------------------------------------------------
ITEM 2 PROPERTIES.
- ------------------------------------------------------------------------------
The Company has its principal offices at 320 Washington Street, Mt. Vernon,
New York, where it leases approximately 70,000 square feet of administrative
offices, manufacturing and warehousing facilities and a factory showroom. A
five-year lease was executed on January 1, 1997 with 320 Washford LLC, the
owner of the facility. The Company's monthly base rent payments under the
sublease for the first year are approximately $16,000 per month. Thereafter,
annual escalation of the base rent is provided. For the year ended December
31, 2001, the monthly base rent payment will total approximately $21,000.
The Company also operates two specialty custom frame showrooms, which are in
Mt. Vernon and New York City. The Company occupies approximately 1,800 square
feet of showroom and office space at 172 East 75th Street in New York City
pursuant to a lease expiring January 31, 2003 between the Company and
Francesco Saggese. The lease requires the Company to pay rent at rates which
escalate 4% per year on February 1 and which rental is currently approximately
$6,200 per month.
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.
Photo-2-Art subleases approximately 21,000 square feet of office and
manufacturing space form the Company at an annual rental rate of $63,000 per
year plus rent escalations. The term of the sublease is from June 1, 1997 to
December 31, 2001.
- ------------------------------------------------------------------------------
ITEM 3 LEGAL PROCEEDINGS.
- ------------------------------------------------------------------------------
8
<PAGE>
During April and May of 1995, Hide Tashiro commenced two lawsuits, now
settled, in the Supreme Court of New York, Manhattan County, totaling
approximately $300,000, plus interest and attorney's fees, against the Company
and others. The Company claimed that Mr. Tashiro and his affiliates owed a
greater amount to the Company for earned royalties and commissions. The
complaint demanded payment by the Company for loans made by Mr. Tashiro. In
April 1996 the plaintiff's motions for summary judgment were denied and the
court held that there was an issue of fact to be tried. On June 30, 1997 the
Company, Hide Tashiro, Takehisa Nishijima, and Max Munn, President of the
Company, entered into a settlement agreement (the "Settlement Agreement")
whereby the Company would issue Mr. Tashiro 300,000 shares (the "Shares") of
the Company's unregistered Class A Common Stock in exchange and satisfaction
of all accruals due to and from the plaintiff. The Settlement Agreement
contains certain restrictions (commencing January, 1999, for a period of 10
months thereafter) on resale of the Shares as well as providing for certain
"piggy-back" registration rights.
On October 13, 1995, a lawsuit now settled, was brought by 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, a lawsuit, now settled was brought by Ted Stevens in
United States District Court, Southern District of New York, against Laurie
Munn and American Stock Transfer & Trust Company seeking, among other things,
the equitable recision of a stock sale agreement between Mr. Stevens and Ms.
Munn. On February 29, 1996, the Court held that Mr. Stevens did not have the
right to recision and denied Mr. Stevens' motion for a preliminary injunction
and on April 17, 1996, the Court dismissed the action for lack of subject
matter jurisdiction.
On December 12, 1995, a lawsuit now settled was brought by Ann Stevens 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, a lawsuit now settled, was brought by Ted Stevens in the
Court of Chancery of the State of Delaware against the Company and certain
Directors, seeking among other things, the recision of a certain stock sale
agreement between the Company and Laurie Munn.
The litigation relating to the termination of the 1995 employment agreement
between Ann Stevens and the Company has been settled by the execution of an
employment severance agreement (the "Agreement"). Pursuant to the Agreement,
the Company paid Ms. Stevens $63,000 for accrued and unpaid compensation upon
execution of the Agreement. Subsequently, for a period of seven years, the
Company will make bi-weekly payments to Ms. Stevens to total $72,000 for the
first year, $70,000 for each of the next three years, and $50,000 for each of
the final three years. As additional compensation, the Company will pay Ms.
Stevens for reimbursement for certain expenses, $50,000 in various
installments during the four months ending December 1996. The Company also
entered into a non-compete agreement with Ms. Stevens for which the Company
will make bi-weekly payments to Ms. Stevens to total $25,000 per year for
seven years, plus automobile and insurance costs for five years. As of June
30, 1996, the Company issued to Ms. Stevens 50,000 shares of the Company's
Class A Common Shares, which were previously committed to Ms. Stevens pursuant
to her 1995 employment agreement. The 50,000 Class A Common Shares are subject
to a "lock-up" agreement with VTR Capital Corporation, the Company's
investment bankers. As of June 30, 1996, the Company placed into escrow
1,250,000 shares of its Class B Common Shares (the "Escrow Shares") with
Michael Levine, Esq., attorney of Ms. Stevens, as escrow agent (the "Escrow
Agent"). The Escrow Agent shall abstain from voting the Escrow Shares for any
purpose, except in the event of either the failure by the Company to adhere to
the payment provisions noted above or the financial insolvency of the Company.
If either event occurs, Ms. Stevens will be in a position to elect replacement
Directors. Once the payment provisions in the severance and non-compete
agreements are satisfied, the Escrow Agent shall return the Escrow Shares to
the Company.
In July 1996, certain litigation, now settled, was brought against the Company
and its principals and Directors by Ted Stevens, Ann Stevens and Morris Munn,
as listed below, was settled. The litigation involved the manner in which
control of the Company passed from Morris Munn, the Company's founder, to Max
Munn, his son and the
9
<PAGE>
Company's current President and Chief Executive Officer. Ann Stevens is
Morris Munn's daughter, Max Munn's sister, and Ted Stevens wife. Both Ann and
Ted Stevens had been senior executives of the Company prior to October 1995.
At that date, their employment from the Company was terminated. Thus, the
litigation also involved the settlement between the Company and Ann Stevens
of her employment agreement in effect at the time of her termination from the
Company in October 1995.
In February 1997, the terms of the agreement with Ms. Stevens were modified to
provide for additional payments of $500 per month over 16 months, and to
provide for $6,000 as reimbursement for additional legal expenses.
In August 1996, a lawsuit, now settled, was brought by The Munn Trust of 1975,
Sol Munn and Evelyn A. Munn, Co-Trustees commenced an action in the Supreme
Court of New York , County of Suffolk against the Company as well as Max Munn,
the Company's President and Chief Executive Officer and Laurie Munn, his wife
for non-payment of $150,000 plus interest. The Company claims that any
obligation that it had pursuant to this matter has been satisfied by the
Company in the prior fiscal year and that any amounts that may be unpaid are
due solely by Mr. and Mrs. Max Munn. The Company has not guaranteed such
liabilities. This matter has been settled and releases were exchanged without
any payment by the Company or by the Munn Trust to the other.
In August 1996, SJP Contractors of New York, Inc. commenced an action in the
Supreme Court of New York, County of Westchester against the predecessor
entity of the Company, A.P.F. Holdings, Inc., and others for $208,165 for
work, labor, and services allegedly performed in January 1991 for the
renovation of the Company's premises. The Company's answer pleads that payment
was made for the amount owed and that it will prevail in the matter.
In July 1997, an action was brought against the Company and certain of the
Company's officers and directors, by Mary Stewart Lepp, in the United States
District Court for the Southern District of New York. Ms. Lepp, a former
employee of the Company, claims among other things, that she was discharged
because she was pregnant, and seeks compensatory and punitive damages in
unspecified amounts for alleged violations of various Federal and New York
State employment and discrimination laws. Management believes this claim to be
wholly without merit and that the claim will eventually be dismissed or
adjudicated in the Company's favor.
In July 1996, Gear Holdings, Inc. brought an action in the Supreme Court of
New York, Manhattan County, against the Company for the alleged breach of a
licensing agreement. The Company denies that it was a party to an agreement,
or that an agreement in writing exists with Gear, or that the Company owes any
sum of money to Gear. The complaint demands sums Gear allegedly would have
received under an agreement in a sum to be determined, but not less than
$250,000. The suit has remained dormant since inception and the Company
expects the plaintiff to discontinue the matter or for the matter to be
adjudicated in the Company's favor.
The Company and its Chief Executive Officer ("CEO") during fiscal year 1996
were involved in numerous lawsuits with various members of the CEO's immediate
family, certain of whom were Officers and Directors of the Company. All of
this litigation has been settled and all resulting charges were reflected in
the fiscal 1996 financial statements. In addition, as a component of the
settlement, the Company entered into various severance and non-compete
agreements discussed in Note ______. Reference is made to legal procedures
section of this Form 10-KSB.
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.
- ------------------------------------------------------------------------------
No matters were submitted to a vote of the holders of the Company's Common
Stock during the last quarter of its fiscal year ended June 30, 1997.
10
<PAGE>
PART II
- ------------------------------------------------------------------------------
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
- ------------------------------------------------------------------------------
Prior to the Initial Public Offering, there existed no public trading market
for any of the Company's securities. In connection with the Initial Public
Offering, the Company applied for and was granted inclusion of its securities
for quotation on The Nasdaq SmallCap Market. The Class A Shares and the Class
WA Warrants commenced quotation on The Nasdaq SmallCap Market on June 23, 1994
under the symbols "INTXA and INTXW", respectively, and the Class WB Warrants
commenced quotation on June 24, 1994 under the symbol "INTXZ." On September
18, 1995, the Company's Series A Preferred Shares and Class WC Warrants
commenced quotation under the symbols "INTXP" and "INTXL" respectively. While
the Company's securities are currently listed for quotation on The Nasdaq
SmallCap Market, there can be no assurance given that the Company will be able
to satisfy the requirements for continued quotation on The Nasdaq SmallCap
Market or that such quotation will otherwise continue; nor can there be any
assurance given that any market for the Company's securities that has
developed since completion of the Initial Public Offering or the Preferred
Stock Offering will continue or be sustained. See "Risk Factors - No Assurance
of Public Market or Continued Nasdaq Listing."
The following table sets forth, for the periods indicated, the average closing
bid prices, reported by The Nasdaq SmallCap Market, for the Class A Shares,
the Class A Warrants the Class B Warrants the Series A Preferred Shares, and
the Class WC Warrants for the periods such securities have been trading on The
Nasdaq SmallCap Market.
CLASS A COM CLASS WA WT CLASS WB WT SERIES A PFD CLASS WC WT
------------------------------------------------------------
FISCAL YEAR - JUNE 1995
- -----------------------
QUARTER ENDED - SEPT 94 4.72 1.81 0.60 N/A N/A
QUARTER ENDED - DEC 94 3.00 0.85 0.47 N/A N/A
QUARTER ENDED - MAR 95 2.32 1.09 0.25 N/A N/A
QUARTER ENDED - JUNE 95 1.69 0.72 0.12 N/A N/A
FISCAL YEAR - JUNE 1996
- -----------------------
QUARTER ENDED - SEPT 95 1.50 1.25 0.13 7.50 2.50
QUARTER ENDED - DEC 95 1.25 1.12 0.20 7.13 3.00
QUARTER ENDED - MAR 96 2.59 1.33 0.61 6.17 2.38
QUARTER ENDED - JUNE 96 3.55 1.39 0.83 6.00 1.93
FISCAL YEAR - JUNE 1997
- -----------------------
QUARTER ENDED - SEPT 96 2.86 2.11 1.09 6.29 1.79
QUARTER ENDED - DEC 96 2.41 1.81 0.75 7.31 1.54
QUARTER ENDED - MAR 97 1.42 0.88 0.50 4.63 1.33
QUARTER ENDED - JUNE 97 1.30 0.54 0.41 3.91 0.70
As of September 30, 1997, there were approximately 1,111 beneficial owners of
Class A Shares and three beneficial owners of Class B Shares. At this date,
there were 5,261,241 Class A Shares, 1,769,750 Class B Shares, 3,055,588 Class
WA Warrants, 845,150 Class WB Warrants, 1,147,060 Series A Preferred Shares
and 2,270,000 Class WC Warrants outstanding. There has been no change to the
number of outstanding securities issued as of the date of this filing. 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 September 30, 1997,
were $1-1/4 and $1-3/8 per Class A Share, respectively; $ 5/16 and $ 1/2 per
Class WA Warrant, respectively; $ 5/16 and $ 1/2 per Class WB Warrant,
respectively, $ 4 and $ 4-1/4 per Series A Preferred Share, respectively, and
$ 13/32 and $ 9/16 per Class WC Warrant, respectively.
11
<PAGE>
The Company has never paid and does not anticipate paying any cash dividends
on its Class A or Class B Shares in the foreseeable future, but instead
intends to retain all working capital and earnings, if any, for use in the
Company's business operations, and in the expansion of its business. See
"Liquidity and Capital Resources".
- ------------------------------------------------------------------------------
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
OVERVIEW
[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.]
Statements in this Form 10-KSB concerning the Company's business outlook or
future economic performance; anticipated profitability, revenues, expense or
other financial items; introductions and advancements in development or
products, and plans and objectives related thereto; and statements concerning
assumptions made or expectations as to any future events, conditions,
performance or other matters, are "forward-looking statement" as that term is
defined under the Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual
results to differ materially from those stated in such statements. The
auditors report therein contains an explanatory fourth paragraph with regard
to the Company's ability to continue as a going concern.
RESULTS OF OPERATIONS
Period Ended June 30, 1997 as Compared to Period Ended June 30, 1996
The Company's net sales from continuing operations for the fiscal year ended
June 30, 1997 decreased by $727,000 or 13.5% to $4,652,500 from $5,379,000 for
the fiscal year ended June 30, 1996.
Net sales for the A.P.F. Master Framemakers division for the year ended June
30, 1997 remained relatively flat as compared with the year ended June 30,
1996.
Wholesale sales breakdown as follows for the year ended June 30, 1997 and
1996:
1997 1996 PERCENTAGE CHANGE
------------- ---------------
Significant
Customers $ 2,089,000 $ 1,175,000 77.8 %
Italia 43,000 2,010,000 (97.9)$
------------- ---------------
TOTAL $ 2,132,000 $ 3,185,000 (33.1)%
============= ===============
The decrease in sales in the Italia subsidiary is a result of COMPANY TO FILL
IN. The increase in sales to the significant customers results from a
dedicated sales. (COMPANY TO CONFIRM ACCURACY)
The Company's cost of goods sold as a percentage of net sales was 66% for both
the years ended June 30, 1997 and June 30, 1996. During March 1997, pursuant
to the dissolution of Italia, inventory totaling approximately $226,000 was
written off. Although overall cost of sales in the current year was consistent
with the prior year, cost of sales for the APF Master Framemaker division
declined from approximately 68% as of June 30, 1996 to 66% as of June 30,
1997. This improvement was due to the business associated with a major
wholesale customer.
The Company's selling, general and administrative expenses as a percentage of
net sales totaled 55.2% for the year ended June 30, 1997, versus 67.2% for the
year ended June 30, 1996. To achieve the reduction in the ratio of selling,
general, and administrative expenses as a percentage of net sales for the year
ended June 30, 1997 versus the prior period, the Company has taken certain
measures to reduce expenses. For example, reductions of administrative
personnel have led to reduced salaries, benefits, and travel expenses. Also
discretionary spending for such items as stationery and supplies, advertising,
and consulting fees has been curtailed. Further, this Company has entered into
12
<PAGE>
various transactions with P-2-A (See "Liquidity and Capital Resources for
discussion that has served to reduce the Company's selling, general and
administrative expenses.
