<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A No-1
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For Nine Month Period Ended March 31, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From to .
------- -------
Commission File No. 0-24352
INTERIORS, INC.
---------------
(Doing Business in New York under the name A.P.F. Master Framemakers)
(Exact name of small business issuer as specified in its charter)
Delaware 13-3590047
-----------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 Washington Street, Mt. Vernon, New York 10553
-------------------------------------------------
(Address of principal executive offices) (zip code)
Issuer's Telephone Number: (914) 665-5400
-----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
--- ---
<PAGE>
The number of shares outstanding of the issuer's Class A Common Stock and Class
B Common Stock as of May 15, 1997 was 4,861,241 and 1,769,750, respectively.
Transitional Small Business Disclosure Format (check one). Yes No X .
--- ---
1
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INTERIORS, INC.
TABLE OF CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statement .............................................. 1
Consolidated Balance Sheet as of March 31, 1997................... 2
Consolidated Statements of Operations - For the Three Months Ended
March 31, 1997 and 1996........................................... 3
Consolidated Statements of Operations - For the Nine Months Ended
March 31, 1997 and 1996........................................... 4
Consolidated Statement Changes in Stockholders' Equity -
For the Nine Months Ended March 31, 1997.......................... 5
Consolidated Statements of Cash Flows -
For the Nine Months Ended March 31, 1997 and 1996................. 6
Notes to Consolidated Financial Statements........................ 7-15
Item 2. Management's Discussion and Analysis.............................. 16
PART II - OTHER INFORMATION
Item 1. Legal Proceeding.................................................. 21
Item 2. Changes in Securities............................................. 24
<PAGE>
Item 3. Defaults Upon Senior Securities................................... 24
Item 4. Submission of Matters to a Vote of Security Holders............... 24
Item 5. Other Information................................................. 24
Item 6. Exhibits and Reports on Form 8-K.................................. 24
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements included herein have been prepared
by Interiors, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
statements include all adjustments necessary to present fairly the financial
condition of the Company as of March 31, 1997 and the results of operations for
the three and nine month periods ended March 31, 1997 and 1996.
The Company's results of operations during the three and nine months
ended March 31, 1997 are not necessarily indicative of any future results. It is
suggested that the financial statements included in this report be read in
conjunction with the financial statements and notes thereto in the Company's
Annual Report on Form 10-KSB for the fiscal year ended June 30, 1996.
1
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INTERIORS, INC.
BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
March 31,
ASSETS 1997
---------------------
<S> <C>
CURRENT ASSETS:
Cash $172,804
Accounts receivables -
Trade, net of allowance of $287,000 532,256
Inventories 2,197,625
Prepaid expenses and other current assets 521,970
---------------------
Total current assets 3,424,655
---------------------
INVESTMENT IN AFFILIATE 2,772,967
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 1,484,725
Furniture and fixtures 144,297
Leasehold improvements 213,010
---------------------
Total property and equipment, at cost 1,842,032
Less- Accumulated depreciation and
amortization 922,412
---------------------
Net property and equipment 919,620
OTHER ASSETS 398,941
---------------------
Total assets $7,516,183
=====================
March 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997
---------------------
CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt $2,646,130
Accounts payable and accrued liabilities 1,264,776
---------------------
Total current liabilities 3,910,906
---------------------
NON-CURRENT LIABILITIES:
Capital lease obligations 23,282
---------------------
Total noncurrent liabilities 23,282
---------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,300,000 shares authorized,
1,147,060 shares issued and outstanding 11,471
Class A common stock, $.001 par value,
30,000,000 shares authorized,
4,961,241 shares issued and outstanding 4,961
Class B common stock, $.001 par value,
2,500,000 shares authorized,
1,769,750 shares issued and outstanding 1,770
Additional paid-in-capital 13,193,457
Retained deficit (9,191,564)
Treasury Stock (600)
Note receivable (437,500)
---------------------
Total stockholders' equity 3,581,995
---------------------
Total liabilities and stockholders' equity $7,516,183
=====================
</TABLE>
The accompanying notes are an integral part of this balance sheet
2
<PAGE>
INTERIORS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------------- -----------------
<S> <C> <C>
NET SALES $905,132 $1,756,106
COST OF GOODS SOLD ( incl. write-down in 1997 of $225,969
of Italia collection obsolete inventory) (Note 6) 657,047 863,937
------------------- -----------------
Gross profit from continuing operations 248,085 892,169
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 573,245 821,741
PROVISION - ISSUANCE OF STOCK OPTIONS 0 (6,800)
------------------- -----------------
Operating expenses 573,245 814,941
(Loss) Income from continuing operations (325,160) 77,228
GAIN ON SALE OF SECURITIES 243,945 0
RESERVE FOR DISSOLUTION OF ITALIA COLLECTION, INC. (Note 6) (56,000) 0
INTEREST EXPENSE (including financing charges) (154,152) (73,714)
------------------- -----------------
Income (loss) from continuing operations
before provision for taxes (291,367) 3,514
PROVISION FOR INCOME TAXES 0 0
------------------- -----------------
Income (loss) from continuing operations (291,367) 3,514
DISCONTINUED OPERATIONS
Loss from operations of discontinued operations 0 862,647
------------------- -----------------
Loss from discontinued operations 0 862,647
NET INCOME (LOSS) ($291,367) ($859,133)
=================== =================
NET EARNINGS (LOSS) PER COMMON STOCK
CONTINUING OPERATIONS ($0.07) $0.00
DISCONTINUED OPERATIONS $0.00 ($0.33)
------------------- -----------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK ($0.07) ($0.33)
=================== =================
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 4,408,553 2,604,869
=================== =================
</TABLE>
The accompanying notes are an integral part of these financial statements
3
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INTERIORS, INC.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
<S> <C> <C>
NET SALES $2,958,167 $5,032,906
COST OF GOODS SOLD ( incl. write-down in 1997 of $225,969
of Italia Collection obsolete inventory) (Note 6) 1,782,751 2,497,620
------------------- -------------------
Gross profit from continuing operations 1,175,416 2,535,286
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,430,418 2,121,320
PROVISION - ISSUANCE OF STOCK OPTIONS 15,000 193,200
------------------- -------------------
Operating expenses 1,445,418 2,314,520
(Loss) Income from continuing operations (270,002) 220,766
GAIN ON SALE OF SECURITIES 243,945 0
RESERVE FOR DISSOLUTION OF ITALIA COLLECTION, INC. (Note 6) (56,000) 0
INTEREST EXPENSE (including financing charges) (314,402) (321,240)
------------------- -------------------
Income (loss) from continuing operations
before provision for taxes (396,459) (100,474)
PROVISION FOR INCOME TAXES 9,973 5,998
------------------- -------------------
Income (loss) from continuing operations (406,432) (106,472)
DISCONTINUED OPERATIONS
Loss from operations of discontinued operations 0 1,523,714
------------------- -------------------
Loss from discontinued operations 0 1,523,714
NET INCOME (LOSS) ($406,432) ($1,630,186)
=================== ===================
NET EARNINGS (LOSS) PER COMMON STOCK
CONTINUING OPERATIONS ($0.09) ($0.04)
DISCONTINUED OPERATIONS $0.00 ($0.59)
------------------- -------------------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK ($0.09) ($0.63)
=================== ===================
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 4,408,553 2,604,869
=================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Series A Class A Class B
Preferred Stock Common Stock Common Stock
-----------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1996 790,000 $7,900 3,470,247 $3,470 2,039,500 $2,040
Proceeds from the exercise of common stock warrants 822,424 $822
Proceeds from the exercise of pfd. stock options 350,000 $3,500
Common stock issued to directors 20,000 $20
Conversion of preferred stock to common stock (92,940) ($929) 278,820 $279
Increase in valuation of investment in affiliate
Conversion of Class B Com sh. into Class A Com sh. 269,750 $270 (269,750) ($270)
Common and preferred stock issued to BH Funding 100,000 $1,000 100,000 $100
Assumption of payroll tax liabilties - dissolution
Net income through March 31, 1997
-----------------------------------------------------------------------
BALANCE, March 31, 1997 1,147,060 $11,471 4,961,241 $4,961 1,769,750 $1,770
=======================================================================
</TABLE>
<TABLE>
<CAPTION>
Additional Retained
Paid-In Earnings Treasury Note
Capital (Deficit) Stock Receivable Total
---------- --------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1996 $8,564,741 ($8,785,132) ($600) ($437,500) ($645,081)
Proceeds from the exercise of common stock warrants $1,291,820 $1,292,642
Proceeds from the exercise of pfd. stock options $821,500 $825,000
Common stock issued to directors $14,980 $15,000
Conversion of preferred stock to common stock $650
Increase in valuation of investment in affiliate $1,700,522 $1,700,522
Conversion of Class B Com sh. into Class A Com sh.
Common and preferred stock issued to BH Funding $723,900 $725,000
Assumption of payroll tax liabilties - dissolution $75,344 $75,344
Net income through March 31, 1997 ($406,432) ($406,432)
-----------------------------------------------------------------
BALANCE, March 31, 1997 $13,193,457 ($9,191,564) ($600) ($437,500) $3,581,995
=================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
INTERIORS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
---------------------------
1997 1996
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) ($406,432) ($1,630,186)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 508,796 666,937
Provision for losses on accounts receivable 250,000 33,766
Write off of non-productive assets 698,712
Reduction of liabilities from dissolution of subsidiary (586,509)
Financing charge 50,000
Gain from sale of investment securities (243,945)
Non-cash provision for discontinued catalog operations 1,100,000
Provision for dissolution of Italia 56,000
Provision for issuance of stock 15,000 193,200
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, trade 2,344 (147,616)
Decrease (increase) in inventories (532,321) (560,484)
Decrease (increase) in prepaid expenses and other current assets 91,295 (149,669)
Decrease (increase) in other assets (127,712)
Increase (decrease) in accounts payable and accrued expenses (909,241) (317,114)
Increase (decrease) in net liabilities and accrued expenses of discontinued operations (90,557)
Increase (decrease) in prepaid sales & customer deposits 3,415
------------ ------------
Net cash used in operating activities (1,224,570) (807,751)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (500,467) (483,234)
Decrease (increase) in other assets (99,995)
Investment in Decor Group, Inc. (826,000) (2,200)
------------ ------------
Net cash used in investing activities (1,326,467) (585,429)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 700,000
Proceeds from sale of investment securities 372,500
Repayments of debt and capitalized lease obligations (470,443) (275,626)
Proceeds from sale of Series A preferred stock and warrants 1,666,692
Proceeds from exercise of common stock warrants 1,292,642
Proceeds from exercise of preferred stock options 825,000
------------ ------------
Net cash provided by financing activities 2,719,699 1,391,066
------------ ------------
Net Increase (decrease) in cash 168,662 (2,114)
CASH, beginning of period 4,142 2,114
------------ ------------
CASH, end of period $172,804 $0
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $177,500 $366,118
Taxes $5,973 $5,998
NON-CASH FINANCING ACTIVITIES:
Conversion of convertible debt into Class WC Warrants $100,000
Conversion of convertible debt into Class A Preferred Stock $200,000
Conversion of Series A Preferred Stock to Class A Common Stock $650
Stock issuance for prepaid financing charges $300,000
Stock issuance for consulting service in connection with Decor acquisition $350,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company
without audit, in accordance with generally accepted accounting principles, and
pursuant to the rules and regulations of the Securities and Exchange Commission.
