<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 0-24352
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INTERIORS, INC.
(EXACT NAME OF REGISTRANT 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 665-5400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
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(TITLE OR CLASS)
SERIES A 10% CUMULATIVE CONVERTIBLE PREFERRED STOCK, PAR VALUE $.01 PER SHARE
-----------------------------------------------------------------------------
(TITLE OR CLASS)
CLASS WB REDEEMABLE COMMON STOCK PURCHASE WARRANTS
--------------------------------------------------
(TITLE OR CLASS)
CLASS WC REDEEMABLE COMMON STOCK PURCHASE WARRANTS
--------------------------------------------------
(TITLE OR CLASS)
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 [ ]
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-B IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THE FORM 10-KSB OR ANY
AMENDMENT TO THIS FORM 10-KSB/A.
REGISTRANT'S REVENUES FOR ITS MOST RECENT FISCAL YEAR WERE $13,447,243.
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT, COMPUTED BY REFERENCE TO THE CLOSING PRICE OF SUCH STOCK AS
OF OCTOBER 9, 1998, WAS APPROXIMATELY $29,322,743.
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S CLASS A COMMON
STOCK, $.001 PAR VALUE (THE "CLASS A SHARES") AS OF OCTOBER 9, 1998, WAS
27,404,433 SHARES AND THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S
CLASS B COMMON STOCK, $.001 PAR VALUE PER SHARE (THE "CLASS B SHARES") AS OF
OCTOBER 9, 1998, WAS 2,355,000 SHARES.
DOCUMENTS INCORPORATED BY REFERENCE:
DEFINITIVE PROXY STATEMENT TO BE FILED NO LATER THAN OCTOBER 28, 1998
PURSUANT TO REGULATION 13A WITH RESPECT TO REGISTRANT'S 1998 ANNUAL MEETING OF
STOCKHOLDERS (INCORPORATED BY REFERENCE IN PART III).
TRANSITIONAL SMALL BUSINESS FORMAT (CHECK ONE):
YES [ ] NO [X]
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INTERIORS, INC.
1998 FORM 10-KSB/A ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS..............................................4
ITEM 2. DESCRIPTION OF PROPERTIES...........................................12
ITEM 3. LEGAL PROCEEDINGS...................................................12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........14
ITEM 7. FINANCIAL STATEMENTS................................................16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................17
PART III
ITEMS 9, 10, 11, AND 12 - INCORPORATED BY REFERENCE..........................18
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.............18
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Interiors, Inc., a Delaware corporation ("Interiors" or the
"Company"), is a leading designer, manufacturer and marketer of a broad range
of decorative accessories for the residential, commercial, institutional and
contract markets, including museum-quality traditional and contemporary picture
frames, framed wall mirrors, framed hand-painted oil paintings, framed prints
under glass, portable and installed lighting and lighting fixtures, sculptures
and decorative tabletop accessories. Interiors primarily markets its products
to retailers in the home furnishings industry, including furniture stores, home
furnishings centers, catalog retailers, home improvement centers, department
stores and lighting retailers. The Company believes that it has a unique
competitive advantage in serving a broad range of customers because of the
breadth and depth of its product lines as well as its ability to coordinate
design among several product lines.
Interiors' goal is to become the premier, national single-source
provider of decorative accessories to the home furnishings industry. To achieve
this goal, Interiors has taken a leading position in consolidating the highly
fragmented decorative accessories industry, rapidly establishing its national
presence through the acquisition, integration, and growth of established,
well-regarded manufacturers of decorative accessories. The Company's business
strategy was developed in response to changing demands of large retailers, who
seek to increase "single-sourcing" of inventory purchases in order to reduce
distribution and related expenses, including styling costs associated with
coordinating related products from multiple vendors. Interiors intends to
integrate and optimize the operations of acquired companies by consolidating
into regional operating units with centralized management, which management
believes will lead to better product design and greater efficiency in
manufacturing, shipping and inventory management, resulting in increased sales.
Interiors was originally incorporated in New York in October 1990
under the name A.P.F. Holdings, Inc., which subsequently merged with and into
Interiors, Inc., a Delaware corporation, in March 1994. Historically, Interiors
has had two primary operating divisions: the Custom Framing Division, which,
through its A.P.F. Master Framemakers Division, is engaged in the manufacture
of antique and contemporary picture and mirror frames for museums, art
galleries, designers, collectors and frame retailers; and the Wholesale
Division, which manufacturers and markets a line of high-end traditional and
contemporary mirrors sold through upscale retail furniture and department
stores. Since early 1998, the Company has been rapidly acquiring new operating
divisions and expanding its product lines such that today its business includes
the design, manufacture and distribution of a broad range of decorative
accessories.
INDUSTRY
According to the most recent Universe Study conducted by Home Accents
Today, domestic wholesale sales of home furnishings accessories totaled $19.7
billion in 1995. The two categories most relevant to the Company are wall decor
and portable lamps, which together accounted for 8.2% of total industry sales,
or $1.6 billion, in 1995. Wall decor consists of three segments: framed art,
framed mirrors and miscellaneous wall objects such as metal sculpture. The
Company has strong product lines in each of these categories. Within the wall
decor market, framed art is estimated to account for approximately 70% of sales
at wholesale, framed mirrors to account for approximately 20% of such sales,
and miscellaneous wall objects to account for approximately 10% of such sales.
The market for wall decor has been growing rapidly in recent years. Wholesale
sales of wall decor, which were $357 million in 1993, increased by 40% in 1994
and 40% again in 1995 to $700 million. Home Accents Today's Universe Study
estimated growth for 1996 and 1997 at 20% in each year, resulting in
anticipated total sales in excess of $1 billion in 1997. This represents a
compound annual growth rate of 23% since 1991.
The growth in the decorative accessory industry is being driven in
part by demographic changes. The "baby boomer" generation, which represents the
largest population group in the country, is entering their 40s and 50s, their
peak earnings years. The baby boomers have traded up from starter homes into
their dream homes, and are spending more on home improvements, additions, and
furnishings to make their homes more luxurious. Management believes that
Interiors' products appeal to the tastes and quality expectations of the baby
boomer generation.
The manufacturing sector of the decorative accessory industry is
highly fragmented and is composed predominately of small companies with limited
product lines. Over the last 20 years, the retail distribution channels for
their products has
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shifted from local independent retailers to large, national and regional
retailers in the mass and specialty markets that strive to attain superior
economics of scale and marketing leverage. The Company believes that the
manufacturing sector of the industry is under pressure to consolidate from
these large retailers. These retailers seek increased "single-sourcing" of
inventory purchases, particularly in product categories that do not account for
a significant percentage of their sales. Single-sourcing allows the retailers
to reduce distribution and related expenses, including styling costs associated
with coordinating related products from multiple vendors. Additionally, these
retailers are placing additional burdens on their suppliers by insisting that
suppliers communicate via electronic data interchange ("EDI"), hold inventory
to ensure quick delivery, and drop-ship inventory to each store in the
retailer's chain and, in many instances, directly to the retailer's customers.
The Company also believes that these retailers give preference to
vendors offering coordinated accessories. Coordinated accessories help satisfy
the consumer's preference for one-stop-shopping, whereby the consumer can
purchase furniture, floor coverings, window treatments and accessories from one
retailer in coordinated styles. Consumers find this approach preferable to
attempting to achieve consistent styling of accessories from several retailers.
Management believes that compliance with the demands of retailers and consumers
is very costly for many small manufacturers of decorative accessories. As a
result, the Company believes that many of these manufacturers are receptive to
being acquired by larger manufacturers such as the Company.
The Company, through the acquisition and consolidation of
manufacturers and distributors of decorative accessories, as well as internal
growth, intends to capitalize on both the fragmented nature of the
manufacturing sector of this industry and changing demands of retailers and
consumers. Management believes that increasing the breadth and depth of its
product offerings will enhance the Company's ability to expand its wholesale
operations as it develops the capability to market "whole room" packages of
decorative accessories to retailers in the mass and specialty markets. In
addition, management believes that the operations of acquired businesses can be
consolidated into regional operating units with centralized management,
eliminating operating and management redundancies which should help Interiors
improve its cash flow and operating margins. There can be no assurance,
however, that Interiors will be able to successfully integrate the operations,
facilities and management of acquired businesses or realize any benefits from
any such acquisitions.
ACQUISITION AND EXPANSION STRATEGY
The Company's strategic objective is to become the premier, national
single-source provider of decorative accessories to the home furnishings
industry. Key elements of the Company's strategy to accomplish this objective
are to (i) continue its role as the leading consolidator of independent
manufacturers of decorative accessories; (ii) integrate the operations of its
operating divisions and capture economies of scale; (iii) expand the Company's
product lines through acquisition and internal growth; and (iv) expand into new
markets.
Continue Consolidation Through Acquisitions. The Company has rapidly
established a national presence and critical customer mass by acquiring several
established, well-regarded companies which design, manufacture and distribute
decorative accessories in selected regions throughout the United States. The
Company intends to continue its consolidation strategy by acquiring additional
manufacturers of decorative accessories in order to deepen and broaden its
market presence and to expand its product offerings. Given the increasing
pressure from large retailers to consolidate, the Company believes that smaller
manufacturers of decorative accessories will continue to be attracted to, and
benefit from, the consolidation opportunity provided by the Company. As part of
its integration strategy, management intends to pursue companies with annual
revenues ranging from $3 million to $15 million, a moderate-to premium-priced
product line, a positive reputation in the marketplace and profitable
operations. The Company has identified several candidates for acquisition that
meet these parameters.
Integrate Operations and Capture Economies of Scale. To support the
growth of its business, the Company has implemented a continuing program
designed to maximize operating efficiencies by reducing manufacturing costs,
increasing inventory turnover and enhancing its management information systems.
As a result of this program, the Company seeks to integrate and optimize the
operations of the companies it acquires by (i) consolidating operations into
regional operating units with centralized management, (ii) providing the
acquired companies with material requirements planning software, which better
determines inventory requirements, (iii) linking ordering systems through EDI,
which permits the computerized receipt of customer orders, billing and exchange
of information with customers, and (iv) providing the acquired companies with
the Company's integrated support services. Management believes that the
centralization of these functions will lead to increased sales, better product
design, and greater efficiency in manufacturing, shipping and inventory
management. The Company also believes that there will be significant
opportunities for cross-marketing the products of its various operating units.
Expand Product Lines. Interiors continuously introduces new products
to complement new trends in interior design and decorating. As the Company
grows, management intends to centralize and coordinate product design
throughout the
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Company. Management believes that the Company's business consolidation and
integration activities will also enhance the Company's ability to design and
manufacture new products which are coordinated with products from the Company's
other product lines. Interiors also plans to pursue licensing arrangements with
one or more leading designer labels to bolster its product development efforts.
Expand Into New Markets. The Company intends to expand the
distribution of its products into new domestic and international markets.
Initially, the Company intends to focus on those markets in which it already
has achieved some market penetration or for which access is facilitated through
existing distribution channels and relationships. In addition, through its
recently-formed Habitat Solutions division, the Company intends to expand its
business to include merchandising and design for the hospitality, time-share
and model homes industries.
ACQUISITION HISTORY
Set forth below is a list of the Company's acquisitions since January
1, 1998 along with the date of acquisition, trade or brand names and product
categories related to each acquired company, and the approximate amount of
aggregate annual sales for the businesses acquired in the full year prior to
acquisition:
<TABLE>
<CAPTION>
Date Company Trade or Product Categories Approximate
- ---- ------- Brand Names ------------------ Annual Sales
----------- ------------
<S> <C> <C> <C> <C>
March 1998 Henlor, Inc. (1) Serengeti Framed mirrors, paintings $13 million
International; and prints; lighting
Vanguard Studios ;Lee products; sculptures and
Reynolds tabletop accessories
March 1998 Merchandise Renaissance; Framed mirrors, paintings $7.5 million
Sales, Inc. (1) Artmaster Studios and prints; lighting
products
August 1998 Windsor Art, Inc. Windsor; Dolbi Cashier Framed paintings and $14 million
prints; framed mirrors
August 1998 Troy Lighting, Troy-Lite Lighting products $13 million
Inc.
</TABLE>
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(1) On June 29, 1998, the Company combined Henlor, Inc. ("Henlor"),
Merchandise Sales, Inc. ("MSI") and Vanguard Studios, Inc. ("Vanguard"),
(a wholly-owned subsidiary of Henlor) into a single entity. The
surviving corporation is Vanguard Studios, Inc., a California corporation
and a wholly-owned subsidiary of the Company.
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PRODUCTS
The Company manufactures picture frames and framed mirrors, framed
paintings and prints, sculptures and tabletop accessories, and portable and
fixed lighting products. The Company's products, brand names and price
positioning are described below.
Picture Frames and Framed Mirrors. Interiors is a leader in producing
high-end, custom frames for paintings, prints and mirrors. The Company also
restores frames. The Company's frames are primarily reproductions of antique
frames made to look as distressed as genuine frames from that period would look
today. Customers select any combination of elements from the Company's library
of approximately 1,500 elements to generate the frame style best suited for the
picture or mirror and/or their decorating needs. These elements have been
collected over several decades, mostly through the Company's restoration
activities, and primarily represent features from antique frames, many of which
cannot be replicated. The Company's skilled craftspeople hand produce the frame
based on the elements selected by the customer. Frame prices range from $300 to
$52,000, but typically are between $800 and $4,000.
Picture frames and mirror frames are made with the same tools, dies
and molds. Mirror frames differ from picture frames in that mirror frames are
constructed in the traditional design, with a top that is different from the
sides and bottom. In comparison, picture frames have the same design throughout
the four sides of the frame. The Company's mirror prices range from $1,000 to
$8,000. The Company's picture frames and framed mirrors are sold primarily
under the trade name of A.P.F. Master Framemakers.
Framed Paintings and Prints. The Company produces framed hand-painted
oil paintings on artist canvas and framed paper prints. The Company's line of
framed hand-painted oil paintings is available in over 500 designs. These large
canvases come in a variety of subjects including floral, abstracts, landscapes,
seascapes, and figurative subjects. The Company also sells prints, both
proprietary and non-proprietary, that are framed and placed under glass. Frames
and mats for both products are carefully selected to complement current trends
in interior design. Retail prices for the Company's framed paintings and prints
range from $70 to $600. The Company's framed art is sold primarily under the
trade names of Vanguard Studios, Artmaster Studios, Lee Reynolds and Windsor.
Lighting Products. The Company manufactures lamps which are available
in over 350 styles. The Company's portable lamps are manufactured with bases
made of metal, crystal and hand-painted hydrocal, a plaster composition that
can be finished to resemble stone, ceramic or metal. Additionally, the Company
designs and manufactures formed and decorated metal lamps, both portable and
fixed. The Company's lighting products generally are "fashion-forward" and do
not compete with commodity or imported lighting. The Company's lighting
products are sold primarily under the trade names Vanguard Studios, Artmaster
Studios and Troy Lighting.
Sculptures and Tabletop Accessories. Interiors manufactures and
distributes hand-crafted hydrocal sculptures and tabletop accessories. The
Company's products in this category sell for $75 to $200 at retail. The
Company's sculptures and tabletop accessories are sold primarily under the
trade names of Vanguard Studios and Serengeti International.
RAW MATERIALS AND SUPPLIERS
The primary raw materials used by Interiors in manufacturing and
distributing its products are wood, hydrocal, composite resins, paint, glass,
plexiglass, corrugated packaging materials, matboards, gold leaf and metal. The
Company purchases its raw materials from a wide variety of domestic and foreign
suppliers. Interiors has at least two, and often more, suppliers for each item
used in its manufacturing process, and has chosen to limit the majority of its
purchases to those vendors with whom it has developed long-term relationships.
Interiors believes that there are a relatively large number of other suppliers
of raw materials available, which enable Interiors to obtain competitive prices
for its raw materials. Interiors does not anticipate, nor has it experienced,
any difficulty in obtaining any of its raw materials, and is not dependent upon
any one supplier. Interiors generally does not enter into long-term contracts
with its suppliers. Significant increases in the costs of raw materials could
have a negative effect on Interiors' gross margins for its products if
Interiors were unable to build these costs into the prices of its products or
to offset such raw material cost increases through cost reductions.
MANUFACTURING
All of the Company's products are either manufactured directly by the
Company or specifically on its behalf. The Company operates six manufacturing
and distribution facilities in California and New York. Approximately 90% of
the Company's products are manufactured at its production facilities. The
balance of the Company's products are manufactured
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primarily in Mexico, China, and Europe. The Company's manufacturing and
distribution systems are run by well-trained and experienced production
personnel.
