<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 the Nine Month Period Ended March 31, 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. 0-24352
INTERIORS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 13-3590047
-----------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
320 Washington Street, Mt. Vernon, New York 10553
-----------------------------------------------------------------
(Address of principal executive offices) (zip code)
Issuer's Telephone Number: (914) 665-5400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
The number of shares outstanding of the issuer's Class A Common Stock and Class
B Common Stock as of May 7, 1998 was 8,520,520 and 1,124,750 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 March 31, 1998 .......................... 2
Consolidated Statements of Operations -
For the Three Months Ended March 31, 1998 and 1997 ....................... 4
For the Nine Months Ended March 31, 1998 and 1997 ........................ 5
Consolidated Statement of Changes in Stockholders Equity -
For the Nine Months Ended March 31, 1998 ................................. 6
Consolidated Statements of Cash Flows -
For the Nine Months Ended March 31, 1998 and 1997 ........................ 7
Notes to Consolidated Financial Statements ............................... 8
Item 2. Management's Discussion and Analysis ............................ 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 14
Item 2. Changes in Securities ........................................... 15
Item 3. Defaults Upon Senior Securities ................................. 15
Item 4. Submission of Matters to a Vote of Security Holders ............. 15
Item 5. Other Information ............................................... 15
Item 6. Exhibits and Reports on Form 8-K ................................ 15
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
The consolidated 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, 1998 and the results of operations for
the three and nine months ended March 31, 1998 and 1997.
The Company's results of operations during the three and nine months ended
March 31, 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, 1997, and the
Company's Quarterly Reports on Forms 10-QSB for the periods ended September 30,
1997 and December 31, 1997 and the Company's filings on Forms 8K describing its
recent acquisitions on March 10 and March 23, 1998 filed on March 25, 1998 and
April 6, 1998 respectively.
1
<PAGE>
INTERIORS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
March 31, 1998
ASSETS $(000)
CURRENT ASSETS:
Cash $ 1,739
Accounts receivable, net of allowance of $459 3,164
Inventories 4,230
Other current assets 984
--------
Total current assets 10,117
--------
INVESTMENTS 3,977
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 2,078
Furniture and fixtures 209
Leasehold improvements 345
--------
Total 2,632
Less - Accumulated depreciation
1,420
--------
Net property and equipment 1,212
PURCHASE PRICE IN EXCESS OF FAIR
VALUE OF NET ASSETS ACQUIRED, NET 5,836
OTHER ASSETS 1,083
--------
Total assets $ 22,225
========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
INTERIORS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
March 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY $ (000)
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt $ 5,067
Accounts payable and accrued liabilities 4,822
--------
Total current liabilities 9,889
--------
LONG TERM DEBT 5,295
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,300,000 shares
authorized, 846,197 shares issued and outstanding 8
Class A common stock, $.001 par value, 60,000,000 shares
authorized, 15,609,187 shares issued and outstanding 16
Class B common stock, $.001 par value, 2,500,000 shares
authorized, 2,449,750 shares issued and outstanding 2
Additional paid-in-capital 16,810
Accumulated deficit (8,847)
Treasury Stock --
Notes receivable (948)
--------
Total stockholders' equity 7,041
--------
Total liabilities and stockholders' equity $ 22,225
========
The accompanying notes are an integral part of this balance sheet
3
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(unaudited)
$(000) $(000)
1998 1997
---- ----
NET SALES $ 2,389 $ 905
COST OF GOODS SOLD 1,378 657
------- -------
Gross profit 1,011 248
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 707 573
------- -------
Income (loss) from operations 304 (325)
GAIN ON SALE OF SECURITIES 244
INTEREST EXPENSE (257) (154)
OTHER INCOME (EXPENSE) 7 (56)
------- -------
Income (loss) before provision for taxes 54 (291)
PROVISION FOR INCOME TAXES 2 --
------- -------
NET INCOME (LOSS) $ 52 $ (291)
======= =======
BASIC EARNINGS PER SHARE $.01 $(.07)
DILUTED EARNINGS PER SHARE $.01 $(.07)
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 6,689,000 4,408,553
DILUTED 7,158,000 4,408,553
The accompanying notes are an integral part of these financial statements
4
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(unaudited)
