<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(x) Quarterly Report Under Section 13 pr 15(d) of the Securities Exchange Act
of 1934 For Three Month Period Ended September 30, 1998,
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. 0-24362
INTERIORS, INC.
---------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3590047
-------- ----------
(State or other Jurisduction of (I.R.S. Employer
Incorporation or organization) Identification No.)
320 Washington Street, Mt. Vernon, New York 10553
-------------------------------------------------
(Address of principal executive offices) (zip code)
Issuer's Telephone Number (914) 665-5400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's Class A Common Stock and Class
B Common Stock as of November 19, 1998 was 19,373,659 and 1,105,000
respectively
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
<PAGE>
INTERIORS, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.................................. 1
Consolidated Balance Sheet as of September 30, 1998......................... 2
Consolidated Statements of Operations -
For the Three Months Ended September 30, 1998 and 1997............. 3
Consolidated Statement Changes in Stockholders' Equity -
For the Three Months Ended September 30, 1998...................... 4
Consolidated Statements of Cash Flows -
For the Three Months Ended September 30, 1998 and 1997............. 5
Notes to Consolidated Financial Statements.................................. 7
Item 2. Management's Discussion and Analysis............................... 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 14
Item 2. Changes in Securities............................................... 14
Item 3. Defaults Upon Senior Securities..................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................ 14
Item 5. Other Information................................................... 14
Item 6. Exhibits and Reports on Form 8-K.................................... 14
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
The condensed financial statements included herein have been prepared by
Interiors, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
statements include all adjustments necessary to present fairly the financial
condition of the Company as of September 30, 1998 and the results of operations
for the three month period ended September 30, 1998 and 1997.
The Company's results of operations during the three months ended September 30,
1998 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, 1998.
1
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INTERIORS, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,250,270
Accounts receivable, net 7,991,596
Inventories 7,790,904
Other current assets 3,263,860
------------
Total current assets 20,296,630
INVESTMENT IN AFFILIATES 4,516,679
PROPERTY AND EQUIPMENT, net 1,658,381
OTHER ASSETS 19,772,069
------------
Total assets $ 46,243,759
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt 13,003,739
Accounts payable and accrued liabilities 8,847,317
------------
Total current liabilities 21,851,056
LONG TERM DEBT 6,372,357
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,300,000 shares
authorized, 579,438 shares issued and outstanding 5,790
Class A common stock, $.001 par value, 60,000,000 shares
authorized, 27,464,642 shares issued and outstanding 27,465
Class B common stock, $.001 par value, 2,500,000 shares
authorized, 2,480,000 shares issued and outstanding 2,480
Additional paid-in-capital 27,225,501
Accumulated deficit (8,292,890)
Notes receivable (948,000)
------------
Total stockholders' equity 18,020,346
------------
Total liabilities and stockholders' equity $ 46,243,759
============
</TABLE>
The accompanying notes are ann integral part of this consolidated balance sheet.