The Company's manufacturing processes vary greatly among product
lines, and include metal fabrication and welding, wood cutting and joining,
finishing processes (including painting, polishing and etching), hydrocal
casting, electrification, silk screening and hand painting. Certain of the
Company's manufacturing processes utilize sophisticated computerized equipment,
including mat cutting, metal cutting and acetate generation, and advanced
primer and paint application systems. The Company emphasizes cost-efficiencies
in the manufacturing process and seeks to improve its manufacturing processes
through capital expenditures in facilities and equipment.
The Company's distribution facilities are located adjacent to its
manufacturing facilities. Interiors is currently investing in sophisticated
computer systems to code and track inventory and to coordinate and monitor
loading and shipment of products to retailers. The Company believes that
coordination of the manufacturing, packaging and distribution functions will
allow for greater quality control and production efficiencies.
SALES AND MARKETING
The Company's primary customers are domestic retailers in the home
furnishings industry, including furniture stores, home furnishings centers,
catalog retailers, home improvement centers, department stores and lighting
retailers. In addition, the Company's custom frame division markets its
products to museums, art galleries, designers, interior decorators and custom
frame retailers. In the fiscal year ended June 30, 1998, the Company sold
products to over 3,000 home furnishings and specialty accounts. The Company's
ten largest customers accounted for approximately 32% of the Company's net
sales for the fiscal year ended June 30, 1998.
Each of the Company's product lines is marketed and sold through a
network of independent manufacturers' representatives, who are often agencies
employing a number of sales personnel. These representatives are paid on a
commission-only basis, which the Company believes makes them highly motivated.
None of the Company's present manufacturers' representatives are exclusive to
the Company, and any representative could terminate its relationship with the
Company at any time for any reason. In addition, manufacturers' representatives
typically represent and distribute other non-competing decorative accessories.
Given the large number of accounts, the Company believes that the use of
independent representatives is an effective and cost-efficient means to
distribute its products. The Company's manufacturer's representatives are
supported by an in-house team of twelve sales and marketing personnel. Each of
the Company's product lines is managed by a National Sales Manager or Vice
President of Sales and Marketing who works exclusively with that product line.
In addition, the Company maintains an in-house support staff consisting of
order entry personnel as well as pre-sale and post-sale customer service
personnel.
To supplement its sales efforts to the home furnishings industry and
specialty account customers, the Company uses a variety of means to advertise
and promote its products, including product brochures, trade shows and
cooperative advertising with some of its accounts. Participation in trade
shows, particularly the semi-annual shows in High Point, North Carolina, is an
important element of Interiors' marketing efforts. In addition, the Company
operates eleven showrooms in five cities around the country.
The Company believes that one of the primary ways it distinguishes
itself from its competitors is through customer service. A critical element of
the Company's customer service is on-time delivery of products to its
customers. Retailers are pursuing a number of strategies to deliver the
highest-quality, lowest-cost products to their customers. A growing trend among
retailers is to purchase on a "just-in-time" basis in order to reduce inventory
costs and increase returns on investment. As retailers shorten their lead times
for orders, manufacturers need to more closely anticipate consumer buying
patterns. The Company supports its retail customers' "just-in-time" inventory
strategies through investments in supporting inventory, improved forecasting
systems, more responsive manufacturing and distribution capabilities and
electronic manufacturing, communications and distribution capabilities.
Customer service also involves customer contact with the Company's top-level
decision makers, which permits early recognition of market trends and timely
response to customer problems.
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COMPETITION
The decorative accessories industry is highly competitive, and
includes a large number of domestic and foreign manufacturers, none of which
dominate the market. A number of the companies which compete directly with the
Company are well established and may have financial and other resources equal
to, or greater than, those of the Company. Interiors believes that it is the
largest manufacturer of premium picture and mirror frames (as well as other
wall decor) in the United States. Interiors maintains a strong competitive
advantage in this market due to its extensive collection of tools, dies, and
molds developed over decades from restoration of genuine antique frames.
Interiors believes that it would be extremely difficult for a competitor to
build a comparable collection of these elements. In addition, Interiors has a
work force of skilled crafts people that would be difficult to replicate.
Interiors also believes that it dominates a niche market for mass production of
hand-painted oil paintings on artist canvasses.
The rapid growth of high-volume retailers, together with changes in
consumer shopping patterns, have contributed to a significant consolidation of
the domestic home furnishings retail industry and the formation of dominant
multi-category retailers. Other trends among retailers are to require
manufacturers to maintain or reduce product prices or deliver products with
shorter lead times, or for the retailers to import generic products directly
from foreign sources. The combination of these market influences creates a
highly competitive environment in which the Company's largest customers
continuously evaluate which product suppliers to use, resulting in pricing
pressures and the need for ongoing improvements in customer service. Management
believes that the competition in the decorative accessories industry is
generally a function of timeliness of delivery, price, quality, reliability,
product design, product availability and customer service. Interiors believes
that it competes favorably with other companies with respect to the foregoing
factors.
INTELLECTUAL PROPERTY RIGHTS
Many of the Company's products and their designs, as well as the
design of many of the tools, dies and molds used in manufacturing certain of
the Company's products, are proprietary to Interiors. In addition, the Company
has sought to establish certain proprietary rights with respect to the marks
under which its products and product categories are marketed, including the
registered trademarks "Interiors," "A.P.F. Master Framemakers," "Vanguard
Studios," "Lee Reynolds," and "Artmaster Studios" and the tradenames "Serengeti
International," "Windsor," "Troy-Lite," "Dolbi Cashier" and "Renaissance."
Consequently, the business of the Company is dependent, to a certain extent, on
the Company's ability to establish and protect its intellectual property rights
with respect to its products, designs, trademarks and tradenames under which it
does business.
The Company believes that it owns or has the right to use all designs
and proprietary technology necessary to manufacture and market its existing and
planned products. Designs with respect to its products are generally created by
employees and artists on a work-for-hire basis (i.e., the design automatically
becomes the property of the Company upon creation) or purchased or licensed
from independent designers on a consulting or royalty basis. The Company has no
knowledge that it is infringing on any existing copyright, trademark or patent
such that it would be liable for material damages or be prevented from
manufacturing or marketing its products. In the event the Company's right to
market any of its products were to be successfully challenged, the Company may
be required to discontinue certain products and the Company's business and
prospects may be adversely affected if acceptable alternative products were not
available.
REGULATORY MATTERS
Interiors is subject to a wide range of federal, state and local laws
and regulations relating to protection of the environment, worker health and
safety and the emission, discharge, storage, treatment and disposal of
hazardous materials. These laws include the Clean Air Act of 1970, as amended,
the Resource Conservation and Recovery Act, the Federal Water Pollution Control
Act and the Comprehensive Environmental, Response, Compensation and Liability
Act. Certain of the Company's operations use materials containing chemicals
that are considered hazardous under various environmental laws. Accordingly,
management closely monitors the Company's environmental performance at all of
its manufacturing facilities. Management believes that the Company is in
substantial compliance with all environmental laws. While the Company may be
required to make capital investments at some of its facilities to ensure
compliance, Interiors believes that it will continue to meet all applicable
requirements in a timely fashion and that any investment required to meet these
requirements will not materially affect its financial condition or results of
operations. However, legal and regulatory requirements in these areas have been
increasing, and there can be no assurance that significant costs and
liabilities will not be incurred in the future due to regulatory noncompliance.
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DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the directors and executive officers of
the Company and their respective ages and positions:
NAME AGE POSITION(S) HELD WITH THE COMPANY
---- --- ---------------------------------
Max Munn 54 President, Chief Executive Officer, Chief
Financial Officer and Director
Dennis D. D'Amore 49 Executive Vice President and President of
Decorative Accessories Division
Joan York 53 Secretary
Roger Lourie 53 Director
Richard Josephberg 51 Director
MANAGEMENT BIOGRAPHIES
Brief biographies of the directors, executive officers, and key
personnel of the Company are set forth below. All Directors hold office until
their resignation, retirement, removal, disqualification, death or until their
successors have been elected and qualified. Vacancies in the existing Board of
Directors are filled by majority vote of the remaining directors. Officers of
the Company serve at the will of the Board of Directors.
Max Munn has been a director of Interiors since March 1994 and
Chairman of the Board, President and intermittently as Chief Financial Officer
of Interiors since September 1995. Since June 1996, Mr. Munn has served as
Chairman of the Board of Decor Group. Mr. Munn previously held the positions of
Executive Vice President, Operations and Secretary of Interiors from 1993
through September 1995. From November 1990 to May 1993, Mr. Munn served as a
consultant to various companies in the home accessories industry, including
Interiors. From 1980 to February to 1990, Mr. Munn served as President and
Chief Executive Officer of Collectors' Guild International, Inc., a
manufacturer and marketer of decorative accessories. Mr. Munn received a
Bachelor of Architecture degree from the Massachusetts Institute of Technology
and attended graduate school at Columbia University.
Roger Lourie has served as a director of Interiors since May 1995.
Since 1980, Mr. Lourie has been a General Partner of Tremont Associates, a
private equity investment fund, and since 1980 has served as President of Misty
Ridge Associates, another private equity investment fund. Mr. Lourie is also
Chairman of the Board of two Connecticut-based manufacturing concerns. Mr.
Lourie received a B.S. degree in engineering from Rensselaer Polytechnic
Institute of Technology and M.B.A. and M.I.A. degrees from Columbia University
in New York.
Richard Josephberg has served as a director of Interiors since October
1995. Since 1986, Mr. Josephberg has served as the Chairman of Josephberg Grosz
& Co., Inc., a New York-based investment banking firm specializing in providing
private institutional capital to emerging growth companies. From 1969 through
1975, Mr. Josephberg served with Goldman Sachs & Co. Additionally, from 1985
through 1990, Mr. Josephberg served as a member of the New York Stock Exchange.
Mr. Josephberg received a B.B.A. degree from the University of Cincinnati, and
attended the M.B.A. program at Bernard Baruch Graduate School of Business in
New York.
Dennis D. D'Amore served as Executive Vice President of Interiors and
President of Interiors' Decorative Accessories Division since June 1998. Since
March 1997, Mr. D'Amore has served as President and Chief Financial Officer of
Decor Group, Inc. From 1991 through 1996, Mr. D'Amore was a consultant to
various private and public companies. From 1989 to 1991, Mr. D'Amore served as
Vice President of Sales and Marketing for Lasco Bathware, a division of Tomkins
Industries. From 1988 to 1989, Mr. D'Amore served as President of
Colford-D'Amore, a management consulting firm. From 1981 to 1988, Mr. D'Amore
served as Executive Vice President and General Manager of Water Jet
Corporation. Mr. D'Amore holds a Bachelor
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<PAGE>
of Engineering-Mechanical Degree from New York University and subsequently
received a Masters of Business Administration in finance from Fairleigh
Dickinson University.
Richard Belinsky, 43, was appointed Chief Financial Officer of
Interiors, effective October 19, 1998. Mr. Belinsky has over 20 years
experience in the management of retail, direct marketing and manufacturing
companies. Prior to joining Interiors, Mr. Belinsky was Vice President and
Chief Financial Officer of Petals, Inc., a major catalog retailer of decorative
accessories. Prior to that, he served as Vice President of Finance and Chief
Financial Officer for operating divisions of the J. Crew Group, Inc., an
international catalog and retail company with total revenues of $900 million.
Mr. Belinsky was also Director of Budgeting and Financial Analysis at Lincoln
for the Preforming Arts, Inc. and has held management positions with J.C. Penny
Company, Inc.
Todd R. Langner, 43, was appointed Executive Vice President of Sales
and Marketing of Interiors in August 1998. From 1990 to 1998, Mr. Langner was
President of Troy Lighting and Chief Operating Officer since March, 1994. From
1988 to 1990 Mr. Langner served as Vice President Sales and Marketing for
Hinkley Lighting and President of its subsidiary, LuminArt. From 1982 to 1988
Mr. Langner was Vice President Sales, Marketing and Product Development for
Forecast Lighting. From 1979 to 1982 Mr. Langner served as Marketing Manager of
Illuminating Experiences. Mr. Langner holds a Bachelor of Science Degree in
Journalism and Public Relations from the University of Florida.
James J. McCorry. Since 1996, Mr. McCorry has served as the Executive
Vice President, Chief Operating Officer and Chief Financial Officer of Plaid
Clothing Group, Inc. From 1994 through 1995, Mr. McCorry served as the Senior
Vice President, Chief Financial and Chief Operating Officer of Warnaco Group,
Inc., Warners/Intimates Division. From 1988 to 1994, Mr. McCorry served as the
Chief Financial Officer and Vice President of Operations and Administration of
Sara Lee Corp., Aris Isotoner Division. From 1979 to 1988, Mr. McCorry held
various senior managerial and operating positions with this company.
Joan York has served as Secretary of Interiors since 1994. From
1990 to 1994 Ms. York served in various administrative capacities at Premier
New York.
There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse the Company or any of its subsidiaries.
EMPLOYEES
As of August 15, 1998, the Company employed approximately 626
full-time persons, approximately 115 of whom were subject to collective
bargaining agreements. The Company and its subsidiaries are party to two
collective bargaining agreements which expire in the years 2002 and 2003. None
of the Company's employees have been on strike, or threatened to strike, since
the Company's inception and the Company believes that its relations with its
employees are good.
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ITEM 2. DESCRIPTION OF PROPERTIES
Interiors' headquarters are located in Mount Vernon, New York, in
leased facilities consisting of 70,000 square feet of manufacturing and
warehouse space together with administrative offices and a showroom. The
facility is occupied under a five year lease expiring at the end of 2001 with a
five-year renewal option. The Company leases the manufacturing facilities
listed in the table below.
<TABLE>
<CAPTION>
Approximate Size
Location Primary Use (square feet)
- -------- ----------- -------------
<S> <C> <C>
Mount Vernon, New York Manufacturing; Offices; Executive Offices 70,000 (1)
Mount Vernon, New York Manufacturing 10,000 (2)
City of Industry, California Manufacturing; Administrative Offices 98,000 (3)
Pacoima, California Manufacturing; Administrative Offices 108,000 (4)
Pacoima, California Manufacturing 22,000 (5)
Pico Rivera, California Manufacturing; Administrative Offices 74,000 (6)
</TABLE>
- ------------
(1) Lease expires December 31, 2002.
(2) Lease expires August 31, 1999.
(3) Lease expires December 31, 2002.
(4) Lease expires December 31, 1999.
(5) Month-to-month lease.
(6) Lease expires November 30, 1998.
In addition, the Company leases showroom facilities in High Point,
North Carolina (three showrooms), San Francisco, California (three showrooms),
New York, New York (two showrooms), Dallas, Texas (two showrooms) and Atlanta,
Georgia, as well as a small retail outlet in Yonkers, New York. The showroom
sizes range from 300 square feet to approximately 9,800 square feet and rent
aggregates approximately $480,000 per annum.
Interiors believes that its facilities are well-maintained and
adequate for its current requirements, and that suitable additional space will
be available as needed to accommodate anticipated growth of its operations in
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Interiors is subject to claims and litigation and other claims arising
in the ordinary course of its business. In management's opinion, Interiors is
not presently a party to any such litigation or claims the outcome of which
would have a material adverse effect on its financial position or its results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the
fiscal year.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Shares are traded on the Nasdaq Small Cap Market
("NASDAQ") under the symbol INTXA. Prior to this offering, the Company's stock
had been traded on the NASDAQ since June 23, 1994, when the Company completed
its initial public offering. Prior to that date, there was no public market for
the Company's Class A Shares. The Class B Shares are not traded on any public
market. The following table sets forth, for the periods indicated, the high and
low bid prices of shares of the Company's Class A Shares on the NASDAQ:
FISCAL YEAR ENDING JUNE 30, 1999 HIGH LOW
---- ---
Second Quarter (through October 9, 1998)........... $1.25 $ .78
First Quarter ..................................... $2.16 $ .94
FISCAL YEAR ENDING JUNE 30, 1998 HIGH LOW
---- ---
Fourth Quarter .................................... $2.03 $1.69
Third Quarter...................................... $2.50 $ .97
Second Quarter..................................... $1.53 $ .97
First Quarter...................................... $1.63 $ .75
FISCAL YEAR ENDING JUNE 30, 1997 HIGH LOW
---- ---
Fourth Quarter..................................... $1.75 $ .75
Third Quarter ..................................... $2.19 $1.00
Second Quarter..................................... $3.50 $1.75
First Quarter...................................... $4.25 $2.00
As of October 9, 1998, there were 122 holders of record of the
Company's Class A Shares and 2 holders of record of the Company's Class B
Shares. On October 9, 1998, the last reported sale price on the NASDAQ for the
Company's Class A Shares was $1.08.
The Company has never declared or paid cash dividends on its Class A
Shares or Class B Shares. The Company intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate
declaring or paying any cash dividends in the foreseeable future.
