<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 23, 1998
INTERIORS, INC.
---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-6395 13-3590047
- - ----------------------------------- ----------- ------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization) File Number) 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
---------------------
Not Applicable
---------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
3
The Registrant hereby amends its Current Report on Form 8-K as filed with the
Commission on April 6, 1998 as provided herein.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On March 23, 1998, the Registrant entered into, and consummated, an
Agreement and Plan of Merger (the "Merger Agreement") among the Registrant,
Artmaster Studios, Inc. ("Artmaster"), a wholly-owned subsidiary of the
Registrant, Merchandise Sales, Inc. ("MSI") and certain shareholders of MSI.
The transaction was structured as a forward triangular merger. As a result of
the merger, MSI has been merged with and into Artmaster. MSI (and, after the
merger, Artmaster) designs, manufactures and wholesales wall decor and lighting
products for the home. The acquisition of MSI provides the Registrant with an
expanded breadth of product offerings.
Pursuant to the Merger Agreement, the purchase price paid to the
shareholders of MSI at closing consisted of the delivery of a subordinated
promissory note in the aggregate principal amount of $537,248. In addition, the
Registrant issued to the shareholders of MSI an aggregate of 779,302
unregistered shares of its Class A Common Stock (the "Merger Shares") and the
Registrant repaid indebtedness of MSI owed to certain creditors of MSI in the
aggregate amount of $1,022,752 through an aggregate cash payment of $750,000
and the issuance of a subordinated promissory note in the aggregate principal
amount of $272,752. All of the Merger Shares are being held in a one year
escrow as security for the indemnification obligations of MSI's former
shareholders pursuant to the Merger Agreement, and the number of Merger Shares
remains subject to adjustment based on the value of the Merger Shares on the
first anniversary of the closing date.
The merger was financed by the Registrant's available working capital
which was derived in part, from an earlier, unrelated private placement to
accredited investors of the Registrant's unregistered Subordinated Convertible
Promissory Notes. The aggregate purchase price was determined in arms-length
negotiations between the Registrant 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 Registrant intends to utilize such assets in connection with the
operation of the business of MSI and Vanguard Studios, Inc., another subsidiary
of the Registrant.
A copy of the Merger Agreement was appended as an exhibit to the
Report on this transaction filed on Form 8-K on April 6, 1998.
<PAGE>
4
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
Financial Statements for Merchandise Sales, Inc. DBA Artmaster Studios For the
Period ended March 23, 1998 and the year ended March 28, 1997 are appended as
an Exhibit to this Report.
(b) Pro Forma Financial Information.
Pro Forma Financial Information with respect to the acquisition of Merchandise
Sales, Inc. DBA Artmaster Studios by the Registrant is appended as an Exhibit
to this Report.
(c) Exhibits
Document Description Exhibit No.
- -------------------- -----------
Financial Statements for Merchandise Sales, Inc. DBA
Artmaster Studios For the Period ended March 23, 1998
and the year ended March 28, 1997 3
Pro Forma Financial Information with respect to the
acquisition of Merchandise Sales, Inc. DBA Artmaster
Studios by the Registrant 4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this amendment to report to be signed on
its behalf by the undersigned hereunto duly authorized.
May 28, 1998 INTERIORS, INC.,
a Delaware corporation
By: /s/ John D. Mazzuto.
-------------------------------------------
Chief Financial Officer
<PAGE>
5
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Document Description Numbered Pages
- ------- -------------------- --------------
<S> <C> <C>
3 Financial Statements for Merchandise Sales, Inc. DBA Artmaster Studios Cover
For the Period ended March 23, 1998 and the year ended March 28, 1997 Contents
Pages 1 - 17
4 Pro Forma Financial Information with respect to the acquisition of
Merchandise Sales, Inc. DBA Artmaster Studios by the Registrant Pages 1 - 9
</TABLE>
<PAGE>
MERCHANDISE SALES, INC.
DBA ARTMASTER STUDIOS
FINANCIAL STATEMENTS
PERIOD ENDED MARCH 23, 1998 AND
THE YEAR ENDED MARCH 28, 1997
<PAGE>
CONTENTS
Page
-----
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS:
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Equity (Deficiency) 4
Statements of Cash Flows 5
NOTES TO THE FINANCIAL STATEMENTS 6-17
<PAGE>
Board of Directors
Artmaster Studios, Inc., successor to
Merchandise Sales, Inc. dba Artmaster Studios
San Fernando, California
Independent Auditor's Report
We have audited the accompanying balance sheets of Merchandise Sales, Inc. dba
Artmaster Studios as of the period ended March 23, 1998 and the year ended
March 28, 1997, and the related statements of operations, stockholders' equity
(deficiency), and cash flows for the periods then ended. 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 audit.