All adjustments (of normal recurring nature) which are, in the opinion of
management, necessary for a fair presentation of the results of the interim
period have been included. The results of operations for the three and nine
months ended March 31, 1997 are not necessarily indicative of those to be
expected for the entire year. The Company, for the three and nine months ended
March 31, 1997 and 1996, used the gross profit method to value inventory.
2. ACQUISITIONS AND STRATEGIC ALLIANCES
Part of the Company's long-term plan for growth includes either the
acquisition of or entering into strategic alliances with unrelated companies in
the decorative accessories industry to maximize market potential. For this
purpose, pursuant to a March 3, 1996 agreement relating to the capitalization of
Decor Group, Inc., ("Decor"), Decor issued to the Company 250,000 shares of its
Series A Non-Voting Convertible Preferred Stock and an option to purchase
10,000,000 shares of its Series B Non-Convertible Voting Preferred Stock (the
"Option Shares") in exchange for issuance to Decor by the Company of 200,000
shares of its Class A Common stock, (being registered as part of this filing)
and 200,000 shares of its Series A Convertible Preferred stock (also being
registered as part of this filing) and a guarantee with respect to certain
indebtedness should such indebtedness become necessary. (The Decor securities
are adjusted to reflect a 1-for-two reverse split effected by Decor in October
1996.) Also, the Company exercised its option to purchase the Option Shares in
September 1996, for total cash consideration of $2,000. Concurrent with the
exercise of this option, the Company executed a Voting Agreement (the "Voting
Agreement") to vest the power to vote the Option Shares in a Voting Trust (the
"Voting Trust".) The Voting Agreement will expire upon the earlier of February
7, 2007 or upon the Company's repayment in full of its obligations to BH
Funding, LLC, (Note 3) but in no event earlier than December 31, 1997. The
Voting Trust comprises three individuals: the Company's President and Chief
Executive Officer (and also the Chairman of the Board of Decor), and two
Directors of Decor who are otherwise unrelated to the Company. As part of the
Company's investment in Decor, during the months of August and September 1996,
the Company purchased 54,934 shares of
7
<PAGE>
Decor's Series C Non-Voting, Convertible, Preferred Stock at a cost of $824,000.
In the formation of Decor, the Company's intention was to create an affiliate
with a corporate identity clearly separate and distinct from that of the
Company. Decor was organized for the purpose of acquiring the business
operations of unrelated companies. On November 12, 1996, (the "Effective Date")
a public offering by Decor of certain of its securities was declared effective
by the Securities and Exchange Commission. Subsequent to the effective date of
Decor's initial public offering, the Company owned approximately 79.6% of the
total voting stock of Decor. In December 1996, Decor declared and issued a
dividend on its common stock payable in the form of two (2) shares of common
stock for each one (1) share of common stock held as of the record date of
December 16, 1996. Each share of Decor's Series A and Series C Preferred stock
are convertible into three (3) shares of Decor's common stock effective December
16, 1996. During February 1997, the Company sold its entire holdings of Series A
Convertible Preferred Stock to an independent investor. Assuming conversion by
the subsequent holder to common stock, the Company will own approximately 77.5%
of the total voting stock of Decor subsequent to such sale and conversion. As of
March 31, 1997, the holding in Decor is recorded on the Company's financial
statements at the market value on November 12, 1996, the "Measurement Date" of
the Company's trading securities previously transferred to Decor during March
1996, plus acquisition costs less the proportionate value of the securities sold
during February 1997.
In May 1996, the Company entered into a two year Management Services
Agreement with Decor whereby the Company will advise Decor on the manufacturing,
sale, marketing and distribution of Decor's products as well as providing Decor
with accounting and administrative services and advice on strategic planning of
joint ventures, acquisitions, and other long term initiatives. Pursuant to this
agreement, the Company will be paid on an annual basis the greater of (1)
$75,000 or (2) 1.5% of excess cashflow as defined in the agreement. The Company
and Decor amended this agreement to increase this payment to $90,000 per annum.
Additional transfers of funds from Decor to the Company will be subject to the
attainment by Decor of excess cash flow totaling $4,000,000 per year through
December 31, 1999. At March 31, 1997, the Company has accrued approximately
$60,000 of fees pursuant to this agreement.
Decor entered into an asset purchase agreement (the "Agreement") with
Artisan House, Inc. ("Artisan House") to purchase substantially all of the
operating assets, and assume certain liabilities, of Artisan House
8
<PAGE>
for an aggregate purchase price of $3,526,400, subject to certain adjustments.
Decor completed the Artisan House acquisition on November 18, 1996. Artisan
House, located in Los Angeles, California and founded in 1964, is engaged in the
design, manufacturing, and marketing of metal wall, table and freestanding
sculptures. Management believes that Artisan House's products bridge the gap
between high priced gallery art and mass produced decorative pieces. Artisan
House products retail from approximately $100 to over $400. The primary goal of
Artisan House is to supply a broad spectrum of design driven sculpture and
decorative accessories at moderate prices.
Pursuant to a March 31, 1996 agreement relating to the capitalization
of Decor, Laurie Munn, wife of the Company's President and Chief Executive
Officer purchased and was issued certain shares of the Common Stock of Decor. As
of March 31, 1997, Ms. Munn was issued 300,000 shares of the outstanding common
shares of Decor, adjusted to reflect a 1-for-2 reverse split effected by Decor
in October 1996, and a stock dividend of two (2) common shares for each common
share owned as of December 16, 1996.
3. NOTES PAYABLE
The Company has outstanding secured financing with United Credit
Corporation totaling approximately $700,000 at March 31, 1997. Interest is
determined at an annual rate of 16%. The Company signed an agreement in
February, 1997, whereby it agreed to issue 100,000 shares of Class A common
stock to this debtor. To date, no shares have been issued.
The Company received $600,000 of loans from BH Funding in February
1997. This loan is to be repaid with interest on April 28, 1998. Interest is
determined at an annual rate of 15%. The Company, in order to collateralize the
loan to BH pledged and assigned to BH and granted to
9
<PAGE>
BH a continuing security interest in the Company's 20,000,000 shares of Series B
Non- Convertible Preferred Stock of Decor and the Company's 54,934 shares of
Series C Convertible Preferred Stock of Decor. See note 5 for discussion of
equity instruments issued to BH Funding, partially in connection with this
financing agreement.
The Company has outstanding secured financing with Infinity Investors,
Ltd. totaling approximately $181,000 at March 31, 1997. The Company paid $40,000
of this balance during April 1997 and will subsequently pay principal of $7,500
per month plus interest calculated at an annual rate of 15% against the unpaid
principal balance, until the full balance is repaid for 12 months plus a balloon
payment comprising all remaining interest and principal on March 15, 1998. In
connection with the settlement of terms agreement, (March 1996) the Company also
issued 25,000 warrants to purchase common stock at $2.50 per share. This lender
also continues to hold 600,000 common shares as collateral.
The Company received $100,000 of demand loans from Laurie Munn, wife of
the Company's President and Chief Executive Officer during March 1997, at an
annual interest rate of 6%.
4. COMMITMENTS AND CONTINGENCIES
Operating Leases
On January 16, 1991, the Company entered into a sublease agreement that
provides for the leasing of a site which serves as the Company's principal
office and manufacturing facility. The term of the sublease expires December 31,
1996. This lease requires minimum annual lease payments of approximately
$265,000. The Company has not renewed this lease. The site has been purchased by
a new owner on December 31, 1996. On April 14, 1997, The Company entered into a
new five year lease of this facility with the new owner. The new lease commenced
January 1, 1997, and requires monthly rent payments totaling $192,000
10
<PAGE>
for the first year, $236,400 for the second year, $227,130 for the third year,
$245,670 for the fourth year and $255,497 for the fifth year.
The Company entered into a lease on February 1, 1993 for a 1,800 square foot
Manhattan, New York showroom. The lease expires January 3, 2003, and requires
rent payments of approximately $78,000 per annum.
The Company entered into a lease on August 31, 1995 for a 5,739 square foot
Philadelphia, Pennsylvania showroom. The lease expires on August 31, 2000, and
requires rent payments of approximately $30,000 per annum.
Italia occupies approximately 1,750 square feet at International Home
Furnishings Center in High Point, North Carolina, pursuant to a lease dated May
1, 1993. The term of the lease is five years and requires minimum annual rent
payments of approximately $26,500. The Company terminated this lease on October
31, 1996. In full settlement of outstanding rent liabilities and subsequent
cancellation of the lease, the owner of the facility agreed to the Company's
offer of certain sample merchandise maintained by the Company at this facility.
In addition, on March 28, 1996 the Company's Italia operation was closed in
Hialeah Gardens, Florida and the product line was out-sourced to Lance
Corporation in Hudson, Massachusetts. During July, 1996, Italia's assets were
returned to the Company's principal office and manufacturing facility. During
December 1996, the operations of Italia were discontinued.
Future minimum lease payments under operating leases are as follows:
1997 $300,000
1998 344,400
1999 335,136
2000 343,670
2001 333,497
Thereafter 78,000
----------
Total $1,734,703
==========
Union Agreement
11
<PAGE>
Effective April 1, 1991, the Company signed a three-year (with additional
two-year automatic renewal) union contract for its union members under the terms
of a collective bargaining agreement. The Company has received notice that the
two-year automatic renewal and the existing union contract will remain in effect
through April 1, 1996. The Company is currently negotiating the renewal of its
union contract. None of the Company's employees have been on strike, or
threatened to strike since the Company's inception and The Company believes its
relationship with all of its personnel is satisfactory.