UNREGISTERED OFFERINGS
In February 1996, the Company's Board of Directors approved the
issuance of 150,000 Class A Shares in a private placement to Sol Munn, uncle of
the Max Munn, in consideration for past consulting services
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<PAGE>
provided. The subsequent issuance of the Class A Shares was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), as a transaction by the issuer not involving any public
offering.
Pursuant to a March 3, 1996 agreement, the Company issued an aggregate
of 200,000 Class A Shares and 200,000 shares of its Series A 10% Convertible
Preferred Stock ("Series A Preferred Shares") To Decor Group, Inc ("Decor") in
exchange for issuance by Decor to the Company of 250,000 shares of its Series A
Non-Voting Convertible Preferred Stock (sold by Interiors in February 1997) and
an option to purchase 10,000,000 shares of Decor's Series B Non-Convertible
Voting Preferred Stock. The issuance of the Class A Shares and the Series A
Preferred Shares was exempt from registration under Section 4(2) of the
Securities Act, as a transaction by the issuer not involving any public
offering.
On April 8, 1996, the Company issued an aggregate of 250,000 Class B
Shares in a private placement to Laurie Munn, wife of Max Munn, 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 issuance of the Class B Shares was exempt from
registration under Section 4(2) of the Securities Act, as a transaction by the
issuer not involving any public offering.
In April 24,1996, the Company received $431,251, in a private
placement of 175,000 Class A Shares and 50,000 Series A Preferred Shares to
accredited investors, in a private placement. The issuance of the Class A
Shares and the Series A Preferred Shares was exempt from registration under
Section 4(2) of the Securities Act, as a transaction by the issuer not
involving any public offering.
On June 30, 1996, pursuant to a Consulting Agreement with Morris Munn,
father of Max Munn, the Company issued options to purchase up to 350,000 Series
A Preferred Shares, in consideration of certain future services. These options
were fully exercised during July to September 1996, generating net proceeds to
the Company totaling $787,500. The issuance of the Series A Preferred Shares
was exempt from registration under Section 4(2) of the Securities Act, as a
transaction by the issuer not involving any public offering.
In July 1996, the Company issued an aggregate of 50,000 Class A Shares
in a private placement to Ann Stevens, a former executive of the Company,
pursuant to the Company's June 30, 1996 settlement with Ms. Stevens (the
"Stevens Settlement"). Pursuant to the Stevens Settlement the Company placed
into escrow 1,250,000 Class B Shares (the "Escrow Shares") with Michael Levine,
Esq., attorney of Ms, Stevens, as escrow agent. Pursuant to the terms of the
Stevens Settlement, in November 1997, February 1998 and September 1998, the
Company added an aggregate of 12,500,000 Class A Shares to the Escrow Shares.
The Escrow Shares are being held as security for certain obligations of the
Company under the Stevens Settlement. Accordingly, no proceeds were received by
the Company upon the issuance of the Escrow Shares. Upon satisfaction of such
obligations, the Escrow Shares will be returned to the Company (subject to an
option to purchase the Class B Escrow Shares granted to Laurie Munn, as
described below). The issuance of the Class A Shares and Class B Shares was
exempt from registration under Section 4(2) of the Securities Act, as a
transaction by the issuer not involving any public offering.
In September 1996, the Company issued 10,000 Class A Shares to an
outside director of the Company, and 10,000 Class A Shares to various
individuals named by another outside director of the Company, in consideration
of services performed by such outside directors on behalf of the Company. The
issuances of the Class A Shares were exempt from registration under Section
4(2) of the Securities Act, as a transaction by the issuer not involving any
public offering.
On June 30, 1997, the Company issued an aggregate of 300,000 Class A
Shares in a private placement to Hide Tashiro, pursuant to the Company's June
30, 1997 settlement with Mr. Tashiro (The "Tashiro Settlement"). The issuance of
the Class A Shares was exempt from registration under Section 4(2) of the
Securities Act, as a transaction by the issuer not involving any public
offering.
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<PAGE>
On August 18, 1997, the Company issued an aggregate of 23,000 Class A
Shares in a private placement to an accredited investor, in consideration of
services rendered. The issuance of the Class A Shares was exempt from
registration under Section 4(2) of the Securities Act, as a transaction by the
issuer not involving any public offering.
On August 29, 1997, the Company issued an aggregate of 100,000 Class A
Shares and 100,000 Series A Preferred Shares in a private placement to BH
Funding, LLC in consideration of consulting and other services to the Company.
The issuance of the foregoing shares to BH Funding, LLC was exempt from
registration under Section 4(2) of the Securities Act, as a transaction by the
issuer not involving any public offering.
On December 2, 1997, the Company issued an aggregate of 2,000 Series A
Preferred Shares in a private placement to an accredited investor, in
consideration of services rendered. The issuance of the Series A Preferred
Shares was exempt from registration under Section 4(2) of the Securities Act,
as a transaction by the issuer not involving any public offering.
In January 1998, the Company granted an option to purchase the Escrow
Shares to Laurie Munn in consideration for the guarantee by Ms. Munn of certain
obligations of the Company to certain creditors of the Company. The option to
purchase the Escrow Shares must be exercised by January 9,2001. In the event
that Ms. Munn exercises the option, Ms. Munn must pay $500 in cash, and execute
and deliver a secured promissory note for $500,000 with interest on the unpaid
principal balance at the rate of 6.5% per annum, with interest and unpaid
principal amount to be paid in five equal annual installments commencing on the
first anniversary of the exercise of the option. The grant of the foregoing
option to purchase the Escrow Shares was exempt from registration under Section
4(2) of the Securities Act, as a transaction by the issuer not involving any
public offering.
On March 5, 1998, the Company issued an aggregate of 730,000 Class B
Shares in a private placement to Laurie Munn for an aggregate purchase price of
$511,000 and in consideration for the guarantee by Ms. Munn of certain
obligations of the Company to United Credit Corporation and other creditors of
the Company. The issuance of the Class B Shares was exempt from registration
under Section 4(2) of the Securities Act, as a transaction by the issuer not
involving any public offering.
On March 10, 1998, the Company consummated the transactions
contemplated by that certain Agreement and Plan of Merger among the Company,
Vanguard Acquisition Corp. ("Acquisition"), Henlor and the shareholders of
Henlor. Pursuant to the agreement, Acquisition merged with and into Henlor,
with Henlor continuing as the surviving corporation and as a wholly-owned
subsidiary of the Company. The merger consideration paid by the Company
consisted of (i) a cash payment of $705,621, (ii) a promissory note at an
interest rate of 8% per annum, in the aggregate principal amount of $794,379,
with a maturity date of December 1, 2000, issued by Henlor to Michael H,
Greeley, as representative for each of the former shareholders of Henlor, and
(iii) the issuance of 299,581 Class A Shares (the "Vanguard Merger Shares") to
the former shareholders of Henlor. The Vanguard Merger Shares remain subject to
adjustment, based upon the fair market value of the Vanguard Merger Shares on
March 10, 1999. 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.
In March 1998 and April 1998, the Company issued convertible notes
(the "Notes") in the aggregate principal amount of $3,175,000, and 15,000 Class
B Warrants and 15,000 Class C Warrants in connection with the issuance of
certain Notes, in a private placement to 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, and met the
requirements of Rule 506 of Regulation D promulgated under the Securities Act.
On June 9, 1998, the Company filed a registration statement on Form S-3 with
the Securities and Exchange Commission in order to register the Class A Shares
underlying the Notes and the warrants issued in connection therewith.
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<PAGE>
The registration statement was subsequently declared effective by the
Securities and Exchange Commission. The proceeds received by the Company
Pursuant to this private placement were applied toward the working capital of
the Company and were used, in part, for the acquisitions of Henlor and MSI.
Of the Notes, notes in the principal amount of $1,700,000 (the
"6% Notes") accrue interest at a rate of 6% per annum, with interest payable
quarterly beginning July 1, 1998; any default in payment of interest triggers a
default interest rate of 16% per annum. The maturity date of the 6% Notes is
March 19, 2000. $ 1,000,000 of the Notes are three-year convertible
subordinated notes secured by the stock of Vanguard, the successor of Henlor,
with an interest rate of 15%. These notes are convertible at the election of
the holders into Class A Shares at a rate of $1.50 per share. The remaining
$475,000 of the Notes are three-year unsecured subordinated debentures with an
interest rate of 15%. These debentures are convertible at the holders' election
into Class A Shares at a rate of $1.75 per share. Attached to certain of the
Notes are warrants to purchase an aggregate of 320,833 Class A Shares with
expiration dates identical to the maturity dates of the Notes to which they are
attached. These exercise prices range from $1.75 to $2.00 per note warrant.
The 6% Notes are convertible into Class A Shares according to the
following terms: one-half of the principal amount of the 6% Notes are
convertible at the election of the noteholders from and after 180 days after
the date of issuance and at any time prior to full repayment of the principal
amount of the 6% Notes; the entire principal amount of the 6% Notes is
convertible at the election of the noteholders from and after 270 days after
the date of issuance and at any time prior to full repayment of the principal
amount of the 6% Notes. The conversion price for the 6% Notes is the lower of
(i) the closing bid price for the Class A Shares on NASDAQ, (ii) if the
conversion date is less than 270 days after the date of issuance, 80% of the
average closing bid price for Class A Shares on NASDAQ for the 5 trading days
immediately preceding (but not including) the conversion date, or (iii) if the
conversion date is more than 270 days after the date of issuance, 75% of the
average closing bid price for Class A Shares on NASDAQ for the 5 trading days
immediately preceding (but not including) the conversion date. The conversion
price is adjustable in the event of a merger, sale of assets, reclassification
of the Class A Shares, stock splits, and additional share issuances at less
than the conversion price.
On July 31,1998, the Company issued 44,431 Class A Shares and options
to purchase 300,000 Class A Shares to James J. McCorry (collectively,
the'"McCorry Shares") in consideration of Mr. McCorry joining the Company as
President of the Habitat Solutions division of the Company and for the
performance of certain services on behalf of the Company. The exercise price of
the options is equal to the closing price of the Class A Shares on July 31,
1998. The issuance of the McCorry Shares was exempt from registration under
Section 4(2) of the Securities Act, as a transaction by the issuer 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 McCorry Shares.
In July and August 1998, the Company issued convertible debentures
(the "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 Convertible Debentures
and related warrants.
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<PAGE>
The 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. Upon conversion, the holders
of the Convertible Debentures will receive Class A Shares equal to the sum
found by dividing the principal amount being converted, plus any accrued and
unpaid interest on that amount, by the lesser of (i) 80% of the average closing
bid during the three day trading period immediately preceding the conversion or
(ii) $2.10. The Convertible Debentures must be converted at their respective
dates of maturity if: (i) the Class A Shares are listed on the OTC Bulletin
Board or NASDAQ, (ii) the bid price of the Class A Shares is greater than $1.00
for the ten trading days immediately preceding the maturity date, (iii)
there has not been any suspension in the trading of the Class A Shares on the
OTC Bulletin Board or NASDAQ during the thirty trading days immediately
preceding the maturity date, and (iv) the Company has been in full compliance
with the terms and conditions of the Convertible Debenture agreement. If these
conditions are not satisfied, the Company is required to pay the holders of the
Convertible Debentures a sum of cash equal to the market value of the Class A
Shares which such holders would have received if the Convertible Debentures had
been converted.
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<PAGE>
In conjunction with the issuance of the 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.
On August 14, 1998, the Company consummated the transactions
contemplated by that certain Agreement and Plan of Merger dated July 2, 1998 by
and among the Company, Troy Lighting, Inc. ("Troy") and others, pursuant to
which a wholly-owned subsidiary of the Company merged 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 consisted of a cash
payment of $250,000 and the issuance of 650,000 Class A Shares (the "Troy
Merger Shares") to the former shareholders of Troy. The Troy Merger Shares
remain subject to adjustment, based upon the fair market value of the Troy
Merger Shares on July 2, 1999. In addition, the Company agreed to cause Troy to
repay S 1,700,000 in indebtedness to certain shareholders of Troy. The
issuance of the Troy Merger Shares was exempt from registration under Section
4(2) of the Securities Act, as a transaction by the issuer 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 issuances described above and, accordingly, no underwriting discounts or
commissions were paid.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a discussion of the financial condition and results
of operations of the Company for the years ended June 30, 1997 and 1998.
It should be read in conjunction with the Selected Financial and Operating Data
and the Company's Financial Statements, the related notes thereto, and the
other financial and operating information included elsewhere in this Report.
Certain statements contained or incorporated by reference in this Report
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by forward-looking statements. The Company
undertakes no obligation to release publicly the results of any revisions to
these forward-looking statements to reflect events or circumstances arising
after the date hereof.
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997
Net Sales. The Company's net sales from operations for the fiscal year
ended June 30, 1998, increased by $8,795,000, or 189.1%, to $13,447,000 from
$4,652,000 for the fiscal year ended June 30, 1997. Sales increased by
$6,130,000 as a result of the Company's acquisitions of Henlor and MSI during
March 1998. Net sales for the A.P.F. Master Framemakers division increased
$2,665,000 for the year ended June 30, 1998, due to increased sales to a major
wholesale customer.
Cost of Goods Sold. The Company's cost of goods sold as a percentage of
net sales was 61% for the year ended June 30, 1998, and 66% for the year ended
June 30, 1997. The cost of sales for the A.P.F. Master Framemakers division
declined from approximately 66% as of June 30, 1997 to 59% as of June 30, 1998.
The cost of goods sold improved at the A.P.F. Master Framemakers division as a
result of increased sales to a major wholesale customer and increases in
factory productivity. The Company's cost of goods sold was further improved due
to the acquisitions of Henlor and MSI. As a result of the acquisitions, the
Company recorded rapid sales growth in the fourth Quarter of fiscal 1998.
During this period, the Company achieved savings in the cost of raw materials
and direct labor as a percentage of sales as a result of manufacturing
synergies resulting from the consolidation of manufacturing facilities of these
two subsidiaries.
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<PAGE>
Selling, General and Administrative Expenses. The Company's selling,
general and administrative expenses as a percentage of net sales totaled 30.4%
for the year ended June 30, 1998, versus 55.2% for the year ended June 30,
1997. The reduction in the ratio of selling, general, and administrative
expenses as a percentage of net sales for the year ended June 30, 1998 versus
the prior period resulted primarily the increase in sales, the containment of
the growth of administrative personnel which led to reduced salaries, benefits
and travel expenses as a percentage of sales. Futhermore, discretionary
spending for such items as stationery and supplies, advertising, and consulting
fees were curtailed. These cost containments were achieved during the same
periods that sales grew rapidly as a result of the above acquisition.
Interest Expense. Interest expense as a percentage of net sales
totaled approximately 4.1% for the year ended June 30, 1998, versus
approximately 8.7% for the year ended June 30, 1997. Interest expense was
approximately $152,000 higher in the year ended June 30, 1998 versus the year
ended June 30, 1997, due largely to new debt to finance acquisitions.
Other Income. Consulting and Management Fee income decreased $805,000
from fiscal 1997 to 1998. During 1997, the Company reflected $1,140,000 in
revenues as a result of its non-cash transactions (sale of certain assets and
other goods and services) with an affiliate. For the fiscal year ended June 30,
1998, the Company has recognized an aggregate of $335,000 in other income for
consulting and management services rendered to affiliates.
Net Income. For the year ended June 30, 1998, the Company realized net
income of approximately $634,000 ($0.04 per share), versus net income of
approximately $106,000 (($0.09) per share) for the year ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that future cash flow from operations will be
sufficient to support the Company's operations. However, Company management
continues to implement what it believes to be the changes deemed necessary to
further increase positive cash flow and profitability. The Company has also
undertaken efforts to obtain additional sources of financing to fund future
acquisitions. No assurances can be given that these measures will generate the
fiscal improvement sought by the Company.
As of June 30, 1998, the Company reflected cash balances of
approximately $4,036,000 as compared to cash balances of approximately $271,000
at June 30, 1997, representing an increase of $3,765,000. Net cash used in
operating activities was approximately $338,000 for the fiscal year ended June
30, 1998, as compared to net cash used in operating activities of approximately
$1,350,000 for the fiscal year ended June 30, 1997. The net cash used in
operating activities during the year ended June 30, 1998 was primarily a result
of net income of approximately $634,000 as well as the following approximate
changes from continuing operations: increase in inventories of $139,000, an
increase in accounts receivable of $417,000, an incease in other current assets
of $539,000 and an increase in other assets of $1,354,000. The increase in cash
provided by operating activities was largely due to increased sales at the
Company's A.P.F. Master Framemakers division and cash provided by Henlor and
MSI, companies which were acquired by the Company in March 1998.
Net cash used in investing activities during the fiscal year ended
June 30, 1998 totaled $2,065,000 versus approximately $620,000 for the
fiscal year ended June 30, 1997. During the fiscal year ended June 30, 1998,
the Company invested $237,000 to acquire equipment, versus approximately
$166,000 used to acquire equipment and other assets during the fiscal year ended
June 30, 1997. The Company completed the acquisitions of Henlor and MSI,
accounting for almost all of the Company's investing activities for the period.