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 balance sheets referred to above present fairly, in all
material respects, the financial position of Merchandise Sales, Inc. dba
Artmaster Studios as of the period ended March 23, 1998 and the year ended
March 28, 1997, and the results of its operations and its cash flows for the
periods then ended in conformity with generally accepted accounting principles.
As described in Note 3 of the financial statements, on March 23, 1998,
Merchandise Sales, Inc. dba Artmaster Studios merged into Artmaster Studios,
Inc.
Kellogg and Andelson
May 22, 1998
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
BALANCE SHEETS
MARCH 23, 1998 AND MARCH 28, 1997
<TABLE>
<CAPTION>
ASSETS
1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 40,182 $ 86,954
Accounts receivable, less allowance of $146,800 and
$80,570, respectively (Note 2) 266,097 454,293
Inventories (Note 5) 662,228 611,785
Prepaid expenses and other current assets 36,396 78,592
----------- -----------
Total current assets 1,004,903 1,231,624
----------- -----------
PROPERTY AND EQUIPMENT, at cost less accumulated
depreciation and amortization of $513,123 and $413,505,
respectively (Note 6) 350,541 157,008
----------- -----------
OTHER ASSETS:
Security deposits and other assets 25,983 32,344
Notes receivable - related parties (Note 7) -- 126,880
Covenant not-to-compete, net of accumulated
amortization of $1,224,080 and $1,122,059 (Note 8) -- 102,021
----------- -----------
Total other assets 25,983 261,245
----------- -----------
$ 1,381,427 $ 1,649,877
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 791,658 $ 665,897
Current portion of capital lease obligations (Note 9) 4,618 4,063
Interest payable-stockholders (Note 10) -- 3,333
Notes payable-stockholders-current portion (Note 10) -- 447,650
Notes payable-related parties (Note 14) -- 11,808
Advances from related party (Note 14) 1,022,752 --
----------- -----------
Total current liabilities 1,819,028 1,132,751
ACCOUNTS PAYABLE (Note 4) -- 14,394
CAPITAL LEASE OBLIGATIONS (Note 9) 12,286 16,904
NOTES PAYABLE - STOCKHOLDERS (Note 10) -- 52,350
----------- -----------
Total liabilities 1,831,314 1,216,399
----------- -----------
COMMITMENTS (Note 13) -- --
STOCKHOLDERS' (DEFICIENCY) EQUITY (Notes 4 and 14) (449,887) 433,478
----------- -----------
$ 1,381,427 $ 1,649,877
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
2
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED MARCH 23, 1998 AND THE YEAR ENDED MARCH 28, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET SALES $ 7,078,534 $ 8,292,484
COST OF SALES 4,795,792 5,616,354
----------- -----------
Gross profit 2,282,742 2,676,130
----------- -----------
OPERATING EXPENSES:
Selling expenses 1,294,288 1,311,985
General and administrative expenses 1,079,790 1,164,985
----------- -----------
Total operating expenses 2,374,078 2,476,967
----------- -----------
(LOSS) INCOME FROM OPERATIONS BEFORE
DEPRECIATION AND AMORTIZATION (91,336) 199,163
DEPRECIATION AND AMORTIZATION 207,130 339,053
----------- -----------
LOSS FROM OPERATIONS (298,466) (139,890)
----------- -----------
OTHER INCOME (EXPENSES):
Interest expense (141,401) (125,829)
Interest income 386 1,177
Miscellaneous income 43,159 7,735
----------- -----------
Net other (expenses) (97,856) (116,917)
----------- -----------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEMS (396,322) (256,807)
INCOME TAX PROVISION (Note 12) 800 800
----------- -----------
LOSS BEFORE EXTRAORDINARY ITEMS (397,122) (257,607)
EXTRAORDINARY ITEMS - net of tax of $0 (Notes 4 and 7):
Forgiveness of notes receivable (126,880) --
Forgiveness of debt prior to reorganization -- 1,688,693
Forgiveness of debt subsequent to reorganization -- 22,091
Direct expenses related to merger transaction (359,363) --
----------- -----------
NET (LOSS) INCOME $ (883,365) $ 1,453,177
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
3
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD ENDED MARCH 23, 1998 AND THE YEAR ENDED MARCH 28, 1997
<TABLE>
<CAPTION>
8% Series B Non- 8% Series A
Cumulative Redeemable Non-Cumulative
Voting Preferred Stock, Voting Preferred Stock,
$1.00 Stated Value $1.00 Stated Value
------------------------ -------------------------
Number Number
of Shares Amount of Shares Amount
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance, April 1 1996 3,505,333 $ 3,505,333 2,077,505 $ 2,077,505
Reorganization (Note 4):
Effects of recapitalization (3,505,333) (3,505,333) (2,077,505) (2,077,505)