2
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INTERIORS, INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET SALES $10,406,470 $ 1,517,782
COST OF GOODS SOLD 6,842,734 956,203
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Gross profit 3,563,736 561,579
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,791,944 341,169
----------- -----------
Income from operations 771,792 220,410
OTHER EXPENSE (INCOME)
Amortization of goodwill 81,098 --
Interest expense 429,983 112,502
Financing charges - noncash 90,150 --
Consulting and management fees (97,500) --
----------- -----------
Total other expense (income) 503,731 112,502
Income (loss) from operations
before (benefit) provision for taxes 268,061 107,908
(BENEFIT) PROVISION FOR INCOME TAXES (14,914) 0
----------- -----------
NET INCOME $ 282,975 $ 107,908
=========== ===========
EARNINGS PER COMMON SHARE:
(RESTATED FOR 1997)
BASIC $ 0.00 $ (0.10)
=========== ===========
DILUTED $ 0.00 $ (0.10)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION
BASIC 9,467,209 4,780,991
=========== ===========
DILUTED 10,378,752 4,780,991
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
3
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INTERIORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Series A Class A Class A
Preferred Stock Common Stock Preferred Stock
-----------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1998 679,438 $6,794 19,614,857 $19,615 2,105,000 $2,105
Class B Common Shares issued 375,000 $375
Conversion of Preferred to Class A Common (100,390) ($1,004) 301,170 $301
Escrow Shares 5,000,000 $5,000
Troy Lighting Acquisition 650,000 $650
Windsor Art Acquisition 1,500,000 $1,500
Exercise of Class WA Warrants 240,517 $241
Private Placement Shares 122,700 $123
Shares issued for services rendered 35,398 $35
Warrants issued with convertible debentures
Warrants issued in connection with debt offerings
Net income through September 30, 1998
-----------------------------------------------------------
BALANCE, September 30, 1998 579,048 $5,790 27,464,642 $27,465 2,480,000 $2,480
===========================================================
<CAPTION>
Additional
Paid-In Accumulated Treasury Note
Capital (Deficit) Stock Receivable Total
------- --------- ----- ---------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1998 $21,751,749 ($8,575,865) $0 ($948,000) $12,256,398
Class B Common Shares issued $397,125 $397,500
Conversion of Preferred to Class A Common $703
Escrow Shares ($5,000)
Troy Lighting Acquisition $974,350 $975,000
Windsor Art Acquisition $2,528,719 $2,530,219
Exercise of Class WA Warrants $360,535 $360,776
Private Placement Shares $99,877 $100,000
Shares issued for services rendered $42,443 $42,478
Warrants issued with convertible debentures $1,000,000 $1,000,000
Warrants issued in connection with debt offerings $75,000 $75,000
Net income through September 30, 1998 282,975 282,975
------------------------------------------------------------
BALANCE, September 30, 1998 $27,225,501 ($8,292,890) $0 ($948,000) $18,020,346
============================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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INTERIORS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
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<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 282,975 $ 0
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 337,964 155,092
Non-cash financing charge 90,150
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in accounts receivable, trade (438,458) (15,709)
Decrease (increase) in inventories (728,371) (101,717)
Decrease (increase) in prepaid expenses and other current assets 165,732 (20,576)
Decrease (increase) in other assets (511,601) 16,720
Increase (decrease) in notes payable and current maturities of long term debt 4,229,337 (20,936)
Increase (decrease) in accounts payable and accrued expenses 13,599 (145,063)
----------- -----------
Net cash used in operating activities 3,441,327 (132,189)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (81,792) --
Acquisition of Bentley, International (2,006,992) --
Acquisition of Troy Lighting (1,968,378) --
----------- -----------
Net cash used in investing activities (4,057,162) 0
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 2,737,500 61,051
Repayments of debt and capitalized lease obligations (5,267,761) (113,983)
Net proceeds from exercise of common stock warrants 360,776 --
Net proceeds from exercise of preferred stock options -- --
----------- -----------
Net cash provided by financing activities (2,169,485) (52,932)
----------- -----------
Net increase (decrease) in cash (2,785,320) (185,121)
CASH, beginning of period 4,035,590 271,408
----------- -----------
CASH, end of period $ 1,250,270 $ 86,287
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 212,522 $ 20,725
Taxes 1,853 300
NON-CASH FINANCIAL ACTIVITIES:
Conversion of Series A Preferred Stock to Class A Common Stock 703 --
Stock issuance for services 42,478 --
Stock issuance in connection with acquisitions 3,505,219 --
Stock issuance for promissory notes 100,000 --
Debt issuance in connection with acquisitions 2,000,000 --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS -- (CONTINUED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPT. 30
-------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Supplemental disclosure of cash flows related to acquisitions:
Fair value of assets acquired, excluding cash $ 8,532,567 $ --
Issuance of common stock (3,505,219 --
Issuance of notes payable (2,000,000) --
Payments in connection with acquisitions, net of cash acquired (4,096,230) --
Liabilities assumed $ 7,043,778 $ --
Supplemental disclosure of non cash items from investing and
financing activities:
Issuance of common stock in connection with acquisitions $ 3,505,219 $ --
Issuance of warrants in connection with private placements $ 75,000 --
Issuance of warrants in connection with convertible
debentures $ 1,000,000 --
Issuance of Class B common shares in connection with Laurie
Munn debt guarantees $ 397,500 --
Issuance of debt in connection with acquisitions $ 2,000,000 $ --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
INTERIORS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT
SEPTEMBER 30, 1998
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 months ended
September 30, 1998 are not necessarily indicative of those to be expected
for the entire year. The Company, for the three months ended September 30,
1998 and 1997 used the gross profit method to value inventory.