Net cash provided by financing activities totaled approximately
$6,169,000 during the fiscal year ended June 30, 1998, verus approximately
$2,238,000 during the fiscal year ended June 30, 1997. The increase in 1998
results primarily from the issuance of debt of approximately $3,143,000
and exercise of common stock warrants of approximately $3,873,000 offset by
repayment of debt of approximately $847,000, versus issuance of debt of
approximately $1,214,000 and exercise of warrants and options aggregating
approximately $1,917,000, offset by repayment of debt approximating $894,000 in
fiscal 1997.
-19-
<PAGE>
As of June 30, 1998, the Company's financial position reflected a working
capital surplus of approximately $1,114,000, versus a working capital deficit
of approximately $99,000 at June 30, 1997. As of June 30, 1998 versus June 30,
1997, there were increases in trade receivables of approximately $417,000,
other assets of $1,354,000 and an increase in inventories of approximately
$139,000.
The Company declared a recorded 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 at September 1997. The dividend
($0.75 per perferred share) was paid on January 10, 1998 in the form of the
Class A Shares. Retained earnings was charged $530,000 in December 1997 in
conjunction with the issuance of these shares. The Company has not declared
a subsequent record date.
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 one year
escrow as security for the 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 of the second anniversary of
the closing date (value of shares is fixed at $500,000).
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 of 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 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 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 $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 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 (value of shares is fixed at $1,200,000).
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.
SUBSEQUENT EVENTS
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 transactions
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 obligations 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 transactions contemplated by
that certain Agreement and Plan of 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 distributes 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 amount 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.
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 of $1,500,000 from United Credit Corporation and cash on
hand.
The assets acquired pursuant to the Troy Merger Agreement included, among other
things, (i) fixed assets owned, leased or used by Troy, including equipment,
(ii) receivable, (iii) inventory and (iv) contracts agreements, and lease of
real and personal property. For the foreseeable future, the Company intends to
utilize such assets in connection with the operation of the business of Troy.
In conjunction with the issuance of the Convertible Debentures, the Company
issued Common Stock Purchase Warrants ("A Warrants") to the holders of the
Convertible Debentures. The A Warrants expire five years from their respective
dates of issue and allow the holders to purchase 1,339,286 Class A Shares
in the aggregate at an exercise price equal to the lessor of (i) 120% of the
closing bid price of the Class A Shares on the trading day immediately
preceding the respective issuance dates of the A Warrants, plus an amount equal
to the Exercise Premium (as defined below) or (ii) 120% of the closing bid
price of the Class A Shares on the Reset Date, which shall be a single date
during the period commencing on the 91st day after the respective issuance
dates of the A Warrants through and including the 210th day after the
respective issuance dates of the A Warrants, to be designated by the holder of
the A Warrant, plus an amount equal to the Exercise Premium. The "Exercise
Premium" will be equal to 1/2 of the closing bid price of the Class A Shares on
the trading day immediately preceding the exercise date of the A Warrant in
question, less $4.11 per Class A Share, unless such closing bid price is less
than $4.11 per share, in which case the Exercise Premium shall be $0.00.
-20-
<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.
The Company operates pursuant to a policy that generally precludes
acceptance of goods on a non-cash basis (sometimes known as barter
transactions).
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.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Report of Independent Public Accountants .............................. F-1
Consolidated Financial Statements:
Consolidated Balance Sheet as of June 30, 1998 ........................ F-2
Consolidated Statements of Income for the
years ended June 30, 1998 and 1997 .................................... F-3
Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1998 and 1997 ..................... F-4
Consolidated Statements of Cash Flows for
the years ended June 30, 1998 and 1997 ................................ F-5-6
Notes to Consolidated Financial Statements ............................ F-7-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF
INTERIORS, INC.:
We have audited the accompanying consolidated balance sheet of Interiors, Inc.
(a Delaware corporation) as of June 30, 1998, and the related consolidated
statements of income (earnings per share restated for 1997 -- See Note 1),
changes in stockholders' equity, and cash flows of Interiors, Inc. and its
subsidiaries (subsidiary for 1997) for each of the two years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interiors, Inc. as of June 30,
1998 and the results of its operations and its cash flows for each of the two
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
NEW YORK, NEW YORK
OCTOBER 9, 1998
F-1
<PAGE>
INTERIORS, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 4,035,590
Accounts receivable, net 3,469,444
Inventories 3,170,938
Other current assets 1,696,891
------------
Total current assets 12,372,863
INVESTMENT IN AFFILIATES 4,276,679
PROPERTY AND EQUIPMENT, net 1,294,809
OTHER ASSETS 8,397,419
------------
Total assets $ 26,341,770
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt 5,621,930
Accounts payable and accrued liabilities 5,637,012
------------
Total current liabilities 11,258,942
LONG TERM DEBT 2,826,430
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,300,000 shares
authorized, 679,438 shares issued and outstanding 6,794
Class A common stock, $.001 par value, 60,000,000 shares
authorized, 19,614,857 shares issued and outstanding 19,615
Class B common stock, $.001 par value, 2,500,000 shares
authorized, 2,105,000 shares issued and outstanding 2,105
Additional paid-in-capital 21,751,749
Accumulated deficit (8,575,865)
Notes receivable (948,000)
------------
Total stockholders' equity 12,256,398
------------
Total liabilities and stockholders' equity $ 26,341,770
============
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-2
<PAGE>
INTERIORS, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 13,447,234 $ 4,796,131
EXPENSES:
Cost of goods sold 8,268,922 3,075,821
Selling, general, and administrative expenses 4,082,779 2,569,697
------------ ------------
Total expenses 12,351,701 5,645,518
Income (Loss) from operations 1,095,533 (849,387)
OTHER EXPENSE
Amortization of goodwill 42,042 --
Interest expense 557,341 405,048
Financing charges - noncash 305,716 --
Gain on sale of investment -- (201,013)
Consulting and management fees (335,000) (1,140,000)
------------ ------------
Total other expense (income) 570,099 (935,965)
Income from operations
before (benefit) provision for taxes 525,434 86,578
(BENEFIT) FOR INCOME TAXES (108,240) (19,346)
------------ ------------
NET INCOME $ 633,674 $ 105,924
------------ ------------
EARNINGS PER COMMON SHARE:
(restated for 1997 -- See Note 1)
Basic $ 0.04 $ (0.09)
------------ ------------
Diluted $ 0.04 $ (0.09)
------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION
Basic 7,251,193 4,527,160
------------ ------------
Diluted 8,154,083 4,527,160
------------ ------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-3
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<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
Net proceeds from the exercise of common stock warrants 822,424 822
Net proceeds from the exercise of preferred stock options 350,000 3,500
Common stock issued to directors 20,000 20
Conversion of preferred stock to common stock (92,940) (929) 278,820 279
Increase in valuation of investment in Decor
Conversion of Class B Common shares into Class A Common shares 269,750 270 (269,750) ($270)
Common and preferred stock issued to BH Funding 100,000 1,000 100,000 100
Assumption of payroll tax liabilities - by officer in connection
with Italia dissolution
Common stock issued to liquidate debt 300,000 300
Net income through June 30, 1997
---------------------------------------------------------------
BALANCE, June 30, 1997 1,147,060 $11,471 5,261,241 $5,261 1,769,750 $1,770
Sale of Treasury Stock
Conversion of preferred stock to common stock (517,622) (5,177) 1,552,866 1,553
Class B Common Shares issued 730,000 730
Escrow shares 7,500,000 7,500
Class A Common Shares issued for services rendered 226,670 227
Common stock issued in connection with acquisitions 1,078,883 1,079
Exercise of Class WA Warrants, net of expenses 2,607,116 2,607
Warrants issued in connection with convertible debt
Stock dividends declared December, 1997 530,331 530
Conversion of Class B Common shares into Class A Common shares 394,750 395 (394,750) (395)
Issuance of Preferred Stock 50,000 500
Conversion of promissory notes to Class A common 463,000 463
Net income through June 30, 1998
---------------------------------------------------------------
BALANCE, June 30, 1998 679,438 $6,794 19,614,857 $19,615 2,105,000 $2,105
======= ====== ========== ======= ========= ======
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-In Accumulated 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)
Net proceeds from the exercise of common stock warrants 1,178,820 1,179,642
Net proceeds from the exercise of preferred stock options 734,000 737,500
Common stock issued to directors 14,980 15,000
Conversion of preferred stock to common stock 650
Increase in valuation of investment in Decor 1,624,501 1,624,501
Conversion of Class B Common shares into Class A Common shares
Common and preferred stock issued to BH Funding 723,900 725,000
Assumption of payroll tax liabilities - by officer in connection
with Italia dissolution 75,344 75,344
Common stock issued to liquidate debt 299,700 300,000
Net income through June 30, 1997 105,924 105,924
----------------------------------------------------------------
BALANCE, June 30, 1997 $13,216,636 ($8,679,208) ($600) ($437,500) $4,117,830
Sale of Treasury Stock 479,400 600 480,000
Conversion of preferred stock to common stock 3,624
Class B Common Shares issued 510,270 (510,500) 500
Escrow shares (7,500)
Class A Common Shares issued for services rendered 350,993 351,220
Common stock issued in connection with acquisitions 1,748,921 1,750,000
Exercise of Class WA Warrants, net of expenses 3,775,567 3,778,174
Warrants issued in connection with convertible debt 200,000 200,000
Stock dividends declared December, 1997 529,801 (530,331)
Conversion of Class B Common shares into Class A Common shares
Issuance of Preferred Stock 249,500 250,000
Conversion of promissory notes to Class A common 694,537 695,000
Net income through June 30, 1998 633,674 633,674
----------------------------------------------------------------
BALANCE, June 30, 1998 $21,751,749 ($8,575,865) $0 ($948,000) $12,256,398
=========== =========== == ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 633,674 $ 105,924
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES:
Photo-2-Art transaction -- (1,140,000)
Depreciation and amortization 741,722 628,416
Provision for losses on accounts receivable 228,160 228,000
Non-cash write off of non-productive asets -- 534,049
Non-cash financing charge 305,716 50,000
Reduction of liabilities from dissolution of subsidiary -- (586,509)
Gain from sale of investment securities -- (201,013)
Provision for dissolution of Italia -- 56,000
Provision for issuance of stock -- 15,000
Royalty and commissions -- 144,000
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in accounts receivable, trade (416,843) (390,228)
Decrease (increase) in inventories (138,960) 200,475
Decrease (increase) in prepaid expenses and other current assets (539,347) (585,126)
Decrease (increase) in other assets (1,354,345) 287,887
Increase (decrease) in accounts payable and accrued expenses 202,456 (606,654)
Increase (decrease) in net liabilities and accrued expenses of discontinued operations -- (90,557)
Net cash used in operating activities (337,767) (1,350,336)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (237,255) (166,621)
Proceeds from sales of investments securities -- 372,500
Sale of investment in Decor Group, Inc. -- (826,000)
Business acquistions net of stock issued (1,828,000) --
----------- -----------
Net cash used in investing activities (2,065,255) (620,121)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 3,142,796 1,214,369
Repayments of debt and capitalized lease obligations (846,602) (893,788)
Net proceeds from exercise of common stock warrants 3,873,174 1,179,642
Net proceeds from exercise of preferred stock options -- 737,500
----------- -----------
Net cash provided by financing activities 6,169,368 2,237,723
----------- -----------
Net increase (decrease) in cash 3,766,346 267,266
CASH, beginning of period 269,244 4,142
----------- -----------
CASH, end of period $ 4,035,590 $ 271,408
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 449,554 $ 241,959
Taxes 19,943 5,973
NON-CASH FINANCIAL ACTIVITIES:
Conversion of Series A Preferred Stock to Class A Common Stock -- 650
Stock issuance for financing charges -- 350,000
Stock issuance for consulting services in connection with Decor acquisition -- 350,000
Debt Financing Costs 351,220 --
Debt issued for services rendered 45,000 --
Debt and Guarantee Reduction Through Treasury Stock Issuance 480,000 --
Stock Issuance Financed by note or Short-Term Receivable 760,500 --
Debt Discount-Warrants Issued 200,000 --
Promissory Note Conversion 695,000 --
Common Stock issued for preferred dividends 530,531 --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flows related
to acquisitions:
Fair value of assets acquired,
excluding cash $ 4,670,570 $ --
Issuance of common stock (1,750,000) --
Issuance of notes payable (1,604,379) --
Payments in connection with acquisitions,
net of cash acquired (1,709,818) --
Liabilities assumed $ 6,051,947 $ --
Supplemental disclosure of non cash
items from investing activities:
Issuance of common stock in connection
with acquisitions $ 1,750,000 $ --
Issuance of debt in connection with
acquisitions $ 1,604,379 $ --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
- -------------------------------------------------------------------------------
ORGANIZATION
Interiors, Inc., a Delaware corporation ("Interiors" or the "Company"), is a
designer, manufacturer and marketer of a broad range of decorative accessories
for the residential, commercial, institutional and contract markets, including
museum-quality traditional and contemporary picture frames, framed wall
mirrors, framed hand-painted oil paintings, framed prints under glass, portable
and installed lighting and lighting fixtures, sculptures and decorative
tabletop accessories. Interiors primarily markets its products to retailers in
the home furnishings industry, including furniture stores, home furnishings
centers, catalog retailers, home improvement centers, department stores and
lighting retailers. The Company believes that it has a unique competitive
advantage in serving a broad range of customers because of the breadth and
depth of its product lines as well as its ability to coordinate design among
several product lines.
The majority of the Company's sales are domestic. Sales to the largest
customers totaled $4,274,521 and $1,786,000, or 32% and 38% of net sales
respectively, for the years ended June 30, 1998 and June 30, 1997. Accounts
Receivable due from the largest customers totaled approximately $451,000 and
$373,000 as of June 30, 1998 and 1997 respectively.
The Company from time to time entered into transactions with related parties
(See Note 13). To the extent that the Company is unable to attract and retain
qualified independent persons to serve on its board of directors, conflicts of
interest may arise due to these relationships.
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
BASIS OF PRESENTATION
The consolidated statements of income, stockholders' equity and cash flows
include the accounts of Interiors, Inc. and its wholly-owned subsidiaries
Henlor, Inc. and Artmaster Studios, Inc., which are included from their
respective dates of acquisition (refer to Note 4). Accordingly, significant
intercompany accounts and transactions have been eliminated in the
consolidation. Henlor and Artmaster were subsequently merged with the
surviving entity, Henlor, changing its name to Vanguard Studios, Inc.
REVENUE RECOGNITION
Revenue is recognized at the time finished goods, whether standard product or
custom work is shipped or acceptance is acknowledged by the customer. Payments
received for merchandise not yet shipped or accepted are reflected within
prepaid sales and customer deposits, a current liability. Historically, sales
returns have not been significant.
CASH
The Company classifies as cash and cash equivalents amounts on deposit in banks
and cash invested temporarily in various instruments with maturities of three
months or less at time of purchase.
INVENTORIES
Inventory is valued at the lower of cost or market, with cost determined using
the first-in, first-out method. Finished goods consists of those items
available for shipping.
F-7
<PAGE>
INVESTMENT IN AFFILIATES
The Company accounts for its investment in affiliates under the cost method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. The cost of additions and
improvements and the costs incurred in the construction of castings and the
related master molds are capitalized and expenditures for repairs and
maintenance are expensed in the period incurred. Depreciation and amortization
of property and equipment is provided utilizing straight-line and accelerated
methods over the estimated useful lives of the respective assets as follows:
YEARS
-----
MACHINERY AND EQUIPMENT 3 - 10
FURNITURE AND FIXTURES 7 - 10
Leasehold improvements are amortized over the shorter of the remaining term of
the lease or the useful life of the improvement utilizing the straight-line
method.
INCOME TAXES
The Company uses the liability method of accounting for income taxes. Under
this method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. Deferred income taxes have been provided for the
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities (See Note 15).
GOODWILL
In connection with the acquisitions of Henlor, Inc. and Artmaster Studios, Inc.
amounts were paid in excess of the fair market value of the assets acquired.
These amounts have been recorded as goodwill and are being amortized over 40
years. It is the Company's policy to evaluate the life and amount of goodwill
on a continuous basis. Such evaluations are based on current market conditions
and expected future cash flows.
USE OF ESTIMATES IN PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires of management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from changes in these estimates.
EARNINGS PER COMMON SHARE
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.