Employment Agreements
The litigation relating to the termination of the 1995 employment
agreement between Ann Stevens and the Company has been settled by the execution
of an employment severance agreement (the "Agreement"). Pursuant to the
Agreement, the Company paid Ms. Stevens $63,000 for accrued and unpaid
compensation upon execution of the Agreement. Subsequently, for a period of
seven years, the Company will make bi-weekly payments to Ms. Stevens to total
$72,000 for the first year, $70,000 for each of the next three years, and
$50,000 for each of the final three years. As additional compensation, the
Company paid Ms. Stevens for reimbursement of certain expenses, $50,000 in
various installments during the four months ending December 1996. The Company
also entered into a non-compete agreement with Ms. Stevens for which the Company
will make bi-weekly payments to Ms. Stevens to total $25,000 per year for seven
years, plus automobile and insurance costs for five years. As of June 30, 1996,
the Company issued to Ms. Stevens 50,000 shares of the Company's Class A Common
Shares, which were previously committed to Ms. Stevens pursuant to her 1995
employment agreement. As of June 30, 1996, the Company issued 1,250,000 shares
of its Class B Common Shares (the "Escrow Shares") to Michael Levine, Esq.,
attorney of Ms. Stevens, as escrow agent (the "Escrow Agent"). The Escrow Agent
shall abstain from voting the Escrow Shares for any purpose, except in the event
of either the failure by the Company to adhere to the payment provisions noted
above or the financial insolvency of the Company. If either event occurs, Ms.
Stevens will be in a position to elect replacement Directors. Once the payment
provisions in the severance and non-compete agreements are satisfied, the Escrow
Agent shall return the Escrow Shares to the Company. In February 1997, the terms
of the agreement with Ms. Stevens were modified to provide for additional
payments of approximately $550 per month over 18 months, and to provide for
approximately $6,000 as reimbursement for legal expenses.
12
<PAGE>
On February 15, 1996, the Company's Board of Directors agreed in
principle to enter into a four-year employment agreement between the Company and
its President and Chief Executive Officer. The agreement will provide an annual
base salary of $150,000, with annual increases of 10%. Such increases will be
subject to the attainment of profitable results of operations by the Company. In
addition, the agreement will grant the President and Chief Executive Officer an
option to purchase at any time 150,000 shares of the Company's Series A, 10%
Cumulative Convertible Preferred Stock at a price of $2.50 per share. The
exercise of this option which has not yet been granted, as well as any
subsequent conversion to the Company's Class A Common Stock, will require the
prior consent of the Company's investment banking firm. The agreement will also
contain a "non-compete" clause and provide the President and Chief Executive
Officer with the use of an automobile. As of the date of this filing, the
document for this agreement has not been finalized or executed. Presently, the
President and Chief Executive Officer draws an annual salary of $150,000 and has
the use of an automobile provided by the Company.
On April 1, 1995, the Company entered into a Consulting Agreement with
Morris Munn, father of Max Munn, the Company's President and Chief Executive
Officer under which he will provide the Company with: design and fabrication of
new molds for sculpture; recommend, and implement improvements in antiquing,
woodworking, gilding and carving processes; and attend trade shows for frame
making and mold making. Fees under the agreement are payable at $54,000 per
annum for one year renewable at the Company's option. On June 30, 1996, Morris
Munn's Consulting Agreement was extended for five (5) years. Pursuant to the
terms of this new agreement, the Company agreed to issue to Morris Munn an
option to purchase up to 350,000 shares of the Company's Preferred Shares at a
net exercise price of $2.25 per share. The Preferred Shares issuable upon the
exercise of the Option were registered for sale to the public under a
Registration Statement in Form S-8 filed with the Securities and Exchange
Commission on July 3, 1996. The Option was fully exercised during July to
September 1996 generating net proceeds to the Company totaling $787,500. In
addition, the new agreement provides for bi-weekly payments to Morris Munn
totaling $54,000 per year for five years. In exchange, Morris Munn has agreed to
assist the Company with marketing, acquisitions, divestitures, joint ventures
and other strategic initiatives. In conjunction with the issuance of the Option,
the Company recorded charges against earnings of $87,500 at June 30, 1996.
During March 1997, the Company
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modified its agreement with Morris Munn to: provide additional monthly payments
of $950 over two years for the rental of certain machinery used by the Company
in its production processes.
On February 19, 1997, the employment by the Company of Michael J. Amore
as its Vice President and Chief Financial Officer was terminated. Mr. Amore has
provided consulting services to the Company subsequent to February 19, 1997.
Beginning May 6, 1997, the Company will provide Mr. Amore with severance
payments totaling approximately $10,000 over five weeks. No other liabilities
exist pursuant to Mr. Amore's separation from the Company.
The Company is currently a party in various legal proceedings. (See "Legal
Proceedings"). The Company believes that it has meritorious defenses against all
such proceedings and intends to vigorously assert its rights with respect
thereto. Although the Company cannot predict the outcome of these proceedings,
it is the Company's opinion that all such proceedings, both individually and in
the aggregate, will not have a material adverse effect on its results of
operations, liquidity, or equity. No legal matters have changed since the
Company's Form 10-KSB filed as of and for the year ended June 30, 1996.
Except as otherwise set forth herein, the Company has no material
commitments for capital expenditures. In order to fund growth over the long
term, the Company anticipates possible future issuance of its securities
resulting in further dilution to its securityholders
Disclosure of the Company's current legal matters are reflected at Part II,
Item 1. - Legal Proceedings.
5. SHAREHOLDERS' EQUITY
In August 1995, the Company agreed to issue, at a future date, 60,000 Class
A Common shares in settlement of all current and future liabilities under a
two-year Marketing and Organizational Agreement (the "Marketing Agreement") with
a consulting firm dated January 4, 1994. The Company's Board of Directors
approved the issuance of such shares in November 1995. In conjunction with the
issuance of these shares, approximately $105,000 of charges against earnings
were recorded during the year ended June 30, 1996. On January 14, 1997, these
shares were registered by the Company with the Securities and Exchange
Commission on Form S-8.
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In September 1995, the Company issued 460,000 shares of Series A, 10%
Cumulative Convertible Preferred Stock ("Preferred Stock") and 230,000
Redeemable Class WC Warrants ("Warrants") to purchase Preferred Stock at the
exercise price of $5.50 per share. The net proceeds from this Offering were
approximately $1,633,000, including over-allotments. Each share of Preferred
Stock is convertible, commencing one year from the date of issue, subject to
adjustment, into three shares of Class A Common Stock of the Company. As of the
date of this filing, independent holders of 81,140 shares of Preferred Stock
have converted such shares into 243,420 shares of the Company's Class A Common
Stock.
In September 1995, the Company lowered the exercise price of the Company's
Class WA Warrant to $1.50 per share and arranged to place 180,000 shares of the
Company's Class A shares which were previously sold pursuant to a "Regulation S"
private placement into escrow. These shares were sold in January 1996 to
unrelated parties pursuant to a restructuring of a note payable by the Company
to the holder of these shares as discussed below. On July 16, 1996, the Company
filed a Registration Statement with the Securities and Exchange Commission to
register the Class WA Warrants and underlying Common A Shares. The Commission
declared this Registration Statement effective on July 19, 1996. Through the
date of this filing, 704,412 of the Company's Class WA Warrants were exercised
at $1.50 per warrant, generating proceeds to the Company totaling $1,056,618. Of
these proceeds, $811,500 was used to purchase 54,100 shares (adjusted for a
1-for-2 reverse split effected in October 1996) of Decor Group, Inc.'s Series C
Non-Voting, Convertible, Preferred Stock. The balance of the proceeds was
retained by the Company for working capital needs, for the repayment to Decor of
outstanding loans of $50,000, and for the provision of additional loans to
Decor. At March 31, 1997, the balance of loans to Decor totals $110,000.
On May 7, 1997, the Company announced that it will extend the exercise period
of its Class WA Warrant to June 22, 1998.
In December 1995, pursuant to the terms of a promissory note, the holder of
such note converted the note into 80,000 shares of Preferred Stock. Also in
December 1995, and pursuant to the terms of another promissory note, 35,000
shares of the Company's Class A Common Stock were issued to the lender.
Approximately $25,000 was charged against earnings during the quarter ended
December 1995 in conjunction with the issuance of these shares.
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In January 1996, the Company's Board of Directors elected to lower the
exercise price of the Company's Class WB Warrant to $2.00 per Class A Common
share, subject to the filing and effectiveness of a Registration Statement with
the Securities and Exchange Commission. Such Registration Statement was filed
with the Commission on July 16, 1996 and declared effective on July 19, 1996.
Through the date of this filing, 118,012 of the Company's Class WB Warrants were
exercised at an exercise price of $2.00 per option generating proceeds to the
Company of $236,024. These proceeds were used by the Company to support working
capital needs and for the provision of loans to Decor Group, Inc.
In February 1996, the Company's Board of Directors declared a stock dividend
equivalent to $0.25 per share to its Series A 10% Cumulative Convertible
Preferred Stockholders of record as of the close of business on February 23,
1996 (the record date.) Payment was made on March 1, 1996 by the issuance of
0.10231 of a share of the Company's Class A Common Stock for each share of
Series A Preferred Stock held of record on the record date. Accordingly, 55,247
shares of the Company's Class A Common Stock was issued for this purpose.
Retained earnings was charged $165,741 in March 1996 in conjunction with the
issuance of these shares. As of the date of this filing, the Company has not
declared or established a record date for a dividend on its Series A 10%
Cumulative Convertible Preferred Stock for September 1996 or March 1997.
Cumulative but unpaid dividends on Series A 10% Cumulative Preferred Stock as of
March 31, 1997 totals approximately $524,000.
In February 1996, the Company's Board of Directors approved the issuance to
Sol Munn of 150,000 shares of the Company's Class A Common Stock, in
consideration for past consulting services provided. These shares, bearing a
restrictive legend, were issued on April 12, 1996. In conjunction with the
issuance of these shares, approximately $54,000 of charges were recorded against
earnings during the year ended June 30, 1996.
In April 1996, the Company's investment banking firm arranged for the private
placement of 175,000 shares of the Company's Common A Stock and 50,000 shares of
the Company's Series A Preferred Stock. These shares, all bearing a restrictive
legend, were issued on April 24, 1996 to various independent investors (the
"Investors") generating gross proceeds of $431,251. The Company realized net
proceeds of $310,609 which was used to pay certain outstanding liabilities.
Commencing thirty (30) days following the date of the close of the private
placement,
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any of the Investors had the right to demand in writing (the "Demand Notice")
that the Company file a registration statement with the Securities and Exchange
Commission (the "Commission") which shall cover the shares and allow the
Investor to sell the shares to the public. Within fifteen (15) days following
receipt of the Demand Notice, the Company is required to file such registration
statement and use its best efforts to have such registration statement declared
effective by the Commission and such state securities regulators as reasonably
requested by the Investor.
On April 4, 1996 the Company's Board of Directors resolved to issue 250,000
shares of the Company's Class B Common Stock to Laurie Munn, wife of the
Company's President and Chief Executive Officer. This issuance is in
consideration for a down payment of $250, Ms. Munn's 6.6% note to the Company
providing for principal of $437,500 to be paid to the Company in five equal
annual installments of $105,561.90, and Ms. Munn's guarantee and pledge of her
assets for certain Company debt. The shares were issued to Ms. Munn on April 8,
1996. Ms. Munn has executed a Promissory Note and Security Agreement in
conjunction with the issuance of these shares. The Company obtained an appraisal
to determine the fair market values of this transaction.