$(000) $(000)
1998 1997
---- ----
NET SALES $ 6,225 $ 2,958
COST OF GOODS SOLD 3,775 1,783
------- -------
Gross profit 2,450 1,175
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,597 1,445
------- -------
Income (loss) from operations 853 (270)
GAIN ON SALE OF SECURITIES 244
INTEREST EXPENSE (483) (314)
OTHER INCOME (EXPENSE) 7 (56)
------- -------
Income (loss) before provision for taxes 377 (396)
PROVISION FOR INCOME TAXES 15 10
------- -------
NET INCOME (LOSS) $ 362 $ (406)
======= =======
BASIC EARNINGS PER SHARE $.06 $(.09)
DILUTED EARNINGS PER SHARE $.06 $(.09)
WEIGHTED AVERAGE NUMBER OF SHARES
BASIC 5,839,000 4,408,553
DILUTED 6,161,000 4,408,553
The accompanying notes are an integral part of these financial statements
5
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Class A Class B Addl. Retained
Preferred Common Common Paid-In Earnings Treas. Note
--------------- --------------- ---------------- Capital (Deficit) Stock Rec. Total
Shares $(000) Shares $(000) Shares $(000) $(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
June 30, 1997 1,147,060 $11 5,261,241 $5 1,769,750 $2 $13,218 $(8,679) ($1) $(438) $4,118
Sale of Treasury
Stock 180 -- 180
Conversion of
Class B into
Class A 50,000 -- (50,000) --
Conversion of
Preferred into
Class A (300,863) (3) 902,589 1 2
Issue of Class B 730,000 1 510 (510) 1
Escrow shares 7,500,000 8 (8)
Issued for services 230,387 -- 345 345
Henlor acquisition 299,581 -- 500 500
Artmaster acquisition 779,302 1 1,249 1,250
Warrants exercised 55,756 -- 84 84
Warrants issued in
connection with
Convertible Debt 200 200
Dividends declared
December, 1997 530,331 1 530 (530)
Net income to
March 31, 1998 362 362
---------- -- ------------ --- --------- -- ------- ------- --- ------ -------
BALANCE,
March 31,1998 846,197 $8 15,609,187 $16 2,449,750 $2 $16,810 $(8,847) $(-) $(948) $7,041
========== == ============ === ========= == ======= ======= === ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
$(000) $(000)
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 362 $ 406
Adjustments to reconcile Net Income to net cash
provided by (used in) operating activities:
Depreciation and amortization 494 509
Provision for issuance of stock 15
Provision for bad debts 250
Write off of non-productive assets 699
Extinguishment of debt (587)
Financing charge 50
Gain from sale of investment securities (244)
Provision for dissolution of Italia 56
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, trade (17) 2
Decrease (increase) in inventories (76) (532)
Decrease (increase) in other current assets 229 (91)
Decrease (increase) in other assets (199) (124)
Increase (decrease) in accounts payable and accrued expenses (95) (1,000)
------- -------
Net cash provided by (used in) operating activities 698 (1,225)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (124) (500)
Investment in Decor Group, Inc. (826)
Acquisition of Henlor, Inc. (1,078)
Acquisition of Artmaster (750)
------- -------
Net cash used in investing activities (1,952) (1,326)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 2,928 700
Sale of Treasury Stock 180
Sale of investment securities 372
Repayments of debt and capitalized lease obligations (470) (470)
Net proceeds from exercise of common stock warrants 84 1,293
Net proceeds from exercise of common and preferred stock options 825
------- -------
Net cash provided by financing activities 2,722 2,720
------- -------
Net Increase (decrease) in cash 1,468 169
CASH, beginning of period 271 4
------- -------
CASH, end of period $ 1,739 $ 173
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
7
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
$(000) $(000)
1998 1997
---- ----
Cash paid during the period for-
Interest $ 216 $ 177
Taxes $ 15 $ 6
SUPPLEMENTAL DISCLOSURES OF NON CASH FINANCING ACTIVITIES
$(000) $(000)
1998 1997
---- ----
Stock issued for Henlor, Inc. Acquisition $ 500
Stock issued for Artmaster Acquisition $1,250
Debt issued for Henlor, Inc. Acquisition $ 794
Debt issued for Artmaster Acquisition $ 810
Stock issued for prepaid financing charges $ 300
Stock issued for consulting services $ 345 $ 350
The accompanying notes are an integral part of these financial statements
8
<PAGE>
INTERIORS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 the results of the
interim period have been included. The results of operations for the three and
nine months ended March 31, 1998 are not necessarily indicative of those to be
expected for the entire year. The Company, for the three and nine months ended
March 31, 1998 and 1997, used the gross profit method to value inventory.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required primary EPS with a
presentation of basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both basic EPS and diluted EPS on
the face of the statement of income. The Company has adopted the provisions of
SFAS 128 for all periods presented.