Issuance of capital stock
Contribution to capital
Forgiveness of debt
Absorption of
accumulated deficit
Redemption of capital
stock (Note 15)
Issuance of capital stock to
officers (Note 14)
Net loss since
reorganization
----------- ----------- ----------- -----------
Balance, March 28, 1997 -- $ -- -- $ --
Net loss
----------- ----------- ----------- -----------
Balance, March 23, 1998 -- $ -- -- $ --
=========== =========== =========== ===========
</TABLE>
[TABLE RESTUBBED FROM ABOVE]
<TABLE>
<CAPTION>
Common Stock
--------------------------
Additional
Number Paid-in (Accumulated
of Shares Amount Capital Deficit) Total
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, April 1 1996 2,502,033 $ 250,203 $ -- $(12,341,240) $ (6,508,199)
Reorganization (Note 4):
Effects of recapitalization (2,493,944) (250,195) 5,833,033 0
Issuance of capital stock 586,880 587 526,293 0 526,880
Contribution to capital 4,942,065 4,942,065
Forgiveness of debt 1,688,693 1,688,693
Absorption of
accumulated deficit (10,652,547) 10,652,547 0
Redemption of capital
stock (Note 15) (4,577) (5) (1,609) (1,614)
Issuance of capital stock to
officers (Note 14) 19,245 19 21,150 21,169
Net loss since
reorganization (235,516) (235,516)
------------ ------------ ------------ ------------ ------------
Balance, March 28, 1997 609,637 $ 609 $ 668,385 $ (235,516) $ 433,478
Net loss (883,365) (883,365)
------------ ------------ ------------ ------------ ------------
Balance, March 23, 1998 609,637 $ 609 $ 668,385 $ (1,118,881) $ (449,887)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of the financial statements.
4
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
STATEMENTS OF CASH FLOWS
FOR THE PERIOD ENDED MARCH 23, 1998 AND THE YEAR ENDED MARCH 28, 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (883,365) $ 1,453,177
Adjustments to reconcile net (loss) income to net
cash (used in) operating activities:
Depreciation and amortization 207,130 339,053
Forgiveness of debt prior to and subsequent to reorganization -- (1,710,784)
Forgiveness of notes receivable - related parties 126,880 --
Changes in assets and liabilities:
Decrease in accounts receivable 188,196 88,097
(Increase) decrease in inventories (50,443) 166,132
Decrease (increase) in prepaid expenses and other current
assets 42,196 (21,530)
(Increase) in note receivable - related parties -- (1,184)
Decrease in other assets 6,361 16,857
Increase (decrease) in accounts payable and accrued expenses 111,367 (686,262)
(Decrease) increase in interest payable to stockholders (3,333) 3,333
----------- -----------
Net cash (used in) operating activities (255,011) (353,111)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (298,642) (53,959)
----------- -----------
Net cash (used in) investing activities (298,642) (53,959)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances from related party 1,022,752 --
(Decrease) increase in cash overdraft -- (1,385)
Principal payments on note payable -- (400,000)
Proceeds from issuance of common stock -- 400,000
Principal payments on capital lease obligations (4,063) (2,977)
Payments on notes payable from related parties (11,808) --
Proceeds from redemption of capital stock -- (1,614)
Proceeds from issuance of notes payable - stockholders 131,704 500,000
Principal payments in notes payable - stockholders (631,704) --
----------- -----------
Net cash provided by financing activities 506,881 494,024
----------- -----------
NET CHANGE IN CASH (46,772) 86,954
CASH, beginning 86,954 --
----------- -----------
CASH, ending $ 40,182 $ 86,954
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEARS FOR:
Interest $ 144,734 $ 122,496
=========== ===========
Income taxes $ 800 $ 800
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
5
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Organization
Merchandise Sales, Inc. dba Artmaster Studios (the "Company") is a
manufacturer and distributor of wall artwork and lighting products
and has been operating since 1956.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable
The Company maintains a financing arrangement with a factoring
company. The factor provides financing based on a percentage of
eligible customer accounts. In exchange for cash advances made by the
Factor on customer accounts, the Company transfers all of its
customer accounts receivable and subsequent collections to the
Factor. The factoring agreement contains certain covenants regarding
the quality of the accounts receivable portfolio, as well as other
covenants.