A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net earnings is as
F-8
<PAGE>
follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1997 Year Ended June 30, 1998
-------------------------------------------------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET EARNINGS $ 105,924 $ 633,674
LESS: DIVIDENDS
ON PREFERRED STOCK: (523,530) (339,719)
BASIC EPS
Net earnings attributable
to common stock (417,606) 4,527,160 $(0.09) 293,955 7,538,882 $ 0.04
EFFECT OF DILUTIVE
SECURITIES
Stock warrants 902,890
DILUTED EPS
Net earnings attributable
to common stock and
assumed warrant
exercises $(417,606) 4,527,160 $(0.09) $293,955 8,154,083 $ 0.04
------- --------- ------ -------- --------- ------
</TABLE>
Conversion of Series A 10% Cumulative Preferred Stock not assumed for
computation purposes since effect would be antidilutive. Prior Period EPS
Data has also been restated due to an error correction required to incorporate
the deduction of preferred stock dividends, before Common EPS is calculated.
FOURTH QUARTER ADJUSTMENTS/TRANSACTION
The Company recorded approximately $550,000 of adjustments during the fourth
quarter of fiscal 1998. The adjustments relate to write-offs of certain other
assets, along with related amortization expense, interest expense and certain
other selling, general, and administrative expenses.
The Company recorded approximately $1,140,000 in expense reimbursements during
the fourth quarter of fiscal 1997. The income was primarily comprised of the
sale of assets, including inventory, other goods and services to
Photo-To-Art(TM).
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES WERE GENERATED FROM OPERATIONS AS
SCHEDULED BELOW:
1998 1997
CUSTOM AND WHOLESALE DIVISION $ 2,251,444 $ 2,569,697
DECORATIVE ACCESSORIES 1,831,335
----------- -------------
TOTAL $ 4,082,779 $ 2,569,697
----------- -------------
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 131 (SFAS No. 131) " Disclosures About
Segments of an Enterprise and Related Information," 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 June 30, 1998, adoption of SFAS No. 131 would
not have a material effect on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No.
F-9
<PAGE>
133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging
Activities," which is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Statement requires that an entity recognize
all derivatives as either assets or liabilities on the statement of financial
position and measure those instruments at fair value. At June 30, 1998,
adoption of SFAS No. 133 would not have a material effect on the Company's
financial statements.
- -------------------------------------------------------------------------------
3. INVESTMENT IN AFFILIATES
- -------------------------------------------------------------------------------
INVESTMENT IN AFFILIATES CONSISTS OF THE FOLLOWING:
INVESTMENT IN DECOR GROUP, INC. ("DECOR")(a) $ 3,136,679
INVESTMENT IN PHOTO-TO-ART(TM)("P-2-A")(b) 1,140,000
-----------
TOTAL $ 4,276,679
(a) 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 and accordingly, pursuant to a March 3, 1996
agreement, Decor issued to the Company 250,000 shares of its Series A
Non-Voting Convertible Preferred Stock (sold by Interiors in February
1997) and an option to purchase 6,666,667 shares of its Series B
Non-Convertible Voting Preferred Stock (the "Option Shares") in exchange
for issuance to Decor by the Company of 200,000 shares of its Class A
Common Stock, and 200,000 shares of its Series A Convertible Preferred
Stock (both of which have subsequently been sold by Decor) and a
guarantee with respect to certain indebtedness should such indebtedness
become necessary. All Decor related disclosures have been adjusted to
reflect the following: (1) a one for two reverse stock split by Decor in
October, 1996; and (2) Decor declared and issued a dividend on Decor
common stock payable in the form of two shares of common stock for each
one share of common stock held as of December 16, 1996; and, (3) a
reverse stock split of one new share of common stock for each 3 shares
held on October 7, 1997. Effective with the Interiors' exercise of the
Option Shares in September 1996, for total cash consideration of $2,000,
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 terminated in July 1998. In addition,
during the months of August and September 1996, the Company purchased
54,934 shares of Decor's Series C Non-Voting Convertible Preferred
Stock convertible into three shares of Decor's common stock, at a cost
of $824,000.
On November 12, 1996, Decor completed an initial public offering of
certain of its securities. The proceeds of such offering were used to
acquire the net assets of Artisan House, Inc., a designer and
manufacturer of wall hangings. Subsequent to Decor's initial public
offering and currently, the Company owns approximately 79% of the total
voting stock of Decor.
As of June 30, 1998, the Company's holding in Decor was recorded on the
Company's financial statements under the cost method of accounting which
was determined by the market value on November 12, 1996, of the
Company's trading securities previously transferred to Decor during
March 1996, plus acquisition costs, less the proportionate value of the
securities sold during February 1997. The cost method has been used by
Interiors as it presently has no residual equity interest (stock
ownership is mostly through Series B Preferred shares).
On April 21, 1998 the Company and Decor entered into an agreement and
plan of merger approved by the respective Board 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.
F-10
<PAGE>
(b) The Company entered into an agreement effective June 1, 1997, with
"P-2-A" a company which converts photographs into large-scale canvas oil
paintings, whereby the Company agreed to sell certain canvas related
assets as well as other goods and services to P-2-A in exchange for
$600,000 in equity securities of P-2-A and $50,000 in cash. This
agreement was amended as of June 30, 1997 to reflect an increase in value
to $1,140,000. Such amounts are reflected as a cost basis investment on
the Company's balance sheet as of June 30, 1998. The Company owns 270,000
shares of P-2-A stock and 120,000 warrants to purchase additional stock
at $4.50 per share (less than 5% ownership of P-2-A.). The valuation
ascribed to this transaction by the Company is comparable to the values
received by unrelated investors in private placement transactions between
those investors and P-2-A.
For transactions with Decor and P-2-A during the years ended June 30,
1998 and 1997, refer to Note 13.
- -------------------------------------------------------------------------------
4. ACQUISITIONS AND DISPOSITIONS
- -------------------------------------------------------------------------------
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 one year
escrow as security for the 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 of
the second anniversary of the closing date (value of shares is fixed at
$500,000).
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 of 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 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 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 $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 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 (value of
shares is fixed at $1,200,000).
F-11
<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.
Following are pro forma statements of income information which reflects
theses transactions as if they occured at the beginning of each year
ended June 30, 1998 and 1997.
F-12
<PAGE>
INTERIORS, INC.
PRO FORMA INTERIM FINANCIAL INFORMATION FOR INTERIORS AND COMBINED COMPANIES
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Interiors Vanguard Artmaster
12 mths to 12 mths to 12 mths to
6/30/98 6/30/98 6/30/98 Adjustments Total
SALES AND OTHER REVENUES :
<S> <C> <C> <C> <C> <C>
Net Sales 7,317 13,480 6,829 - 27,626
-
-------------------------------------------- ----------
Total Sales and Other Revenues 7,317 13,480 6,829 - 27,626
-------------------------------------------- ----------
EXPENSES :
Cost of goods sold 4,343 8,964 4,398 17,705
Selling, general, and administrative 2,251 4,416 2,157 - 8,824
--------------------------------------------- ----------
Total Expenses : 6,594 13,380 6,555 26,529
--------------------------------------------- ----------
Income (loss) from operations : 723 100 274 1,097
- - -
Amortization of intangibles 41 124 165
Consulting and management fees (335) 67 (668) - (936)
INTEREST EXPENSE 747 (330) (130) 449 736
Income (loss) from operations before
(benefit) provision for taxes 270 363 1,072 1,132
PROVISION FOR TAXES (55) - - (45) (100)
Income(loss) from operations 325 363 1,072 1,232
Basic EPS 0.04 0.04
Diluted EPS 0.04 0.04
Shares (000) 7,251 7,251
Shares (000) 8,154 8,154
</TABLE>
PRO FORMA FINANCIAL INFORMATION REFLECTS ADJUSTMENTS FOR INCREASED INTEREST
EXPENSES AND GOODWILL.
F-13
<PAGE>
INTERIORS, INC.
PRO FORMA INTERIM FINANCIAL INFORMATION FOR INTERIORS AND COMBINED COMPANIES
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Interiors Vanguard Artmaster Adjustments Combined
yr. end 9mo. end yr. end
6/30/97 7/31/97 3/28/97
SALES AND OTHER REVENUES :
<S> <C> <C> <C> <C> <C>
Net Sales $ 4,652 $ 9,700 $ 8,292 $22,644
Royalty & commission revenues 144 144
Proceeds from sales to Photo-To-Art 1,140 1,140
------------------------------------------ ---------
Total Sales and Other Revenues 5,936 9,700 8,292 23,928
------------------------------------------ ---------
EXPENSES :
Cost of goods sold 3,076 6,099 5,955 15,130
Selling, general, and administrative 2,570 3,380 2,477 8,427
Amortization of intangibles 441 441
------------------------------------------ ---------
Total Expenses 5,646 9,479 8,432 23,998
------------------------------------------ ---------
Income (loss) from operations 291 222 (140) (70)
GAIN ON SALE OF INVESTMENT 201 201
OTHER INCOME (EXPENSE), Net 0 163 8 171
INTEREST EXPENSE (405) (321) (125) (297) (1,148)
Income (loss) from operations before
(benefit) provision for taxes 87 64 (257) (846)
(BENEFEIT) PROVISION FOR TAXES (19) 4 1 (14)
Income(loss) from continuing operations $ 106 $ 60 $ (258) $ (832)
Basic EPS $(0.09) $ (0.24)
Diluted EPS $(0.09) $ (0.24)
Shares (000) 4,527 5,606
Shares (000) 4,527 300 779 5,606
</TABLE>
PRO FORMA FINANCIAL INFORMATION REFLECTS ADJUSTMENTS FOR INCREASED INTEREST
EXPENSES AND GOODWILL.
F-14
<PAGE>
DISSOLUTION OF ITALIA COLLECTION, INC. ("ITALIA")
Because of the declining revenues and high operating costs, on December
16, 1996, the Board of Directors decided to discontinue and dissolve
Italia. On December 27, 1996, a Notice of Public Auction was distributed
by Italia, advising all interested parties that a public auction of all
the assets of Italia consisting of molds, equipment, models and inventory
listed in a Security Agreement entered into between Italia, as debtor and
United Credit Corporation, as secured party, was to occur. The auction
took place on January 10, 1997 and the Company was the successful bidder,
thereby acquiring all of the assets of Italia in consideration for a
payment of $2,000 and the assumption by the Company of the liabilities of
Italia to United Credit Corp., which as of June 30, 1997 totaled
approximately $806,000. Since the financial statements of Italia are
consolidated into those of the Company, Italia's liabilities have already
been reflected on the Company's historical consolidated financial
statements. At June 30, 1997, the Company made the adjustments necessary
to properly restate recorded assets and liabilities, together with a
general reserve of approximately $56,000. These adjustments included
approximately $586,000 write-off of debt recorded based on the advice of
the Company's legal counsel (as the Company is not legally liable for
such liabilities). Further the Company wrote-off approximately $534,000
in assets related to its Italia subsidiary, which were not considered to
benefit the Company's future operations.
- -------------------------------------------------------------------------------
5. INVENTORIES
- -------------------------------------------------------------------------------
The components of inventory are as follows:
JUNE 30,1998
RAW MATERIALS $ 1,591,564
WORK IN PROCESS 414,192
FINISHED GOODS 1,165,182
------------
TOTAL $ 3,170,938
------------
- -------------------------------------------------------------------------------
6. OTHER CURRENT ASSETS
- -------------------------------------------------------------------------------
The components of other current assets are as follows:
JUNE 30,1998
PREPAID EXPENSES $ 598,871
DUE FROM AFFILIATES 527,379
DUE FROM INVESTORS 250,000
OTHER 320,641
------------
TOTAL $ 1,696,891
------------
F-15
<PAGE>
- -------------------------------------------------------------------------------
7. PROPERTY AND EQUIPMENT, AT COST
- -------------------------------------------------------------------------------
The components of property and equipment are as follows:
JUNE 30, 1998
Machinery and equipment $ 3,399,404
Furniture and fixtures 531,007
Leasehold improvements 1,153,797
-------------
5,084,208
Accumulated depreciation
and amortization (3,789,399)
-------------
TOTAL $ 1,294,809
-------------
Depreciation expense was approximately $485,000 and $200,000 for the years
ended June 30, 1998 and 1997, respectively.
- -------------------------------------------------------------------------------
8. OTHER ASSETS
- -------------------------------------------------------------------------------
The components of others assets are as follows:
JUNE 30,1998
GOODWILL $ 6,677,228
OTHER 1,720,191
------------
TOTAL $ 8,397,419
------------
The Company has not completed its evaluation of its allocation of the
purchase price of both Henlor and MSI's net assets. The Company has,
however, determined that approximately $163,000 of such amount has been
allocated to the opening inventories acquired in order to reflect their
fair value. Upon completion of the evaluation, the remaining unallocated
portion of the purchase price will be amortized over a period not to exceed
40 years.
- -------------------------------------------------------------------------------
9. ACCRUED LIABILITIES
- -------------------------------------------------------------------------------
JUNE 30, 1998
SALARIES AND EMPLOYEE BENEFITS $ 599,008
PAYROLL TAXES (a) 165,949
EMPLOYEE SETTLEMENTS (b) 291,156
RENT 244,988
DEFERRED RENT 82,657
UNION DUES AND BENEFITS (c) 226,291
PROFESSIONAL FEES 251,351
INSURANCE 10,970
INTEREST 198,900
ROYALTIES & COMMISSIONS 185,500
INCOME TAXES 37,731
OTHER 130,511
-------------
TOTAL $ 2,425,012
-------------
F-16
<PAGE>
(a) As of June 30, 1998, the Company has aggregate unpaid New York State
payroll taxes of approximately $122,500.
In March 1998, the Company entered into a payout arrangement with New
York State to satisfy $99,000 of back payroll withholding taxes through
twenty-eight monthly installments of $3,500 and one final installment of
$1,270. The balance of the payout arrangement was approximately $75,000
as of June 30, 1998. In June 1998, the Company entered into an additional
payout arrangement with New York State to satisfy approximately $47,500
of back taxes through nine payments of $5,275 starting in July 1998.
(b) Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement") a former executive of the Company and sister of the
President and Chief Executive Officer, the Company issued to 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 Company
issued additional Class A common stock aggregating 12,500,000 through
September 1998 in accordance with the anti-dilution terms of the
agreement. The Escrow Agent shall not vote the Escrow Shares unless the
Company defaults on its obligations under the Agreement. Upon
satisfaction of such obligations, the Escrow Agent shall return the
Escrow Shares to the Company. To date the Company has not defaulted on
this agreement and has accrued $291,156 as of June 30, 1998, in
connection with the settlement.
(c) Union Agreement - Effective April 1, 1998, the Company signed a five-year
(with an additional two-year automatic renewal) union contract for its
members under the terms of a collective bargaining agreement. None of the
Company's employees have been on strike, or threatened to since the
Company's inception and the Company believes its relationship with all of
its personnel is satisfactory. The Company owes the Union approximately
$235,000 as of this filing and has agreed to retire this amount through
monthly payments of $11,000.
- -------------------------------------------------------------------------------
10. NOTES PAYABLE
- -------------------------------------------------------------------------------
NOTES PAYABLE JUNE 30, 1998
------------- -------------
BANK LINE OF CREDIT (a) $ 285,000
NOTES PAYABLE, DUE APRIL 28, 1999 TO BH FUNDING,
BEARING INTEREST AT 15% PAYABLE QUARTERLY (d) 375,000
NOTES PAYABLE DUE DECEMBER 31, 1998 TO
EKISTICS CORP., BEARING INTEREST AT 12%, PAYABLE MONTHLY (b) 250,000
FINANCING AGREEMENT WITH A SECURED LENDER (c) 892,213
NOTES PAYABLE, DUE MARCH 31, 1999 TO AN INDIVIDUAL
BEARING INTEREST AT 10% (e) 810,000
NOTE PAYABLE, DUE DECEMBER 1, 2000, TO AN INDIVIDUAL
BEARING INTEREST AT 8% PAYABLE QUARTERLY (f) 794,379
FINANCING AGREEMENT WITH A SECURED LENDER (g) 2,560,338
NOTE PAYABLE, DUE APRIL 16, 2001, TO MORGAN STEEL 250,000
LTD. BEARING INTEREST AT 15% PAYABLE MONTHLY (h)
NOTES PAYABLE DUE MARCH 19, 2000 BEARING INTEREST
BEARING INTEREST AT 6% PAYABLE QUARTERLY (i) 1,700,000
PROMISSORY NOTES (j) 555,000
Discount (180,000)
F-17
<PAGE>
OTHER NOTES PAYABLE 156,430
------------
TOTAL 8,448,360
------------
LESS CURRENT PORTION 5,621,930
------------
LONG-TERM PORTION $ 2,826,430
------------
(a) This line of credit bears interest at a rate of prime plus 1% (9.50%
as of the date of this filing). The Company is paying the remaining
balance off at $12,000 per month.
(b) During November, 1997 the company borrowed $250,000 from Ekistics
Corp. This loan is due December 31, 1998 and bears interest of 12% per
annum.