Interest expense as a percentage of net sales totaled approximately 8.7% for
the year ended June 30, 1997, versus approximately 10.0% for the year ended
June 30, 1996. Interest expense is approximately $133,000 lower in the year
ended June 30, 1997 versus the year ended June 30, 1996 because certain debts
outstanding at higher rates of interest have been replaced by loans carrying
lower interest costs.
For the year ended June 30, 1997, the Company realized a net gain of
approximately $106,000 ($0.02 per share), versus net loss from continuing
operations of approximately $2,348,000 ($0.83 per share), and a loss from
discontinued operations of approximately $2,935,000 ($1.03 per share) for the
year ended June 30, 1996.
As disclosed in the "Description of Business", during the year ended June 30,
1996, the Company decided to discontinue its catalog operations. As a result
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 prior year's
operations of approximately $789,000, inventory reserves of approximately
$954,000, reserves for other assets of approximately $354,000, charges for the
settlement of related party lawsuits of approximately $519,000, with the
balance primarily relating to estimated charges for operating losses. The
discontinuance of the catalog operations was substantially completed by June
30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that future cash flow from operations will be sufficient
to support the Company's operations. However, Company management continues to
implement what it believes to be the changes deemed necessary to further
increase positive cash flow and profitability. Specific action taken as of the
date of this filing include seeking either the acquisition of or entering into
strategic alliances with unrelated companies in the decorative accessories
industry. (See "Acquisitions and Strategic Alliances."). The Company has also
begun to implement a marketing program meant to increase revenues of its
Master Framemakers Division. No assurances can be given that these measures
will generate the fiscal improvement sought by the Company.
On June 1, 1997 the Company entered into an agreement (the "Agreement"), with
P-2-A which amended an earlier supply agreement. The Agreement provides for
the sale of certain manufacturing equipment and related assets, consulting
services, as well as certain contractual reimbursements of General and
Administrative expenses by P-2-A to the Company aggregating $1,140,000. The
Company agreed that the $1,140,000 due to the Company would be used to fund
the purchase from P-2-A of 270,000 shares of P-2-A's common stock and 120,000
of P-2-A's common stock purchase warrants for an aggregate purchase price of
$1,140,000. The Company effectively owns approximately 4.5% of P-2-A after
this transaction. Additionally, P-2-A will pay the Company $50,000 for the
non-exclusive right to utilize the Company's existing mail-order customer
list. P-2-A also agreed to sublease approximately 21,000 square feet of office
and manufacturing space from the Company at an annual rental rate of $63,000
per year plus rent escalations. The term of the sublease is from June 1, 1997
to December 31, 2001. Prior to this Agreement P-2-A was purchasing, stretching
and framing services from the Company
As of June 30, 1997, the Company reflected cash balances of $271,000 in cash
balances as compared to approximately $4,000 at June 30, 1996, representing an
increase of approximately $267,000. Net cash used in operating activities was
$1,650,000 at June 30, 1997, as compared to net cash used in operating
activities of approximately $1,144,000 at June 30, 1996. The increase in net
cash used in operating activities was primarily due to the net gain of
$106,000 and also by the following changes from continuing operations:
non-cash charges for depreciation of $629,000 and for stock issuances of
$15,000, decreases in accounts payable and accrued expenses of $607,000,
inventories of $200,000, and an increase in accounts receivable of $390,000.
Provision for accounts receivable increased from $63,000 as of June 30, 1996
to $175,000 as of June 30, 1997, a change of $228,000. The decreases in
inventory, accounts payable, and accrued expenses were largely due to
discontinued businesses (see "Results of Operations"). THE COMPANY NEEDS TO
ADDRESS INCREASE IN A/R
13
<PAGE>
Net cash used in investing activities during the year ended June 30, 1997
totaled approximately $1,020,000 $620,000 versus approximately $543,000 for
the year ended June 30, 1996. During the year ended June 30, 1997, the Company
invested $826,000 of cash to acquire 54,934 shares of Series C Non-Voting
Convertible Preferred Stock and 10,000,000 shares of Series B Non Convertible
Voting Preferred Stock of Decor Group, Inc., (See "Acquisitions and Strategic
Alliances.") and approximately $167,000 was used to acquire equipment, versus
approximately $543,000 used to acquire equipment and other assets during the
year ended June 30, 1996. These transactions were offset by the sale of Decor
Stock of $372,500 during the year ended June 30, 1997.
Net cash provided by financing activities totaled approximately $2,538,000
during the twelve months ended June 30, 1997 versus approximately $1,689,000
during the twelve months ended June 30, 1996. During the current period, the
funding was the result of the exercise by investors of 704,412 Class WA
Warrants to acquire 704,412 shares of Class A Common shares and 704,412 Class
WB Warrants for an exercise price of $1.50, and the exercise by investors of
118,012 Class WB Warrants to acquire 118,012 shares of Class A Common shares
for an exercise price of $2.00, and the exercise of an option to acquire
350,000 shares of Series A Preferred Shares at a net exercise price of $2.25,
and the receipt of proceeds totaling $600,000 pursuant to new debt financing
obtained by the Company during February 1997, less repayments of notes payable
of $620,000. In addition, Laurie Munn, wife of the Company's President, loaned
the Company $100,000 on March 28, 1997. The demand Promissory Note bears
interest at a rate of 6.5% per annum. Additionally, $514,111 was received from
United Credit Corporation in June 1997, secured by accounts receivable. The
primary source of the prior year's financing was the Company's Preferred Stock
Offering in September 1995 generating proceeds of $1,633,000. Bank of New York
debt decreased from $910,000 as of June 30, 1996 to $380,000 as of June 30,
1997. The debt continues to be amortized at the rate of $5,000 per month.
As of June 30, 1997, the Company's financial position reflected a working
capital deficit of approximately $of approximately $99,000, versus a working
capital deficit of approximately $2,512,000 at June 30, 1996. Of this working
capital deficit at June 30, 1997, $826,000 is directly attributable to the
Company's direct investment in Decor Group, Inc. (See above.) As of June 30,
1997 versus June 30, 1996, trade receivables increased approximately $390,000,
inventories decreased approximately $200,000, and current liabilities
decreased approximately $698,000, due largely to the proceeds received from
the equity transactions described above, and to the extinguishment of
liabilities totaling approximately $587,000 during March 1997.
On July 16, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission to re-register the Class WB Warrants and
underlying Common A Shares issuable if all outstanding Class WA Warrants were
exercised. The Commission declared this Registration Statement effective on
July 19, 1996. Through the date of this filing, 704,412 of the Company's Class
WA Warrants were exercised at $1.50 per warrant, generating gross proceeds to
the Company totaling $1,056,618 net of costs related to professional fees. Of
these proceeds, $811,500 was used to purchase 54,100 shares of Decor Group,
Inc.'s Series C Non-Voting, Convertible, Preferred Stock. The balance of the
proceeds was retained by the Company for working capital needs, and for the
provision of loans to Decor Group, Inc.
On May 7, 1997 the Company announced that it had extended the exercise period
of its Class A Warrants to June 22, 1998.
In January 1996, the Company's Board of Directors elected to lower the
exercise price of the Company's Class WB Warrant to $2.00 per Class A Common
share, subject to the filing and effectiveness of a Registration Statement
with the Securities and Exchange Commission. Such Registration Statement was
filed with the Commission on July 16, 1996 and declared effective on July 19,
1996. This registration statement registered all Class WB Warrants issuable
upon exercise of all outstanding Class WA Warrants, as well as Class A Common
Stock issuable upon exercise of all potentially outstanding warrants. As of
the date of this filing, 118,012 of the Company's Class WB Warrants were
exercised generating gross proceeds of $236,024. These proceeds were retained
by the Company to support working capital needs, and for the provision of
loans to Decor Group, Inc.
In February 1996, the Company's Board of Directors declared a stock dividend
equivalent to $0.25 per share to its Series A 10% Cumulative Convertible
Preferred Stockholders of record as of the close of business on February 23,
1996 (the record date.) Payment was made on March 1, 1996 by the issuance of
0.10231 of a share of
14
<PAGE>
the Company's Class A Common Stock for each share of Series A Preferred Stock
held of record on the record date. Accordingly, 55,247 shares of the Company's
Class A Common Stock was issued for this purpose. Retained earnings was
charged $165,741 in March 1996 in conjunction with the issuance of these
shares. As of the date of this filing, the Company has not yet declared a
dividend to its Series A 10% Cumulative Convertible Preferred Stockholders for
any period subsequent to March. 1996. Cumulative but unpaid dividends on
Series A 10% Cumulative Preferred Stock as of June 30, 1997 totals
approximately $524,000, which the Company intends to declare and issue during
the subsequent period in the form of Class A Common shares.
In February 1996, the Company's Board of Directors approved the issuance to
Sol Munn of 150,000 shares of the Company's Class A Common Stock, in
consideration for past consulting services provided. The Company registered
these securities with the Securities and Exchange Commission during July 1997.
These shares, which bear a two-year lock-up restrictive legend pursuant to an
agreement between VCR Capital, Inc. and Sol Munn, were issued on April 12,
1996.
In April 1996, the Company's investment banking firm arranged for the private
placement of 175,000 shares of the Company's Common A Stock and 50,000 shares
of the Company's Series A Preferred Stock. These shares, all of which bore a
restrictive legend, were issued on April 24, 1996 to various independent
investors (the "Investors") generating gross proceeds of $431,251. The Company
realized net proceeds of $310,609 which was used to pay certain outstanding
liabilities. These shares were registered by the Company with the SEC on
August 13, 1997.
During September 1996, the Company issued 10,000 shares of its Class A Common
shares to Roger Lourie, an outside director of the Company, and 10,000 shares
of its Class A Common shares to various individuals named by Richard
Josephberg, also an outside director of the Company. These shares bear a
restrictive legend. Pursuant to the issuance of these shares, approximately
$15,000 was charged against earnings at June 30, 1997.
The Company has outstanding secured financing with Infinity Investors, Ltd.
totaling approximately $206,000 at June 30, 1997. The Company paid $15,000 of
this balance during the three months ending September 30, 1997 and will
subsequently pay principal and interest of $7,500 per month calculated at an
annual rate of 15% against the unpaid principal balance for nine (9) months
plus a balloon payment comprising all financing interest and principal on
March 15, 1998. In connection with the settlement of terms agreement (March
1996), as note, was past due, the Company also issued 25,000 Warrants purchase
Common Stock at $2.50 per share. This lender also continues to hold 600,000
Common Stock as collateral.
In February 1997 the Company received a loan from BH Funding, LLC ("BH") in
the aggregate principal amount of $600,000 to be utilized to repay certain
indebtedness of the Company and for continued operating expenses. The Company
in order to collateralize the loan to BH pledged and assigned to BH and
granted to BH a continuing security interest in the Company's 20,000,000
shares of Series B Non-Convertible Preferred Stock of Decor, and the Company's
54,934 shares of Series C Convertible Preferred Stock of Decor. Simultaneously
with the loan to the Company, BH purchased all of the Company's Series A
Convertible Preferred Stock holdings in Decor Group, Inc., a total of 250,000
shares. The loan is to be repaid to BH Funding, LLC with interest on April 28,
1998. In addition, the Company entered into a Consulting Agreement with BH
whereby BH would agree to provide consulting and other services to the Company
in exchange for 100,000 shares of the Company's Series A Convertible Preferred
stock (the "Consulting Shares").
In connection with this agreement, the fair market value of these shares on
the date of issuance (less the proceeds received) was allocated as follows:
$350,000 as acquisition consulting on the Decor transaction; $350,000 as
additional financing costs on the loan (to be amortized over the life of the
loan using the effective interest method); and $25,000 as additional expense
of the Company's sale of its 250,000 Series A Convertible Preferred Stock
holdings in Decor Group, Inc.
As of June 30, 1997, the Company has unpaid State payroll taxes of
approximately $202,000. In July, 1997, the Company entered into a payout
arrangement with New York State to satisfy $64,890 of back payroll taxes
through twelve monthly payments of $5,407. The Company expects to negotiate a
settlement for the remaining taxes due in the second quarter of 1998.
15
<PAGE>
Except as otherwise set forth herein, the Company has no material commitments
for capital expenditures. In order to fund growth over the long term, the
Company anticipates possible future issuance of its securities resulting in
further dilution to its securityholders.
While the Company operates pursuant to a policy that generally precludes
acceptance of goods on a non-cash basis (sometimes known as barter
transactions), the Company does from time to time execute upon goods provided
by a customer in the event of non-payment by that customer.
Refer to the "Legal Proceeding" section for discussion of litigation and
related commitments.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material adverse effect
on sales or income during the past several years. Increases in supplies and
other operating costs could adversely affect the Company's operations.
However, the Company believes it could increase prices to offset increases in
cost of goods sold or other operating costs.
SALES VARIATIONS
Although the Company's net sales are not subject to seasonality fluctuations
experienced by certain retailers, the Company experiences some minor
variations in the level of sales by year. The first year of the fiscal year
(i.e., July 1 through September 30) is generally the Company's slowest sales
period due to the fact that the summer period is typically the period when art
galleries are at their slowest purchasing period. During this period, the
Company's warehouse and factory closes for three to five days to take the
annual physical inventory and to consolidate vacation periods for the
Company's employees.
- ------------------------------------------------------------------------------
ITEM 7 FINANCIAL STATEMENTS.
- ------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accounts..................................F-1
Consolidated Balance Sheet as of June 30, 1997.........................F-2
Consolidated Statements of Operation for the Years Ended
June 30, 1997 and 1996............................................F-3
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended June 30, 1997 and 1996................................F-4
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1997 and 1996......................................F-5
Notes to Consolidated Financial Statements.............................F-6
- ------------------------------------------------------------------------------
ITEM 8 CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- ------------------------------------------------------------------------------
None.
16
<PAGE>
PART III
- ------------------------------------------------------------------------------
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
- ------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of the directors and executive officers of the Company are
set forth below:
NAME AGE POSITION(S) HELD WITH THE COMPANY
- ----------------------------------------------------------------------------
Max Munn 53 President, Chief Executive Officer,
Chief Financial and Accounting
Officer, Treasurer and Director
Roger Lourie 52 Director
Richard Josephberg 50 Director
MANAGEMENT BIOGRAPHIES
Brief biographies of the Directors, executive officers, and key personnel of
the Company are set forth below. All Directors hold office until their
resignation, retirement, removal, disqualification, death or until their
successors have been elected and qualified. Vacancies in the existing Board of
Directors are filled by majority vote of the remaining Directors. Officers of
the Company serve at the will of the Board of Directors.
MAX MUNN has been President and Chief Executive Officer since September 1995.
In June 1996 Mr. Munn was named Chairman of the Board of Decor Group, Inc.