During the quarter ended March 31, 1998 the Company adopted FASB Statement No.
130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 requires companies
to disclose, both individually and in the aggregate, the change in equity from
non-owner sources. The Company's comprehensive income is the same as its net
income for the three months ended March 31, 1998 and 1997, respectively.
9
<PAGE>
2. ACQUISITIONS AND STRATEGIC ALLIANCES
The Company's long-term plan for growth includes in part either the acquisition
of or entering into strategic alliances with unrelated companies in the
decorative accessories industry to maximize market potential.
On March 10, 1998, the Company entered into, and consummated, an Agreement and
Plan of Merger among the Company, Vanguard Acquisition Corp., a wholly-owned
subsidiary of the Company, Henlor, Inc. ("Henlor") and the shareholders of
Henlor. The transaction was structured as a reverse triangular merger. As a
result of the merger, Henlor now is a wholly-owned subsidiary of the Company.
Henlor, through its wholly-owned subsidiary Vanguard Studios, Inc.
("Vanguard"), designs, manufactures and wholesales decorative accessories
furnishings for the home, including framed hand-painted oil paintings, framed
prints under glass, wall mirrors, lamps, sculptures and decorative tabletop
accessories. The acquisition of Henlor provides the Company with an expanded
breadth of product offerings.
Pursuant to the merger agreement, the purchase price paid to the shareholders
of Henlor at closing consisted of a cash payment of $705,621 and the delivery
of a subordinated promissory note in the aggregate principal amount of
$794,379. In addition, the Company issued to the shareholders of Henlor an
aggregate of 299,581 unregistered shares of its Class A Common Stock and the
Company repaid indebtedness of Vanguard owed to the principal shareholders of
Henlor in the amount of $294,379 . All of the merger shares are being held in a
two year escrow as security for the indemnification of obligations of Henlor's
former shareholders pursuant to the merger agreement, and the number of merger
shares remains subject to adjustment based on the value of the merger shares on
the second anniversary of the closing date.
The merger was financed by ( i ) a bridge loan in the principal amount of
$500,000 from United Credit Corp., the Company's senior lender, and ( ii ) the
private placement to accredited investors of the Company's unregistered
Subordinated Convertible Promissory Notes in the aggregate principal amount of
$500,000. The aggregate purchase price was determined in arms-length
negotiations between the Company and the shareholders of Henlor.
The assets acquired pursuant to the merger agreement included, among other
things, (i) fixed assets owned, leased or used by Henlor and Vanguard,
including equipment, (ii) accounts receivable, (iii) inventory and (iv)
contracts, agreements, and leases of real and personal and property. For the
foreseeable future, the Company intends to utilize such assets in connection
with the operation of the business of Henlor and Vanguard.
On March 23, 1998, the Company entered into, and consummated, an Agreement and
Plan of Merger among the Company, Artmaster Studios, Inc. ("Artmaster"), a
wholly-owned subsidiary of the Company, Merchandise Sales, Inc. ("MSI") and
certain shareholders of MSI. The transaction was structured as a forward
triangular merger. As a result of the merger, MSI has been merged with and into
Artmaster. Artmaster designs, manufactures and wholesales wall decor and
lighting products for the home. The acquisition of MSI provides the Company
with an expanded breadth of product offerings.