Effective June 30, 1996, the Company entered into a consulting agreement with
Morris Munn, father of the Company's President and Chief Executive Officer, in
exchange for certain services. As part of this agreement, over the subsequent
five-years, the Company will pay Mr. Munn $54,000 per annum in equal bi-weekly
installments, and issue to Mr. Munn options to purchase up to 350,000 shares of
the Company's Series A Preferred stock. These options were fully exercised
during July to September 1996, generating net proceeds to the Company totaling
$787,500. Of these proceeds, approximately $127,000 was used pursuant to the
Company's June 30, 1996 settlement with Ann Stevens, a former Company executive
(See "Legal Proceedings."), and $12,500 was used to purchase 834 shares
(adjusted for a 1-for-2 reverse split effected in October 1996) of Decor Group,
Inc.'s Series C Non-Voting, Convertible, Preferred Stock. The balance of
proceeds was retained by the Company to support working capital needs. In
conjunction with the issuance of the options to Mr. Munn, the Company recorded
charges against earnings totaling $87,500 at June 30, 1996.
Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company, the Company issued to Ms.
Stevens 50,000 shares of the Company's Class A Common Stock.
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Also pursuant to the Settlement, the Company issued to Michael Levine as escrow
agent (the "Escrow Agent") 1,250,000 unregistered shares of the Company's Class
B Common shares (the "Escrow Shares".) The Escrow Shares shall not be voted by
the Escrow Agent, unless the Company defaults on its obligations under the
agreement. Upon satisfaction of such obligations, the Escrow Shares shall be
returned by the Escrow Agent to the Company. (See "Legal Proceedings".) In
conjunction with the issuance of the Company's shares to Ms. Stevens, the
Company recorded charges against earnings totaling $71,400 at June 30, 1996.
During September 1996, pursuant to the Company's Director Stock Option Plan,
the Company issued: 10,000 shares of its Class A Common shares to Roger Lourie,
an outside director of the Company, and 10,000 shares of its Class A Common
shares to various individuals named by Richard Josephberg, also an outside
director of the Company. These shares bear a restrictive legend. Pursuant to the
issuance of these shares, $15,000 was charged against earnings at December 31,
1996.
During February 1997, pursuant to an agreement which BH Funding, LLC will
provide certain advisory services to the Company over five years, the Company
agreed to issue to BH Funding 100,000 shares of its Class A Common shares and
100,000 shares of its Series A Preferred shares. (See Note 6).
Pursuant to a July 1996 agreement (the "Forfeit Agreement") between the
Company's President and CEO's wife and the Company's underwriters ("VTR"), in
consideration for the release of the Company's restrictions on issuing 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 $330,000 and $366,000 for the years ending June 30, 1997 and 1998
respectively.
Other than services provided by the Company's investment banking firm, no
services have been provided at the Company's direction by any consultant or
advisor with respect to the issuance or sale of the Company's equity securities.
6. RECENT DEVELOPMENTS
Because of declining revenues and high operating costs, on December 16, 1996,
the Board of Directors decided to discontinue and dissolve Italia. On December
27, 1996, a Notice of Public Auction was distributed by Italia, advising all
interested parties that a public auction of all the assets of Italia consisting
of molds, equipment, models, and inventory listed in a Security Agreement
entered into between Italia, as debtor, and United Credit Corporation, as
secured party, was to occur. The auction took place on January 10, 1997 and the
Company was the successful bidder, thereby acquiring all of the assets of Italia
in consideration for a payment of $2,000 and the assumption by the Company of
the liabilities of Italia to United Credit Corp., which as of March 31, 1997
totaled approximately $806,000. Since the financial
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statements of Italia are consolidated into those of the Company, Italia's
liabilities have already been reflected on the Company's historical consolidated
financial statements. At March 31, 1997, the Company made the adjustments
necessary to properly restate recorded assets and liabilities, together with a
general reserve approximately $56,000. These adjustments included approximately
$590,000 write-off of debt recorded based on the advice of the Company's
legal counsel. (As the Company is not legally liable for such liabilities).
Further, the Company wrote off approximately $700,000 in assets related to its
Italia subsidiary which were not considered to benefit the Company's future
operations.
In February 1997, the Company received a loan from BH Funding, LLC
("BH") in the aggregate principal amount of $600,000 to be utilized to repay
certain indebtedness of the Company and for continued operating expenses. The
Company in order to collateralize the loan to BH pledged and assigned to BH and
granted to BH a continuing security interest in the Company's 20,000,000 shares
of Series B Non-Convertible Preferred Stock of Decor, and the Company's 54,934
shares of Series C Convertible Preferred Stock of Decor. The loan is to be
repaid to BH Funding, LLC with interest on April 28, 1998. The Company received
$375,000 of proceeds relating to the sale by the Company of its holdings of
250,000 shares of Series A Convertible Preferred Stock of Decor Group, Inc. to
BH Funding.
In connection with this agreement, the fair market value of these shares on
the date of issuance was allocated as follows:$300,000 as acquisition consulting
on the Decor transaction; $300,000 as interest on the loan ( to be amortized
over the life of the loan using the effective interest method); and $25,000 as
additional expense on the Company's sale of its 250,000 Series A Convertible
Preferred Stock holdings in Decor Group Inc.
In May 1996, the Company entered into a two year Management Services
Agreement with Decor whereby the Company will advise Decor on the manufacturing,
sale, marketing and distribution of Decor's products as well as providing Decor
with accounting and administrative services and advice on strategic planning of
joint ventures, acquisitions, and other long term initiatives. Pursuant to this
agreement, the Company will be paid the greater of (1) $75,000 or (2) 1.5% of
excess cashflow as defined in the agreement.
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Additional transfers of funds from Decor to the Company will be subject to the
attainment by Decor of excess cash flow totaling $4,000,000 per year through
December 31, 1999. At March 31, 1997, the Company has accrued approximately
$60,000 of fees pursuant to this agreement.
MANAGEMENT DISCUSSION AND ANALYSIS
General
The following discussion should be read in conjunction with (a) the
information contained in the financial statements of the Company (the "Financial
Statements") and the Notes (the "Notes") thereto appearing elsewhere herein and
(b) the Company's Form 10-KSB and Form 10-QSB/A filed for the periods ended June
30, 1996 and March 31, 1997. The financial statements have been prepared in
conformity with generally accepted accounting principles, but have not been
audited except that financial balances at June 30, 1996 disclosed herein are
based on the Company's financial statements for the fiscal year ended June 30,
1996, which have been audited by the Company's independent auditors
("Auditors".) The auditors have issued a modified opinion on the Company's
financial statements at June 30, 1996 (See Risk Factors - Modified Auditors's
Report.) Due to $5,283,773 net losses during the year ended June 30, 1996, and
negative net worth at that date, substantial doubt existed as to the Company's
ability to continue as a going concern. During the period subsequent to June 30,
1996, certain events led to improvement of the Company's financial position.
Results of Operations
Period Ended March 31, 1997 as Compared to Period Ended March 31, 1996.
The Company's net sales from continuing operations for the quarter ended
March 31, 1997 decreased by $851,000 or 48.5% to $905,000 from $1,756,000 for
the quarter ended March 31, 1996. The Company's net sales from continuing
operations for the nine months ended March 31, 1997 decreased $2,075,000 or
41.2% to $2,958,000 from $5,033,000 for the nine months ended March 31, 1996.
(See following discussion.)
Net sales for the A.P.F. Master Framemakers division for the quarter ended
March 31, 1997 decreased $582,000 or 38.6% to $927,000 from $1,509,000 for the
quarter ended March 31, 1996. Net sales for the
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A.P.F. Master Framemakers division for the nine months ended March 31, 1997
decreased $229,000 or 7.3% to $2,915,000 from $3,144,000 for the nine months
ended March 31, 1996. These decreases are largely due to the discontinuation of
selling certain products to the discontinued Italia unit, partially offset by
approximately $222,000 of revenues realized by a new relationship with a major
party plan marketer. (See "Liquidity and Capital Resources.") Due to the
termination of operations, the net sales for the Italia Collection subsidiary
for the quarter ended March 31, 1997 decreased $269,000 or 108.9% to ($22,000)
from $247,000 for the quarter ended March 31, 1996. The negative sales for the
current quarter reflect certain returns of merchandise by customers during the
current quarter. Due to termination of operations, the net sales for the Italia
Collection subsidiary for the nine months ended March 31, 1997 decreased
$1,846,000 or 97.7% to $43,000 from $1,889,000 for the nine months ended March
31, 1996. Because of declining revenues and high operating costs, the Company
decided to discontinue and dissolve Italia. (See "The Company - Italia
Collection.")
The Company's cost of goods sold as a percentage of net sales increased to
60% for the nine months ended March 31, 1997, from 50% for the nine months ended
March 31, 1996. During March 1997, pursuant to the dissolution of Italia,
inventory totaling approximately $226,000 was written off. Without this charge,
the Company's cost of goods sold as a percentage of net sales would have totaled
approximately 53% for the nine months ended March 31, 1997. Revenues of Italia
have historically been generated at a higher gross margin than those of the
A.P.F. Master Framemakers Division. Since Italia revenues have significantly
declined during the current period versus the prior period, the consolidated
gross margins for the current period have declined versus the prior period, even
without the charges recorded for inventory write offs. The Company used during
the three and nine months ended March 31, 1997 and 1996 the gross profit method
to value inventory. The Company expects to begin the implementation of a
perpetual inventory system within the next twelve months. The Company believes
that such a system will enable it to determine product costing and margins more
precisely. No assurances can be given however that the Company will successfully
implement this new system, or that greater precision in the determination of
product costing or margins will be achieved.
The Company's selling, general and administrative expenses as a percentage of
net sales totaled 48.4% for the nine months ended March 31, 1997, versus 42.1%
for the nine months ended March 31, 1996. The
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increase was due to a reserve for bad debts of $250,000. Without this reserve,
the Company's selling, general and administrative expenses as a percentage of
net sales would have totaled approximately 39.9% for the nine months ended March
31, 1997. To achieve the reduction in the ratio of selling, general, and
administrative expenses as a percentage of net sales for the nine months ended
March 31, 1997 versus the prior period, the Company has taken certain measures
to reduce expenses. For example, reductions of administrative personnel have led
to reduced salaries, benefits, and travel expenses. Also discretionary spending
for such items as stationery and supplies, advertising, and consulting fees has
been curtailed. Finally, due to the overall reduction of revenues, sales
commission expenses are reduced in the current period versus the prior period.
Interest expense as a percentage of net sales totaled approximately 10.6% for
the nine months ended March 31, 1997, versus approximately 6.4% for the nine
months ended March 31, 1996. In absolute dollars however. interest expense is
approximately $7,000 lower in the nine months ended March 31, 1997 versus the
nine months ended March 31, 1996 because certain debts outstanding at higher
rates of interest have been replaced by loans carrying lower interest costs.