(See "Recent Developments.") He served as Executive Vice President, Operations
and Secretary of the Company between February 1994 and September 1995, and a
Director thereof since March 1994. He served as Vice President of A.P.F. from
May 1993 until the A.P.F. merger with the Company. From November 1990 to May
1993, he was a consultant to the Company, as well as a consultant directly and
indirectly to Imperial Enterprises, Inc., a catalog company in Japan, and the
IEI Corporation, a direct marketer, in Princeton, New Jersey. From 1981 to
February 1990 he was Chairman, President and Chief Executive Officer of
Collectors' Guild International Inc. In June 1990 approximately five months
after leaving the Collectors' Guild, 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.
ROGER LOURIE was named as a Director on May 4, 1995. He is an engineer and
book publisher. He has over twenty years of experience with Procter and
Gamble, Time Inc., Mead Paper, and Grolier Inc. He was Senior Vice President
of Marketing of Grolier Inc. Currently, he is a General Partner of Tremon
Associates and President of Misty Ridge Associates, which are equity
investment firms. He is also Chairman of the Board of two Connecticut-based
manufacturing concerns. He has a B.S. degree in Engineering from Rensselaer
Polytechnic Institute and M.B.A. and M.I.A. degrees from Columbia University
in New York.
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.
17
<PAGE>
On February 19, 1997, the employment of Michael J. Amore as the Company's Vice
President and Chief Financial Officer was terminated. As of that date, Mr.
Amore's service as a director of the Company also terminated. This termination
was necessitated by the Company's need to restructure its administrative
organization, particularly in light of the need for cost reductions. Mr. Amore
did not have an employment contract. It is not anticipated that his
termination will result in any significant charges against earnings.
On January 31, 1997, Donald Feldman resigned from the Company's Board of
Directors to devote his time exclusively to the business activities of Decor
Group, Inc. On February 28, 1997, Mr. Feldman's employment with Decor was
terminated. The Company has no obligation to make severance payments to Mr.
Feldman pursuant to his separation from the Company. All severance payments to
Mr. Feldman were made by Decor and/or its subsidiary Artisan House, Inc.
There are no material proceedings to which any director, officer or affiliate
of the Company, any owner of record or beneficially of more than five percent
of any class of voting securities of the Company, or any associate of any such
director, officer, affiliate of the Company or security holder is a party
adverse to the Company or any of its subsidiaries or has a material interest
adverse the Company or any of its subsidiaries.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons
who own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission and
Nasdaq. Officers, directors and greater-than-ten percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms that they file.
Based solely upon a review of Forms 3, Forms 4, and Form 5 furnished to the
Company pursuant to Rule 16a-3 under the Exchange Act, the Company believes
that all such forms required to be filed pursuant to Section 16(a) of the
Exchange Act were timely filed, as necessary, by the officers, directors and
securityholders required to file the same.
18
<PAGE>
EXECUTIVE COMPENSATION
- ------------------------------------------------------------------------------
ITEM 10 SUMMARY COMPENSATION TABLE [UPDATE ALL CHARTS]
- ------------------------------------------------------------------------------
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 Annual Stock Options/ LTIP Compen-
Principal Fiscal Salary Bonus Compensation Awards SARs Payouts sation
Position Year ($) ($) ($) ($) ( ) ( ) ($)
- --------- ------ ------ ----- ------------ --------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MAX MUNN 1997 109,610
PRESIDENT, CHIEF 1996 144,230 10,000
EXECUTIVE OFFICER 1995 151,127 10,000
MICHAEL J. AMORE 1997 80,769 8,076
VICE PRESIDENT, 1996 58,558
CHIEF FINANCIAL 1995 --0--
OFFICER (TO FEB 19, 1994 --0--
1997)
DONALD FELDMAN 1997 31,558
VICE PRESIDENT, 1996 117,500
SALES AND MARKETING 1995 5,423
(TO FEB 28, 1997)
THEODORE STEVENS 1996 78,115 16,00 0
DIRECTOR (TO 1995 81,000
JUNE 21,1996) 1994 74,800
ANN STEVENS(1) 1997 --0-- 72,000
EXECUTIVE VICE 1996 80,769
PRESIDENT (TO 1995
SEPT 1995)
</TABLE>
(1) Does not include certain automobile expenses and other perquisites which
in the aggregate do not exceed the lesser of $50,000 or 10% of the named
executive officer's compensation.
See "Executive Compensation - Employment Arrangements" for a description of
the Company's employment agreements with Messrs. Munn and Feldman.
The following table sets forth certain information with respect to options
granted during the last fiscal year to the Company's Executive Officers named
in the above Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
19
<PAGE>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN FISCAL BASE PRICE
NAME GRANTED (#)(1) YEAR ($/SH) EXPIRATION DATE
------------- ------------------- ----------- ---------------
NONE
(1) The Company's Director Plan provides for the granting of options to
Directors to purchase 10,000 of the Company's Class A Common Shares at Fair
Market Value at date of grant. Options are granted to Directors as of the
second Monday in May of each year. As of the date of this filing, the only
unexercised options pursuant to the Director Plan are as presented in this
schedule.
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information with respect to options
exercised during the fiscal year ended June 30, 1995, by the Company's
Executive Officers named in the Summary Compensation Table, and with respect
to unexercised options held by such person at the end of the fiscal year ended
June 30, 1995.
NUMBER OF SECURITIES
SHARES UNDERLYING VALUE OF
ACQUIRED ON VALUE UNEXERCISED UNEXERCISED IN THE
EXERCISE REALIZED OPTIONS/SARS AT MONEY OPTIONS/SARS
NAME (#)(1) $ FY-END (#) AT FY-END
---- ---------- ---------
($) (2)
-------
NONE
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".
EMPLOYMENT ARRANGEMENTS
On February 15, 1996, the Company's Board of Directors agreed in principle to
enter into a four-year employment agreement between the Company and its
President and Chief Executive Officer. The agreement will provide an annual
base salary of $150,000, with annual increases of 10%. Such increases will be
subject to the attainment of profitable results of operations by the Company.
In addition, the agreement will grant the President and Chief Executive
Officer an option to purchase at any time 150,000 shares of the Company's
Series A, 10% Cumulative Convertible Preferred Stock at a price of $2.50 per
share. The exercise of this option, as well as any subsequent conversion to
the Company's Class A Common Stock, will require the prior consent of the
Company's investment banking firm. The agreement will also contain a
"non-compete" clause and provide the President and Chief Executive Officer
with the use of an automobile. As of the date of this filing, the document for
this agreement has not been finalized or executed. This is expected to occur
during the subsequent period. Presently, the President and Chief Executive
Officer draws an annual salary of $150,000 and has the use of an automobile
provided by the Company.
On May 8, 1995, the Company entered into a four year Employment Agreement
with Donald Feldman, Vice President of Sales and Marketing of the Company.
Concurrent with the Effective Date of Decor Group, Inc.'s ("Decor") initial
public offering (See "Acquisitions and Strategic Alliances."), the Company
and Mr. Feldman planned to terminate Mr. Feldman's Employment Agreement with
the Company. Mr. Feldman and Decor had planned to enter into a three (3)
year employment agreement with Decor at such Effective Date. Mr. Feldman
20
<PAGE>
resigned from the Company's Board of Directors effective January 31, 1997. On
April 17, 1997, Mr. Feldman resigned from the Company and simultaneously
resigned from Decor entering into a Severance Agreement with Decor.
CONSULTING ARRANGEMENTS
On April 1, 1995, the Company entered into a Consulting Agreement with Morris
Munn, father of Max Munn, the Company's President and Chief Executive Officer
under which he will provide the Company with: design and fabrication of new
molds for sculpture; recommend, and implement improvements in antiquing,
woodworking, gilding and carving processes; and attend trade shows for frame
making and mold making. Fees under the agreement are payable at $54,000 per
annum for one year renewable at the Company's option. On June 30, 1996, Morris
Munn's Consulting Agreement was extended for five (5) years. Pursuant to the
terms of this new agreement, the Company agreed to issue to Morris Munn an
option to purchase up to 350,000 shares of the Company's Preferred Shares at a
net exercise price of $2.25 per share. The Preferred Shares issuable upon the
exercise of the Option were registered for sale to the public under a
Registration Statement in Form S-8 filed with the Securities and Exchange
Commission on July 3, 1996. The Option was fully exercised during July to
September 1996 generating net proceeds to the Company totaling $787,500. (See
"Liquidity and Capital Resources.") Subsequent to Morris Munn's exercise of
these shares, the Company's investment banking firm arranged for the sale of
all 350,000 shares to independent investors at a price per share of $2.50. In
conjunction with the issuance of the Option, the Company recorded charges
against earnings of $87,500 at June 30, 1996. In addition, the new agreement
provides for bi-weekly payments to Morris Munn totaling $54,000 per year for
five years. In exchange, Morris Munn has agreed to assist the Company with
marketing, acquisitions, divestitures, joint ventures and other strategic
initiatives. Morris Munn has previously spent up to 10 to 15 hours per month
in consulting activities for the Company , primarily on product development
and assisting Max Munn in analyzing potential acquisitions. Morris Munn has
ceased performing consulting or any other services for the Company.
From time-to-time during prior periods, Sol Munn, uncle of Max Munn, President
and Chief Executive Officer of the Company have 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
The 1994 Plan. On June 20, 1994, the Company adopted the Interiors, Inc. 1994
Stock Option and Appreciation Rights Plan (the "1994 Plan"), which provides
for the granting of options to officers, employees and consultants to purchase
not more than an aggregate of 250,000 Class A Shares. Directors of the Company
are not eligible to participate in the 1994 Plan. The 1994 Plan provides for
the grant of options intended to qualify as "incentive stock options" under
the Internal Revenue Code of 1986, as amended (the "Code") as well as options
which do not so qualify.
Pursuant to the 1994 Plan, the Board of Directors or a stock option committee
established by the Board to administer the 1994 Plan determines the persons to
whom options are granted, the number of Class A Shares subject to option, the
period during which the options may be exercised and the option exercise
price. With respect to incentive stock options, no option may be granted more
than ten years after the effective date of the 1994 Plan or exercised more
than ten years after the date of grant (five years if the optionee owns more
than ten percent of the Class A Shares of the Company at the time of grant).
Additionally, with respect to incentive stock options, the option price may
not be less than 100% of the fair market value of the Class A Shares on the
date of the grant (110% if the optionee owns more than ten percent of the
Class A Shares of the Company at the time of grant). The fair market value of
the Class A Shares will be determined by the Board or the Committee in
accordance with the 1994 Plan as follows: If the
21
<PAGE>
Class A Shares are not listed and traded upon a recognized securities
exchange, on the basis of recent purchases and sales of Class A Shares in
arms-length transactions or based on the last reported sale or transaction
price for such stock on the date of grant or, if the shares are traded on a
recognized securities exchange or quoted on the Nasdaq National Market System
upon the basis of the last reported sale or transaction price on the date of
grant or, if the shares were not traded on such date, on the date nearest
preceding that date. Subject to certain limited exceptions, options may not be
exercised unless, at the time of exercise, the optionee is in the service of
the Company.
The Board of Directors or the Committee may, in its discretion, at any time
prior to the exercise of any option, grant in connection with such option the
right to surrender part or all of such option to the extent the option is
exercisable, and receive an amount (payable in cash, Class A Shares or
combination thereof as determined by the Board or the Committee) equal to the
difference between the then fair market value of the shares issuable upon the
exercise of the option (or portions thereof surrendered) and the exercise
price of the option or portion thereof surrendered.
On September 16, 1994, the Board of Directors granted Incentive Options to
purchase an aggregate of 159,000 Class A Shares under the 1994 Plan at an
exercise price equal to the fair market value of the shares on the date of
grant, or $3.50 per share, to 23 employees and Incentive Options to purchase
25,000 Class A Shares to Ann Stevens, then Executive Vice President of the
Company and wife of then Company President, Theodore Stevens, at 110% of the
fair market value or $3.85 per share. Of such options, options to purchase
75,000 Class A Shares were granted to Max Munn, now President and Chief
Executive Officer of the Company, and Ann Stevens, then Executive Vice
President of the Company, and Mr. Munn's sister. In addition, on October 5,
1994 the Board of Directors granted Incentive Options to two employees to
purchase an aggregate of 20,000 Class A Shares at exercise prices equal to the
fair market value of the shares or $3.38 per share. With respect to each such
grant, 25% of such options will vest each year commencing on the first
anniversary of the grant.
The Director Plan. On June 20, 1994 the Board of Directors approved the 1994
Director Stock Option and Appreciation Rights Plan (the "Director Plan"). The
Director Plan was adopted to provide an incentive to Directors through
automatic and discretionary grants of stock options. The Director Plan
provides for the grant of options intended to qualify as "incentive stock
options" under the Code as well as options which do not so qualify.
The Director Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). Options under the Director Plan
may be granted to each person who is a Director of the Company on the date of
grant. All Directors of the Company are eligible to receive options under the
Director Plan.
The Director Plan provides for the granting of options to Directors in such
amount and, subject to the terms of the Director Plan, upon such terms as the
Board or Committee determines in its discretion in order to reward the
recipient director for extraordinary service to the Company. In addition, on
the second Monday of May of each year each person who is then a director of
the Company shall be automatically granted an option to purchase 10,000 of the
Company's Class A Shares, subject to adjustment as provided for in the
Director Plan. The aggregate number of shares for which options may be issued
pursuant to the Director Plan is 250,000 shares. The exercise price for
options granted under the Director Plan must be equal to the fair market value
per Class A Share on the date of grant. The fair market value of the Class A
Shares will be determined by the Board or the Committee in accordance with the
Director Plan as follows: If the Class A Shares are not listed and traded upon
a recognized securities exchange, on the basis of recent purchases and sales
of Class A Shares in arms-length transactions or based on the last reported
sale or transaction price for such stock on the date of grant or, if the
shares are traded on a recognized securities exchange or quoted on the Nasdaq
National Market System upon the last reported sale or transaction price on the
date of grant or, if the shares were not traded on such date, on the date
nearest preceding that date. Each option granted under the Director Plan
expires ten years after the date of grant, unless a lesser period is specified
by the Committee.
In the event an optionee ceases to be a Director of the Company for any reason
at a time when he holds an option, he may exercise only such options as are
exercisable at the time he ceases to be a Director, within the original term
of the option. Options which are not exercisable at the time an optionee
ceases to be a Director shall terminate. In the event an optionee dies, the
Director Plan provides for the exercise of an option on behalf of the deceased
Director.
22
<PAGE>
On September 16, 1994, the Board of Directors granted Incentive Options to
purchase 25,000 Class A Shares to each of Theodore Stevens, then President and
Max Munn, President and Chief Executive Officer and then Executive Vice
President-Operations under the Director Plan at an exercise price equal to
110% of the fair market value of the shares on the date of grant, or $3.85 per
share, all of which options immediately vested. As of the date of this filing,
with Mr. Stevens no longer an officer or Director of the Company, the Company
does not plan to issue to Mr. Stevens any additional shares pursuant to any
agreement currently in effect. During the current year Mr. Stevens converted
269,750 shares of the Company's Class B common shares into 269,750 shares of
the Company's Class A common shares.