Pursuant to the Merger Agreement, the purchase price paid to the shareholders
of MSI at closing consisted of the delivery of a subordinated promissory note
in the aggregate principal amount of $537,248. In addition, the Company issued
to the shareholders of MSI an aggregate of 779,302 unregistered shares of its
Class A Common Stock and the Company repaid indebtedness of MSI owed to certain
creditors of MSI in the aggregate amount of $1,022,752 through an aggregate
cash payment of $750,000 and the issuance of a subordinated promissory note in
the aggregate principal amount of $272,752. All of the merger shares are being
held in a one year escrow as security for the indemnification obligations of
MSI's former shareholders pursuant to the merger agreement, and the number of
merger shares remains subject to adjustment based on the value of the merger
shares on the first anniversary of the closing date.
10
<PAGE>
The merger was financed by the Company's available working capital which was
derived in part, from an earlier, unrelated private placement to accredited
investors of the Company's unregistered Subordinated Convertible Promissory
Notes. The aggregate purchase price was determined in arms-length negotiations
between the Company and the shareholders of MSI.
The assets acquired pursuant to the merger agreement included, among other
things, (i) fixed assets owned, leased or used by MSI, including equipment,
(ii) accounts receivable, (iii) inventory and (iv) contracts, agreements, and
leases of real and personal and property. For the foreseeable future, the
Company intends to utilize such assets in connection with the operation of the
business of MSI and Vanguard Studios, Inc., another subsidiary of the Company.
On a proforma basis the combined company would have had net sales of
$20,915,000 and a net loss of $14,000 for the nine months ended March 31, 1998,
without taking into consideration any benefits from operating the three
companies as a unified Company.
On April 21, 1998 the Company and Decor Group, Inc. entered into an agreement
and plan of merger approved by the respective Boards of Directors upon the
terms and subject to the conditions set forth in the agreement, whereby each
issued and outstanding share of common stock, par value $.0001 per share, of
Decor ("Decor Common Stock"), other than shares owned by Interiors or Decor,
will be converted into the right to receive .50 shares of Interiors Class A
Common Stock.
Pursuant to an April 21, 1998 resolution of the Company's Board of Directors
relating to the guarantee of the Company's obligations to the former
shareholders of Henlor, Inc. and other continuing guarantees by Laurie Munn,
wife of the Company's President and Chief Executive Officer , the Company
agreed to defer certain payments on notes receivable from Laurie Munn. As
restructured interest accrued on the combined balance of $948,000 at 6.6%
interest will be due April 21, 1999 and annually thereafter. The principal is
due on April 21, 2003.
3. NOTES PAYABLE
At March 31, 1998, the Company has aggregate notes payable of approximately
$10,362,000. The components of these notes are discussed below.
The Company has outstanding secured formula based financing with United Credit
Corporation totaling approximately $1,443,000 at March 31, 1998. Interest is
determined at an annual rate of 16% plus related fees.
The Company has outstanding secured financing with the Bank of New York
totaling approximately $315,000 at March 31, 1998. Interest is determined at an
annual rate of prime plus 1%, (9.50% as of the date of this filing.)
During November 1997 the Company received $250,000 in a loan from Ekistics
Corp. This loan is due December 31, 1998 and bears 12% interest.
The Company has outstanding $500,000 from BH Funding as of March 31, 1998. This
loan is to be repaid with interest on April 28, 1999. Interest is determined at
an annual rate of 15%.
As part of the Artmaster acquisition the Company issued a total of $810,000 in
10% subordinated promissory notes to the former shareholders.
11
<PAGE>
As part of the Henlor, Inc. acquisition the Company caused its subsidiary to
issue $794,000 in 8% subordinated promissory notes to the former shareholders,
as well as agree to employment contracts of up to five years with the former
shareholders. These contracts have been valued at $1,235,000 for financial
statement purposes.
Henlor, Inc. has $2,448,000 in outstanding revolving bank debt as of March 31,
1998.
The Company has issued $1,000,000 of three year convertible subordinated notes
secured by the stock of Henlor, Inc. with an interest rate of 15% convertible
at a rate of $1.50 per share with 100,000 two year warrants attached at a
conversion price of $1.75 per share.
The Company has issued $225,000 of three year unsecured subordinated debentures
with an interest rate of 15% convertible at the rate of $1.75 per share with
22,500 two year warrants attached convertible at a rate of $2.00 per share.
The Company has issued $1,500,000 of 6% subordinated convertible notes due
March 19, 2000 with a varying conversion rate dependent on when the conversion
is made. These notes have 175,000 two year warrants attached at a price of
$1.75.