For the year ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards (`SFAS") No. 128, "Earnings Per Share" In
accordance with SFAS No. 128, net earnings per common share amounts ("basic
EPS") were computed by dividing net earnings by the weighted average number
of common shares outstanding, and excluding any potential dilution. For
purposes of this calculation, common shares include both Class A and B
shares of common stock. Net earnings per common share amounts assuming
"diluted EPS" were computed by reflecting potential dilution from the
exercise of stock options and warrants. SFAS No. 128 requires the
presentation of both basic EPS and diluted EPS on the income statement.
Earnings per share amounts for the same prior-year periods have been
restated to conform with the provision of SFAS No. 128. All periods
presented include a deduction for the dividend requirement of the Company's
Series A Preferred stock. EPS for the three months ended September 30, 1997
has been restated to reflect the preferred dividend deduction.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131 (SFAS No. 131)"
Disclosures About Segment of an Enterprise and Related," which is effective
for fiscal years beginning after December 15, 1997. This Statement requires
that a public business enterprise report certain financial and descriptive
information about its operating segments. At September 30, 1998 the
adoption of SFAS 131 No. would not have a material effect on the Company's
financial statements.
7
<PAGE>
2. ACQUISITIONS AND STRATEGIC ALLIANCES
On July 7, 1998, the Company entered into Stock Purchase Agreement (the
"Bentley Agreement"), with Bentley International, Inc. a Missouri
corporation ("Bentley") and on July 30, 1998, the Company consummated the
transaction contemplated by the Agreement. Pursuant to the Agreement, the
Company purchased all the issued and outstanding shares (the "Shares") of
Windsor Art, Inc., a Missouri corporation and a wholly-owned subsidiary of
Bentley ("Windsor"). As a result of the purchase of the Shares, Windsor is
now a wholly-owned subsidiary of the Company. Windsor manufacturers and
distributes decorative mirrors and framed prints to furniture stores, mass
merchants, hotels and designers throughout the United States.
The assets acquired pursuant to the Bentley Agreement included, among other
things (I) fixed assets owned, leased or used by Windsor, including
equipment (ii) accounts receivable, (iii) inventory and (iv) contracts,
agreements, and leases of read and personal property. For the foreseeable
future, the Company intends to utilize such assets in connection with the
operation of the business of Windsor.
The purchase price paid to Bentley for the Shares consisted of a cash
payment of $1,706,992 (financed by $2,250,000 in convertible promissory
notes issued by the Company) and the delivery of two secured, subordinated
promissory notes in the aggregate principal amount of $5,300,000 (the
"Notes"). As a condition precedent to the Bentley Agreement, the Company
and Bentley entered into and consummated a pledge agreement on July 30,
1998 (the "Pledge Agreement"). Pursuant to the Pledge Agreement, the
Company pledged the Shares as collateral for the Notes and security for the
obligation of the Company under the Agreement. Until the debt is repaid by
the Company, the former shareholder and the President and CEO of the
Company have agreed to vote the shares as a block. Concurrently with the
Closing, the Company entered into and consummated, a securities Purchase
and Registration Rights Agreement (the "Securities Purchase Agreement") by
and between the Company and Bentley. Pursuant to the Securities Purchase
Agreement, the Company purchased 150,000 shares of common stock of Bentley
and a warrant to purchase 300,000 shares of common stock of Bentley
(collectively, the "Bentley Shares"). The purchase price paid to Bentley
for the Bentley Shares consisted of 1,500,000 shares of the Company's Class
A Common Stock (the "Interiors Shares") issued by the Company. The Interior
shares will be held in escrow for one year from the Closing as security for
the obligations of Bentley to the Company.