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.
23
<PAGE>
- ------------------------------------------------------------------------------
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------------
The following table sets forth as of September 30, 1997, certain Information
with respect to the beneficial ownership of the Company's common Stock and
Series BA Preferred Stock by each person or entity known by the company to be
the beneficial owner of %% or more of such shares, each officer and director
of the Company, and all officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Percent of Votes (2)
------------------------
After
Percent Prior to Conversion
of Conversion of of all
Name and Address of Number of Class all Class B Class B
Beneficial Owner (1) Title of Class Shares (2) Shares (3) Shares (4)
- ---------------------- -------------- --------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Theodore Stevens Class A Shares 319,250(5) 6.4% 2.3% 4.7%
Class B Shares -0- -0-
Max Munn Class A Shares 45,000 0.9% * *
(7)(8)(9)
Class B Shares -0-(8) -0-
Laurie Munn Class A Shares 519,750 10.48% 22.6% 15.44%
(9)(10)
Class B Shares 519,750(10) 29.4%
Michael Levine Class A Shares -0- -0- 9.05% 18.6%
as escrow agent Class B Shares 1,250,000 70.6%
(6)
Roger Laurie Class A Shares 20,000(13) .4% * *
Class B Shares -0- -0-
Richard Josephberg Class A Shares 20,000(13) .4% * *
Class B Shares -0- -0-
All Executive Class A Shares 85,000(11) 1.7% 0.61% 1.2%
Officers and Class B Shares -0- -0-
Directors as a Group
(3 persons) (Note 12.)
</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
that are held by such person which are exercisable within 60 days from the
date hereof have been exercised. During March 1997, Mr. Stevens converted
269.750 shares of Series A Preferred Stock into 269,750 shares of Class A
Common Stock.
(2) Does not give effect to the exercise of the Warrants, the Underwriters or
prior underwriters Warrants or stock options granted under the Plans other
than as noted.
24
<PAGE>
(3) Reflects the percentage of the votes to which the voting Common Stock
owned is entitled to vote if the Class A Shares and Class B Shares vote as one
class. Assumes that the 1,769,750 outstanding Class B Shares have not been
converted to Class A Shares and, consequently, have five votes per share
(aggregating 8,848,750 votes).
(4) Reflects the percentage of the votes to which the voting Common Stock
owned is entitled to vote if the Class A Shares and Class B Shares vote as one
class. Assumes the 1,769,750 Class B Shares have been converted to 1,769,750
Class A Shares and, consequently, have one vote per share rather than five
votes per share.
(5) Includes 269,750 Class A Shares converted from Class B shares during March
1997. Does not include 50,000 Class A Shares issued to Ann Stevens, wife of
Mr. Stevens, pursuant to her settlement agreement with the Company, such
50,000 Class A Common Shares being registered with the Securities and Exchange
Commission as part of this filing. (See Legal Proceedings.)
(6) Includes 1,250,000 Class B Shares (the "Escrow Shares") issued to Mr.
Levine as escrow agent pursuant to the settlement reached by the Company and
Ann Stevens with respect to a prior employment agreement. Ann Stevens, a
former executive of the Company is the beneficial owner of the escrow shares.
The escrow agent may vote the escrow shares only in the event of the Company's
default of its obligations pursuant to the settlement agreement between the
Company and Ms. Stevens. (See Legal Proceedings.)
(7) Represents Class A Shares issuable to Mr. Munn upon exercise of an
Incentive Stock Option issued pursuant to the Director Plan established on
June 20, 1994, and a grant provided on Sept. 16, 1994.
(8) Does not include 519,750 Class B Shares (convertible into 519,750 Class
A Shares) held by Mr. Munn's wife. Mr. Munn disclaims ownership of any such
shares.
(9) Pursuant to an agreement between Laurie Munn, Interiors, Inc. and VTR
Capital, Inc., entered into in July 1996, if the Company does not meet certain
net profit targets, Ms. Munn is required to forfeit her shares of the
Company's Common Stock back to the Company.
(10) Includes 519,750 shares of Class B Shares (convertible into 519,750 Class
A Shares).
(11) Includes 45,000 Shares of Class A Common Stock issuable upon the exercise
of options pursuant to existing stock option plans.
(12) Represents the following Class A Common shares for each of three (3)
directors: 45,000 shares issuable to Max Munn, the Company's President and
Chief Executive Officer upon exercise of options pursuant to a grant issued on
September 16, 1994 and the Company's Director Plan, 10,000 shares issued to
Roger Lourie under the Company's Director Plan, and 20,000 shares issued to
Richard Josephberg under the Company's Director Plan.
(13) Includes 20,000 Shares of Class A Common Stock issuable upon the exercise
of options pursuant to existing stock option plans.
There are no agreements or other arrangements or understandings known to the
Company concerning the voting of the Common Stock of the Company or otherwise
concerning control of the Company which are not disclosed herein. There are no
pre-emptive rights applicable to the Company's securities.
- ------------------------------------------------------------------------------
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
- ------------------------------------------------------------------------------
On July 7, 1994, Theodore Stevens, Max Munn and Ann Stevens, then respectively
President, Executive Vice President and Executive Vice President of the
Company, personally guaranteed the obligations of the Company under a
Promissory Note dated July 7, 1994 in the amount of $950,000 at an interest
rate of prime plus one percent (9.25% as of the date of this filing) to a New
York bank. Pursuant to terms of settlement involving various issues (See
"Legal Proceedings"), in the event that the Company's debt to the Bank is not
repaid in full prior to March 31,
25
<PAGE>
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, 1997, the outstanding balance of this note
totals $365,000.
For the years ended June 30, 1997 and June 30, 1996, the Company paid
approximately $54,000 and $30,000, respectively, to the father of the
President, and Chief Executive Officer for consulting services. See "Executive
Compensation - Consulting Arrangements." These amounts are included in
capitalized mold costs on the balance sheet.
In October 1994, the Company borrowed the sum of $8,000 from the President of
the Company. The amount due was evidenced by a promissory note dated October
27, 1994, which bore interest at a rate of 12% per annum. The principal and
interest were due November 17, 1994. In November 1994, the Company repaid the
loan. In addition, in November and December 1994, the Company advanced an
aggregate amount of $13,000 to the then Executive Vice President-Operations of
the Company, and now its President and Chief Executive Officer. This amount
will be repaid by the President and Chief Executive Officer to the Company
during the twelve months ended October 1997 at an 18% annual rate of interest.
On April 1, 1995, the Company entered into a Consulting Agreement with and
issued certain shares to Morris Munn, the father of the President of the
Company, Max Munn. See "Consulting Arrangements".
In August 1995, Theodore Stevens, a Director of the Company, and Laurie Munn,
wife of Max Munn, President and Chief Executive Officer and a Director of the
Company, entered into an agreement whereby Mr. Stevens sold to Mrs. Munn
269,750 shares of Class B Common Stock for $150,000 payable by an initial
installment of $15,000 and a promissory note for the balance of the purchase
price payable in 15 years with interest at the rate of 6.6% per annum.
On February 8, 1996, the Company entered into a demand loan for approximately
$38,000, bearing 18% interest, with the President and Chief Executive Officer
of the Company. This note will be repaid by the President and Chief Executive
Officer to the Company during the twelve months ended October 1997, with
interest as specified above.
On February 15, 1996, the Company's then Italia Collection subsidiary entered
into a Financing Arrangement with a New York corporation whereby Italia
Collection borrowed pursuant to an asset-related formula. This Financing
Arrangement has been personally guaranteed by Max Munn, the Company's
President and Chief Executive Officer and his wife.
In February 1996, the Company's Board of Directors approved the issuance to
Sol Munn, uncle of the President of the Company, Max Munn. See "Consulting
Arrangements".
On April 4, 1996, the Company's Board of Directors resolved to issue 250,000
shares of the Company's Class B Common Stock to Laurie Munn, wife of the
Company's President and Chief Executive Officer. This issuance is in
consideration for a down payment of $250, Ms. Munn's 6.6% note to the Company
providing for principal of $437,500 to be paid to the Company in five equal
annual installments of $105,561.90, and Ms. Munn's guarantee and pledge of her
assets for certain Company debt. The shares were issued to Ms. Munn on April
8, 1996. Ms. Munn has executed a Promissory Note and Security Agreement in
conjunction with the issuance of these shares. The first annual installment is
due to be paid on June 30, 1998. The Company obtained an appraisal at that
time to determine the fair market value of this transaction.
Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company, the Company issued to Ms.
Stevens 50,000 shares of the Company's Class A Common Stock. 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 paid
$228,353 in the current year to Ms. Stevens in compliance with the settlement
Agreement.
26
<PAGE>
- ------------------------------------------------------------------------------
ITEM 13 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- ------------------------------------------------------------------------------
(A) EXHIBITS
1.1 Form of Amended Underwriting Agreement..(2)
1.2 Form of Agreement Among Underwaters.(1)
1.3 Form of Selected Dealer Agreement.(1)
1.4 Form of Management Agreement between the Company and Decor Group,
Inc.(12)
2.01 Stock Purchase Agreement, dated October 21, 1994, among the Company
and Murano Crystal Corp. and Stephen M. Tucker.(6)
2.02 Stock Purchase Agreement, dated October 21, 1994, among the Company
and Cemmic Productions Corp. and Stephen M. Tucker and Michael D. Tucker.(2)
3.1 Certificate of Incorporation of the Company. (1)
3.1(a) Amendment to the Certificate of Incorporation.(2)
3.1(b) Certificate of Designations, Rights and Preferences of Series A
Preferred Stock.(2)
3.2 By-Laws of the Company.(1)
3.3 Restated Certificate of Incorporation of A.P.F. Holdings, Inc. (1)
3.4 Certificate of Ownership and Merger between Interiors, Inc. and A.P.F.
Holdings, Inc. (1)
3.5 Articles of Incorporation of Italia Collection, Inc. (7)
3.6 By-laws of Italia Collection, Inc. (7)
4.1 Forms of Representative's Warrants to Purchase Class A Common Stock,
Class WA Warrants and Class WB Warrants. (2)
4.1(a) Consulting Agreement between the Company and VTR Capital, Inc.(2)
4.1(b) Form of Warrant Exercise Fee Agreement by and between the Company, VTR
Capital, Inc., and the Transfer Agent. (2)
4.2 Form of Warrant Agreement by and between the Company, J. Gregory &
Company, Inc., and Transfer Agent. (3)
4.3(a) Specimen Class A Preferred Stock Certificate.(2)
4.3(b) Specimen Class WC Warrant Certificate.(2)
4.3(c) Specimen Class A Common Stock Certificate.(2)
4.4 Specimen Class B Common Stock Certificate.(2)
27
<PAGE>
4.5 Specimen Class WA Warrant Certificate.(2)
4.6 Specimen Class WB Warrant Certificate.(2)
4.7 First Amendment to Warrant Agreement.(3)
10.1 Sublease Agreement dated January 16, 1991 between Stern Metals and the
Company.(1)
10.2 Lease dated August 11, 1992 between Hoopskirt Factory Partners and
I.R.A.L., Inc.(2)
10.3 Lease dated February 1, 1993 between Arglo Realty Company and the
Company (1)
10.4 Security Agreement dated November 13, 1990 between the Company and
United Credit Corporation and amendments thereto dated November 13, 1990,
January 7, 1992 , October 11, 1991 , December 15, 1992 and June 23, 1993. (1)
10.5 Promissory note dated June 27, 1991 for $75,000 to Mount Vernon Urban
Renewal Agency. (1)
10.6 Mount Vernon Small and Minority Business Loan Agreement dated
June 27, 1991 (1)
10.7 Security Agreement between Mount Vernon Urban Renewal Agency and the
Company dated June 27, 1991.(1)
10.8 Intercreditor Agreement dated June 27, 1991 between United Credit
Corporation and Mount Vernon Urban Renewal Agency (1)
10.9 Promissory note dated April 2, 1992 in favor of Hide Tashiro, in
principal amount Of $150,000.(1)
10.10 Promissory note dated April 2, 1992 in favor of Takehima Nishijima, in
principal amount of $150,000. (1)
10.11 Promissory note dated June 8, 1992 in favor of Roger Lourie, in
principal amount of $15,000. (1)
10.12 Promissory note dated September 19, 1992 in favor of Howard
Morganstein, in principal amount of $50,000. (1)
10.13 Promissory note dated September 1, 1993 in favor of The Munn Trust of
1975 Trustee: Sol Munn and Evelyn Munn, in the principal amount of $150,000. (1)
10.14 Agreement dated April 1, 1991 between Production, Merchandising &
Distribution Employees Union, Local 210, affiliated with The International
Brotherhood of Teamsters, Chauffeurs, Warehouseman and Helpers of America,
AFL-CIO and the Company. (1)
10.15 Form of Security Agreement between the Company and the Bridge
Lenders. (1)
10.16 Form of Non-Negotiable 6% Convertible Promissory Note. (1)
10.17 Form of Non-Negotiable 10% Promissory Note (1)
10.18 Employment Agreement dated March 8, 1994 between A.P.F. Holdings, Inc.
and Max Munn (1)
10.19 Marketing and Organizational Agreement between the Company and Robert
M. Leopold dated as of January 4, 1994.(1)
10.20 Promissory Note dated March 16 , 1994 in favor of William Evenchick,
in the principal amount of
28
<PAGE>
$100,000.(1)
10.21 Pledge and Security Agreement between Ted Stevens and Stern Metals,
Inc. dated January 16, 1991. (1)
10.22 Promissory Note dated January 16, 1991 in favor of Stern Metals, Inc.
in the principal amount of $125,000.(1)
10.23 1994 Stock Option and Appreciation Rights Plan.(5)
10.24 1994 Director Stock Option and Appreciation Rights Plan.(4)
10.25 Revised form of Warrant Exercise Fee Agreement.(5)
10.26 Revised form of Consulting Agreement between the Company and J.
Gregory & Company, Inc.(2)
10.27 General Loan and Security Agreement dated July 7, 1994 between the
Company and The Bank of New York.(5)
10.28 Promissory Note dated July 7, 1994 in the amount of $950,000. (5)
10.29 General Guarantees dated July 7, 1994 of Ann Stevens, Theodore Stevens
and Max Munn to The Bank of New York. (5)
10.30 Lease Agreement dated July 15, 1994 between the Company and Robert
Schildkraut.(5)
10.31 Promissory Note dated June 30, 1994 in the amount of $100,000 issued
to Ted Stevens. (5)
10.32 Agreement dated October 6, 1994 among the Company, J. Gregory &
Company, Inc. and Vincent Mongo.(5)
10.33 Consulting agreement between Morris Munn and the Company dated October
1, 1993.(5)
10.34 Consulting agreement between M & E Company and the Company dated
October 1, 1993.(5)
10.35 Promissory Note dated October 25, 1994 in the amount of $100,000
issued to Nybor Group, Inc. together with Affidavit of Confession of Judgment
relating thereto.(7)
10.36 Employment Agreement dated October 21, 1994, between Murano Crystal
Corp. and Stephen M. Tucker. (6)
10.37 Consulting Agreement dated October 21, 1994, between Murano Crystal
Corp. and Jean Tucker.(6)
10.38 Guaranty issued by the Company to Stephen M. Tucker and Jean
Tucker.(6)
10.39 Guaranty issued by the Company to Stephen M. Tucker and Michael D.
Tucker.(6)
10.40 Non-Competition and Confidentiality Agreement entered into between
Murano Crystal Corp. and Michael D. Tucker.(6)
10.41 Non-Competition and Confidentiality Agreement entered into between
Murano Crystal Corp. and Lisette Tucker. (6)
10.42 Promissory Note dated October 27, 1994 in the amount of $8,000 issued
to Max Munn.(7)
10.43 Promissory Notes dated October 27 and October 28, 1994 in the amounts
of $8,000 and $25,000,
29
<PAGE>
respectively, issued to Robert M. Schildkraut together with Affidavits of
Confession of Judgment relating thereto.(7)
10.44 Promissory Note dated November 23, 1994 in the amount of $225,000
issued to Ekistics Corp.(7)
10.45 Guarantees dated November 23, 1994 of Theodore Stevens, Max Munn,
Laurie Munn, and Ann Stevens.(7)
10.46 General Loan and Security Agreement dated November 22, 1994 from the
Company to Ekistics Corp.(7)
10.47 Rollover Promissory Notes issued to Robert Schildkraut in the amounts
of $25,000 and $8,000.