In connection with these convertible debt instruments, the Company has valued
the attached warrants and recorded an aggregate amount of $200,000 as debt
discount. This amount will be amortized over the life of the respective debt
instruments.
Other long term debt totaled $43,000 at March 31, 1998.
4. COMMITMENTS AND CONTINGENCIES
The Company entered into an employment severance agreement with Ms. Ann Stevens
in 1996, and 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 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 of the agreement 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. During the nine months ended March 31, 1998 the Company
added 7,500,000 Common A shares to the Escrow shares under the same terms and
conditions of the original Escrow shares agreement.
On January 9, 1998 Laurie Munn, wife of the Company's President and CEO,
obtained an option to purchase the above 1,250,000 Escrow Shares at fair value
at the date of the grant. This option was issued to Laurie Munn in
consideration, amongst other things, for her continuing personal guarantees of
Company obligations to several lenders, including BH Funding. In addition
Laurie Munn purchased 730,000 shares of Class B Common stock at $.70 per share,
the approximate fair value of such shares at the time of the purchase.
Approximately $51,000 of the purchase price is due in May of 1998. The balance
is due in annual installments through January 2005 at an interest rate of 6.6%.
The purchased stock is the collateral for this obligation.
Effective January 1, 1998 the Company entered into a five-year employment
agreement (the "Agreement") with its President and Chief Executive Officer. The
Agreement provides for an annual base salary of $150,000 commencing July 1,
1997 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 grants the Chief Executive Officer an option to purchase at any time
during the Agreement term 150,000 shares of the Company's Series A, 10%
Cumulative Convertible Preferred Stock at fair value at the date of the grant
and 250,00 shares of Class A or Class B Common Stock at fair value at the date
of the grant during the first year of employment. This Agreement further allows
additional purchases of 150,000 shares of Common stock per year for each of the
four remaining years of the Agreement at an exercise cost which increases
approximately 10% each year from the above fair value at the date of the grant.
The Agreement also contains a non-compete clause and provides the Chief
Executive Officer with life insurance and the use of an automobile. Presently,
the Chief Executive Officer draws an annual salary of $150,000.
12
<PAGE>
Except as otherwise set forth herein, the Company has no material commitments
for capital expenditures. In order to fund growth over the long term, the
Company anticipates possible future issuance of its securities resulting in
further dilution to its security holders
Disclosure of the Company's current legal matters are reflected at Part II,
Item 1. - Legal Proceedings.
5. SHAREHOLDERS' EQUITY
The Company declared a record date of December 10, 1997 for a dividend on its
Series A 10% Cumulative Convertible Preferred Stock for the six month periods
ending September 1996, March 1997 and September 1997. The dividend ($.75 per
Preferred Share) was paid on January 10, 1998 in the form of the Company's
Common A Shares. Accordingly, shares of the Company's Class A Common Stock was
issued for this purpose. Retained earnings was charged $530,000 in December
1997 in conjunction with the issuance of these shares.
Laurie Munn, wife of the Company's CEO obtained certain options on the Escrow
Shares and in addition purchased 730,000 shares of Class B Common stock (See
"Commitments and Contingencies").
In January 1998 the Company entered into an Employment Agreement with its
President and CEO (See "Commitments and Contingencies").
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. INCOME TAXES
For the nine months ended March 31, 1998 and 1997 the income tax provision is
offset by a corresponding reduction in the valuation allowance associated with
the Company's deferred tax assets.
Item 2. Management's Discussion and Analysis
The following discussion should be read in conjunction with the information
contained in the financial statements of the Company and the Notes thereto
appearing elsewhere herein and in conjunction with the Management's Discussion
and Analysis set forth in the Company's Form 10-KSB for the fiscal year ended
June 30, 1997, which discussion is incorporated herein by reference.
Results of Operations
Periods Ended March 31, 1998 as compared to Periods Ended March 31, 1997
The Company's net sales from operations for the nine months ended March 31,
1998 increased by $3,267,000 or 110% to $6,225,000 from $2,958,000 for the
period ended March 31, 1997. The growth in revenue was the result of an
increase in sales to a large customer as well as a price increases.