The former owner of Bentley entered into a consulting agreement with the
Company aggregating $782,000 over a four-year period, and was granted a
warrant to purchase 50,000 Class A Shares.
On August 14, 1998, the Company consummated the transaction contemplated by
that certain Agreement and Plan or Merger (the "Troy Merger Agreement")
dated July 2, 1998 by and among the Company, Troy Acquisition Corp.
("Newco"), Troy Lighting, Inc. ("Troy"), and certain shareholders of Troy.
Pursuant to the Troy Merger Agreement, Newco Merger with and into Troy,
with Troy continuing as the surviving corporation and as a wholly-owned
subsidiary of the Company. Troy manufactures and distribute portable and
installed lighting and light fixtures.
The purchase price paid by the Company consisted of $250,000 in cash and
Class A Common Stock of the Company ("Class A Shares") with a fair market
value of $975,000 (the "Troy Merger Shares"). In addition, the Company
agreed to repay $1,700,000 to extinguish obligations of Newco to certain
former shareholders of Troy. The Troy Merger Shares are to be held in
escrow as collateral for certain obligations of the former shareholders of
Troy. If the Troy merger Shares are worth less than $1,053,000 as of July
2, 1999, less amounts in the escrow account and amounts paid for any
resolved claims, the Company is required to issue additional Class A Shares
to the former Troy shareholders equal in value to such deficiency. If the
Troy Merger Shares are worth more than $1,053,000 as of July 2, 1999, the
former Troy shareholders are required to return Class A Shares to be
Company equal in value to such excess amount.
8
<PAGE>
The cash portion of the purchase price paid pursuant to the Troy Merger
Agreement and the repayment of certain Troy indebtedness was financed by
unsecured borrowing $1,500,000 from an asset based lender and from cash on
hand.
On August 27, 1998, the Company entered into a Stock Purchase Agreement
with the shareholders of a certain portable lamp manufacturer to purchase
all issued and outstanding shares of that Company's Common Stock. There can
be no assurance that this proposed transaction will close.
In connection with the above acquisitions, goodwill of approximately
$11,169,000 was recorded to reflect the excess of purchase price paid over
the fair market value of the net assets acquired.
3. NOTES PAYABLE
At September 30, 1998, the Company has aggregate notes payable of
approximately $20,376,000. The major components of this position follow:
The Company has outstanding secured formula based financing for the
operations of Windsor Art, Inc. with an asset based lender totalling
approximately $2,455,000 on September 30, 1998. Interest is determined at
an annual rate of prime plus 5.5 % (13.5% as of the date of this filing)
The Company has outstanding secured formula based financing for the
operations of Troy Lighting, Inc. with an asset based lender totalling
approximately $1,659,000 on September 30, 1998. Interest is determined at
an annual rate of prime plus 5.59 (13.5% as of the date of this file.
The Company has outstanding secured formula based financing with an asset
based lender totalling approximately $3,018,000 on September 30, 1998.
Interest is determined at an annual rate of 10.25% plus related fees.
The Company has outstanding secured financing with a New York based bank,
totalling approximately $253,000 on September 30, 1998. Interest is
determined at an annual rate of prime plus 1.0%. (9.0% as of the date of
this filing).
During November 1997 the Company received a $250,000 loan from an overseas
lender. The loan is due December 31, 1998 and bears 12% interest.
During April 1998, the Company received $250,000 from a loan from an
overseas lender. The loan is due April 16, 2001 and bears 15% interest.