(c) During February 1996 Interiors entered into an agreement with United
Credit Corporation ("UCC") a New York based lender whereby it borrowed
pursuant to an asset-related formula. The agreement remains in effect,
and may be terminated by either party upon notice to the other and
payment of the commitment fee for the unexpired term of this
agreement. The lender advanced the Company 80% of eligible
receivables. Upon collection of the receivable, the lender remits the
balance of 20%. Interest is calculated on the daily cash balance at
the rate of prime plus 9% per annum (17% as of the date of this
filing) or a minimum of 18% per annum against a minimum monthly
defined compensation of $3,000. In addition, the secured lender
received personal guarantees from Max Munn, President and Chief
Executive Officer of the Company, and his spouse.
The Company had outstanding secured financing with Infinity Investors,
Ltd., totaling approximately $188,000 at September 30, 1997. This loan
was secured by 600,000 shares of the Company's Class A common stock
(the "Infinity Collateral") that had been held in Treasury Stock. UCC
paid approximately $188,000 to Infinity, on December 17, 1997, which
consisted of all of the Company's then outstanding debt to Infinity
and received title to the Ininity Collateral. The Company consented to
UCC's peaceful possession of the Infinity Collateral in exchange for a
reduction of the Company's debt in the amount of $480,000. This debt
reduction shall occur simultaneously with UCC's disposal of the
Infinity Collateral. This debt reduction totaled $180,000 as of
December 31, 1997 and has been reflected in shareholders' equity as a
sale of Treasury Stock. The balance of $300,000 was used to satisfy
debt previously guaranteed on Interiors and indemnified by Decor
(dating back to March 1996). The payment of the guarantee was intially
recorded as expenses during the year ended June 30, 1998, with a
corresponding receivable of $300,000 from Decor recorded and was also
reflected in equity as a sale of Treasury Stock.
(d) In February 1997, the Company received a loan from BH Funding, LLC
("BH") in the aggregate principal amount of $600,000 to be utilized to
repay certain indebtedness of the Company and for continued operating
expenses. The Company in order to collateralize the loan to BH pledged
and assigned to BH and granted to BH a continuing security interest
in the Company's 6,666,667 shares of Series B Non-Convertible
preferred Stock of Decor, and the Company's 54,934 shares of Series C
Convertible Preferred Stock holdings in Decor Group, Inc to BH. In
connection with this agreement, the Company transferred to BH 100,000
shares of Series A Preferred Stock and 100,000 shares of Class A
Common Stock. The fair market value of these shares on the date of
issuance was allocated as follows: $350,000 as acquisition consulting
on the Decor transaction; $350,000 as interest on the loan (to be
amortized over the life of the loan using the effective interest
method); and $25,000 as additional expense of the Company's sale of
its 250,000 Series A Convertible Preferred Stock holdings in Decor
Group, Inc. During the year ended June 30, 1998 the company repaid
$225,000 leaving a balance of $375,000 as of June 30, 1998. In July
1998, the Company entered into an agreement with BH Funding whereby
all unpaid accrued interest was waived upon the Company's full
repayment of the principal balance of the debt. The related
unamortized debt issuance costs will be written off during the first
quarter of fiscal 1999 against the gain on forgiveness of the debt
(accrued interest) resulting in an immaterial amount.
(e) In connection with Interiors recent acquisition of Merchandise Sales,
Inc. (MSI), the Company issued a total of
F-18
<PAGE>
$810,000 in 10% subordinated promissory notes to the former
shareholders due March 31, 1999.
(f) In connection with Interiors recent acquisition of Henlor, Inc.
(Henlor), 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 principal payment of $100,000. On March 1,
1999, and every three months thereafter, Henlor will make a principal
repayment of $86,797.
(g) On April 19, 1995 Vanguard Studios entered into an agreement with
Capital Factors, Inc., a Florida based lender, whereby it borrowed
pursuant to an asset-related formula. The agreement, including various
revisions, remains in effect as of June 30, 1998. According
to the agreement, the lender, upon confirmation of shipments, will
advance the company 85% of the receivable. Interest is calculated on
the daily cash balance at the rate of 6.75% above the Prime Rate
(15.25% as of the date of this filing). The maximum loan amount is set
at $3,000,000, which includes a borrowing limit of $1,200,000 on
inventory, based on 50% of the total inventory reported. On October
17, 1997, the Company arranged for additional financing from this
lender in the form of a term loan for $152,000. Interest will be
calculated at 1.75% above the Prime Rate. This loan will be payable in
monthly installments concluding on September 1, 2000.
(h) During April 1998, the Company issued a convertible note in the amount
of $250,000. This note is due April 16, 2001, and bear interest at
15% per annum payable monthly. This debenture is convertible at the
holders' election into Class A Shares at the rate of $1.75 per share.
Class B Warrants to purchase 15,000 shares of Class A Common Stock and
Class C Warrants to purchase 15,000 shares of Series A Preferred Stock
were issued in connection with this note. These options were valued
using the Black Scholes model and the discount was determined to be
immaterial to the consolidated financial statements.
(i) 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. Any default in payment of interest
triggers a default interest rate of 16% per annum. The holders have
the right, from and after 180 days after the issuance of the notes to
convert up to one-half of the outstanding and unpaid principal portion
of the notes into Class A shares based upon a formula involving the
five previous trading days of the shares. The terms of these notes
required issuance of 175,000 two-year warrants to purchase Class A
Common Stock at $1.75 per share. Warrants to purchase 198,333 shares
of Class A common stock were issued in connection with these notes.
These options were valued using the Black Scholes model and discount
was recorded accordingly.
(j) During March, 1998 the Company issued convertible subordinated notes
in the aggregate principle amount of $1,270,000. These notes are due
March 17, 2001 and bear interest at 15% per annum payable quarterly.
These notes are secured by stock of Henlor and are convertible at the
election of the holders into Class A Shares at the range of
$1.50-$1.75 per share. The associated capitalized deferred issuance
expenses were charged to operations. The terms on this note required
issuance of 100,000 two-year warrants with an exercise price of $1.75
per warrant for each Class A Common Share. 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. The warrants were valued using the Black Scholes formula
and discount was recorded accordingly.
Aggregate Maturities of Notes Payable over the next five years
(inclusive of aggregate amounts due under Financing Agreements which
are classified as current) are as follows:
1999 $5,621,930
2000 1,991,586
2001 791,586
2002 43,258
2003 --
----------
TOTAL $8,448,360
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11. SHAREHOLDERS EQUITY
- -------------------------------------------------------------------------------
DESCRIPTION OF SECURITIES
COMMON STOCK
Class A Shares. The Certificate of Incorporation of the Company
authorizes the issuance of up to 60,000,000 Class A Shares. Each Class
A Share is entitled to one non-cumulative vote per share on all
matters on which stockholders' may vote at meetings of stockholders.
The Class A Shares are not convertible into any other securities of
the Company.
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<PAGE>
Class B Shares. The Certificate of Incorporation of the Company
authorizes the issuance of up to 2,500,000 Class B Shares. Each Class
B Share is entitled to five non-cumulative votes per share on all
matters on which stockholders may vote at meetings of stockholders.
The Class B Shares are convertible on a one-for-one basis at any time
after issuance at the option of the holder into Class A Shares.
The holders of Class A Shares and Class B Shares (collectively,
"Common Stock"): (i) have equal ratable rights to dividends from funds
legally available therefor, when, as and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all of
the assets of the Company available for distribution to holders of
Common Stock, upon liquidation, dissolution or winding up of the
affairs of the Company; and (iii) do not have preemptive or
subscription rights and there are no redemption or sinking fund
provisions applicable thereto. All shares of Common Stock issued and
outstanding are duly authorized, fully paid and nonassessable. Except
as otherwise required by law, the holders of Common Stock shall vote
together as a single class on all matters.
PREFERRED STOCK
The Certificate of Incorporation of the Company authorizes the
issuance of up to 5,300,000 shares of Preferred Stock, $.01 par value
per share. Of this amount 2,870,000 shares have been designated as
Series A, 10% Cumulative Convertible Preferred Stock (the "Series A
Preferred Shares"). The Board of Directors is authorized to issue
shares of Preferred Stock from time to time in one or more series and,
subject to the limitations contained in the Certificate of
Incorporation and any limitations prescribed by law, to establish and
designate any such series and to fix the number of shares and the
relative conversion rights, voting rights and terms of redemption
(including sinking fund provisions) and liquidation preferences. If
shares of Preferred stock are issued with voting rights, such issuance
could affect the voting rights of the holders of the Company's Class A
Shares by increasing the number of outstanding shares having voting
rights, and by the creation of class or series voting rights. Shares
of Preferred Stock with conversion rights could potentially increase
the number of Class A Shares outstanding. Issuance of Preferred Stock
could, under certain circumstances, have the effect of delaying or
preventing a change in control of the Company and may adversely affect
the rights of holders of Class A Shares. Also, Preferred Stock could
have preferences over the Class A Shares (and other series of stock)
with respect to dividends and liquidation rights.
SERIES A 10% CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Series A Preferred Stock consists of 2,870,000 shares. After
September 17, 2000, each Series A Preferred Share is redeemable by the
Company in whole or in part at $5.50 per share upon 30 days prior
written notice. Each Series A Preferred Share is convertible, subject
to adjustment, into three shares of Class A Common Stock of the
Company. The Series A Preferred Stock is entitled to a dividend, prior
to any payment of dividends on the Class A or Class B Common Stock, of
$0.50 per share per annum payable in semi-annual installments of $0.25
per share. If the Series A Preferred Stock dividend is not paid, it
accumulates until paid in full to date. The Company may elect to pay
the Series A Preferred Stock dividend either in cash or in shares of
Class A Common Stock, which Class A Common Stock shall be issued for
such purposes on the basis of the average closing prices of the Class
A Common Stock for the ten business days prior to the date of
declaration of the Series A Preferred Stock dividend. The Series A
Preferred Stock shall not have any right to vote except to the extent,
if any, required by Delaware law. Upon liquidation of the Company,
each Series A Preferred Share is entitled to receive $5.00 plus
accrued and unpaid dividends before any payment is made to the holders
of Common Stock.
In December 1997, the Company's Board of Directors declared a stock
dividend equivalent to $0.75 per share to its series A 10% Cumulative
Convertible Preferred Stockholders of record as of the close business
on December 10, 1997 (The "Record Date"). Accordingly, 530,331 shares
of the Company's Class A Common Stock was issued for this purpose
retained earnings was charged $530,331 in January 1998 in conjunction
with the issuance of these shares.
As of June 30, 1998, the Company has not declared or established a
record date for a dividend for its Series A 10% Cumulative Convertible
Preferred Stock for the period October 1997 through June 30, 1998.
Cumulative but unpaid dividends on Series A 10% Cumulative Preferred
Stock as of June 30, 1998 total approximately $510,000.
EQUITY TRANSACTIONS
During September 1996, the Company issued: 10,000 shares of its Class
A Common shares to an outside director of the Company, and 10,000
shares of its Class A Common share to various individuals named by
another outside director of the Company. These shares bear a
restrictive legend. Pursuant to the issuance of these shares, $15,000
was charged against earnings for the year ended June 30, 1997.
<PAGE>
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
F-20
<PAGE>
which carried a restrictive legend and were issued on April 24, 1996
to various independent investors (the "investors") generating gross
proceeds of $431,251. The Company realized net proceeds of $310,609
which was used to pay certain outstanding liabilities. The Company
registered the above shares on August 13, 1997.
The Company has not paid and does not anticipate paying any cash
dividends on it Class A Shares, Class B Shares, or Series A Preferred
Shares in the foreseeable future, but instead intends to retain all
working capital and earnings, if any, for use in the Company's
business operations, and in the expansion of its business.
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 share of its Series B Non-Convertible
Voting Preferred Stock (the "Option Shares") in exchange for issuance
to Decor by the Company of 200,000 share of its Class A Common Stock,
(which has been sold) and a guarantee with respect to 200,000 shares
of its Series A Convertible Preferred Stock ( which has been sold) and
a guarantee with respect to certain indebtedness should such
indebtedness become necessary.
On June 30, 1997, the Company issued 300,000 Shares of Class A Stock
to Mr. Hide Tashiro in settlement of certain amounts owned to Mr.
Tashiro and claims by the Company of amount due from Mr. Tashiro and
his affiliates. (See "Commitments ad Contingency").
Pursuant to the Company's June 30, 1996 settlement with Ann Stevens
(the "Settlement") a former executive of the Company and sister
of the President and Chief Executive Officer, the Company issued to
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 Agent shall not vote the Escrow Shares unless the
Company defaults on its obligations under the agreement. Upon
satisfaction of such obligations, the Escrow Agent shall return the
Escrow Shares to the Company. To date the Company has not defaulted on
this agreement, and has accrued $291,156 as of June 30, 1998 in
connection with the settlement.
WARRANTS AND OTHER
Except as otherwise set forth herein, the Company has not material
commitments for capital expenditures. In order to fund growth over the
long term, the Company anticipates possible future issuance of its
securities resulting in further dilution to its security holders.
STOCK OPTION PLANS
The 1994 Plan. On June 20, 1994, the Company adopted the Interiors,
Inc. 1994 Stock Option and Appreciation Rights Plan (the "1994 Plan"),
which provides for the granting of options to officers, employees and
consultants to purchase not more than an aggregate of 250,000 Class A
shares. Directors of the Company are not eligible to participate in
the 1994 Plan. The 1994 Plan provides for the grant of options
intended to qualify as "incentive
F-21
<PAGE>
stock options" under the Internal Revenue Code of 1986, as amended
(the "Code") as well as options which do not so qualify.
Pursuant to the 1994 Plan, the Board of Directors or a stock option
committee established by the Board to administer the 1994 Plan
determines that persons to whom options are granted, the number of
Class A shares subject to option, the period during which the options
may be exercised and the option exercise price. With respect to
incentive stock options, no option may be granted more than ten years
after the effective date of the 1994 Plan or exercised more than ten
years after the date of grant (five years if the optionee owns more
than ten percent of the Class A Shares of the Company at the time of
grant). Additionally, with respect to incentive stock options, the
option price may not be less than 100% of the fair market value of the
Class A Shares on the date of the grant (110% if the optionee owns
more than ten percent of the Class A Share of the Company at the time
of grant). The fair market value of the Class A Shares will be
determined by the Board or the Committee in accordance with the 1994
Plan as follows: If the Class A Shares are not listed and traded upon
a recognized securities exchange, on the basis of recent purchases and
sales of Class A Shares in arms-length transactions or based on the
last reported sale or transaction price for such stock on the date
grant or, if the shares are traded on a recognized securities exchange
or quoted on the NASDAQ National Market System upon the basis of the
last reported sale or transaction price on the date of grant or, if
the shares were not traded on such date, on the date nearest preceding
that date. Subject to certain limited exceptions, options may not be
exercised unless, at the time of exercise, the optionee is in the
service of the Company.
The Board of Directors or the Committee may, in its discretion, at any
time prior to the exercise of any option, grant in connection with
such option the right to surrender part or all of such option to the
extent the option is exercisable, and receive an amount (payable in
cash, Class A Shares or combination thereof as determined by the Board
or the Committee) equal to the difference between the then fair market
value of the shares issuable upon the exercise of the option (or
portions thereof surrendered) and the exercise price of the option or
portion thereof surrendered.
The Director Plan. On June 20, 1994 the Board of Directors approved
the 1994 Director Stock Option and Appreciation Rights Plan (the
"Director Plan"). The Director Plan was adopted to provide an
incentive to Directors through automatic and discretionary grants of
stock options. The Director Plan provides for the grant of options
intended to qualify as "incentive stock options" under the Code as
well as options which do not so qualify.
The Director Plan may be administered by a committee appointed by the
Board of Directors of the Company (the " Committee"). Options under
the Director Plan may be granted to each person who is a Director of
the Company on the date of grant. All Directors of the Company are
eligible to receive options of the Director Plan.
The Director Plan provides for the granting of options to Directors in
such amount and, subject to the terms of the Director Plan, upon such
terms as the Board or Committee determines in its discretion in order
to reward the recipient director for extraordinary service to the
Company. In addition, on the second Monday of May of each year each
person who is then a director of the Company shall be automatically
granted an option to purchase 10,000 of the Company's Class A Shares,
subject to adjustment as provided for by the Director Plan. The
aggregate number of shares for which options may be issued pursuant to
the Director Plan is 250,000 shares. The exercise price for options
granted under the Director Plan must be equal to the fair market value
per Class A Share on the date of grant. The fair market value of the
Class A Shares will be determined by the Board or the Committee in
accordance with the Director Plan as follows: If the Class A share are
not listed and traded upon a recognized securities exchange, on the
basis of recent purchase and sales of Class A Share in arms-length
transactions or based on the last reported sale or transaction price
for such stock on the date of grant or, if the share are traded on a
recognized securities exchange or quoted on the NASDAQ National Market
System up the last reported sales or transaction price on the date of
grant or, if the shares were not trade on such date, on the date
nearest preceding that date. Each option granted under the Director
Plan expire ten years after the date of grant, unless a less period is
specified by the Committee.