Inventories
Inventories are stated at the lower of cost or market using a
standard cost method which approximates the first-in, first-out
method.
Property and Equipment
Property and equipment are stated at cost. Improvements are
capitalized while repairs and maintenance are charged to expense as
incurred. Depreciation expense has been provided for on a
straight-line basis over the estimated useful lives of the assets
which range from three to five years. Upon the sale or retirement of
property and equipment, the accounts are relieved of the cost and
related accumulated depreciation and any resulting gain or loss is
included in income.
Covenant Not-to-Compete
Contracts entered into in connection with the acquisition of a
predecessor company are amortized on a straight-line basis over the
terms of the agreements (See Note 8).
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes".
This statement requires recognition of deferred tax liabilities and
assets for the expected future tax
6
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Income Taxes - (continued)
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred liabilities
and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities, using
enacted tax rates in effect for the year in which the differences are
expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be
realized.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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 those estimates.
Concentration of Risk
The Company maintains its cash accounts with established commercial
banks. Cash deposits in financial institutions may, from time to
time, exceed federally insured limits.
The Company sells its products and extends credit to customers in the
retail industry. Also, the Company factors a significant portion of
its receivables with one factoring company. The Company's receivables
are exposed to concentration of credit risk in the event of
noncompliance by its customers or factor. To reduce credit risk, the
Company performs customary credit evaluations of its customers and
factoring company.
Royalties
The Company has royalty agreements with artists for designs used by
the Company for its products. The terms commence on the date of
product introduction into the market, and terminate upon, the
discontinuance of the product from the product line, or in five years
from date of first sale, or upon payment of ten thousand dollars in
royalties per term, whichever occurs first. Artists are paid a design
royalty equal to an average of 3% of the net sales for the products
designed by the artist. Payments are paid to artists within 30 days
of the close of each calendar month. In 1998 and 1997, approximately
$50,000 and $53,000, respectively, in royalty fees expense was
incurred by the Company.
7
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Product Warranty
The Company warrants to the consumer that its products are free from
defects in material workmanship (except for the glass parts) for a
period of 90 days from the date of original purchase when used in
compliance with directions as outlined in the manufacturers
instructions. Warranty costs related to products are charged to
operations in the period in which the related revenue is recognized.
Reclassification
Certain reclassifications have been made to the March 28, 1997
financial statements to conform with the March 23, 1998 financial
statement presentation without affecting net loss as previously
recorded.
Accounting Period
The reporting period for the Company is the 52 or 53 week period
ending on the last Friday closest to March 31. For the 1997 fiscal
year, the year end was March 28, 1997. For the 1998 fiscal year, the
financial statements have been audited for the period from March 29,
1997 to March 23, 1998, the date of merger.
NOTE 3 - MERGER
On March 23, 1998, the Company entered into an Agreement and Plan of
Merger ("Agreement") with Interiors, Inc. ("Interiors") and a
wholly-owned subsidiary, Artmaster Studios, Inc. ("Artmaster
Studios"), pursuant to which all of the outstanding shares of the
Company were acquired by Interiors. In addition, as part of the
transaction the Company merged into Artmaster Studios. Under the
terms of the Agreement, Artmaster Studios, will be the surviving
company and Merchandise Sales dba Artmaster Studios will cease to
exist.
8
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 3 - MERGER - CONTINUED
In connection with the Agreement, the following occurred:
1) Interiors provided funds to the Company which were used to pay
off the debt owed to its stockholders, certain professional
fees, direct transaction costs related to the merger and
retention bonuses. The Company received $1,022,752 in the form
of a cash advance of $750,000 and $272,752 in exchange for a
note payable (see Note 14).
2) The Company forgave notes receivable from officers/employees in
the amount of $126,880 (see Note 7). This amount has been
included as an extraordinary item in the accompanying statements
of operations.
3) The Company incurred direct transaction expenses related to the
merger in the amount of $359,363. This amount has been included
as an extraordinary item in the accompanying statements of
operations.
4) Artmaster Studios acquired all the assets, liabilities, debts,
interests, title to property, both real and personal, rights and
duties of the Company.
5) Artmaster Studios indemnified all employees, officers and
stockholders of the Company against any losses or liabilities
from its failure to discharge debts and obligations of the
Company.
The accompanying financial statements present the financial position
and the results of the Company's operations and cash flows
immediately preceding the cessation of the Company.