During March 1998, the Company issued convertible notes in the amount of
$1,700,000. These notes are due March 19, 2000 and bear interest at 6%. per
annum payable quarterly. On March 19, 2000, the holder must convert into
Class A Shares. Any default in payment of interest triggers a default
interest rate of 16% per annum. The Holders have the right 180 days after
the issuance of the notes to convert up to one-half of the outstanding
unpaid principle portion of the notes into Class A shares. At September 30,
1998, $100,000 of these notes had converted , reducing the outstanding
balance to $1,600,000.
In conjunction with Interiors recent acquisition of Henlor, Inc., the
Company caused its subsidiary to issue $794,379 in 8% subordinated
promissory notes to the former shareholders. On December 1, 1998, Henlor
will make a of principal payment of $294,879. On March 1, 1999 and every
three months thereafter Henlor will make a principal repayment of $62,500.
9
<PAGE>
In conjunction with Interior's recent acquisition of Merchandise Sales
Inc., the Company issued a total of $810,000 in 10%. subordinated
promissory notes to the former shareholders due March 15, 1999. On July 31,
1998, a payment of $350,000 plus accrued interest was made. The balance of
$460,000 plus accrued interest due March 15, 1999 is outstanding at
September 30, 1998.
In conjunction with Interiors purchase of all the issued and outstanding
shares of Windsor Art, Inc., a wholly owned subsidiary of Bentley
International, Inc., Interiors delivered to the seller, as partial payment
of the purchase price, two secured subordinated promissory notes in the
aggregate principal amount of $5,300,000. On September 30, 1998, $2,000,000
of principle remained unpaid together with accrued interest at 8% from July
7, 1998. Principal payments of approximately $166,667 together with accrued
interest on the unpaid principal balance commence on July 1, 1999, and
thereafter equal quarterly principal payments continue, commencing October
1, 1999 together with accrued interest until the principal balance of the
note is paid in full on April 1, 2002. The Company is currently negotiating
with the Owner of Bentley International, Inc., the seller of Windsor Art,
Inc., to settle this and all remaining obligations of the Company that
resulted from the purchase of Windsor Art, Inc. for a cash payment of
$2,500,000.
In July and August 1998, the company issued redeemable convertible
debentures (the "redeemable Convertible Debentures") in the aggregate
principal amount of $3,000,000, and warrants to purchase an aggregate of
1,451,786 Class A Shares in a private placement to three accredited
investors. The issuance was exempt from registration under Section 4(2) of
the Securities Act, as a transaction by the issuer not involving any public
offering. All proceeds received by the Company pursuant to this private
placement were applied toward the working capital of the Company. On
September 10, 1998, the Company filed a registration statement on Form S-3
with the Securities and Exchange Commission in order to, among other
things, register the Class A Shares underlying the redeemable Convertible
Debentures and related warrants.
The redeemable Convertible Debentures bear interest at the rate of 7% per
annum, payable quarterly beginning October 1, 1998, and mature in July and
August, 2001, three years after their respective issuance dates. Any or all
portion of the Convertible Debentures may be converted to Class A Shares
any time after 240 days from their respective dates of issuance based upon
market prices. The redeemable Convertible Debentures may be redeemed at
face value (plus any accrued interest) by The Company at any time (in part
or in whole) until they are converted.
In conjunction with the issuance of the redeemable Convertible Debentures,
the Company issued Common Stock Purchase Warrants ("B Warrants") to a
finder. The B Warrants expire five years from their respective dates of
issue and allow the holder to purchase 112,500 Class A Shares in the
aggregate at an exercise price of $2.10 per Class A Share. If 50% or more
of the voting power of the Company is disposed of in an exchange other than
an exchange solely for cash the B Warrants may be used to purchase whatever
assets or securities that the holder of the B Warrants would have been able
to acquire had the B Warrants been previously used to purchase Class A
Shares.
Warrants, at fair market value, have been recorded as a debt discount to be
amortized over the term of the obligation.