Interest as a percent of net sales has increased because of the reduced net
sales of the current period versus the prior period.
For the quarter ended March 31, 1997, the Company realized a net loss of
approximately $291,000 ($0.07 per share), versus net income from continuing
operations of approximately $4,000 ($0.00 per share), and a loss from
discontinued operations of approximately $863,000 ($0.33 per share) for the
quarter ended March 31, 1996. For the nine months ended March 31, 1997, the
Company realized a net loss of approximately $406,000 ($0.09 per share), versus
a net loss from continuing operations of approximately $106,000 ($0.04 per
share), and a loss from discontinued operations of approximately $1,524,000
($0.59 per share) for the nine months ended March 31, 1996.
Year Ended June 30, 1996 as Compared to Year ended June 30, 1995
As disclosed in the "Description of Business", during the year ended June 30,
1996, the Company decided to discontinue its catalog operations. Prior year
financial statements were reclassified to disclose the results of catalog
operations as if they were discontinued at the beginning of the year ending June
30, 1996.
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The Company's net sales from continuing operations for the fiscal year ended
June 30, 1996, increased by $224,000 or 4.4% to $5,379,000 from $5,155,000 for
the fiscal year ended June 30, 1995.
Net sales for the A.P.F. Master Framemakers division for the fiscal year
ended June 30, 1996 decreased by $154,000 or 4.4% to $3,369,000 from $3,523,000
for the fiscal year ended June 30,1995. The average selling price per order for
the A.P.F. Master Framemakers division remained relatively unchanged for the
fiscal years ended June 30, 1996 and 1995.
With the acquisition by the Company of Italia Collections Inc.(Italia) in
October 1994 (See "Description of Business"), the Company began to conduct its
wholesale business through Italia. During the transition from the Company's
prior wholesale business to Italia, the Company generated revenues of $528,000
from this wholesale business during the year ended June 30, 1995. Italia
revenues for this same period totaled $1,104,000. Thus, for the year ended June
30, 1995, the Company's wholesale based revenues totaled $1,632,000. Net sales
for Italia for the fiscal year ended June 30, 1996 totaled $2,010,000, which is
an increase of $378,000 or 23.2% over total wholesale business for the prior
year. During the year ended June 30, 1996, as disclosed in the "Description of
Business", Italia has been undergoing disruption due to efforts to relocate
Italia operations to a suitable location. Because of this disruption, the
revenues for the year ended June 30, 1996 have been negatively affected. Also,
additional expenses pursuant to relocation efforts totaling some $235,000 have
been incurred.
The Company's cost of goods sold from continuing operations as a percentage
of net sales increased to 66.1% for the the fiscal year ended June 30, 1996,
from 59.7% for the fiscal year ended June 30, 1995. This increase is due to
larger fourth quarter book-to-physical adjustments as compared to the prior year
recorded by the Company during the year ended June 30, 1996. Gross margins for
the year ended June 30, 1996 are largely consistent with those of the prior
year.
Selling, general and administrative expenses from continuing operations
increased $1,791,000 or approximately 98% over the comparable amount in the
prior year. Such increase included additional costs relating to the relocation
of Italia in the amount of approximately $763,000, additional reserves for
certain assets of $310,000, additional facilities charges of approximately
$120,000, with the balance relating to various other costs associated with the
implementation of the Company's strategic plan.
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Interest expense for the year ended June 30, 1996 increased approximately
$302,000 to $538,000 versus the year ended June 30, 1995. Italia's revenues were
financed with a New York based secured lender pursuant to an asset-related
formula. (See Liquidity and Capital Resources.) Italia's revenues have increased
$906,000 during the year ended June 30, 1996 versus June June 30, 1995. This is
the basis for approximately $122,000 of the current year increase. The balance
relates to financing costs related to certain third-party loans obtained during
the prior year.
Because of the Company's decision to discontinue its catalog operations, it
incurred charges during the year ended June 30, 1996 for such discontinuation
totaling $2,935,633. These charges relate primarily to a loss for the current
year's operations of approximately $789,000, inventory reserves of approximately
$954,000, reserves for other assets of approximately $354,000, charges for the
settlement of related party lawsuits of approximately $519,000, with the balance
primarily relating to estimated charges for operating losses.
The Company believes that the charges recorded during the year ended June 30,
1996 are sufficient. The Company will wind down its catalog business by March
31, 1997, and may possibly mail one final clearance catalog, The Company's
management believes that no additional charges will be necessary from such
efforts.
Liquidity and Capital Resources
Management believes that cash flow from operations through March 31, 1997 were
not sufficient to support such operations. Accordingly, Company management has
been implementing what it believes to be the corrective changes deemed
necessary. Specific action taken as of the date of this filing include the
following: a) The Company is seeking either the acquisition of or entering into
stategic alliances with unrelated companies in the decorative accessories
industry. As part of this strategy, a public offering of certain securities of
Decor Group, Inc. ("Decor"), an affiliate of the Company, has been declared
effective by the Securities and Exchange Commission on November12,1996(the
"Effective Date"). On November 18, 1996, Decor acquired substantially all of the
operating assets and assumed certain liabilities of Artisan House, Inc., a
California based manufacturer and distributor of metal wall, table, and
freestanding sculptures. (See "Acquisitions and Strategic Alliances."), b) Due
to declining revenues and high operating costs, the Company has discontinued its
catalog business effective
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March 31, 1996 (See "The Company - Discontinuation of operations of Interiors
Catalog"), c) Beginning with the quarter ended March 31, 1996, the Company has
begun to reduce operating expenses through a combination of staff reductions and
expense controls, d) Due to declining revenues and high operating costs, in
December 1996, the Company dissolved its Italia Collection subsidiary (See "The
Company - Italia Collection"), and e) The Company is seeking additional sources
of revenues. As part of this effort, on October 12, 1996. the Company announced
that it has entered into an exclusive three year agreement with a major party
plan marketer of customized canvas based enlargement of photographs. As of March
31, 1997, approximately $222,000 of revenues have been realized by the Company
from this relationship. No assurances however can be given that these, or any
subsequent initiatives by the Company will ultimately produce the desired
positive cash flow from operations. Finally, the Company has begun to implement
a marketing program meant to increase revenues of its Master Framemakers
Division. No 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")which
agreement superseded the Requirements Agreement. The Agreement provides that, in
exchange for the Company agreeing to supersede the terms of the Requirements
Agreement and sell certain manufacturing equipment and related assets to P-2-A,
P-2-A will pay to the Company $600,000 in cash. The Company agreed that upon its
receipt of the $600,000, the Company will purchase from P-2-A 150,000 shares of
P-2-A's common stock and 120,000 of P-2-A's common stock purchase warrants for
an aggregate purchase price of $600,000. Additionally, P-2-A will pay the
Company $50,000 for the non-exclusive right to utilize the Company's existing
mail-order customer list. P-2-A also agreed to sublease approximately 21,000
square feet of office and manufacturing space from the Company at an annual
rental rate of $63,000 per year plus rent escalations. The term of the sublease
is from June 1, 1997 to December 31, 2001.
At March 31, 1997, cash balances totaling approximately $173,000 were
recorded as compared to approximately $4,000 at June 30, 1996. Net cash used in
operating activities during the nine months ended March 31, 1997 totaled
approximately $1,225,000 compared with net cash used in operating activity of
approximately $808,000 during the nine months ended March 31, 1996. During the
nine months ended March 31, 1997, cash used from operations was largely a result
of the
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current period's net loss of approximately $406,000, increased by non-cash
charges for depreciation, amortization, bad debts, write-offs of non-productive
assets, dissolution of subsidiary, and stock issuances of approximately
$1,529,000, and reduced by non-cash reduction of liabilities from extinguishment
of debt, and gain on sale of investment securities of approximately $830,000,
and impacted by decreases in trade receivables of approximately $2,000,
increases in inventories of approximately $532,000, decreases in prepaid
expenses of approximately $91,000, increases in other assets of approximately
$128,000 and decreases in notes payable, accounts payable and accrued expenses
of approximately $1,000,000.
Because of declining revenues and high operating costs, on December 16, 1996,
The Board of Directors decided to discontinue and dissolve Italia. On December
27, 1996, a Notice of Public Auction was distributed by Italia, advising all
interested parties that a public auction of all the assets of Italia consisting
of molds, equipment, models, and inventory listed in a Security Agreement
entered into between Italia, as debtor, and United Credit Corporation, as
secured party, was to occur. The auction took place on January 10, 1997 and the
Company was the successful bidder, thereby acquiring all of the assets of Italia
in consideration for a payment of $2,000 and the assumption by the Company of
the liabilities of Italia to United Credit Corp., which as of March 31, 1997
totaled approximately $806,000. Since the financial statements of Italia are
consolidated into those of the Company, Italia's liabilities have already been
reflected on the Company's historical consolidated financial statements. At
March 31, 1997, the Company made the adjustments necessary to properly restate
recorded assets and liabilities, together with a general reserve of
approximately $56,000. These adjustments included approximately $590,000
write-off of debt recorded based on the advice of the Company's legal counsel
(as the Company is not legally liable for such liabilities). Further, the
Company wrote-off approximately $700,000 in assets related to its Italia
subsidiary which were not considered to benefit the Company's future
operations.
Cash balances of approximately $4,000 were recorded as of June 30, 1996, as
compared to approximately $2,000 at June 30, 1995, representing an increase of
approximately $2,000. Net cash used in operating activities was $1,144,000 at
June 30, 1996, as compared to net cash used in operating activities of
approximately $2,287,000 at June 30,1995. The decrease in net cash used in
operating activities was primarily due to the net loss of $5,284,000 offset by a
non-cash provision for discontinued operation totaling $2,236,000, and also
offset
26
<PAGE>
by the following changes from continuing operations: non-cash charges for
depreciation of $680,000, and for stock issuances of $141,000, increases in
accounts payable and accrued expenses of $1,113,000, inventories of $346,000,
and a decrease in accounts receivable of $179,000. The decrease in accounts
receivable was primarily due to the Company's adherence to established credit
policies while at the same time successfully pursuing the collection of past due
balances. Although total inventories decreased during the current period,
inventories from continuing operations increased largely due to support the
Italia business. The increase in accounts payable and accrued expenses was due
largely to increased operating expenses incurred during the current year. (See
"Results of Operations".)
Net cash used in investing activities during the nine months ended March 31,
1997 totaled approximately $1,326,000 versus approximately $585,000 for the nine
months ended March 31, 1996. During the current period, the Company invested
$826,000 of cash to acquire 54,934 shares of Series C Non-Voting Convertible
Preferred Stock and 10,000,000 shares of Series B Non Convertible Voting
Preferred Stock of Decor Group, Inc., (See "Acquisitions and Strategic
Alliances.") During the same current period, an additional amount of
approximately $500,000 was used to acquire equipment, versus approximately
$583,000 used to acquire equipment and other assets during the nine months ended
March 31, 1996.