13
<PAGE>
The Company's cost of goods sold as a percentage of net sales increased to 61%
for the nine months ended March 31, 1998, from 60% for the nine months ended
March 31, 1997. Cost of goods sold for the current period was approximately
$3,775,000 versus $1,783,000 for the prior period. This increase in percentage
was due to an increase in labor costs in anticipation of increased sales. The
Company used the gross profit method to value inventory during the nine months
ended March 31, 1998 and 1997.
The Company's selling, general and administrative expenses as a percentage of
net sales totaled 26% for the nine months ended March 31, 1998 , versus 49% for
the nine months ended March 31, 1997. To achieve this reduction in the ratio of
selling, general, and administrative expenses as a percentage of net sales, 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. Interest expense
as a percentage of net sales totaled approximately 8% for the nine months ended
March 31, 1998 , versus approximately 11% for the nine months ended March 31,
1997. Interest expense increased approximately $169,000 for the nine months
ended March 31, 1998 in comparison to the nine months ended March 31, 1997
because of new loans.
For the quarter ended March 31, 1998, the Company realized net income of
approximately $52,000 or $.01 per share, versus a net loss of $291,000 or $.07
per share for the quarter ended March 31, 1997. The quarter ended March 31,
1997 included $244,000 from a gain on sale of securities. Income from
operations before interest and provision for taxes increased to $304,000 for
the quarter ended March31, 1998 from a loss of $325,000 for the quarter ended
March 31, 1997. For the nine months ended March 31, 1998, the Company realized
net income of approximately $362,000 ($.06 per share), versus a net loss of
$406,000 ($.09 per share) for the nine months ended March 31, 1997.
Liquidity and Capital Resources
Management believes that future cash flow from operations will be sufficient to
support the Company's operations. However, Company management continues to
implement what it believes to be the changes deemed necessary to further
increase positive cash flow and profitability. Specific action taken as of the
date of this filing include seeking either the acquisition of or entering into
strategic alliances with unrelated companies in the decorative accessories
industry. (See "Acquisitions and Strategic Alliances."). The Company has also
undertaken efforts to continue to seek new sources of financing to fund its
acquisitions (See "Notes Payable"). The Company has also begun to implement a
marketing program meant to increase revenues of its Master Framemakers
Division. No assurances can be given that these measures will generate the
fiscal improvement sought by the Company.
As of March 31, 1998, the Company reflected cash balances of approximately
$1,739,000 as compared to cash balances of approximately $271,000 at June 30,
1997, representing an increase of $1,468,000. Net cash provided by operating
activities was approximately $698,000 for the nine months ended March 31, 1998
, as compared to net cash used in operating activities of approximately
$1,225,000 for the nine months ended March 31, 1997. The net cash used in
operating activities during the nine months ended March 31, 1998 was primarily
a result of net income of approximately $362,000 as well as the following
approximate changes from continuing operations: decrease in accounts payable
and accrued expenses of $95,000, increase in inventories of $76,000, and an
increase in accounts receivable of $17,000, a decrease in other current assets
of $229,000 and an increase in other assets of $199,000. The increase in cash
provided by operating activities was largely due to increased sales at the
Company's A.P.F. Master Framemakers division (see "Results of Operations").
14
<PAGE>
Net cash used in investing activities during the nine months ended March 31,
1998 totaled $1,952,000 versus approximately $1,326,000 for the nine months
ended March 31, 1997. During the nine months ended March 31, 1998, the Company
invested $ 124,000 to acquire equipment, versus approximately $500,000 used to
acquire equipment and other assets during the nine months ended March 31, 1997.
The Company completed the acquisitions of Henlor, Inc. and Artmaster,
accounting for almost all of the Company's investing activities for the period.
Net cash provided by financing activities totaled approximately $2,722,000
during the nine months ended March 31, 1998, versus approximately $2,720,000
during the nine months ended March 31, 1997.
As of March 31, 1998 , the Company's financial position reflected a working
capital surplus of approximately $228,000, versus a working capital deficit of
approximately $99,000 at June 30, 1997. As of March 31, 1998 versus June 30,
1997, there were increases in trade receivables of approximately $17,000, other
assets of $199,000 and an increase in inventories of approximately $76,000.