In connection with Interiors recent acquisition of Troy Lighting Inc., the
Company issued $1,500,000 24.5% promissory notes on July 2, 1998 to an
asset based lender. The entire principal balance together with accrued
interest remained unpaid on September 30, 1998. Accrued interest is payable
on the last day of every month during the term with the entire principal
and accrued interest due on December 31, 1998.
In connection with Interiors recent acquisition of Windsor Art Inc. the
Company has outstanding approximately $1,000,000 in secured formula based
financing with an asset based lender. Interest is determined at the annual
rate of prime plus 8% (16.0% as of the date of this filing)
10
<PAGE>
During March 1998, the Company issued convertible subordinated notes in the
aggregate principal amount of $1,270,000. These notes are due March 17,
2001, and bear interest at 15% per annum payable quarterly. As of June 30,
1998, $695,000 of these notes were converted into Class A Shares and
warrants to purchase 286,000 shares of Series A Preferred Stock and 27,000
shares of Class A common stock were issued in connection with these notes.
On September 30, 1998, $575,000 of these notes remain unconverted with
$375,000 of this amount classified as debt.
On August 14, 1998, the Company entered into a five year Employment
Agreement with Todd R. Langer, the Former President and Chief Operating
Officer of Troy Lighting and currently the Company's Executive Vice
President of Sales and Marketing. The aggregate obligation of the Company
on September 30, 1998 based on this agreement is $1,000,000 over five
years.
On July 30, 1998, the Company entered into a consulting agreement with the
former owner of Bentley. The remaining aggregate obligation of the Company
on September 30, 1998, based on the agreement is $655,000.
4. SHAREHOLDERS' EQUITY
On August 14, 1998, the Company consummated the transactions contemplated
by an Agreement and plan of merger dated July 2, 1998 by and among the
Company, Troy Lighting, Inc. and others, pursuant to which a wholly owned
subsidiary at the Company merger with and into Troy, with Troy continuing
as the surviving corporation and a wholly owned subsidiary of the Company.
The merger consideration paid by the company consist of a cash payment of
$250,000 and the issuance of $650,000 Class A shared to the former
shareholders of Troy with a fair market value of $974,000.
The issuance of the Troy merger Shares was exempt from registration under
Section 4(2) of the Securities Act, as a transaction by the issue not
involving any public offering. On September 10, 1998, the Company filed a
registration statement on Form S-3 with the Securities and Exchange
Commission in order to, among other things, register the Troy Merger
Shares.
No underwriters were engaged by the Company in connection with any of the
issuance described above and, accordingly, no underwriting discounts or
commissions were paid.
On July 7, 1998 the Company entered into a Stock Purchase Agreement with
Bentley International, Inc., and on July 30, 1998, the Company consummated
the transactions contemplated by the Agreement. Pursuant to the Agreement,
the Company purchased all the issuing and outstanding shares of Windsor
Art, Inc., a wholly owned Subsidiary of Bentley. As a result of the
purchase of the shares, Windsor is now a wholly-owned subsidiary of the
Company. Concurrently with the closing, the Company entered into and
consummated a Securities Purchase and Regulations Rights Agreement by and
between the Company and Bentley. Pursuant to this agreement, the Company
purchasing 150,000 Shares of Common stock of Bentley and a warrant to
purchase 300,000 shares of Common Stock of Bentley. The purchase price paid
to Bentley for the Bentley Shares consisted of 1,500,000 shares of the
Company's Class A Common Stock issuing by the Company with a fair market
value of $2,525,000. The Interior's Shares will be held in escrow for one
year from the closing as security for the obligations of Bentley to the
Company.
On August 14, 1998, The Company consummated an Employment Agreement with
Todd R. Langner, the Former President and Chief Operating Officer, Troy
Lighting and currently the Company's Executive Vice President of Sales and
Marketing. Pursuant to the term of this agreement, the Company issued
35,398 Shares of Class A Common on September 11, 1998. The Company has
expensed this obligation in the period.