Net cash used in investing activities was $543,000 for the year ended June
30, 1996, versus $591,000 for the year ended June 30, 1995.
Net cash provided by financing activities totaled approximately $2,720,000
during the nine months ended March 31, 1997 versus approximately $1,391,000
during the nine months ended March 31, 1996. During the current period, the
funding was the result of the exercise by investors of 704,412 Class WA Warrants
to acquire 704,412 shares of Class A Common shares and 704,412 Class WB Warrants
for an exercise price of $1.50, and the exercise by investors of 118,012 Class
WB Warrants to acquire 118,012 shares of Class A Common shares for an exercise
price of $2.00, and the exercise of an option to acquire 350,000 shares of
Series A Preferred Shares at a net exercise price of $2.25, and the receipt of
proceeds totaling $600,000 pursuant to new debt financing obtained by the
Company during February 1997, and the receipt of proceeds totaling $372,500
pursuant to the sale by the Company during February 1997 of certain securities
held for sale, less repayments of notes payable of $470,000. During the nine
months ended March 31, 1996, the funding was the result of the sale by the
27
<PAGE>
Company of 460,000 shares of Series A Preferred Stock registered by the Company
in September 1995, offset by debt repayments totaling approximately $276,000.
The net proceeds from the Preferred Offering were approximately $1,633,000,
including over-allotments. In addition, Laurie Munn wife of the Company's
president, loaned theCompany $100,000 on March 28, 1997. The demand Promissory
Note bears interest at the rate of 6.0% per annum.
Net cash provided by financing activities was $1,689,000 for the year ended
June 30, 1996, compared to $1,839,000 for the year ended June 30, 1995. The
primary source of the current year's financing was the Company's Preferred Stock
Offering in September 1995 generating proceeds of $1,633,000. During fiscal
1995, the Company sold 3,000,000 Class WA Warrants to raise net proceeds of
approximately $372,000 in additional working capital in part to suuport the
acquired operations, sale of 500,000 registered Class A Common shares to raise
net proceeds of approximately $438,000, and the sale of 235,000 Class A Common
shares pursuant to Regulation S under the Securities Act of 1933 ("Regulation
S") to raise net proceeds of approximately $283,000.
As of March 31, 1997, the Company's financial position reflected a working
capital deficit of approximately $486,000, versus a working capital deficit of
approximately $2,512,000 at June 30, 1996. Of this working capital deficit at
March 31, 1997, $826,000 is directly attributable to the Company's direct
investment in Decor Group, Inc. (See above.) As of March 31, 1997 versus June
30, 1996, trade receivables decreased approximately $252,000, inventories
increased approximately $476,000, and current liabilities decreased
approximately $1,425,000, due largely to the proceeds received from the equity
transactions described above, and to the extinguishment of liabilities totaling
approximately $587,000 during March 1997.
As of June 30, 1996, working capital was ($2,512,000), as compared to
($15,000) as of June 30, 1995. As of June 30, 1996, trade accounts receivable
decreased $179,000 and inventories decreased $346,000 versus the prior period.
Notes payable and current maturities of long-term debt reduced $369,000 during
the same period. The changes from these specific accounts produce a reduction to
working capital of $536,000. Additionally, in connection with plans to
discontinue its catalog operations, the Company recorded reserves totaling
approximately $2,200,000, which is the substantial cause of the decrease of
working capital during the year ended June 30, 1996. The Company's Management
believes that this working capital reduction
28
<PAGE>
will be isolated to the year ended June 30, 1996, and that positive working
capital will be generated during subsequent periods. As disclosed at the
beginning of "Results of Operations" the negative working capital changes during
the year ended June 30,1996 are consistent with the Company's intentions to
reposition itself for growth and profitability in subsequent periods. No
assurances can be given, however, that the Company's expectations of improved
results in subsequent periods will occur.
In March 1996, the Company executed an agreement with the Internal Revenue
Service (the "Service") for the payment of outstanding payroll tax liabilities
totaling approximately $100,000. The agreement required the Company to pay
approximately $9,000 per month until the liability is fully paid down. The final
payment in the amount of $11,000 was made on February 28, 1997.
In September 1995, the Company issued 460,000 shares of Series A, 10%
Cumulative Convertible Preferred Stock ("Preferred Stock") and 230,000
Redeemable Class WC Warrants ("Warrants") to purchase Preferred Stock at the
exercise price of $5.50 per share. The net proceeds from this Offering were
approximately $1,633,000, including over-allotments. Each share of Preferred
Stock is convertible, commencing one year from the date of issue, subject to
adjustment, into three shares of Class A Common Stock of the Company. As of the
date of this filing, independent holders of 81,140 shares of Preferred Stock
have converted such shares into 243,420 shares of the Company's Class A Common
Stock.
In May 1995, the Company filed a registration statement with the Securities
and Exchange Commission which, among other things, lowered the exercise price of
the Company's Class WA Warrant to $1.50 per share. Also in May 1995, the Company
arranged to place 180,000 shares of the Company's Class A Shares which were
previously sold pursuant to a "Regulation S" private placement into escrow.
These shares were sold in January 1996 to unrelated parties pursuant to a
restructuring of a note payable by the Company to the holder of these shares as
discussed below. On July 16, 1996, the Company filed a Registration Statement
with the Securities and Exchange Commission to re-register the Class WB Warrants
and underlying Common A shares issuable if all outstanding Class WA Warrants
were exercised. The Commission declared this Registration Statement effective on
July 19,1996. Through the date of this filing, 704,412 of the Company's Class WA
Warrants were exercised at $1.50 per warrant, generating proceeds to the Company
totaling $1,056,618. Of these proceeds, $811,500 was
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<PAGE>
used to purchase 54,100 shares of Decor Group, Inc.'s Series C Non-Voting,
Convertible, Preferred Stock. The balance of the proceeds was retained by the
Company for working capital needs, and for the provision of loans to Decor
Group, Inc.
On October 16, 1995, the Company entered into an agreement to restructure a
promissory note dated May 1995, with the principal amount of $500,000 bearing
interest at the rate of 18% per annum with the principal which was due and
payable in full on September 30, 1995 and a $150,000 note dated May 12, 1995,
bearing interest at the rate of 18% payable monthly with 135% of the principal
which was also due and payable in full on September 30, 1995 with Infinity
Investors, Ltd., a Nevis, BWI Corporation. ("Infinity"). The $500,000 note arose
from the restructuring of a sale of 270,000 shares of the Company's Class A
Common Stock to Infinity for proceeds totaling $501,120 under Regulation S into
a loan whereby 180,000 of the 270,000 Class A shares would be placed into
escrow, and ultimately sold by Infinity in satisfaction of $180,000 of the note,
with the balance of $220,000 to be paid by the Company in installment payments.
As of October 16, 1995 the parties agreed the Company owes Infinity, including
interest and monthly extension fees of approximately $102,500 through December
15, 1995, an aggregate amount of approximately $805,000. Pursuant to the new
agreement, the Company paid $405,000 to Infinity upon acceptance of the
agreement. The Company also delivered a Promissory Note in the the principal
amount of approximately $400,000, in extension and replacement of the remaining
balance due and payable of $180,000 on or before December 15, 1995 and $220,000
on July 31, 1996. As noted above, the new agreement also stipulates that
Infinity shall sell the 180,000 shares of the Company's Class A Common Stock,
held in escrow by Infinity, for $180,000 to an unaffiliated third party. The
proceeds of such sale will be applied against the note during January 1996. In
addition, during December 1995, the Company issued to Infinity 35,000
unregistered shares of Class A Common Stock. Such shares shall be afforded a
piggyback registration right for all registration statements filed by the
Company before July 31, 1996. Approximately $25,000 was charged against earnings
during the quarter ended December 31, 1995 in conjunction with the issuance of
these shares. The promissory note is also guaranteed by Max Munn, President and
Chief Executive Officer of the Company. The note is collateralized by 600,000
shares of the Company's Class A Common Stock formerly owned by the Company's
Italia Collections Inc. subsidiary. The Company has reached a general agreement
with this lender to restructure the repayment schedule of approximately $280,000
of principal and interest payable at March 31, 1997. Under the terms of this
30
<PAGE>
agreement, the Company paid $40,000 to the lender in April 1997, and will
subsequently pay principal of $7,500 per month plus interest calculated at an
annual rate of 15% against the unpaid principal balance. Pursuant to settlement
agreement, the Company also issued 25,000 warrants to purchase common stock at
$2.50 per share.
In January 1996, the Company's Board of Directors elected to lower the
exercise price of the Company's Class WB Warrant to $2.00 per Class A Common
share, subject to the filing and effectiveness of a Registration Statement with
the Securities and Exchange Commission. Such Registration Statement was filed
with the Commission on July 16, 1996 and declared effective on July 19, 1996.
This registration statement registered all Class WB Warrants issuable upon
exercise of all outstanding Class WA Warrants, as well as Class A Common Stock
issuable upon exercise of all potentially outstanding warrants. As of the date
of this filing, 118,012 of the Company's Class WB Warrants were exercised
generating proceeds of $236,024. These proceeds were retained by the Company to
support working capital needs and for the provision of loans to Decor Group,
Inc. Further, in connection with Decor's public offering, the Company will
recognize any gains in accordance with Securities and Exchange Commission("SEC")
Staff Accounting Bulletin No. 51.
In February 1996, the Company's Board of Directors declared a stock dividend
equivalent to $0.25 per share to its Series A 10% Cumulative Convertible
Preferred Stockholders of record as of the close of business on February 23,
1996 (the record date.) Payment was made on March 1, 1996 by the issuance of
0.10231 of a share of the Company's Class A Common Stock for each share of
Series A Preferred Stock held of record on the record date. Accordingly, 55,247
shares of the Company's Class A Common Stock was issued for this purpose.
Retained earnings was charged $165,741 in March 1996 in conjunction with the
issuance of these shares. As of the date of this filing, the Company has not yet
declared a dividend to its Series A 10% Cumulative Convertible Preferred
Stockholders for either September 1996, or March 1997. Cumulative but unpaid
dividends on Series A 10% Cumulative Preferred Stock as of March 31, 1997 totals
approximately $524,000 which the Company intends to declare and issue during the
subsequent period in the form of Class A Common shares.
In February 1996, the Company's Board of Directors approved the issuance to
Sol Munn of 150,000 shares of the Company's Class A Common Stock, in
consideration for past consulting services provided. The Company is planning to
register these securities with the Securities and Exchange Commission during the
quarter ended March 31, 1997.
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<PAGE>
These shares, which bear a restrictive legend, were issued on April 12, 1996. In
conjunction with the issuance of these shares, approximately $54,000 of charges
were recorded against earnings during the year ended June 30, 1996. The 150,000
Class A Common Shares are subject to a "lock-up" agreement with VTR Capital
Corporation, the Company's investment bankers.