10.48 Form of Subscription Agreement for Private Placement of Series A 10%
Convertible Preferred Stock.(8)
10.49 Letter Agreement dated march 15, 1995 between the Company and Chatham
Capital Partners, Ltd.(3)
10.49(a)Form of Subscription Agreement for Offering by Decor Group, Inc.(11)
10.50 Demand note between the Company and Max Munn dated February 8,
1996.(9)
10.51 Non-negotiable Promissory Note between Laurie Munn and the Company
dated April 8, 1996, and Security Agreement relating thereto.(10)
10.51(a)Letter dated March 28, 1995 between Reynders, Gray & Co. Incorporated
to Theodore Stevens.(3)
10.52 Voting Agreement between the Company, Interiors, Inc., Max Munn,
Michael Lulkin, and Matthew Harriton.(8)
10.52(a)Revised Voting Agreement between the Company, Interiors, Inc., Max
Munn, Michael Lulkin, and Matthew Harriton.(12)
10.53 Credit Agreement between BH Funding, LLC and Interiors, Inc.(12)
10.54 Consulting Agreement between the Company and BH Funding, LLC. (12)
10.55 Promissory Note executed in favor of BH Funding, LLC. (12)
10.56 Pledge Agreement between the Company and BH Funding, LLC. (12)
11.0 Statement re: computation of per share earnings as of December 31, 1997.
21.1 Subsidiaries of the Registrant.(5)
23.1 Consent of Arthur Andersen LLP, independent Public accountants. (12)
23.2 Consent of Bernstein & Wasserman, LLP - such consent is contained in
the opinion contained in Exhibit 5.1.(12)
99.1 U.S. Patent and Trademark office Trademark Reg- No. 1,736,623(1)
99.2 U.S. Patent and Trademark Office Service mark Reg. No. 1,783,694(1)
99.3 Consent Order for Permanent injunction for Defendant Max Munn issued
by the Federal Trade Commission in September 1991. (1)
99.4 Satisfaction of Judgment in the matter of A.P.F. Holdings, Inc. vs.
Max Munn.(2)
30
<PAGE>
- ------------
(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. (1)
(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. 33-7728-NY), which exhibit is incorporated by
reference.
(5) Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1994 (File No. 0-24352), which exhibit is
incorporated herein by this reference.
(6) Filed as an exhibit to the Company's Current Report on Form 8-K filed
November 3, 1994 (File No. -24352), which exhibit is incorporated herein by
this reference.
(7) Previously filed as an exhibit to the Registration Statement
(Registration No. 33-86296) and which exhibit is incorporated herein by
reference.
(8) Previously filed as an exhibit to the Registration Statement
(Registration No. 33-08215) and which exhibit is incorporated herein by this
reference.
(9) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995 and which such exhibit is
incorporated herein by this reference.
(10) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1996 and which such exhibit is
incorporated herein by this reference.
(11) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1996 (File No. 0-24352), which
exhibit is incorporated herein by this reference.
(12) Previously filed as an exhibit to the Registration Statement
(Registration No. 33-94404), which exhibit is incorporated herein by
reference.
(13) Previously filed as an exhibit to the Registration Statement
(Registration No. 33-17671), which exhibit is incorporated herein by
reference.
31
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly executed on this 13 day of October, 1997.
INTERIORS, INC.
By: /s/ Max Munn
------------------------------
Max Munn, President
Chief Executive Officer and
Secretary
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant in the capacities and on the
dates indicated
Signature Title Date
- --------- ----- ----
/s/ Max Munn President, Chief Executive, October 13, 1997
- -------------------------- Officer, and Secretary
Max Munn
/s/ Roger Lourie Director October 13, 1997
- --------------------------
Roger Lourie
/s/ Richard A. Josephberg Director October 13, 1997
- --------------------------
Richard A. Josephberg
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Interiors, Inc.:
We have audited the accompanying balance sheet of Interiors, Inc. (a Delaware
corporation) as of June 30, 1997, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows of Interiors, Inc.
and subsidiary for each of the two years in the period ended June 30, 1997.
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. as of June
30, 1997 and the results of operations and cash flows of Interiors, Inc. and
subsidiary for each of the two years in the period ended June 30, 1997, 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 the accompanying notes
to the financial statements, the Company has a working capital deficiency,
has utilized approximately $1,350,000 in cash for its operations and is
involved in various lawsuits, the outcome of which is not certain. These factors
raise 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 3, 1997
F-1
<PAGE>
BALANCE SHEET
JUNE 30,
ASSETS 1997
------ --------
CURRENT ASSETS:
Cash $271,408
Accounts receivables -
Trade, net of allowance of $268,000 946,828
Inventories 1,520,829
Prepaid expenses and other current assets 898,391
-----------
Total current assets 3,637,456
-----------
INVESTMENTS 3,976,679
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 1,546,347
Furniture and fixtures 144,297
Leasehold improvements 213,010
----------
Total property and equipment, at cost 1,903,654
Less-Accumulated depreciation and
amortization 1,018,687
-----------
Net property and equipment 884,967
OTHER ASSETS 263,240
-----------
Total assets $8,762,342
===========
JUNE 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997
- ------------------------------------ --------
CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt $1,617,859
Accounts payable and accrued liabilities 2,099,734
Capital lease obligations 18,965
-----------
Total current liabilities 3,736,558
-----------
NON-CURRENT LIABILITIES:
Notes Payable 890,000
Loan Payable 17,954
-----------
Total noncurrent liabilities 907,954
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,300,000 shares authorized,
1,147,060 shares issued and outstanding 11,471
Class A Common Stock, $.001 par value,
30,000,000 shares authorized,
5,261,241 shares issued and outstanding 5,261
Class B Common Stock, $.001 par value,
2,500,000 shares authorized,
1,769,750 shares issued and outstanding 1,770
Additional paid-in-capital 13,216,636
Retained deficit (8,679,208)
Treasury Stock (600)
Note receivable (437,500)
-----------
Total stockholders' equity 4,117,830
-----------
Total liabilities and stockholders' equity $8,762,342
===========
The accompanying notes are in integral part of this balance sheet
F-2
<PAGE>
INTERIORS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
SALES AND OTHER REVENUES:
Net sales $ 4,652,131 $ 5,378,761
Royalty & commission revenues 144,000 0
Proceeds from sales to Photo-To-Art 1,140,000 0
----------- -----------
TOTAL SALES AND OTHER REVENUES $ 5,936,131 $ 5,378,761
EXPENSES:
Cost of goods sold $ 3,075,821 $ 3,558,733
Selling, general, and administrative expenses 2,569,697 3,611,812
----------- -----------
TOTAL EXPENSES $ 5,645,518 $ 7,170,545
Income from operations 290,613 (1,791,784)
GAIN ON SALE OF INVESTMENT 201,013 0
INTEREST EXPENSE (including securities related financing charges) (405,048) (538,497)
----------- -----------
Income (loss) from operations
before (benefit) provision for taxes 86,578 (2,330,281)
(BENEFIT) PROVISION FOR INCOME TAXES (19,346) 17,859
----------- -----------
Income (loss) from continuing operations 105,924 (2,348,140)
DISCONTINUED OPERATIONS
Loss from operations of discontinued operations 0 789,332
Provision for disposal of discontinued operations 0 2,146,301
----------- -----------
Loss from discontinued operations 0 2,935,633
NET EARNINGS (LOSS) PER COMMON STOCK
CONTINUING OPERATIONS $0.02 ($0.83)
DISCONTINUED OPERATIONS $0.00 ($1.03)
----------- ------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $0.02 ($1.86)
=========== ============
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 4,527,160 2,837,293
=========== ===========
</TABLE>
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, 1997 AND 1996
<TABLE>
<CAPTION>
Series A Class A Class B
Preferred Stock Common Stock Common Stock
--------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 1,570,000 $1,570 882,500 $883
Proceeds from issuance of Series A Preferred 460,000 $4,600
Conversion of Class B Shares 330,000 $330 (330,000) ($330)
Conversion of convertible debt into Class WC Warrants
Issuance of Series A Common Stock for services 360,000 $360
Conversion of convertible debt into Series A Preferred 80,000 $800
Issuance of shares to Italia - in Treasury 600,000 $600
Preferred stock dividend 55,247 $55
Issuance to Decor Group, Inc. 200,000 $2,000 200,000 $200
Issuance to Laurie Munn 250,000 $250
Private placement 50,000 $500 175,000 $175
Other (13,000) ($13)
Sale of Treasury Stock 180,000 $180
Escrow shares 1,250,000 $1,250
Net loss through June 30, 1996
-------------------------------------------------------------
BALANCE, June 30, 1996 790,000 $7,900 3,470,247 $3,470 2,039,500 $2,040
Net proceeds from the exercise of common stock warrants 822,424 $822
Net proceeds from the exercise of pfd. stock options 350,000 $3,500
Common stock issued to directors 20,000 $20
Conversion of preferred stock to common stock (92,940) ($929) 278,820 $279
Increase in valuation of investment in Decor
Conversion of Class B Common shares. into Class A Common shares. 269,750 $270
Common and preferred stock issued to BH Funding 100,000 $1,000 100,000 $100
Assumption of payroll tax liabilities - by officer in connection
with Italia dissolution
Common stock issued to liquidate debt 300,000 $300
Net income through June 30, 1997
-------------------------------------------------------------
BALANCE, June 30, 1997 1,147,060 $11,471 5,261,241 $5,261 1,769,750 $1,770
=============================================================
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated Treasury Note
Capital (Deficit) Stock Receivable Total
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 $5,595,763 ($3,335,618) ($270,257) $1,992,341
Proceeds from issuance of Series A Preferred $1,553,032 $1,557,632
Conversion of Class B Shares
Conversion of convertible debt into Class WC Warrants $100,000 $100,000
Issuance of Series A Common Stock for services $299,500 $299,860
Conversion of convertible debt into Series A Preferred $199,200 $200,000
Issuance of shares to Italia - in Treasury ($600)
Preferred stock dividend $165,686 ($165,741)
Issuance to Decor Group, Inc. ($2,200)
Issuance to Laurie Munn $437,500 ($437,500) $250
Private placement $307,934 $308,609
Other $13
Sale of Treasury Stock ($90,437) $270,257 $180,000
Escrow shares ($1,250)
Net loss through June 30, 1996 ($5,283,773) ($5,283,773)
---------------------------------------------------------------
BALANCE, June 30, 1996 $8,564,741 ($8,765,132) ($600) ($437,500) ($645,081)
Net proceeds from the exercise of common stock warrants $1,178,820 $1,179,642
Net proceeds from the exercise of pfd. stock options $734,000 $737,500
Common stock issued to directors $14,960 $15,000
Conversion of preferred stock to common stock $650
Increase in valuation of investment in Decor $1,624,501 $1,624,501
Conversion of Class B Common shares. into Class A Common shares
Common and preferred stock issued to BH Funding $723,900 $725,000
Assumption of payroll tax liabilities - by officer in connection
with Italia dissolution $75,344 $75,344
Common stock issued to liquidate debt $299,700 $300,000
Net income through June 30, 1997 $105,924 $105,924
---------------------------------------------------------------
BALANCE, June 30, 1997 $13,216,636 ($8,679,208) ($600) ($437,500) $4,117,830
===============================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INTERIORS, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30
------------------------------------
1997 1996
--------------- -----------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income (loss) $ 105,924 $ (5,283,773)
--------------- -----------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES:
Photo-2-Art-transaction (1,140,000)
Depreciation and Amortization: 628,416 680,137
Provision for losses on accounts receivable 228,000 63,244
Non-cash write off of non-productive assets 534,049
Non-cash financing charge 50,000
Reduction of liabilities from dissolution of subsidiary (586,509)
Non-cash provision for discontinued catalog operations 2,235,835
Gain from sale of investment securities (201,013)
Provision for dissolution of Italia 56,000
Provision for issuance of stock 15,000 140,960
Royalty and commissions 144,000
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in accounts receivable, trade (390,228) 178,743
Decrease (increase) in inventories 200,475 (346,275)
Decrease (increase) in prepaid expenses and other current assets (585,126) (47,512)
Decrease (increase) in other assets 287,887 162,891
Increase (decrease) in accounts payable and accrued expenses (606,654) 1,112,556
Increase (decrease) in net liabilities and accrued expenses of discontinued operations (90,557)
Increase (decrease) in prepaid sales and customer deposits (40,800)
---------------- -----------------
Net cash used in operating activities (1,350,336) (1,143,994)
--------------- -----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (166,621) (543,272)
Proceeds from sales of investments securities 372,500
Sale of investment in Decor Group, Inc. (826,000)
--------------- -----------------
Net cash used in investing activities (620,121) (543,272)
=============== =================
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 1,214,369
Net proceeds from sale of investment securities (357,197)
Repayments of debt and capitalized lease obligations (893,788)
Net proceeds from sale of Series A preferred stock, common stocks, and warrants 2,046,491
Net proceeds from exercise of common stock warrants 1,179,642
Net proceeds from exercise of preferred stock options 737,500
--------------- -----------------
Net cash provided by financing activities 2,237,723 1,689,294
--------------- -----------------
Net increase (decrease) in cash 267,266 2,028
CASH, beginning of period 4,142 2,114
--------------- -----------------
CASH, end of period $ 271,408 $ 4,142
=============== =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest $ 241,959 $ 366,118
Taxes 5,973 8,344
NON-CASH FINANCIAL ACTIVITIES:
Conversion of convertible debt into Class WC Warrants 100,000
Conversion of convertible debt into Class A Preferred Stock 200,000
Conversion of Series A Preferred Stock to Class A Common Stock 650
Investment - Decor Group, Inc. - issuance of Common A and Preferred Shares 437,500
Decor Acquisition 2,200
Stock issuance for financing charges 350,000
Stock issuance to settle debt and litigation
Stock issuance for consulting services in connection with Decor acquisition 350,000
The accompanying notes are an integral part of these financial statements
</TABLE>
F-5
<PAGE>
INTERIORS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997 AND 1996
- -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
- -------------------------------------------------------------------------------
BUSINESS ACTIVITY
The Company has been experiencing a shortage of working capital since
commencement of its catalog operations in February, 1992. Initially, this
shortage was due substantially to the unexpected positive response to catalog
mailings the demand for the products offered exceeded the Company's ability to
finance the cost of adequate inventory levels for such demand, thus leading to
delays in fulfilling orders. Ultimately, the working capital shortages became
more a function of the difficulty in sustaining revenue levels from the
catalog business and the high costs associated with the conduct of such
business, particularly with respect to recent substantial increases in paper,
printing, and postage costs. Although management decided to discontinue the
catalog business as of March 31, 1996, there can be no assurance that such
action eliminated current cash restraints. Because of the Company's cash flow
constraints, it has experienced problems in making payments for such
liabilities as payroll taxes, accrued rent, and third-party debt service. The
Company is working to arrange for paydowns of existing debt and is negotiating
monthly payment plans with regard to certain liabilities. In support of this
effort, during February, 1997, the Company arranged for additional financing
of approximately $975,000 based on a loan of $600,000 and the sale of certain
its holdings in Decor Group, Inc. to BH Funding, LLC. No assurances, however,
can be given that the Company's efforts will ultimately be successful. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Financial Statements and Notes.".