The Company has declared a record date of December 10, 1997 for a dividend on
its Series A 10% Cumulative Convertible Preferred Stock for the six-month
period ending September 1996, March 1997 and September 1997. The dividend ($.75
per Preferred share) was paid on January 10, 1998 in the form of the Company's
Common A Shares. Accordingly, shares of the Company's Class A Common Stock was
issued for this purpose. Retained earnings was charged $530,000 in December
1997 in conjunction with the issuance of these shares.
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.
The Company operates pursuant to a policy that generally precludes acceptance
of goods on a non-cash basis (sometimes known as barter transactions).
Refer to the "Legal Proceedings" section for discussion of litigation and
related commitments.
Impact of Inflation
The Company does not believe that inflation has had a material adverse effect
on sales or income during the past several years. Increases in supplies and
other operating costs could adversely affect the Company's operations. However,
the Company believes it could increase prices to offset increases in cost of
goods sold or other operating costs.
Sales Variations
Although the Company's net sales are not subject to seasonality fluctuations
experienced by certain retailers, the Company experiences some minor variations
in the level of sales 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.
15
<PAGE>
PART II
OTHER INFORMATION
Item 1 . Legal Proceedings
In July 1996, Gear Holdings, Inc. brought an action against the Company for the
alleged breach of a licensing agreement. The Company denies that it was a party
to an agreement with Gear, or that any sum of money is owed. The complaint
demands sums Gear would have received under the alleged agreement in a sum to
be determined, but not less than $250,000. The suit has remained dormant since
inception. Management believes this matter will be dismissed with no material
impact to the Company's financial position or results of operations.
The Company is subject to 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
Henlor Acquisition on March 10, 1998 filed March 25, 1998 Artmaster Acquisition
on March 23, 1998 filed April 6, 1998
15
<PAGE>
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.
Date: May 28, 1998 By: /s/ Max Munn
------------------------------
Max Munn, President and Chief Executive Officer
16
<PAGE>
Exhibit 11
Interiors, Inc.
Computation of weighted average shares
For the Nine and Three months ended
March 31, 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, 1997 7,031
Escrow shares at June 30, 1997 (1,250)
Shares vs. Note Receivable at June 30, 1997 (250)
-----
Basic Common A & B shares for EPS at June 30, 1997 5,531 250 5,531 5,781
Additional Basic Shares 2,798 308 308
Additional Shares vs. Note Receivable 730 72
Basic Common A & B shares for EPS at March 31, 1998 8,329 980 5,839 6,161
===== =====
Shares vs. Note Receivable at March 31, 1998 980
Escrow shares at March 31, 1998 8,750
Total Issued March 31, 1998 18,059
======
<CAPTION>
Computation of weighted average shares (000) (000) (000) (000)
For Three months ended March 31, 1998 Common Shares vs. Weighted Weighted
A & B Note Rec. Basic Diluted
<S> <C> <C> <C> <C>
Total Issued at December 31, 1997 7,031
Escrow shares at December 31, 1997 (1,250)
Shares vs. Note Receivable at December 31, 1997 (250)
-----
Basic Common A & B shares for EPS at December 31, 1997 5,531 250 5,531 5,781
Additional Basic Shares 2,798 1,158 1,158
Additional Shares vs. Note Receivable 730 219
Basic Common A & B shares for EPS at March 31, 1998 8,329 980 6,689 7,158
===== =====
Shares vs. Note Receivable at March 31, 1998 980
Escrow shares at March 31, 1998 8,750
Total Issued March 31, 1998 18,059
======
</TABLE>
The above schedule should be read in conjunction with the Statement of Changes
in Stockholders' Equity
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,739,000
<SECURITIES> 0
<RECEIVABLES> 3,164,000
<ALLOWANCES> 0
<INVENTORY> 4,230,000
<CURRENT-ASSETS> 10,117,000
<PP&E> 2,632,000
<DEPRECIATION> 1,420,000
<TOTAL-ASSETS> 22,225,000
<CURRENT-LIABILITIES> 9,889,000
<BONDS> 0
0
8,000
<COMMON> 18,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 22,225,000
<SALES> 6,225,000
<TOTAL-REVENUES> 6,255,000
<CGS> 3,775,000
<TOTAL-COSTS> 1,597,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 483,000
<INCOME-PRETAX> 377,000
<INCOME-TAX> 15,000
<INCOME-CONTINUING> 362,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 362,000
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