11
<PAGE>
On September 14, 1998, the Company issued an aggregate of 375,000 Class B
Shares, to Laurie Munn, wife of Max Munn in consideration for the guarantee
by Ms. Munn of certain obligations of the Company to certain creditors of
the Company. The Company has recorded this obligation as a deferred
financing cost to be amortized over the life of the related debt
guarantees.
See Notes Payable for warrants issued in conjunction with Convertible Debt
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be made in conjunction with the information
contained in the financial statement of the company and the Notes thereto
appearing elsewhere herein and in conjunction with Management's Discussion
and analysis set forth in the Company's Form 10-KSB for the fiscal year
ended June 30, 1998, which discussion is incorporated herein by reference.
RESULTS OF OPERATIONS
Three months ending September 30, 1998 as compared to three months ending
September 30, 1997.
The Company's net sales from operations for the three months ending
September 30, 1998 totaled $10,406,470; an increase of $8,888,688 or 586%
from $1,517,782 for the period ending September 30, 1997. The revenue
growth has resulted from executing the Company's business plan that
requires acquiring and consolidating independent companies that design,
manufacture and distribute decorative accessories. In March 1998 the
Company acquired Henlor, Inc. and Merchandise Sales, Inc. and in August
1998 the Company acquired Windsor Art, Inc. and Troy Lighting, Inc.
The Company's cost of goods sold as a percentage of net sales increased 2.8
percentage points from 63% for the three months ending September 30, 1997
to 65.8% for the three months ending September 30, 1998. Cost of goods for
the current quarter was approximately $6,843,000 compared to approximately
$956,000 for the same period last year. The increase in the cost of goods
percentage year-to-year is primarily the result of acquiring new product
lines with alternative margin structures.
The Company's selling, general and administrative expenses as a percentage
of net sales totaled 26.8% for the three months ending September 30, 1998
compared to 22.5% for the same period last year. SG & A for the period
ending September 30, 1998 was approximately $2,792,000 compared to $341,000
for the same period last year. The Company has begun to execute its
strategy of consolidation to overcome redundancies in the expense structure
by combining Henlor, Inc. and Merchandise Sales, Inc. in one facility in
June of 1998 under the name Vanguard Studios, Inc.
The Company is preparing to sign a lease on a 216,000 square foot
manufacturing and distribution facility. This facility will be used to
consolidate the operations of Windsor Art, Inc., and Vanguard Inc.
Additionally, expense redundancies at Troy Lighting, Inc. will be overcome
with management from the new facility. Further reductions in overhead are
planned from a systems integration program that is already underway.
Interest expense, primarily from financing activities associated with the
acquisitions, has increased approximately $317,000 to $430,000 during the
three months ending September 30, 1998 from approximately $113,000 for the
same interval last year
For the three months ending September 30, 1998, the Company `s net income
was $282,975 or 0.0 per share compared to $107,908 or (0.10) per share for
the same last year interval. EPS data for the three months ending
12
<PAGE>
September 30, 1998, reflects a deduction of preferred stock dividend and
last years EPS data is restated to reflect the deduction of preferred stock
dividends. Income from operations before interest and provisions for income
taxes was $698,000 this year versus $220,410 last year.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that future cash flows from operations will be
sufficient to support the Company's operation. Company management continues
to implement what it believes is necessary to insure positive cash flow and
profitability. Specific actions taken as of the date of this filing include
seeking acquisition or strategic alliances with unrelated companies in the
decorative accessory industries. The Company continues to seek new sources
of financing to fund it's acquisitions. No assurances can be given that
these measures will generate the fiscal improvement sought by the Company.
As of September 30, 1998, the Company had cash balances of approximately
$1,250,000 compared to cash balances of approximately $4,036,000 at June
30, 1998, a decrease of approximately $2,786,000. Net cash provided by
operating activities was $2,736,545 for the three months ended September
30, 1998 compared to a net use of cash of $24,281 for the same period last
year. Net cash provided by operating activities was primarily the result of
asset based borrowings which are included in Notes Payables and Current
Maturities of Long Term Debt.