In the event an optionee ceases to be an option, he may exercise only
such options as are exercisable at the time he ceases to be a
Director, within the original term of the option. Options which are
not exercisable at the time an optionee ceases to be a Director shall
terminate. In event an optionee dies, the Director Plan provides for
the exercise of an option on behalf of the deceased Director.
F-22
<PAGE>
As of June 30, 1998, an aggregate of 1,032,500 options are exercisable
at prices ranging from $1.00 to $3.50.
The Company accounts for its plan under APB Opinion No. 25, under
which no compensation cost has been recognized as all options granted
during 1996 and 1997 have been granted at the fair value of Company's
common stock. Had compensation cost for these plans been determined in
accordance with SFAS 123, the Company's net income and EPS would have
been reduced as follows:
YEAR ENDED JUNE 30 YEAR ENDED JUNE 30
------------------ ------------------
1998 1997
NET INCOME AS REPORTED.... $633,674 $105,924
PRO FORMA...... (88,232) 105,924
BASIC EPS AS REPORTED.... $.04 $(.09)
PRO FORMA...... $(.06) $(.09)
DILUTED EPS AS REPORTED.... $.04 $(.09)
PRO FORMA...... $(.06) $(.09)
Under SFAS No. 123, the fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1998: (1) expected life of option is 2-5
years; (2) dividend yield of 0%; (3) expected volatility of 93%; and (4) risk
- -free interest rate of 6.0%.
Because SFAS No. 123 method of accounting has not been applied to options
granted prior to July 1, 1995 resulting pro forma compensation cost may not be
representative of the to be expect in future years.
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12. COMMITMENTS AND CONTINGENCIES
- -------------------------------------------------------------------------------
OPERATING LEASES
On January 1, 1997, the Company entered into a lease agreement that provides
for the leasing of a 70,000 square foot site which serves as the Company's
principal office and manufacturing facility. The term of the lease expire
December 31, 2001, with an option by the Company for a five-year extension.
This lease requires minimum annual lease payments of approximately $168,000
(net of $63,000 sublease to P-2-A).
P-2-A has 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 lease rent escalations. The term of the sublease is from June 1, 1997 to
December 31, 2001. Minimum annual lease payments approximate $442,800.
The Company leases its facilities in California under operating leases
expiring in December 1999. Minimum annual lease payments approximate $442,800.
In addition, the Company leases showroom facilities in High Point, North
Carolina (three showrooms), San Francisco, California (three showrooms), New
York, New York (two showrooms), Dallas, Texas (two showrooms) and Atlanta,
Georgia, as well as a small retail outlet in Yonkers, New York. The showroom
sizes range from 300 square feet to approximately 9,800 square feet and rent
aggregates approximately $480,000 per annum.
The approximate future minimum lease on payments per fiscal year under
operating leases exclusive of sublease income are as follows:
1999 1,141,503
2000 785,223
2001 338,883
2002 219,580
F-23
<PAGE>
2003 54,798
Rent expense charged to operation, which includes escalation charges, for the
years ended June 30, 1998 and 1997, amounted to $560,224 and $307,941
respectively, excluding sublease income.
UNION AGREEMENT
Effective April 1, 1998, the Company signed a five-year (with an additional
two-year automatic renewal) union contract for it members under the terms of a
collective bargaining agreement. None of the Company's employees have been on
strike, or threatened to since the Company's inception and the Company believes
its relationship with all of its personnel is satisfactory. The Company owes
the Union approximately $235,000 as of this filing and has agreed to retire
this amount through monthly payments of $11,000.
CONSULTING ARRANGEMENTS
Refer to Note 13 for discussion of these arrangements.
LEGAL PROCEEDINGS
Interiors is subject to claims and litigation and other claims arising in the
ordinary course of its business. In management's opinion, Interiors is not
presently a party to any such litigation or claims the outcome of which would
have a material adverse effect on its financial position or its results of
operations.
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13. RELATED PARTY TRANSACTIONS
- -------------------------------------------------------------------------------
During the year ended June 30, 1998, the Company advanced the President and CEO
amounts aggregating $77,000. These amounts were repaid subsequent to year end.
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 joint
ventures, acquisitions, and other long term initiatives. Pursuant to this
agreement (as amended), the Company will be paid on an annual basis the greater
of (1) $135,000 as a Management Fee, (2) 1.5% of excess cashflow as defined in
the agreement. 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. During the fourth quarter of 1998, the Company
charged Decor $125,000 for various services considered to be outside the scope
of the Management Fee, including engineering and marketing studies. At June 30
1998, the Company has accrued approximately $260,000 of fees pursuant to the
agreement and the fiscal 1998 additional fee.
P-2-A has 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. In addition, the current supply contract between the Company
and P-2-A has been amended to continue for a term of seven (7) years. Sales to
P-2-A for the years ended June 30, 1998 and 1997 were approximately $360,000
and $365,000 respectively. During the year ended June 30, 1998, the Company
provided consulting services to P-2-A in the amount of $75,000. As of June 30,
1998, P-2-A owed the Company $150,676.
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 no interest has been accrued as of
June 30, 1998. The principal is due on April 21, 2003.
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 $250, Ms. Munn's 6.6% note to the Company
providing for principal of $437,500 to be paid to the Company in five equal
annual installments of $105,561.90 and Ms. Munn's guaranty and pledge of her
assets for certain Company debt. The company obtained an appraisal at that time
to determine the fair market values of this transaction. The shares were issued
to Ms. Munn on April 8, 1996. A Promissory Note and Security Agreement, whereby
the shares will collateralize the Promissory Note, was executed by the Company
and Ms. Munn pursuant to these terms. The Promissory Note remains outstanding.
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. Due to the substance of this grant, the wife of the
CEO, Laurie Munn's options are accounted for as if she is an employee of the
Company. 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
F-24
<PAGE>
fair value of such shares at the time of the purchase. The purchase price is
due in annual installments through January 2005 at an interest rate of 6.6%.
The purchased stock is the collateral for this obligation.
In March, 1997 the Company borrowed $100,000 at 6 1.2% per annum interest from
Laurie Munn, wife of Max Munn, the Company's CEO. The loan is evidence by
demand promissory note. This note was repaid in October 1997.
Effective June 30, 1996, the Company entered into a consulting agreement with
Morris Munn, father of the Company's President and Chief Executive Officer,
under which he will provide the Company with the following: design and
fabrication of new molds for sculpture, recommend and implement improvements in
antiquing, woodworking, gliding and carving processes, and attend trade shows.
As part of this agreement, over the subsequent five-years, the Company will
payment 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.
The Company currently has employment agreements with five key executives. Under
these agreements the Company has committed to total aggregate base compensation
per year of approximately $815,000 plus other normal customary fringe benefits,
stock options, bonuses and annual increase in compensation. The employment
agreements generally have terms of three to five years.
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14. PROFIT SHARING AND DEFERRED COMPENSATION PLANS
- -------------------------------------------------------------------------------
In July 1991, the Company started a qualified Profit Sharing Plan for all
nonunion employees and a nonqualifed Deferred Compensation Plan for certain key
employees. The Company has not made any contributions to the Qualified Profit
Sharing Plan or the Deferred Compensation Plan since its initial contribution
during the fiscal year ended June 30, 1992.
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15. PROVISION (BENEFIT) FOR INCOME TAXES
- -------------------------------------------------------------------------------
The income tax (benefit) provision consists of:
YEAR ENDED JUNE 30
------------------
1998 1997
CURRENT INCOME TAXES:
FEDERAL $_______ $______
STATE AND LOCAL 52,543 10,654
DEFERRED INCOME TAX (160,783) (30,000)
--------- --------
TOTAL 108,240 $19,346
The benefit from the Company's net operating loss ("NOL") carry forward for
Federal income tax purposes is approximately $4,500,000 (which expire through
2011). The deferred tax asset of approximately $1,500,000 is comprised
primarily of net operating losses. The utilization of such NOL's maybe limited
in the future due to changes in ownership.
Through June 30, 1996, all deferred tax assets were fully reserved. For the
years ending June 30, 1998 and 1997, the Company has determined it is "more
likely than not" that at least a portion of its deferred tax assets with be
utilized. Accordingly, the previously recorded valuation allowance has been
reduced by $30,000 for the year ended June 30, 1997 and by approximately
$161,000 in 1998.
F-25
<PAGE>
The reduction of the valuation allowance in both 1998 and 1997 was calculated
at the statutory federal income tax rate. State income taxes have been recorded
based upon the applicable state requirements.
- -------------------------------------------------------------------------------
16. SUBSEQUENT EVENTS
- -------------------------------------------------------------------------------
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 transactions
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 obligations 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 transactions contemplated by
that certain Agreement and Plan of 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 distributes 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 amount in the escrow
account and amounts paid for any resolved claims,
F-26
<PAGE>
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.
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 of $1,500,000 from United Credit Corporation and cash on
hand.
The assets acquired pursuant to the Troy Merger Agreement included, among other
things, (i) fixed assets owned, leased or used by Troy, including equipment,
(ii) receivable, (iii) inventory and (iv) contracts agreements, and lease of
real and personal property. For the foreseeable future, the Company intends to
utilize such assets in connection with the operation of the business of Troy.
In conjunction with the issuance of the Convertible Debentures, the Company
issued Common Stock Purchase Warrants ("A Warrants") to the holders of the
Convertible Debentures. The A Warrants expire five years from their respective
dates of issue and allow the holders to purchase 1,339,286 Class A Shares
in the aggregate at an exercise price equal to the lessor of (i) 120% of the
closing bid price of the Class A Shares on the trading day immediately
preceding the respective issuance dates of the A Warrants, plus an amount equal
to the Exercise Premium (as defined below) or (ii) 120% of the closing bid
price of the Class A Shares on the Reset Date, which shall be a single date
during the period commencing on the 91st day after the respective issuance
dates of the A Warrants through and including the 210th day after the
respective issuance dates of the A Warrants, to be designated by the holder of
the A Warrant, plus an amount equal to the Exercise Premium. The "Exercise
Premium" will be equal to 1/2 of the closing bid price of the Class A Shares on
the trading day immediately preceding the exercise date of the A Warrant in
question, less $4.11 per Class A Share, unless such closing bid price is less
than $4.11 per share, in which case the Exercise Premium shall be $0.00.
F-27
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Items 9, 10, 11, and 12 are incorporated by reference from the Company's
definitive Proxy Statement to be filed by the Company with the Securities and
Exchange Commission no later than October 28, 1998.
Item 13. Exhibits, Financial Statements and Reports on Form 8-K
(a) 1. Financial Statements:
The Financial Statements are incorporated herein as part
of Item 7 of this Report.
2. Exhibits:
See Index on Page E-1 of this Report.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the last quarter
of fiscal year ended June 30, 1998:
(a) Company's Current Report on Form 8-K, as filed with the
Commission on March 25, 1998 and as amended by the Company's
Current Report on Form 8-K/A as filed with the Securities and
Exchange Commission on May 26, 1998;
(b) Company's Current Report on Form 8-K, as filed with the
Commission on April 6, 1998 and as amended by the Company's
Current Report on Form 8-K/A as filed with the Securities and
Exchange Commission on May 29, 1998;
(c) Company's Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on August 10, 1998 and as
amended by the Company's Current Report on Form 8-K/A as filed
with the Securities and Exchange Commission on October 9, 1998;
and
(d) Company's Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on August 28, 1998 and as
amended by the Company's Current Report on Form 8-K/A as filed
with the Securities and Exchange Comission on October 9, 1998.
The Company's Current Report on Form 8-K, as filed with the Securities and
Exchange Commission on March 25, 1998 and as amended by the Company's Current
Report on Form 8-K/A as filed with the Securities and Exchange Commission on
May 26, 1998 includes the description of the acquisition of Henlor and the
financial statements of Henlor which have been audited by Thomashow, Brown &
Paialii, independent public accountants, as indicated in their report with
respect thereto. The Company's Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on April 6, 1998 and as amended by the
Company's Current Report on Form 8-K/A as filed with the Securities and
Exchange Commission on May 29, 1998 includes the description of the acquisition
of MSI and the financial statements of MSI which have been audited by Kellogg &
Andelson, independent public accountants, as indicated in their report with
respect thereto. The Company's Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on August 10, 1998 and as amended by the
Company's Current Report on Form 8-K/A as filed with the Securities and
Exchange Commission on October 9, 1998 includes the description of the
acquisition of Windsor and financial statements of Windsor which have been
audited by Rubin, Brown, Gornstein & Co., independent public accountants, as
indicated in their report with respect thereto. The Company's Current Report on
Form 8-K, as filed with the Securities and Exchange Commission on August 28,
1998 and as amended by the Company's Current Report on Form 8-K/A as filed with
the Securities and Exchange Commission on October 9, 1998 includes the
description of the acquisition of Troy and financial statements of Troy which
have been audited by Deloitte & Touche LLP, independent public acountants, as
indicated in their report with respect thereto.
<PAGE>
EXHIBIT INDEX
Exhibit Description of Exhibit
No. ----------------------
---
2.1 Agreement and Plan of Merger, dated March 10, 1998, by and among
Interiors, Vanguard Acquisition Corp., a wholly-owned subsidiary
of Interiors, Henlor and the shareholders of Henlor.7/
2.2 Agreement and Plan of Merger, dated March 23, 1998, by and among
Interiors, Artmaster, MSI and certain shareholders of MSI.8/
2.3 Agreement and Plan of Merger, dated April 21, 1998, by and
between Interiors and Decor.
2.4 Agreement and Plan of Merger, dated July 2, 1998, by and among
Troy Acquisition Corp., Interiors, Troy, Barry R. Jackson, and
Todd R. Langner ("Langner").10/
2.5 Stock Purchase Agreement, dated July 30, 1998, by and between
Interiors and Bentley International, Inc.9/
3.1 Certificate of Incorporation of Interiors.1/
3.2 Certificate of Ownership and Merger between Interiors, Inc.
and A.P.F. Holdings, Inc.1/
3.3 Certificate of Amendment of Certificate of Incorporation of
Interiors.2/
3.4 Certificate of Designations, Rights and Preferences of
Interiors.2/
3.5 Certificate for Restoration, Renewal and Revival of the
Certificate of Incorporation.
3.6 Certificate of Merger of Interiors, Inc. into Interiors Holdings,
Inc.
3.7 By-Laws of Interiors.1/
4.1 Forms of Representative's Warrants to Purchase Class A Shares,
Class WA Warrants and Class WB Warrants.2/
4.2 Form of Warrant Exercise Fee Agreement by and between Interiors,
VTR Capital, Inc., and the Transfer Agent.2/
4.3 Form of Warrant Agreement by and between Interiors, J. Gregory &
Company, Inc., and Transfer Agent.3/
4.4 Specimen Class A Preferred Stock Certificate.2/
4.5 Specimen Class WC Warrant Certificate.2/
4.6 Specimen Class A Common Stock Certificate.2/
4.7 Specimen Class B Common Stock Certificate.2/
4.8 Specimen Class WB Warrant Certificate.2/
<PAGE>
4.9 First Amendment to Warrant Agreement. 3/
4.10 Convertible Note, dated April 7, 1998, in favor of Beeston
Investment, Ltd. ("Beeston"), in the amount of $200,000.
4.11 Common Stock Purchase Warrant, dated April 7, 1998, issued by
Interiors to Beeston.
4.12 Convertible Note, dated March 19, 1998, in favor of Austost
Anstalt Schaan ("Austost"), in the amount of $750,000.
4.13 Convertible Note, dated March 19, 1998, in favor of Balmore Funds
S.A. ("Balmore"), in the amount of $375,000.
4.14 Convertible Note, dated March 19, 1998, in favor of Tusk
Investment Inc. ("Tusk"), in the amount of $375,000.
4.15 Common Stock Purchase Warrant, dated March 19, 1998, issued by
Interiors to Austost.
4.16 Common Stock Purchase Warrant, dated March 19, 1998, issued by
Interiors to Balmore.
4.17 Common Stock Purchase Warrant, dated March 19, 1998, issued by
Interiors to Tusk.
4.18 7% Convertible Debenture due July 26, 2001, dated July 27, 1998,
in the amount of $500,000, issued by Interiors to Dominion
Capital Fund, Ltd. ("Dominion").
4.19 7% Convertible Debenture due July 26, 2001, dated July 27, 1998,
in the amount of $500,000, issued by Interiors to Sovereign
Partners, L.P. ("Sovereign").
4.20 7% Convertible Debenture due July 29, 2001, dated July 30, 1998,
in the amount of $1,250,000, issued by Interiors to RBB Bank AG
("RBB").