The Company's independent auditors have modified their report on the Company's
financial statements for the year ended June 30, 1997. The Company's ability
to continue as a going concern is dependent upon the successful achievement of
certain initiatives currently in progress. As of June 30, 1997, the Company
had a working capital deficit of approximately $99,000 and negative cash flow
from operations for the year ending June 30, 1997 totaling approximately
$1,350,000.
The Company has taken certain significant steps to correct the above
deficiencies including:
(a) As a result of the Company's relationship with Decor Group, Inc.
("Decor") the Company has contracted with Artisan House, Inc (a
subsidiary for Decor). for the distribution of framed mirrors to the
home furnishings industry. The Company has participated in the
production of a catalog for the purpose of increasing wholesale
revenues as a result of the relationship.
(b) The Company continues to invest in advertising and marketing
including the creation of direct mail brochures, to increase its
revenues for the customer frame division. Sales for the custom frame
division for the year ended June 30, 1997 was approximately
$3,226,000 an increase of 12.6% over sales of approximately
$2,864,000 for the year ended June 30, 1996. The Company expects to
continue the growth of this division.
(c) The company has received a purchase orders from its largest customer
in April and May of 1997 totaling approximately $1,050,000 for
contemporary picture frames. These purchase orders are an addition to
the continuing purchase orders received by the Company that aggregate
approximately $250,000 per fiscal quarter period. During the two
weeks prior to October 10, 1997 the Company received purchase orders
for an additional $800,000 from the same customer. The Company
expects to receive additional orders of approximately $750,000 which
would be comparable to orders received from the same period during
the fiscal year ended June 30, 1997. The Company therefore expects
sales to this customer to aggregate in excess of $3,000,000 for the
year ended June 30, 1998 as compared to sales of approximately
$1,175,000 to this customer for year ended June 30, 1997. The Company
expects the gross margin to remain unchanged for the sales to the
customer during the fiscal year ended June 30, 1998.
F-6
<PAGE>
(d) The Company has entered into a two year agreement with P-2-A to
supply picture frames and stretchers. The year ended June 30, 1998
will be the first full twelve month period for which the
Company'supplied products to P-2-A. The Company expects the growth of
sales for this period to continue on a full year basis as compared to
sales of only half of year ended June 30, 1997.
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. (the "Company" or "Interiors" known formerly 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. Interiors 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"). Italia was dissolved in December 1996 (See Note 4).
After giving effect to the discontinuance of the Catalog operation during
Fiscal 1996, the Company effectively has two operating divisions although it
is not set up from a financial reporting perspective with regard to cost of
sales and selling, general, and administrative expenses: 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 frames and mirrors through
upscale retail furniture fashion retailers and department stores. The majority
of the Company's sales are domestic. Sales to the largest customers totaled
$1,786,000 and $652,000, or 38% and 15% of net sales respectively, for the
years ended June 30, 1997 and June 30, 1996. Accounts receivable due from the
largerst customers totaled approximately $373,000 and $119,000 as of June 30,
1997 and 1996, respectively..
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
- -------------------------------------------------------------------------------
BASIS OF PRESENTATION
The consolidated statements of operations, stockholders' equity and cash flows
include the accounts of Interiors, Inc. and its former wholly-owned subsidiary
through the date of dissolution (December 1996). Accordingly, significant
intercompany accounts and transactions have been eliminated in the
consolidation.
REVENUE RECOGNITION
Revenue is recognized at the time custom work on wholesale 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.
INVENTORIES
Inventory is valued at the lower of cost or market, with cost determined using
the first-in, first-out method. Finished goods consist of those items
available for shipping through the Wholesale Division.
Bartered inventory acquired is valued at the original cost of the inventory to
the Company, which is determined to be the lower of cost or market. If the
Company determines that historical inventory cost exceeds the estimated
proceeds realizable upon sale of such inventory, it would record a reserve for
writedown to market. The Company
F-7
<PAGE>
recorded such writedowns as of June 30, 1996 which are included in the "Fourth
Quarter Adjustments/Transactions" disclosure below.
INVESTMENT IN AFFILIATE
The Company accounts for its investments in affiliates under the cost method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The cost of additions and
improvements and the costs incurred in the construction of castings and the
related master molds are capitalized and expenditures for repairs and
maintenance are expenses in the period incurred. Depreciation and amortization
of property and equipment is provided utilizing straight-line and accelerated
methods over the estimated useful lives of the respective assets as follows:
YEARS
-----
MACHINERY AND EQUIPMENT 3 - 10
FURNITURE AND FIXTURES 7 - 10
Leasehold improvements are amortized over the shorter of the remaining term of
the lease or the useful life of the improvement utilizing the straight-line
method.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Deferred income taxes have been provided for the
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities (See Note 13).
GOODWILL
In connection with the acquisition of Italia, amounts were paid in excess of
the fair market value of the assets acquired. These amounts have been recorded
as goodwill and are being amortized over 10 years. It is the Company's policy
to evaluate the life and amount of goodwill annually. Such evaluations are
based on current market conditions and expected future cash flows. As of June
30, 1997, in connection with the dissolution of the Italia subsidiary, all
goodwill has been written off.
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 INCOME/LOSS PER SHARE OF COMMON STOCK
Net income/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, 1997, no common stock equivalents were included in
the computation since the effect would be antidilutive.
FOURTH QUARTER ADJUSTMENTS/TRANSACTIONS
The Company recorded approximately $1,140,000 in expense reimbursements during
the fourth quarter of fiscal 1997. The income was primarily comprised of the
sale of assets, including inventory, other goods and services to Photo-to-Art.
F-8
<PAGE>
The Company recorded approximately $3,654,000 in losses during the fourth
quarter of fiscal year 1996. The losses were primarily attributable to the
discontinuance of the Catalog Division ($2,146,000), the write down of
inventory based on the physical count ($1,093,000), and write-off of certain
other assets ($79,200)
Selling, general, and administrative expenses were generated from continuing
operations as scheduled below:
1997 1996
---- ----
CUSTOM AND WHOLESALE DIVISIONS $ 2,569,697 $ 2,564,779
ITALIA COLLECTION, INC. -- 1,047,033
------------ --------------
TOTAL $ 2,569,697 $ 3,611,812
============ ==============
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121 (SFAS 121) titled "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" SFAS 121, which
is effective for financial statements for fiscal years beginning after
December 15, 1995, requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. At June 30, 1997, implementation of SFAS
121 did not have a material effect on the Company's financial statements.
In October 1995, the FASB issued SFAS 123 titled "Accounting for Stock-Based
Compensation," SFAS 123, which is effective for transactions entered into in
fiscal years beginning after December 15, 1995, uses a fair value based method
of accounting for stock options and similar equity instruments as contrasted
to the intrinsic valued based method of accounting for such instruments. See
Note 9 for proforma disclosure requirement of SFAS 123.
In June 1996, the FASB issued SFAS 125 titled "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125,
which is effective for such transactions occurring after December 31, 1996.
Earlier application is not allowed. At June 30, 1997, implementation of SFAS
125 did not have a material effect on the Company's financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS) No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per
share ("EPS"), replacing the presentation of currently required primary EPS
with a presentation of basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both basic EPS and
diluted EPS on the face of the statement of income. For the years ended June
30, 1997 and 1996 implementation of SFAS 128 would not have a material effect
on the Company's financial statements.
- -------------------------------------------------------------------------------
3. DISCONTINUATION OF OPERATIONS OF INTERIORS CATALOG DIVISION
- -------------------------------------------------------------------------------
On March 31, 1996, the Board of Directors, decided to discontinue the
Company's catalog operations because of declining revenues and high operating
costs. As a result, a charge against earnings of approximately $2,200,000, was
recorded at June 30, 1996. For the year ended June 30, 1996, losses from the
discontinued catalog operations totaled $789,000. The Company has fully
carried out its plan to discontinue the catalog operation within one year from
March 31, 1996. As of June 30, 1996, the Company had assets and accrued
expenses totaling $319,000 and $410,000 respectively. The Company has
substantially carried out its plan to wind down operations by filling existing
orders and commencing the mailing one final catalog as a "close-out sale" to
liquidate inventory.
F-9
<PAGE>
The following is a detail of income from discontinued operations for the year
ended June 30, 1996:
1996
----
REVENUE $ 742,640
COST OF GOODS SOLD 408,452
----------
GROSS MARGIN 334,188
SELLING, GENERAL & ADMIN. 1,078,642
INTEREST EXPENSE 44,878
NET LOSS FROM DISCONTINUED OPERATIONS $(789,332)
==========
- -------------------------------------------------------------------------------
4. ACQUISITIONS, DISPOSITIONS AND STRATEGIC ALLIANCES
- -------------------------------------------------------------------------------
INVESTMENTS CONSIST OF THE FOLLOWING:
Investment in Decor (a) $ 2,836,679
Investment in P-2-A (b) 1,140,000
---------
TOTAL $ 3,976,679
F-10
<PAGE>
(a) Part of the Company's long-term plan for growth includes either the
acquisition of or entering into strategic alliances with unrelated
companies in the decorative accessories industry to maximize market
potential. For this purpose, pursuant to a March 3, 1996 agreement
relating to the capitalization of Decor Group, Inc., ("Decor"), Decor
issued to the Company 250,000 shares of its Series A Non-Voting
Convertible Preferred Stock and an option to purchase 10,000,000
shares of its Series B Non-Convertible Voting Preferred Stock (the
"Option Shares") in exchange for issuance to Decor by the Company of
200,000 shares of its Class A Common Stock, (which has been sold) and
200,000 shares of its Series A Convertible Preferred Stock (which has
been sold) and a guarantee with respect to certain indebtedness
should such indebtedness become necessary. (The Decor securities are
adjusted to reflect a 1-for-two reverse split effected by Decor in
October 1996.) Also, the Company exercised its option to purchase the
Option Shares in September 1996, for total cash consideration of
$2,000. Concurrent with the exercise of this option, the Company
executed a Voting Agreement (the "Voting Agreement") to vest the
power to vote the Option Shares in a Voting Trust (the "Voting
Trust".) The Voting Agreement will expire upon the earlier of
February 7, 2007 or upon the Company's repayment in full of its
obligations to BH Funding, LLC (Note 9), but in no event earlier than
December 31, 1997. The Voting Trust comprises three individuals: The
Company's President and Chief Executive Officer (and also the
Chairman of the Board of Decor), and two Directors of Decor who are
otherwise unrelated to the Company. As part of the Company's
investment in Decor, during the months of August and September 1996,
the Company purchased 54,934 shares of Decor's Series C Non-Voting,
Convertible, Preferred Stock as a cost of $824,000. In the formation
of Decor, the Company's intention was to create an affiliate with a
corporate identity clearly separate and distinct from that of the
Company. Decor was organized for the purpose of acquiring the
business operations of unrelated companies. On November 12, 1996,
(the "Effective Date") a public offering by Decor of certain of its
securities was declared effective by the Securities and Exchange
Commission. Subsequent to the effective date of Decor's initial
public offering, the Company owned approximately 79.6% of the total
voting stock of Decor. During February 1997, the Company sold its
entire holdings of Series A Convertible Preferred Stock to an
independent investor. Assuming conversion by the subsequent holder to
common stock, the Company will own approximately 77.5% of the total
voting stock of Decor subsequent to such sale and conversion. All
Decor related disclosures have been adjusted to reflect the
following: (1) a one for two reverse stock split by Decor in October,
1996; and (2) Decor declared and issued a dividend on its common
stock payable in the form of two (2) shares of common stock for each
one (1) share of common stock held as of the record date of December
16, 1996. Each share of Decor's Series A and Series C Preferred stock
are convertible into three (3) shares of Decor's common stock
effective December 16, 1996. As of June 30, 1997, the holding in
Decor is recorded on the Company's financial statements at the market
value on November 12, 1996, the "Measurement Date" of the Company's
trading securities previously transferred to Decor during March 1996
plus acquisition costs, less the proportionate value of the
securities sold during February 1997. As of October 7, 1997, Decor
declared a reverse stock split of one new share of common stock for
each 3 shares held.
As of June 30, 1997, the holding in Decor was recorded on the
Company's financial statements under the Cost Method which was
determined by the market value on November 12, 1996, of the Company's
trading securities previously transferred to Decor during March 1996,
plus acquisition costs, less the proportionate value of the
securities sold during February 1997. As a result of the Company's
sale of its Common Stock equivalents during the nine months ended
March 31, 1997, the Company has accounted for the Decor investment
utilizing the Cost Method of accounting as it presently has no
residual equity interest (stock ownership is through Series B
Preferred shares).
F-11
<PAGE>
In May 1996, the Company entered into a two year Management Services
Agreement with Decor whereby the Company will advise Decor on the
manufacturing, sale, marketing and distribution of Decor's products
as well as providing Decor with accounting and administrative
services and advice on strategic planning of joint ventures,
acquisitions, and other long term initiatives. Pursuant to this
agreement, the Company will be paid on an annual basis the greater of
(1) $75,000 or (2) 1.5% of excess cashflow as defined in the
agreement. The Company and Decor amended this agreement to increase
this payment to $90,000 per annum. Additional transfers of funds from
Decor to the Company will be subject to the attainment by Decor of
excess cash flow totaling $4,000,000 per year through December 31,
1999. At June 30, 1997, the Company has accrued approximately $90,000
of fees pursuant to this agreement.