In April 1996, the Company's investment banking firm arranged for the
private placement of 175,000 shares of the Company's Common A Stock and 50,000
shares of the Company's Series A Preferred Stock. These shares, all of which
bear a restrictive legend, were issued on April 24, 1996 to various independent
investors (the "Investors") generating gross proceeds of $431,251. The Company
realized net proceeds of $310,609 which was used to pay certain outstanding
liabilities. Commencing thirty (30) days following the date of the close of the
private placement, the Investors had the right to demand in writing (the "Demand
Notice") that the Company file a registration statement with the Securities and
Exchange Commission (the "Commission") which shall cover the shares and allow
the Investor to sell the shares to the public. Within fifteen (15) days
following receipt of the Demand Notice, the Company is required to file such
registration statement and use its best efforts to have such registration
statement declared effective by the Commission and such state securities
regulators as reasonably requested by the Investor.
Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company, the Company issued to Ms.
Stevens 50,000 shares of the Company's Class A Common Stock. This filing is
meant, among other things, for the purpose of registering these 50,000 Class A
Common Shares with the Securities and Exchange Commission. The 50,000 Class A
Common Shares are subject to a "lock-up" agreement with VTR Capital Corporation,
the Company's investment bankers. These shares are being registered as part of
this registration statement. Also pursuant to the Settlement, the Company issued
to Michael Levine as escrow agent (the "Escrow Agent") 1,250,000 unregistered
shares of the Company's Class B Common shares (the "Escrow Shares".) The Escrow
Shares shall not be voted by the Escrow Agent, unless the Company defaults
32
<PAGE>
on its obligations under the agreement. Upon satisfaction of such obligations,
the Escrow Shares shall be returned by the Escrow Agent to the Company. (See
"Legal Proceedings".) In conjunction with the issuance of the Company's shares
to Ms. Stevens, the Company recorded charges against earnings totaling $71,400
at June 30, 1996.
Pursuant to the settlements reached with Ann Stevens, as well as other
related parties (See "Legal Proceedings"), the Company is required to make
various periodic payments as disclosed in "Legal Proceedings." The Company
believes that these settlements will have no other effect on the Company's
activities in future periods.
During September 1996, pursuant to the Company's Director Stock Option Plan,
the Company issued: 10,000 shares of its Class A Common shares to Roger Lourie,
an outside director of the Company, and 10,000 shares of its Class A Common
shares to various individuals named by Richard Josephberg, also an outside
director of the Company. These shares bear a restrictive legend. Pursuant to the
issuance of these shares, approximately $15,000 was charged against earnings at
March 31, 1997.
The Company has outstanding secured financing with Infinity Investors , Ltd
totaling approximately $181,000 at March 31, 1997. The Company paid $40,000 of
this balance during April 1997 and will subsequently pay principal of $7,500 per
month plus interest calculated at an annual rate of 15% against the unpaid
principal balance, for 12 months plus a balloon payment comprising all remaining
interest and principal on March 15, 1998. In connection with the settlement of
terms agreement (March 1996), the Company also issued 25,000 warrants to
purchase common stock at $2.50 per share. This lender also continues to hold
600,000 common shares as collateral.
In February 1997 the Company received a loan from BH Funding, LLC ("BH") in
the aggregate principal amount of $600,000 to be utilized to repay certain
indebtedness of the Company and for continued operating expenses. The Company in
order to collateralize the loan to BH pledged and assigned to BH and granted to
BH a continuing security interest in the Company's 20,000,000 shares of Series B
Non-Convertible Preferred Stock of Decor, and the Company's 54,934 shares of
Series C Convertible Preferred Stock of Decor. Simultaneously with the loan to
the Company, BH purchased all of the Company's Series A Convertible Preferred
Stock holdings in Decor Group, Inc., a total of 250,000 shares. In addition, the
Company entered into a Consulting Agreement with BH
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<PAGE>
whereby BH would agree to provide consulting and other services to the Company
in exchange for 100,000 shares of the Company's Class A Common Stock and 100,000
shares of the Company's Series A Convertible Preferred stock (the"Consulting
Shares") . The Consulting Shares are being registered as a part of this
Registration Statement. In connection with this agreement, the fair market value
on these shares on the date of issuance was allocated as follows: $300,000 as
acquisition consulting on the Decor transaction; $300,000 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 on the Company's sale of its
250,000 Series A Convertible Preferred Stock holdings in Decor Group, Inc.
On May 7, 1997 the Company announced that it had extended the exercise
period to June 22, 1998.
The Company is currently a party in various legal proceedings. (See "Legal
Proceedings"). The Company believes that it has meritorious defenses against all
such proceedings and intends to vigorously assert its rights with respect
thereto. Although the Company cannot predict the outcome of these proceedings,
it is the Company's opinion that all such proceedings, both individually and in
the aggregate, will not have a material adverse effect on its results of
operations, liquidity, or equity.
Except as otherwise set forth herein, the Company has no material commitments
for capital expenditures. In order to fund growth over the long term, the
Company anticipates possible future issuance of its securities resulting in
further dilution to its security holders.
While the Company operates pursuant to a policy that generally precludes
acceptance of goods on a non-cash basis (sometimes known as barter
transactions), the Company does from time to time execute upon goods provided by
a customer in the event of non-payment by that customer.
Impact of Inflation
The Company does not believe that inflation has had a material adverse effect
on sales or income during the past several years. Increases in supplies and
other operating costs could adversely affect the Company's operations. However,
the Company believes it could
34
<PAGE>
increase prices to offset increases in cost of goods sold or other operating
costs.
Sales Variations
Although the Company's net sales are not subject to seasonality fluctuations
experienced by certain retailers, the Company experiences some minor variations
in the level of sales by quarter. The first quarter of the fiscal year (i.e.,
July 1 through September 30) is generally the Company's slowest sales period due
to the fact that the summer period is typically the period when art galleries
are at their slowest purchasing period. During this period, the Company's
warehouse and factory closes for three to five days to take the annual physical
inventory and to consolidate vacation periods for the Company's employees.
35
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
During April and May of 1995, Hide Tashiro commenced two lawsuits in the
Supreme Court of New York, Manhattan County, totaling $225,000 (plus interest
and attorney's fees) against the Company and others. The complaint demands
payment by the Company for loans made by the plaintiff. The Company believes it
has meritorious defenses against these claims since it believes that it is owed
commissions in excess of the loan payment. In April 1996 the plaintiff's motions
for summary judgement were denied and the court held that there was an issue of
fact to be tried. As of the date of this filing, there has been no further
action.
In July 1995, the Company through its attorneys made demand against Morgan
Steel Ltd. The office of which is located on the Isle of Man, England, for the
payment to the Company of $362,507 on account of a perceived violation of
Section 16 (b) of the Securities and Exchange Act. No response to said demand
for payment has been made to date. On May 23, 1996, the Company's Board of
Directors resolved that the Company and its officers and directors undertake no
action given the uncertainty of the cost of collectibility, and ultimate legal
liability of Morgan Steel Ltd. either in the United States or the Isle of Man.
As of the date of this filing, there has been no further action.
37
<PAGE>
In July 1996, Gear Holdings, Inc. brought an action in the Supreme Court of
New York, Manhattan County, against the Company for the alleged breach of a
licensing agreement. The Company denies that it was a party to an agreement, or
that an agreement in writing exists with Gear, or that any sum of money is owed.
The complaint demands sums Gear allegedly would have received under an agreement
in a sum to be determined, but not less than $250,000.
In July 1996, certain litigation brought against the Company and its
principals and Directors by Ted Stevens, Ann Stevens and Morris Munn, as listed
below, was settled. The litigation involved the manner in which control of the
Company passed from Morris Munn, the Company's founder, to Max Munn, his son and
the Company's current President and Chief Executive Officer. Ann Stevens is
Morris Munn's daughter, Max Munn's sister, and Ted Stevens wife. Both Ann and
Ted Stevens had been senior executives of the Company prior to October 1995. At
that date, their employment from the Company was terminated. Thus, the
litigation also involved the settlement between the Company and Ann Stevens of
her employment agreement in effect at the time of her termination from the
Company in October 1995. Settlement of the lawsuits by Ted Stevens and Morris
Munn against the Company and its officers and Directors are subject to Court
approval. Request for such approval was submitted to the Court of Chancery of
the State of Delaware in March 1997. Such approval was received in April 1997.
(a) On October 13, 1995, Ted Stevens, individually, as a Shareholder and
Director and Morris Munn, individually and as a Director and on behalf of
themselves and all other similarly situated Shareholders and Directors of the
Company filed a complaint in the Supreme Court of the State of New York, County
of Westchester, against the Company and its directors seeking unspecified
damages and certain changes in the composition of the Company's Board.
(b) On December 1, 1995, Ted Stevens filed a complaint in United States District
Court, Southern District of New York, against Laurie Munn and American Stock
Transfer & Trust Company seeking, among other things, the equitable recision of
a stock sale agreement between Mr. Stevens and Ms. Munn. On February 29, 1996,
the Court held that Mr. Stevens did not have the right to recision and denied
Mr. Stevens' motion for a preliminary injunction and on April 17, 1996, the
Court dismissed the action for lack of subject matter jurisdiction.
(c) On December 12, 1995, Ann Stevens filed a complaint in the Supreme Court of
the State of New York, County of Nassau against the Company
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<PAGE>
and certain Directors seeking, among other things, compensatory and punitive
damages arising out of the alleged breach of Ann Stevens' Employment Agreement.
(d) On April 23, 1996, Ted Stevens filed a complaint in the Court of Chancery of
the State of Delaware against the Company and certain Directors, seeking among
other things, the recision of a certain stock sale agreement between the Company
and Laurie Munn.
The litigation relating to the termination of the 1995 employment agreement
between Ann Stevens and the Company has been settled by the execution of an
employment severance agreement (the "Agreement"). Pursuant to the Agreement, the
Company paid Ms. Stevens $63,000 for accrued and unpaid compensation upon
execution of the Agreement. Subsequently, for a period of seven years, the
Company will make bi-weekly payments to Ms. Stevens to total $72,000 for the
first year, $70,000 for each of the next three years, and $50,000 for each of
the final three years. As additional compensation, the Company will pay Ms.