4.21 Common Stock Purchase Warrant A to Purchase 214,286 Shares of
Common Stock of Interiors, dated July 27, 1998, issued by
Interiors to Dominion.
4.22 Common Stock Purchase Warrant A to Purchase 214,286 Shares of
Common Stock of Interiors, dated July 27, 1998, issued by
Interiors to Sovereign.
4.23 Common Stock Purchase Warrant A to Purchase 535,714 Shares of
Common Stock of Interiors, dated July 30, 1998, issued by
Interiors to RBB.
4.24 Common Stock Purchase Warrant B to Purchase 50,000 Shares of
Common Stock of Interiors, dated July 27, 1998, issued by
Interiors to Cardinal Capital Management Inc. ("Cardinal").
4.25 Common Stock Purchase Warrant B to Purchase 62,500 Shares of
Common Stock of Interiors, dated July 30, 1998, issued by
Interiors to Cardinal.
4.26 Registration Rights Agreement, dated July 27, 1998, by the
Holders listed therein and Interiors.
4.27 Common Stock Purchase Warrant A to Purchase 187,500 Shares of
Common Stock of Interiors, dated August 25, 1998, issued by
Interiors to Sovereign.
4.28 Common Stock Purchase Warrant A to Purchase 187,500 Shares of
Common Stock of Interiors, dated August 25, 1998, issued by
Interiors to Dominion.
<PAGE>
4.29 7% Convertible Debenture due August 24, 2001, in the amount of
$375,000, issued by Interiors to Sovereign.
4.30 7% Convertible Debenture due August 24, 2001, in the amount of
$375,000, issued by Interiors to Dominion.
4.31 Registration Rights Agreement, dated August 25, 1998, by the
Holders listed therein and Interiors.
10.1 Security Agreement, dated November 13, 1990, between Interiors
and United Credit Corporation and amendments thereto dated
November 13, 1990, January 7, 1992 , October 11, 1991, December
15, 1992 and June 23, 1993.1/
10.2 Agreement, dated April 1, 1991, between Production, Merchandising
& Distribution Employees Union, Local 210, affiliated with The
International Brotherhood of Teamsters, Chauffeurs, Warehouseman
and Helpers of America, AFL-CIO and Interiors.1/
10.3 Form of Security Agreement between Interiors and certain bridge
lenders.1/
10.4 Form of Non-Negotiable 6% Convertible Promissory Note.1/
10.5 Form of Non-Negotiable 10% Promissory Note.1/
10.6 1994 Stock Option and Appreciation Rights Plan.5/
10.7 1994 Director Stock Option and Appreciation Rights Plan.4/
10.8 Revised form of Warrant Exercise Fee Agreement.5/
10.9 General Loan and Security Agreement, dated July 7, 1994, between
Interiors and The Bank of New York ("BNY").5/
10.10 Promissory Note, dated July 7, 1994, in favor of BNY, in the
principal amount of $950,000.5/
10.11 General Guarantees, dated July 7, 1994, of Ann Stevens, Theodore
Stevens and Max Munn to BNY.5/
10.12 Consulting Agreement, dated October 1, 1993, between Morris Munn
and Interiors.5/
10.13 Demand Note, dated February 8, 1996, issued by Interiors to Max
Munn. 6/
10.14 Employment Agreement, dated January 1, 1998, between Interiors
and Max Munn.
10.15 Promissory Note, dated March 10, 1998, made by Interiors in favor
of Michael H. Greeley ("Greeley"), in the principal sum of
$794,379.
10.16 Non-Negotiable Promissory Note, dated July 30, 1998, made by
Interiors in favor of Bentley, in the principal sum of
$3,300,300.9/
10.17 Non-Negotiable Promissory Note, dated July 30, 1998, made by
Interiors in favor of Bentley, in the principal sum of
$2,000,000.9/
10.18 Consulting Agreement, dated July 30, 1998, by and among Windsor
Art, Inc., Lloyd R. Abrams, and Interiors. 9/
<PAGE>
10.19 Securities Purchase and Registration Rights Agreement,
dated July 30, 1998, by and among Max Munn, Bentley, and
Interiors. 9/
10.20 Employment Agreement, dated March 10, 1998, by and between
Greeley and Henlor. 7/
10.21 Employment Agreement, dated August 14, 1998, by and between
Interiors and Langner.10/
10.22 Subordinated Promissory Note, dated March 23, 1998, in favor of
Robert M. Perkowitz ("Perkowitz"), in the principal sum of
$272,752.
10.23 Subordinated Promissory Note, dated March 23, 1998, in favor of
Perkowitz, in the principal sum of $537,248.
10.24 Agreement, dated July 29, 1998, between Local 210 and Interiors.
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the Registrant.
99.1 U.S. Patent and Trademark Office Trademark Reg- No. 1,736,623.1/
99.2 U.S. Patent and Trademark Office Service Mark Reg. No.
1,783,694.1/
1/ Previously filed as an exhibit to the Registration Statement
on Form SB-2 (Registration No. 33-77288-NY) (the "Registration
Statement"), which exhibit is incorporated herein by
reference.
2/ Previously filed as an exhibit to Amendment No. 1 to the
Registration Statement, which exhibit is incorporated herein
by reference.
3/ Previously filed as an exhibit to Amendment No. 2 to the
Registration Statement, which exhibit is incorporated herein
by reference.
4/ Previously filed as an exhibit to Amendment No. 3 to the
Registration Statement, which exhibit is incorporated by
reference.
5/ Previously filed as an exhibit to Interiors' Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1994 (File No.
0-24352), which exhibit is incorporated herein by this reference.
6/ Previously filed as an exhibit to Interiors' Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995 (File No.
00-24352), which exhibit is incorporated herein by this
reference.
7/ Previously filed as an exhibit to Interiors' Current Report on
Form 8-K filed March 10, 1998 (File No. 00-24352), which exhibit
is incorporated herein by reference.
8/ Previously filed as an exhibit to Interiors' Current Report on
Form 8-K filed March 23, 1998 (File No. 00-24352), which exhibit
is incorporated herein by this reference.
9/ Previously filed as an exhibit to Interiors' Current Report on
Form 8-K filed July 30, 1998 (File No. 00-24352), which exhibit
is incorporated herein by this reference.
10/ Previously filed as an exhibit to Interiors' Current Report on
Form 8-K filed August 14, 1998 (File No. 00-24352), which exhibit
is incorporated herein by this reference.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
INTERIORS, INC.
By: /s/ MAX MUNN
------------------------------
Name: Max Munn
Title: President, Chief
Executive Officer and
Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ MAX MUNN President, Chief Executive October 16, 1998
- ----------------------- Officer, Chief Financial Officer
Max Munn and Director
/s/ ROGER LOURIE Director October 16, 1998
- -----------------------
Roger Lourie
/s/ RICHARD JOSEPHBERG Director October 16, 1998
- -----------------------
Richard Josephberg
S-1
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ------- ---------------------
2.1 Agreement and Plan of Merger, dated March 10, 1998, by and among
Interiors, Vanguard Acquisition Corp., a wholly-owned subsidiary
of Interiors, Henlor and the shareholders of Henlor.7/
2.2 Agreement and Plan of Merger, dated March 23, 1998, by and among
Interiors, Artmaster, MSI and certain shareholders of MSI.8/
2.3 Agreement and Plan of Merger, dated April 21, 1998, by and
between Interiors and Decor.
2.4 Agreement and Plan of Merger, dated July 2, 1998, by and among
Troy Acquisition Corp., Interiors, Troy, Barry R. Jackson, and
Todd R. Langner ("Langner").10/
2.5 Stock Purchase Agreement, dated July 30, 1998, by and between
Interiors and Bentley International, Inc.9/
3.1 Certificate of Incorporation of Interiors.1/
3.2 Certificate of Ownership and Merger between Interiors, Inc.
and A.P.F. Holdings, Inc.1/
3.3 Certificate of Amendment of Certificate of Incorporation of
Interiors.2/
3.4 Certificate of Designations, Rights and Preferences of
Interiors.2/
3.5 Certificate for Restoration, Renewal and Revival of the
Certificate of Incorporation.
3.6 Certificate of Merger of Interiors, Inc. into Interiors Holdings,
Inc.
3.7 By-Laws of Interiors.1/
4.1 Forms of Representative's Warrants to Purchase Class A Shares,
Class WA Warrants and Class WB Warrants.2/
4.2 Form of Warrant Exercise Fee Agreement by and between Interiors,
VTR Capital, Inc., and the Transfer Agent.2/
4.3 Form of Warrant Agreement by and between Interiors, J. Gregory &
Company, Inc., and Transfer Agent.3/
4.4 Specimen Class A Preferred Stock Certificate.2/
4.5 Specimen Class WC Warrant Certificate.2/
4.6 Specimen Class A Common Stock Certificate.2/
4.7 Specimen Class B Common Stock Certificate.2/
4.8 Specimen Class WB Warrant Certificate.2/
E-1
<PAGE>
4.9 First Amendment to Warrant Agreement. 3/
4.10 Convertible Note, dated April 7, 1998, in favor of Beeston
Investment, Ltd. ("Beeston"), in the amount of $200,000.
4.11 Common Stock Purchase Warrant, dated April 7, 1998, issued by
Interiors to Beeston.
4.12 Convertible Note, dated March 19, 1998, in favor of Austost
Anstalt Schaan ("Austost"), in the amount of $750,000.
4.13 Convertible Note, dated March 19, 1998, in favor of Balmore Funds
S.A. ("Balmore"), in the amount of $375,000.
4.14 Convertible Note, dated March 19, 1998, in favor of Tusk
Investment Inc. ("Tusk"), in the amount of $375,000.
4.15 Common Stock Purchase Warrant, dated March 19, 1998, issued by
Interiors to Austost.
4.16 Common Stock Purchase Warrant, dated March 19, 1998, issued by
Interiors to Balmore.
4.17 Common Stock Purchase Warrant, dated March 19, 1998, issued by
Interiors to Tusk.
4.18 7% Convertible Debenture due July 26, 2001, dated July 27, 1998,
in the amount of $500,000, issued by Interiors to Dominion
Capital Fund, Ltd. ("Dominion").
4.19 7% Convertible Debenture due July 26, 2001, dated July 27, 1998,
in the amount of $500,000, issued by Interiors to Sovereign
Partners, L.P. ("Sovereign").
4.20 7% Convertible Debenture due July 29, 2001, dated July 30, 1998,
in the amount of $1,250,000, issued by Interiors to RBB Bank AG
("RBB").
4.21 Common Stock Purchase Warrant A to Purchase 214,286 Shares of
Common Stock of Interiors, dated July 27, 1998, issued by
Interiors to Dominion.
4.22 Common Stock Purchase Warrant A to Purchase 214,286 Shares of
Common Stock of Interiors, dated July 27, 1998, issued by
Interiors to Sovereign.
4.23 Common Stock Purchase Warrant A to Purchase 535,714 Shares of
Common Stock of Interiors, dated July 30, 1998, issued by
Interiors to RBB.
4.24 Common Stock Purchase Warrant B to Purchase 50,000 Shares of
Common Stock of Interiors, dated July 27, 1998, issued by
Interiors to Cardinal Capital Management Inc. ("Cardinal").
4.25 Common Stock Purchase Warrant B to Purchase 62,500 Shares of
Common Stock of Interiors, dated July 30, 1998, issued by
Interiors to Cardinal.
4.26 Registration Rights Agreement, dated July 27, 1998, by the
Holders listed therein and Interiors.
4.27 Common Stock Purchase Warrant A to Purchase 187,500 Shares of
Common Stock of Interiors, dated August 25, 1998, issued by
Interiors to Sovereign.
4.28 Common Stock Purchase Warrant A to Purchase 187,500 Shares of
Common Stock of Interiors, dated August 25, 1998, issued by
Interiors to Dominion.
E-2
<PAGE>
4.29 7% Convertible Debenture due August 24, 2001, in the amount of
$375,000, issued by Interiors to Sovereign.
4.30 7% Convertible Debenture due August 24, 2001, in the amount of
$375,000, issued by Interiors to Dominion.
4.31 Registration Rights Agreement, dated August 25, 1998, by the
Holders listed therein and Interiors.
10.1 Security Agreement, dated November 13, 1990, between Interiors
and United Credit Corporation and amendments thereto dated
November 13, 1990, January 7, 1992 , October 11, 1991, December
15, 1992 and June 23, 1993.1/
10.2 Agreement, dated April 1, 1991, between Production, Merchandising
& Distribution Employees Union, Local 210, affiliated with The
International Brotherhood of Teamsters, Chauffeurs, Warehouseman
and Helpers of America, AFL-CIO and Interiors.1/
10.3 Form of Security Agreement between Interiors and certain bridge
lenders.1/
10.4 Form of Non-Negotiable 6% Convertible Promissory Note.1/
10.5 Form of Non-Negotiable 10% Promissory Note.1/
10.6 1994 Stock Option and Appreciation Rights Plan.5/
10.7 1994 Director Stock Option and Appreciation Rights Plan.4/
10.8 Revised form of Warrant Exercise Fee Agreement.5/
10.9 General Loan and Security Agreement, dated July 7, 1994, between
Interiors and The Bank of New York ("BNY").5/
10.10 Promissory Note, dated July 7, 1994, in favor of BNY, in the
principal amount of $950,000.5/
10.11 General Guarantees, dated July 7, 1994, of Ann Stevens, Theodore
Stevens and Max Munn to BNY.5/
10.12 Consulting Agreement, dated October 1, 1993, between Morris Munn
and Interiors.5/
10.13 Demand Note, dated February 8, 1996, issued by Interiors to Max
Munn. 6/
10.14 Employment Agreement, dated January 1, 1998, between Interiors
and Max Munn.
10.15 Promissory Note, dated March 10, 1998, made by Interiors in favor
of Michael H. Greeley ("Greeley"), in the principal sum of
$794,379.
10.16 Non-Negotiable Promissory Note, dated July 30, 1998, made by
Interiors in favor of Bentley, in the principal sum of
$3,300,300.9/
10.17 Non-Negotiable Promissory Note, dated July 30, 1998, made by
Interiors in favor of Bentley, in the principal sum of
$2,000,000.9/
10.18 Consulting Agreement, dated July 30, 1998, by and among Windsor
Art, Inc., Lloyd R. Abrams, and Interiors. 9/
E-3
<PAGE>
10.19 Securities Purchase and Registration Rights Agreement,
dated July 30, 1998, by and among Max Munn, Bentley, and
Interiors. 9/
10.20 Employment Agreement, dated March 10, 1998, by and between
Greeley and Henlor. 7/
10.21 Employment Agreement, dated August 14, 1998, by and between
Interiors and Langner.10/
10.22 Subordinated Promissory Note, dated March 23, 1998, in favor of
Robert M. Perkowitz ("Perkowitz"), in the principal sum of
$272,752.
10.23 Subordinated Promissory Note, dated March 23, 1998, in favor of
Perkowitz, in the principal sum of $537,248.
10.24 Agreement, dated July 29, 1998, between Local 210 and Interiors.
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the Registrant.
99.1 U.S. Patent and Trademark Office Trademark Reg- No. 1,736,623.1/
99.2 U.S. Patent and Trademark Office Service Mark Reg. No.
1,783,694.1/
1/ Previously filed as an exhibit to the Registration Statement
on Form SB-2 (Registration No. 33-77288-NY) (the "Registration
Statement"), which exhibit is incorporated herein by
reference.
2/ Previously filed as an exhibit to Amendment No. 1 to the
Registration Statement, which exhibit is incorporated herein
by reference.
3/ Previously filed as an exhibit to Amendment No. 2 to the
Registration Statement, which exhibit is incorporated herein
by reference.
4/ Previously filed as an exhibit to Amendment No. 3 to the
Registration Statement, which exhibit is incorporated by
reference.
5/ Previously filed as an exhibit to Interiors' Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1994 (File No.
0-24352), which exhibit is incorporated herein by this reference.
6/ Previously filed as an exhibit to Interiors' Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1995 (File No.
00-24352), which exhibit is incorporated herein by this
reference.
7/ Previously filed as an exhibit to Interiors' Current Report on
Form 8-K filed March 10, 1998 (File No. 00-24352), which exhibit
is incorporated herein by reference.
8/ Previously filed as an exhibit to Interiors' Current Report on
Form 8-K filed March 23, 1998 (File No. 00-24352), which exhibit
is incorporated herein by this reference.
9/ Previously filed as an exhibit to Interiors' Current Report on
Form 8-K filed July 30, 1998 (File No. 00-24352), which exhibit
is incorporated herein by this reference.
10/ Previously filed as an exhibit to Interiors' Current Report on
Form 8-K filed August 14, 1998 (File No. 00-24352), which exhibit
is incorporated herein by this reference.
E-4