Decor entered into an asset purchase agreement (the "Agreement") with
Artisan House, Inc. ("Artisan House") to purchase substantially all
of the operating assets, and assume certain liabilities of Artisan
House for an aggregate purchase price of $3,526,400, subject to
certain adjustments. Decor completed the Artisan House acquisition on
November 18, 1996. Artisan House, located in Los Angeles, California
and founded in 1964, is engaged in the design, manufacturing, and
marketing of metal wall, table and freestanding sculptures.
Management believes that Artisan House's products bridge the gap
between high priced gallery art and mass produced decorative pieces.
Artisan House products retail from approximately $100 to over $400.
The primary goal of Artisan House is to supply a broad spectrum of
design driven sculpture and decorative accessories at moderate
prices.
(b) The Company entered into an agreement effective June 1, 1997, with
Photo-2-Art, Ltd. ("P-2-A") a company which converts photographs into
large-scale canvas oil paintings, whereby the Company agreed to sell
certain canvas related assets as well as other goods and services to
P-2-A in exchange for $600,000 in equity securities of P-2-A and
$50,000 in cash. This agreement was amended as of June 30. 1997 using
the cost method of accounting to reflect an increase in value to
$1,140,000. Such amounts are reflected as an investment on the
Company's balance sheet as of June 30, 1997. The Company now owns
270,000 shares of P-2-A stock and 120,000 warrants to purchase
additional stock at $4.50 per share (less than 5% ownership of
P-2-A.) The valuation ascribed to this transaction by the Company is
comparable to the values received by unrelated investors in a recent
private placement transactions between those investors and P-2-A. Is
addition, P-2-A has agreed to sublease approximately 21,000 square
feet of office and manufacturing space form the Company at an annual
rental rate of $63,000 per year plus rent escalations. The term of
the sublease is from June 1, 1997 to December 31, 2001. In addition,
the current supply contract between the Company and P-2-A has been
amended to continue for a term of seven (7) years. Sales to P-2-A for
the year ended June 30, 1997 were approximately $365,000, there were
no sales to P-2-A for the year ended June 30, 1996.
DISSOLUTION OF SUBSIDIARY
Because of declining revenues and high operating costs, on December 16, 1996,
the Board of Directors decided to discontinue and dissolve Italia. On December
27, 1996, a Notice of Public Auction was distributed by Italia, advising all
interested parties that a public auction of all the assets of Italia
consisting of molds, equipment, models and inventory listed in a Security
Agreement entered into between Italia, as debtor, and United Credit
Corporation, as secured party, was to occur. The auction took place on January
10, 1997 and the Company was the successful bidder, thereby acquiring all of
the assets of Italia in consideration for a payment of $2,000 and the
assumption by the Company of the liabilities of Italia to United Credit Corp.,
which as of June 30, 1997 totaled approximately $806,000. Since the financial
statements of Italia are consolidated into those of the Company, Italia's
liabilities have already been reflected on the Company's historical
consolidated financial statements. At June 30, 1997, the Company made the
adjustments necessary to properly restate recorded assets and liabilities,
together with a general reserve of approximately $56,000. These adjustments
included approximately $586,000 write-off of debt recorded based on the advice
of the Company's legal counsel (as the Company is not legally liable for such
liabilities). Further the Company wrote-off approximately $534,000 in assets
related to its Italia subsidiary which were not considered to benefit the
Company's future operations.
F-12
<PAGE>
- -------------------------------------------------------------------------------
5. INVENTORIES
- -------------------------------------------------------------------------------
The components of inventory are as follows:
JUNE 30, 1997
-------------
RAW MATERIALS $ 753,685
WORK IN PROCESS 435,204
FINISHED GOODS 331,940
-------------
TOTAL $ 1,520,829
=============
- -------------------------------------------------------------------------------
6. OTHER ASSETS
- -------------------------------------------------------------------------------
The components of other assets are as follows:
JUNE 30, 1997
---------------
SHOWROOM SAMPLES, NET OF ACCUMULATED AMORTIZATION $ 69,925
FRAME MIRROR MOLDS, NET OF ACCUMULATED AMORTIZATION 43,443
OF $169,235
ORGANIZATIONAL COSTS, NET OF ACCUMULATED 50,354
AMORTIZATION OF $187,701
OTHER 99,518
-----------------
TOTAL $ 236,240
=================
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, 1997
-------------
SALARIES AND EMPLOYEE BENEFITS $ 179,854
PAYROLL TAXES (A)_ 201,888
EMPLOYEE SETTLEMENTS (B)_ 289,000
RENT 244,988
DEFERRED RENT 46,752
INSURANCE 10,454
UNION DUES AND BENEFITS(B)_ 153,816
PROFESSIONAL FEES 198,521
INTEREST 32,000
OTHER
15,625
-------------
TOTAL $ 1,372,898
=============
F-13
<PAGE>
(a) As of June 30, 1997, the Company has unpaid State payroll taxes of
approximately $202,000. In July, 1997, the Company entered into a
payout arrangement with New York State to satisfy $64,890 of back
payroll taxes through twelve monthly payments of $5,407. The Company
expects to negotiate a settlement for the remaining taxes due in the
second quarter of 1998.
(b) Refer to Note 10 for details.
- -------------------------------------------------------------------------------
8. NOTES PAYABLE
- -------------------------------------------------------------------------------
NOTES PAYABLE JUNE 30, 1997
- ------------- -------------
BANK LINE OF CREDIT(A) $ 380,000
NOTES PAYABLE, DUE APRIL 28, 1999, TO BH FUNDING, BEARING 600,000
INTEREST AT 15% PAYABLE QUARTERLY. (D)
NOTES PAYABLE TO A NEVIS, BWI CORPORATION, BEARING INTEREST AT 206,292
18%, PAYABLE MONTHLY.(B)
FINANCING AGREEMENT WITH A SECURED LENDER (C) 1,233,622
NOTE PAYABLE TO INDIVIDUAL BEARING INTEREST AT 6.5% 61,675
OTHER NOTES PAYABLE 44,224
-------------
TOTAL 2,525,813
LESS CURRENT PORTION (1,617,859)
-------------
LONG-TERM PORTION $ 907,954
=============
(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, Ted Stevens, and their respective spouses. This line of
credit bears interest at a rate of prime plus 1% (9.50% 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.
F-14
<PAGE>
(b) On October 16, 1995, the Company entered into an agreement to
restructure a promissory note dated May 1995, with the principal
amount of $500,000 bearing interest at the rate of 18% per annum with
the principal which was due and payable in full on September 30, 1995
and a $150,000 note dated May 12, 1995, bearing interest at the rate
of 18% payable monthly with 135% of the principal which was also due
and payable in full on September 30, 1995 with a Nevis, BWI
Corporation. On October 16, 1995 the parties agreed the Company owed
the lender, including interest and monthly extension fees of
approximately $155,000 through December 15, 1995, an aggregate amount
of approximately $805,000. Pursuant to the new agreement, the Company
paid $405,000 to the Nevis Corporation upon acceptance of the
agreement. The Company also delivered a Promissory Note in the
principal amount of approximately $400,000, in extension and
replacement of the remaining balance due and payable of $180,000 on
or before December 15, 1995 and $220,000 on July 31, 1996. The new
agreement also stipulated 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 were applied against the note. The stock sale 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. In March, 1997, the Company renegotiated the terms of the
agreement with the lender. The Company currently pays $7,500 per
month at 15% per annum interest with a final payment due on March 15,
1998.
(c) During February, 1996 Interiors entered into an agreement with a New
York based lender whereby it borrowed 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
the Company 80% of the receivable. Upon collection of the receivable,
the lender remits the balance of 20%. 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. 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. 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. 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
1998.
F-15
<PAGE>
(d) In February, 1997, the Company received a loan from BH Funding, LLC
("BH") in the aggregate principal amount of $600,000 to be utilized
to repay certain indebtedness of the Company and for continued
operating expenses. As of October 3, 1997, the due date of this note
was extended to April 1998, under the same terms and conditions. The
Company in order to collateralize the loan to BH pledged and assigned
to BH and granted to BH a continuing security interest in the
Company's 6,666,667 shares of Series B Non-Convertible preferred
Stock of Decor, and the Company's 54,934 shares of Series C
Convertible Preferred Stock of Decor. As part of this transaction,
the Company sold 250,000 Series A Convertible Preferred Stock
holdings in Decor Group, Inc. to BH. In connection with this
agreement, the fair market value on these shares on the date of
issuance was allocated as follows: $350,000 as acquisition consulting
on the Decor transaction; $350,000 as interest on the loan (to be
amortized over the life of the loan using the effective interest
method); and $25,000 as additional expense of the Company's sale of
its 250,000 Series A Convertible Preferred Stock holdings in Decor
Group, Inc.
- -------------------------------------------------------------------------------
9. SHAREHOLDER'S EQUITY
- -------------------------------------------------------------------------------
SHAREHOLDER'S EQUITY
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 Company obtained an appraisal at that time
to determine the fair market values of this transaction. The shares were
issued to Ms. Munn on April 8, 1996. A Promissory Note and Security Agreement,
whereby the shares will collateralize the Promissory Note, was executed by the
Company and Ms. Munn pursuant to these terms. The Promissory Note remains
outstanding.
During September 1996, the Company issued: 10,000 shares of its Class A Common
shares to an outside director of the Company, and 10,000 shares of its Class A
Common shares to various individuals named by another outside director of the
Company. These shares bear a restrictive legend. Pursuant to the issuance of
these shares, $15,000 was charged against earnings at December 31, 1996.
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 carried
a restrictive legend and 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. The Company registered the above shares on August 13, 1997.
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,
F-16
<PAGE>
55,247 shares of the Company's Class A Common Stock was
issued for this purpose. Retained earnings was charged $165,741 in March 1996
in conjunction with the issuance of these shares. As of June 30, 1997, the
Company has not declared or established a record date for a dividend for its
Series A 10% Cumulative Convertible Preferred Stock for the period from April
1996 through June 30, 1997. Cumulative but unpaid dividends on Series A 10%
Cumulative Preferred Stock as of June 30, 1997 totals approximately $536,000.
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. As of October 1997, this agreement has been ammended
and restated so that the restrictions for the year ended June 30, 1997 have
been waived. The conditions set forth for the year ended June 30, 1998 remain
in effect. In any reporting period where this agreement is in effect and the
Company meets the income threshold requirement, the Company will record a
compensation charge calculated as the fair market value of the common stock
returned by the CEO's wife.
During the year ended June 30, 1997 $822,424 shares of common stock warrants
were exercised at a price of $1.50 yielding net proceeds of approximately
$822,000
Pursuant to a March 3, 1996 agreement relating to the capitalization of Decor
Group, Inc., ("Decor"), Decor issued to the Company 250,000 shares of its
Series A Non-Voting Convertible Preferred Stock and an option to purchase
10,000,000 shares of its Series B Non-Convertible Voting Preferred Stock (the
"Option Shares") in exchange for issuance to Decor by the Company of 200,000
shares of its Class A Common Stock, (which has been sold) and 200,000 shares
of its Series A Convertible Preferred Stock (which has been sold) and a
guarantee with respect to certain indebtedness should such indebtedness become
necessary. (See "Acquisitions, Disposition and Strategic Alliances).
On June 30, 1997, the Company issued 300,000 Shares of Class A Common Stock to
Mr. Hide Tashiro in settlement of certain amounts owned to Mr. Tashiro and
claims by the Company of amounts due from Mr. Tashiro and his affiliates. (See
"Commitments ad Contingency").
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, 1996.
F-17
<PAGE>
In August 1995, the Company agreed to issue, at a future date, 60,000 Class A
Common shares in settlement of all current and future liabilities under a
two-year Marketing and Organizational Agreement (the "Marketing Agreement")
with a consulting firm dated January 4, 1994.
In December 1995, in consideration for certain services rendered, 10,000
shares of the Company's Class A Common Stock were issued to various
individuals related to Richard Josephberg, an outside Director of the Company.
In February 1996, the Company's Board of Directors approved the issuance to
Sol Munn, Uncle of the President, of 150,000 shares of the Company's Class A
Common Stock, in consideration for past consulting services provided.
Effective June 30, 1996, the Company entered into a consulting agreement with
Morris Munn, father of the Company's President and Chief Executive Officer, in
exchange for certain future services (See Note 10-Consulting Arrangements). As
part of this agreement, over the subsequent five-years, the Company will pay
Mr. Munn $54,000 per annum in equal bi-weekly installments, and issue to Mr.
Munn options to purchase up to 350,000 shares of the Company's Series A
Preferred Stock. These options were fully exercised during July to September
1996, generating net proceeds to the Company totaling $787,500.
Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company and sister of the President
and Chief Executive Officer, the Company issued to Ms. Stevens 50,000 shares
of the Company's Class A Common Stock. The Company plans to register these
securities with the Securities and Exchange Commission no later than November
1996. Also pursuant to the Settlement, the Company issued to Michael Levine as
escrow agent (the "Escrow Agent") 1,250,000 unregistered shares of the
Company's Class B Common shares (the "Escrow Shares".) The Escrow Shares shall
not be voted by the Escrow Agent, unless the Company defaults on its
obligations under the agreement. Upon satisfaction of such obligations, the
Escrow Shares shall be returned by the Escrow Agent to the Company.
An aggregate of $350,000 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.
Pursuant to a transaction between BH Funding and the Company, the Company
issued 100,000 shares of Class A Common Stock and 100,000 shares of Preferred
Stock (See "Notes Payable").
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
"Regulations" 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.
On May 7, 1997 the Company announced that it had extended the exercise period
of its Class A Warrants to June 22, 1998.
F-18
<PAGE>
As of June 30, 1997, the Company has not declared or established a record date
for a dividend for its Series A 10% Cumulative Convertible Preferred Stock for
the period from April 1996 through June 30, 1997. Cumulative but unpaid
dividends on Series A 10% Cumulative Preferred Stock as of June 30, 1997
totals approximately $536,000.
At June 30, 1997, certain warrants to acquire Company securities are
outstanding: a) 3,055,588 Class WA Warrants exercisable at $1.50 to acquire
one Class A Common Share and one Class WB Warrant, b) 845,150 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.
STOCK OPTION PLANS
The 1994 Plan. On June 20, 1994, the Company adopted the Interiors, Inc. 1994
Stock Option and Appreciation Rights Plan (the "1994 Plan"), which provides
for the granting of options to officers, employees and consultants to purchase
not more than an aggregate of 250,000 Class A Shares. Directors of the Company
are not eligible to participate in the 1994 Plan. The 1994 Plan provides for
the grant of options intended to qualify as "incentive stock options" under
the Internal Revenue Code of 1986, as amended (the "Code") as well as options
which do not so qualify.