Net cash used in investing activities during the three months ending
September 30, 1998 totaled $4,057,162. There were no investing, activities
during the same period last year. The Company completed the acquisition of
Windsor Art, Inc. and Troy Lighting, Inc. during the period ending
September 30, 1998 accounting for almost all of the company's investing
activities for the period.
As of September 30, 1998 financing activities used $1,464,703 in cash
compared to $52,352 for the same period last year. Net cash usage from
financing activities was primarily the result of satisfying debt
obligations associated with the acquisition of Windsor Art, Inc.
As of September 30, 1998, the Company's financial position reflected a
working capital deficit of approximately $1,554,000 compared to a working
capital surplus of approximately $1,114,000 at June 30, 1998 and a working
capital surplus of approximately $144,000 for the same period end last
year. Change in the Company's working capital position resulted in large
part from acquisition activity.
Except as otherwise set forth here in, the Company has no 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 the
security holders
The Company operates pursuant to a policy that generally precludes
acceptance of goods or non-cash basis (Sometimes known as barter
transaction)
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
supplied and other operating costs could adversely affect the Company's
operations. However, the Company believes it could increase prices to
offset increases in cost of goods sold or other operating costs.
13
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SALES VARIATIONS
Although the Company's net sales are not subject to seasonal fluctuations
experienced by certain retailers, the Company experiences some minor
variations in the level of sales during the year. The first quarter of the
fiscal year (i.e., July 1 through September 30) is generally the Company's
slowest sales period due to the fact that the summer period is typically
the period when art galleries are at their slowest purchasing period.
During this period, the Company's warehouse and factory closes for three to
five days to take the annual physical inventory and to consolidate vacation
periods for the Company's employees.
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating and implementing
changes to computer programs necessary to address the year 2000 issue. The
Company does not anticipate any material additional costs with regard to
its year 2000 compliance.
The Year 2000 issue is expected to affect the systems of various entities
with which the Company interacts. However, there can be no assurance that
the systems of other companies on which the Company's systems rely will be
timely converted, or that a failure by another company's systems to be Year
2000 compliant would not have a material adverse effect on the Company.
14
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PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is subject to other claims and litigation in the ordinary
course of business in Management's opinion, such claims are not material to
the Company's financial position or its results of operations.
ITEM 2. CHANGES IN SECURITIES
None in addition to those disclosed herein.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Windsor Acquisitions on July 30,1998 filed August 10, 1998, Troy
Acquisitions on August 14, 1998 filed October 9, 1998.
15
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SIGNATURES
Pursuant to the requirements of the Security and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERIORS, INC.
NOVEMBER 20, 1997
BY: MAX MUNN, PRESIDENT AND
CHIEF EXECUTIVE, FINANCIAL
AND ACCOUNTING OFFICER
16
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EXHIBIT 11
INTERIORS, INC.
COMPUTATION OF WEIGHTED AVERAGE SHARES
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
(000) (000) (000) (000)
COMMON SHARES VS. WEIGHTED WEIGHTED
A & B NOTE REC. BASIC DILUTED
<S> <C> <C> <C> <C>
Total issued at June 30, 1998 21,720
Escrow shares at June 30, 1998 (8,750)
Shares vs. Note Receivable at June 30, 1998 (980)
-------
Basic Common A & B shares for EPS at June 30, 1998 11,990 980 9,050 9,050
Additional Basic Shares 3,225 417 417
Additional Shares vs. Note Receivable
Stock options and warrants 912
-------------------------------------------------------
Basic Common A& B shares for EPS at September 30, 1998 15,215 980 9,467 10,379
===== ======
Shares vs. Note Receivable at September 30, 1998 980
Escrow shares at September 30, 1998 13,750
=======
Total issued September 30, 1998 29,945
=======
</TABLE>