Stevens for reimbursement for certain expenses, $50,000 in various installments
during the four months ending December 1996. The Company also entered into a
non-compete agreement with Ms. Stevens for which the Company will make bi-weekly
payments to Ms. Stevens to total $25,000 per year for seven years, plus
automobile and insurance costs for five years. As of June 30, 1996, the Company
issued to Ms. Stevens 50,000 shares of the Company's Class A Common Shares,
which were previously committed to Ms. Stevens pursuant to her 1995 employment
agreement. The purpose of thi filing, among other things, is to register these
50,000 Class A Common Shares with the Securities and Exchange Commission. The
50,000 Class A Common Shares are subject to a "lock-up" agreement with VTR
Capital Corporation, the Company's investment bankers. As of June 30, 1996, the
Company placed into escrow 1,250,000 shares of its Class B Common Shares (the
"Escrow Shares") with Michael Levine, Esq., attorney of Ms. Stevens, as escrow
agent (the "Escrow Agent"). The Escrow Agent shall abstain from voting the
Escrow Shares for any purpose, except in the event of either the failure by the
Company to adhere to the payment provisions noted above or the financial
insolvency of the Company. If either event occurs, Ms. Stevens will be in a
position to elect replacement Directors. Once the payment provisions in the
severance and non-compete agreements are satisfied, the Escrow Agent shall
return the Escrow Shares to the Company.
In February 1997, the terms of the agreement with Ms. Stevens were modified
to provide for additional payments of $500 per month over 16
39
<PAGE>
months, and to provide for $6,000 as reimbursement for legal expenses. The terms
described above are the basis for the settlement of certain litigation brought
against the Company and its principals and Directors by Ted Stevens, Ann Stevens
and Morris Munn.
In August 1996, The Munn Trust of 1975, Sol Munn and Evelyn A. Munn,
Co-Trustees commenced an action in the Supreme Court of New York , County of
Suffolk against the Company as well as Max Munn, the Company's President and
Chief Executive Officer and Laurie Munn, his wife for non-payment of $150,000
plus interest. The Company claims that any obligation that it had pursuant to
this matter has been satisfied by the Company in the prior fiscal year and that
any amounts that may be unpaid are due solely by Mr. and Mrs. Munn. The Company
has not guaranteed such liabilities. This matter has been settled.
In August 1996, SJP Contractors of New York, Inc. commenced an action in the
Supreme Court of New York, County of Westchester against the predecessor entity
of the Company, A.P.F. Holdings, Inc., and others for $208,165 for work, labor,
and services allegedly performed in January 1991 for the renovation of the
Company's premises. The Company's answer pleads that payment was made for the
amount owed.
In June 1996, Artagraph Reproduction Technology, Inc., a Canadian company,
brought an action in the Supreme Court of New York, County of Westchester
against the Company demanding the sum of $27,838.08 plus attorney's fees,
alleging that the Company was obligated to deliver a confession of judgement in
connection with the sale of merchandise. Artagraph seeks injunctive relief; the
Company is not aware of a determination of this motion by the Court and denies
any obligation to Artagraph.
In September 1991, without admitting or denying the allegations, Max Munn,
the Company's President and Chief Executive Officer agreed with the Federal
Trade Commission ("FTC") to the entry of a Consent Order in an action brought
against Mr. Munn and others; which action arose out of the advertising of
certain lithographs of original works of art as regards to whether or not the
artist had played a substantial role in the production of the lithographs. The
case was settled before trial or discovery solely with entry of the above
Consent Order; which enjoins Mr. Munn from making certain representations in
connection with the sale of any works of art. The Consent Order also requires
Mr. Munn for a period of five years (which expired as of September 1996) as to
the
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<PAGE>
maintenance of certain records as they concern the sale of certain lithographs.
The Company is subject to other claims and litigation in the ordinary course
of business. In management's opinion, such claims are not material to the
Company's financial position or its results of operations.
Item 2. Changes in Securities
None in addition to those disclosed herein.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re: computation of per share earnings.
27 Financial data summary.
(b) Reports on Form 8-K
During the three months ended March 31, 1997, the Company
filed reports on Form 8-K on February 6, 1997 with respect to Item 2 for
Discontinuation of operations and dissolution of Italia; on February 14, 1997
with respect to Item 5 for Resignation of Donald Feldman; and on February 28,
1997 with respect to Item 5 for Termination of Employment.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERIORS, INC.
July 15, 1997 By: /s/ Max Munn
-------------------------------
Max Munn, President and
Chief Executive, Financial and
Accounting Officer
<PAGE>
Interiors, Inc
Earnings Per Share
March 31, 1997
Exhibit 11
<TABLE>
<CAPTION>
COMMON A SHARES QTY DAYS O/S WEIGHTED
- ------------------------------------------------- --------------- ---------------- -------------------
<S> <C> <C> <C>
As of IPO 517,500 274/274 517,500
Conversion of Bridge Loan units 300,000 274/274 300,000
Sale to Morgan Steel 2/10/95 200,000 274/274 200,000
Ted Stevens conversion of B shares 117,500 274/274 117,500
Reg S sale to Canillo 3/29/95 55,000 274/274 55,000
Class A sh sold to various 274/274
investors on 4/25/95 300,000 274/274 300,000
Subscription agreement Ekistics 274/274
4/24/95 80,000 274/274 80,000
Conversion B shares 8/95 330,000 274/274 330,000
Iss'd to various investors 7/95 55,000 274/274 55,000
Iss'd to various investors - 12/15/95 10,000 274/274 10,000
Iss'd to Infinity Investors - 12/17/95 30,000 274/274 30,000
Iss'd to Infinity Investors - 12/18/95 5,000 274/274 5,000
Sold by Infinity Investors - 1/8/96 180,000 274/274 180,000
Iss'd to various investors - 3/1/96 1,529 274/274 1,529
Iss'd to Decor - 3/3/96 200,000 274/274 200,000
Iss'd to various investors - 3/4/96 53,718 274/274 53,718
Iss'd to Sol Munn - 4/12/96 150,000 274/274 150,000
Iss'd to R. Leopold - 4/16/96 60,000 274/274 60,000
Private placement - 4/24/96 175,000 274/274 175,000
--------------- ------------------
Com A sh O/S per Form 10K - 6/96 2,820,247 2,820,247
COMMON B SHARES
- -------------------------------------------------
As of IPO 1,000,000 274/274 1,000,000
Ted Stevens conversion of B shares (117,500) 274/274 (117,500)
Conversion B shares 8/95 (330,000) 274/274 (330,000)
Issued to Laurie Munn - 4/12/96 250,000 274/274 250,000
Correct prior period issuance (13,000) 274/274 (13,000)
---------------- -------------------
Com B sh O/S per Form 10K - 6/96 789,500 789,500
---------------- -------------------
Tot Com A & B sh @ June 1996 3,609,747 3,609,747
ACTIVITY - NINE MOS. ENDED 3/97
- -------------------------------------------------
Common A shares
- -------------------------------------------------
Issued to former Company exec. - July 25, 1996 50,000 250/274 45,620
Exercise of 500,000 Cl WA Wts - Aug 6, 1996 500,000 238/274 434,307
Exercise of 500 Cl WA Wts - Aug 22, 1996 500 222/274 405
Exercise of 5,500 Cl WA Wts - Sep 5, 1996 5,500 208/274 4,175
Exercise of 35,000 Cl WA Wts - Sep 6, 1996 35,000 207/274 26,442
Exercise of 10,000 Cl WA Wts - Sep 18, 1996 10,000 195/274 7,117
Exercise of 5,000 Cl WA Wts - Sep 25, 1996 5,000 188/274 3,431
Exercise of 10,000 Cl WA Wts - Oct 1, 1996 10,000 182/274 6,642
Exercise of 12,000 Cl WA Wts - Oct 3, 1996 12,000 180/274 7,883
Exercise of 20,000 Cl WA Wts - Oct 10, 1996 20,000 173/274 12,628
Exercise of 12,452 Cl WA Wts - Oct 14, 1996 12,452 169/274 7,680
Exercise of 7,888 Cl WB Wts - Oct 28, 1996 7,888 155/274 4,462
Issued to outside directors - Oct 7, 1996 20,000 176/274 12,847
Exercise of 100 Cl WA Wts - Nov 4, 1996 100 148/274 54
Exercise of 100 Cl WB Wts - Nov 4, 1996 100 148/274 54
Exercise of 24,700 Cl WA Wts - Nov 6, 1996 24,700 146/274 13,161
Exercise of 16,100 Cl WB Wts - Nov 6, 1996 16,100 146/274 8,579
Exercise of 66,548 Cl WB Wts - Nov 8, 1996 66,548 144/274 34,974
Exercise of 10,000 Cl WA Wts - Nov 14, 1996 10,000 138/274 5,036
Exercise of 34,650 Cl WA Wts - Nov 15, 1996 34,650 137/274 17,325
Exercise of 2,000 Cl WA Wts - Nov 15, 1996 2,000 137/274 1,000
Exercise of 4,360 Cl WA Wts - Nov 19, 1996 4,360 133/274 2,116
Exercise of 17,000 Cl WB Wts - Nov 15, 1996 17,000 137/274 8,500
Exercise of 10,376 Cl WB Wts - Nov 19, 1996 10,376 133/274 5,037
Exercise of 10,000 Cl WA Wts - Nov 26, 1996 10,000 126/274 4,599
Exercise of 5,150 Cl WA Wts - Nov 27, 1996 5,150 125/274 2,349
Exercise of 3,000 Cl WA Wts - Dec 4, 1996 3,000 117/274 1,281
Conversion of preferred stock to Common 278,820 100/274 101,759
Issued to BH Funding 100,000 53/274 19,343
Conversion of Cl B Com Stk to Cl A Com Stk 269,750 1/274 984
---------------- -------------------
Com A Sh issued - Nine mos. end 3/97 1,540,994 799,790
---------------- -------------------
Total Common A Sh. @ 3/31/97 4,361,241 3,620,037
---------------- -------------------
Common B shares
- -------------------------------------------------
Conversion of Cl B Com Stk to Cl A Com Stk (269,750) 1/274 (984)
----------------
Com B Sh activity - Nine mos. end 3/97 (269,750) (984)
---------------- -------------------
Total Common B Sh. @ 3/31/97 519,750 788,516
---------------- -------------------
Com A & B sh iss'd - Nine mos. end 3/97 1,271,244 798,806
---------------- -------------------
Tot Com A & B sh @ March 31, 1997 4,880,991 4,408,553
================ ===================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 172,804
<SECURITIES> 0
<RECEIVABLES> 819,256
<ALLOWANCES> 287,000
<INVENTORY> 2,197,625
<CURRENT-ASSETS> 3,424,655
<PP&E> 1,842,032
<DEPRECIATION> 922,412
<TOTAL-ASSETS> 7,516,183
<CURRENT-LIABILITIES> 3,910,906
<BONDS> 0
0
11,471
<COMMON> 6,731
<OTHER-SE> (438,100)
<TOTAL-LIABILITY-AND-EQUITY> 7,516,183
<SALES> 905,132
<TOTAL-REVENUES> 905,132
<CGS> 657,047
<TOTAL-COSTS> 657,047
<OTHER-EXPENSES> 573,245
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 154,152
<INCOME-PRETAX> (291,367)
<INCOME-TAX> 0
<INCOME-CONTINUING> (291,367)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (291,367)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