Pursuant to the 1994 Plan, the Board of Directors or a stock option committee
established by the Board to administer the 1994 Plan determines the persons to
whom options are granted, the number of Class A Shares subject to option, the
period during which the options may be exercised and the option exercise
price. With respect to incentive stock options, no option may be granted more
than ten years after the effective date of the 1994 Plan or exercised more
than ten years after the date of grant (five years if the optionee owns more
than ten percent of the Class A Shares of the Company at the time of grant).
Additionally, with respect to incentive stock options, the option price may
not be less than 100% of the fair market value of the Class A Shares on the
date of the grant (110% if the optionee owns more than ten percent of the
Class A Shares of the Company at the time of grant). The fair market value of
the Class A Shares will be determined by the Board or the Committee in
accordance with the 1994 Plan as follows: If the Class A Shares are not listed
and traded upon a recognized securities exchange, on the basis of recent
purchases and sales of Class A Shares in arms-length transactions or based on
the last reported sale or transaction price for such stock on the date of
grant or, if the shares are traded on a recognized securities exchange or
quoted on the NASDAQ National Market System upon the basis of the last
reported sale or transaction price on the date of grant or, if the shares were
not traded on such date, on the date nearest preceding that date. Subject to
certain limited exceptions, options may not be exercised unless, at the time
of exercise, the optionee is in the service of the Company.
The Board of Directors or the Committee may, in its discretion, at any time
prior to the exercise of any option, grant in connection with such option the
right to surrender part or all of such option to the extent the option is
exercisable, and receive an amount (payable in cash, Class A Shares or
combination thereof as determined by the Board or the Committee) equal to the
difference between the then fair market value of the shares issuable upon the
exercise of the option (or portions thereof surrendered) and the exercise
price of the option or portion thereof surrendered.
On September 16, 1994, the Board of Directors granted Incentive Options to
purchase an aggregate of 159,000 Class A Shares under the 1994 Plan at an
exercise price equal to the fair market value of the shares on the date of
grant, or $3.50 per share, to 23 employees and Incentive Options to purchase
25,000 Class A Shares to Ann Stevens, then Executive Vice President of the
Company and wife of then Company President, Theodore Stevens, at 110% of the
fair market value or $3.85 per share. Of such options, options to purchase
75,000 Class A Shares were granted to Max Munn, now President and Chief
Executive Officer of the Company, and Ann Stevens, then Executive Vice
President of the Company, and Mr. Munn's sister. In addition, on October 5,
1994 the Board of Directors granted Incentive Options to two employees to
purchase an aggregate of 20,000 Class A Shares at exercise prices equal to the
fair market value of the shares or $3.38 per share. With respect to each such
grant, 25% of such options will vest each year commencing on the first
anniversary of the grant.
F-19
<PAGE>
The Director Plan. On June 20, 1994 the Board of Directors approved the 1994
Director Stock Option and Appreciation Rights Plan (the "Director Plan"). The
Director Plan was adopted to provide an incentive to Directors through
automatic and discretionary grants of stock options. The Director Plan
provides for the grant of options intended to qualify as "incentive stock
options" under the Code as well as options which do not so qualify.
The Director Plan may be administered by a committee appointed by the Board of
Directors of the Company (the "Committee"). Options under the Director Plan
may be granted to each person who is a Director of the Company on the date of
grant. All Directors of the Company are eligible to receive options under the
Director Plan.
The Director Plan provides for the granting of options to Directors in such
amount and, subject to the terms of the Director Plan, upon such terms as the
Board or Committee determines in its discretion in order to reward the
recipient director for extraordinary service to the Company. In addition, on
the second Monday of May of each year each person who is then a director of
the Company shall be automatically granted an option to purchase 10,000 of the
Company's Class A Shares, subject to adjustment as provided for in the
Director Plan. The aggregate number of shares for which options may be issued
pursuant to the Director Plan is 250,000 shares. The exercise price for
options granted under the Director Plan must be equal to the fair market value
per Class A Share on the date of grant. The fair market value of the Class A
Shares will be determined by the Board or the Committee in accordance with the
Director Plan as follows: If the Class A Shares are not listed and traded upon
a recognized securities exchange, on the basis of recent purchases and sales
of Class A Shares in arms-length transactions or based on the last reported
sale or transaction price for such stock on the date of grant or, if the
shares are traded on a recognized securities exchange or quoted on the NASDAQ
National Market System upon the last reported sale or transaction price on the
date of grant or, if the shares were not traded on such date, on the date
nearest preceding that date. Each option granted under the Director Plan
expires ten years after the date of grant, unless a lesser period is specified
by the Committee.
In the event an optionee ceases to be a Director of the Company for any reason
at a time when he holds an option, he may exercise only such options as are
exercisable at the time he ceases to be a Director, within the original term
of the option. Options which are not exercisable at the time an optionee
ceases to be a Director shall terminate. In the event an optionee dies, the
Director Plan provides for the exercise of an option on behalf of the deceased
Director.
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. During the current year Mr. Stevens converted
269,750 shares of the Company's Class B common shares into 269,750 shares of
the Company's Class A common shares.
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. In July 1997, all 350,00 of these options were
exercised, generating proceeds to the Company of $787,5000.
At June 30, 1997, an aggregate of 209,000 options are exercisable at prices
ranging from $3.50 to $3.85.
The Company accounts for its plan under APB Opinion No. 25, under which no
compensation cost has been recognized as all options granted during 1996 and
1997 have been granted at the fair value of the Company's common stock. Had
compensation cost for these plans been determined in accordance with SFAS 123,
the Company's net income and EPS would have been reduced as follows:
YEAR ENDED JUNE 30,
--------------------------------
1997 1996
---- ----
NET INCOME AS REPORTED ....... $ 105,924 $ (5,283,773)
F-20
<PAGE>
PROFORMA ....... -- (7,058,273)
PRIMARY EPS: AS REPORTED ....... $.02 ($1.86)
PROFORMA ....... ($2.49)
FULLY-DILUTED EPS AS REPORTED ....... -- --
PROFORMA ....... -- --
Under SFAS 123, the fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1996: (1) expected life of option is 6
months; (2) dividend yield of 0%; (3) expected volatility of 67%; and (4)
risk-free interest rate of 5.62%.
Because SFAS 123 method of accounting has not been applied to options granted
prior to July 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
- -------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
- -------------------------------------------------------------------------------
OPERATING LEASES
On January 1, 1997, the Company entered into a lease agreement that provides
for the leasing of a site which serves as the Company's principal office and
manufacturing facility. The term of the lease expires December 31, 2001, with
an option by the Company for a five-year extension. This lease requires
minimum annual lease payments of approximately $231,000.
P-2-A has agreed to sublease approximately 21,000 square feet of office and
manufacturing space form the Company at an annual rental rate of $63,000 per
year plus rent escalations. The term of the sublease is from June 1, 1997 to
December 31, 2001.
The Company 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 approximate future minimum lease payments per fiscal year under operating
leases exclusive of sublease income are as follows:
1998 $ 317,370
1999 313,405
2000 321,306
2001 338,883
2002 219,580
THEREAFTER 54,798
---------------
$ 1,565,342
===============
Rent expense charged to operations, which includes escalation charges, for the
years ended June 30, 1997 and 1996, amounted to $307,941 and $408,458,
respectively, excluding sublease income.
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, 1998. None of the Company's employees have
been on strike, or threatened to strike since the Company's inception and the
Company believes its relationship with all of its personnel is satisfactory.
The Company owes the Union approximately $162,000 as of this filing and has
agreed to retire this amount through monthly payments of $8,000 with 9%
interest rate.
F-21
<PAGE>
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
The Company and its Chief Executive Officer ("CEO") during fiscal year 1996
were involved in numerous lawsuits with various members of the CEO's immediate
family, certain of whom were Officers and Directors of the Company. All of
this litigation has been settled and all resulting charges were reflected in
the fiscal 1996 financial statements. In addition, as a component of the
settlement, the Company entered into various severance and non-compete
agreements discussed in Note 12.
The litigation relating to the termination of the 1995 employment agreement
between Ann Stevens and the Company has been settled by the execution of an
employment severance agreement (the "Agreement"). Pursuant to the Agreement,
the Company paid Ms. Stevens $63,000 for accrued and unpaid compensation upon
execution of the Agreement. Subsequently, for a period of seven years, the
Company will make bi-weekly payments to Ms. Stevens to total $72,000 for the
first year, $70,000 for each of the next three years, and $50,000 for each of
the final three years. As additional compensation, the Company will pay Ms.
Stevens for reimbursement for certain expenses, $50,000 in various
installments during the four months ending December 1996. The Company also
entered into a non-compete agreement with Ms. Stevens for which the Company
will make bi-weekly payments to Ms. Stevens to total $25,000 per year for
seven years, plus automobile and insurance costs for five years. As of June
30, 1996, the Company issued to Ms. Stevens 50,000 shares of the Company's
Class A Common Shares, which were previously committed to Ms. Stevens pursuant
to her 1995 employment agreement. The 50,000 Class A Common Shares are subject
to a "lock-up" agreement with VTR Capital Corporation, the Company's
investment bankers. As of June 30, 1996, the Company placed into escrow
1,250,000 shares of its Class B Common Shares (the "Escrow Shares") with
Michael Levine, Esq., attorney of Ms. Stevens, as escrow agent (the "Escrow
Agent"). The Escrow Agent shall abstain from voting the Escrow Shares for any
purpose, except in the event of either the failure by the Company to adhere to
the payment provisions noted above or the financial insolvency of the Company.
If either event occurs, Ms. Stevens will be in a position to elect replacement
Directors. Once the payment provisions in the severance and non-compete
agreements are satisfied, the Escrow Agent shall return the Escrow Shares to
the Company. The Company paid $228,353 in the current year to Ms. Stevens in
compliance with the settlement Agreement. The status of the Escrow shares
remain unchanged.
In February 1997, the terms of the agreement with Ms. Stevens were modified to
provide for additional payments of $500 per month over 16 months, and to
provide for $6,000 as reimbursement for legal expenses.
During April and May of 1995, Hide Tashiro commenced two lawsuits, now
settled, in the Supreme Court of New York, Manhattan County, totaling
approximately $300,000, plus interest and attorney's fees, against the Company
and others. The Company claimed that Mr. Tashiro and his affiliates owed a
greater amount to the Company for
F-22
<PAGE>
earned royalties and commissions. The complaint demands payment by the Company
for loans made by Mr. Tashiro. In April 1996 the plaintiff's motions for
summary judgment were denied and the court held that there was an issue of
fact to be tried. On June 30, 1997 the Company, Hide Tashiro, Takehisa
Nishijima, and Max Munn, President of the Company, entered into a settlement
agreement (the "Settlement Agreement") whereby the Company would issue Mr.
Tashiro 300,000 shares (the "Shares") of the Company's unregistered Class A
Common Stock in exchange and satisfaction of all amounts due and from the
plaintiffs. The Settlement Agreement contains certain restrictions on resale
commencing in 1999 of the Shares as well as providing for certain "piggy-back"
registration rights.
In July 1996, Gear Holdings, Inc. brought an action against the Company for
the alleged breach of a licensing agreement. The Company denies that it was a
party to an agreement with Gear, or that any sum of money is owed. The
complaint demands sums Gear would have received under the alleged agreement in
a sum to be determined, but not less than $250,000. The suit has remained
dormant since inception. Management, on the advise of council believes this
matter will be dismissed with no material impact to the Company's financial
position or results of operations.
In August 1996, a lawsuit, now settled, was brought by The Munn Trust of 1975,
Sol Munn and Evelyn A. Munn, Co-Trustees commenced an action in the Supreme
Court of New York, County of Suffolk against the Company as well as Max Munn,
the Company's President and Chief Executive Officer and Laurie Munn, his wife
for non-payment of $150,000 plus interest. The Company claims that any
obligation that it had pursuant to this matter has been satisfied by the
Company in the prior fiscal year and that any amounts that may be unpaid are
due solely by Mr. and Mrs. Munn. The Company has not guaranteed such
liabilities. This matter has been settled and releases exchange without any
payment by the Company or by the Munn Trust.
In August 1996, SJP Contractors of New York, Inc. commenced an action in the
Supreme Court of New York, County of Westchester against the predecessor
entity of the Company, A.P.F. Holdings, Inc., and others for $208,165 for
work, labor, and services allegedly performed in January 1991 for the
renovation of the Company's premises. Management believes that all required
payments have been made and no further amounts should be provided for.
In July 1997, an action was brought against the Company and certain of the
Company's officers and directors, by Mary Stewart Lepp, in the United States
District Court for the Southern District of New York. Ms. Lepp, a former
employee of the Company, claims among other things, that she was discharged
because she was pregnant, and seeks compensatory and punitive damages in
unspecified amounts for alleged violations of various federal and state
employment and discrimination laws. Management, on the advise of council,
believes this claim to be wholly without merit and that the claim will
eventually be dismissed or adjudicated in the Company's favor.
The Company is subject to other claims and litigation in the ordinary course
of business. In management's opinion, such claims are not material to the
Company's financial position or its results of operations.
- -------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
- -------------------------------------------------------------------------------
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, 1997, the outstanding balance of
this note totals $365,000.
On February 15, 1996, the Company entered into a Financing Arrangement with a
New York corporation whereby it 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
F-23
<PAGE>
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 $1,256,000. This Financing Arrangement has been personally
guaranteed by Max Munn, the Company's President and his wife.
For the years ended June 30, 1997 and June 30, 1996, the Company paid
approximately $54,000 and $30,000, respectively, to the father of the
President, and Chief Executive Officer for consulting services. See
"Consulting Arrangements." These amounts are included in capitalized mold
costs on the balance sheet.
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.
In March, 1997, the Company borrowed $100,000 at 6 1/2% per annum interest
from Laurie Munn, wife of Max Munn, the Company's CEO. The loan is evidence by
demand promissory note. The amount outstanding at June 30, 1997 was $61,675.
(See Note 8)
The Company had various transactions with P-2-A during the year ended June 30,
1997 (See Note 4"Acquisitions, Dispositions and Strategic Alliances").
- -------------------------------------------------------------------------------
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 (benefit) provision consists of:
YEAR ENDED JUNE 30
--------------------------
1997 1996
---- ----
CURRENT INCOME TAXES: $ $
FEDERAL --
STATE AND LOCAL 10,654 17,859
DEFERRED INCOME TAX (30,000) --
--------- ---------
TOTAL $(19,346) $ 17,859
========= =========
The difference between the statutory and effective tax rate for the years
ended June 30, 1997 and 1996 results principally from a full reserve against
any benefit generated in 1996 and partial release of such reserve during
fiscal 1997. (State taxes are provided) and immaterial non-deductible expenses
in 1995.
Through June 30, 1996, all deferred tax assets were fully reserved. As of June
30, 1997, the Company has determined it is "more likely than not" that at
least a portion of its deferred tax assets will be utilized. Accordingly, the
previously recorded valuation allowance has been reduced by $30,000 for the
year ended June 30, 1997.
The benefit from the Company's net operating loss carry forward for Federal
income tax purposes in the amount of approximately $5,000,000 (which expire
through 2011). The deferred tax assets of approximately $1,500,000 is
comprised primarily of net operating losses and temporary differences.