NOTE 4 - REORGANIZATION
The Company has previously incurred substantial losses from
operations. As a result, the Company had generated substantial debt
obligations and an accumulated deficit of $12,341,240 at March 31,
1996, its fiscal year end. In order to improve the Company's
financial condition, effective April 22, 1996, the Company adopted a
plan of reorganization. As part of the reorganization, the Company
obtained relief from certain of its debt obligations and raised new
capital.
9
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4 - REORGANIZATION - CONTINUED
In connection with the reorganization, the Company:
a. Amended and restated its Articles of Incorporation to provide
for 20,000,000 authorized shares of common stock and 5,000,000
authorized shares of preferred stock, each with a stated value
of $0.001 per share.
b. Exchanged and combined each 1,000 outstanding shares of its
common stock, Series A preferred stock and Series B preferred
stock into one share of common stock.
c. Issued 586,880 shares of common stock at a total purchase price
of $526,880. Included in the 586,880 shares of common stock
issued were 126,880 shares which were issued in exchange for
notes receivable from officers/employees in the amount of
$126,880 (see Note 7).
d. Issued common stock purchase warrants which grant the holders
the right to purchase from the Company an aggregate of 304,985
shares of the Company's common stock at prices ranging from
$1.093 to $2.459 per share. The holders may exercise the
purchase rights at any time after the date of issuance to April
22, 2006.
e. Put in place a mechanism to prevent dilution of the rights
granted under the warrants. In the case of a reclassification on
conversion of common stock, merger, subdivisions or combinations
of common stock or dividends, the exercise price of the warrants
will be adjusted based upon a specified formula and the number
of common shares which can be purchased will also be adjusted.
In lieu of exercising the warrant, the holder may elect to
receive shares equal to the value of the warrant (or portion
thereof) based upon the fair market value of common stock at the
time of exercise.
10
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4 - REORGANIZATION - CONTINUED
In addition, the Company negotiated substantial debt forgiveness as
follows:
Notes payable to shareholders, inclusive
of accrued interest of $1,417,488 $4,942,065
Collateralized senior demand promissory
note to a bank 1,235,693
Accounts payable - vendors - see below 475,091
----------
$6,652,849
==========
During the year ended March 28, 1997, the Company reached agreements
with certain vendors whereby accounts payable of $475,091 were
forgiven. This amount consists of $453,000 forgiven prior to the
reorganization and $22,091 forgiven subsequent to the reorganization.
These amounts are included as part of the extraordinary items in the
accompanying statements of operations.
As a result of the debt forgiveness, a contribution to capital in the
amount of $4,942,065 has been reflected in the accompanying
statements of stockholders' equity (deficiency) and $1,710,784 has
been included as an extraordinary item in the accompanying statements
of operations due to the non-taxability of the forgiveness of debt.
11
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 - INVENTORIES
Inventories consist of the following:
March 23, March 28,
1998 1997
--------- ---------
Raw materials $ 349,278 $ 387,751
Work in progress 156,747 31,552
Finished goods 314,386 332,656
--------- ---------
820,411 751,959
Less: provision for inventory obsolescence (158,183) (140,174)
--------- ---------
$ 662,228 $ 611,785
========= =========
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 23, March 28,
1998 1997
Machinery and equipment $ 487,676 $ 219,618
Computer hardware and software 155,007 129,914
Leasehold improvements 179,830 179,830
Furniture and fixtures 41,151 41,151
--------- ---------
863,664 570,513
Less: accumulated depreciation and amortization (513,123) (413,505)
--------- ---------
$ 350,541 $ 157,008
========= =========
Depreciation expense for the period ended March 23, 1998 and the year
ended March 28, 1997 amounted to $105,109 and $94,237, respectively.
12
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 - PROPERTY AND EQUIPMENT - CONTINUED
Included above is a lease for equipment which has been capitalized.
The capitalized value amounts to $23,944 and $23,944 less accumulated
depreciation of $8,380 and $3,519 as of March 23, 1998 and March 28,
1997, respectively.
NOTE 7 - NOTES RECEIVABLE - RELATED PARTIES
In connection with the reorganization, the Company issued 126,880
shares of common stock to officers/employees in exchange for notes
receivable in the amount of $126,880 (see Note 4). The notes were
forgiven upon the completion of the merger transaction (see Note 3).
NOTE 8 - COVENANT NOT-TO-COMPETE
Covenant not-to-compete and the related accumulated amortization
are as follows:
March 23, March 28,
1998 1997
----------- -----------
Covenant not-to-compete $ 1,224,080 $ 1,224,080
Less: accumulated amortization (1,224,080) (1,222,059)
----------- -----------
$ -- $ 102,021
=========== ===========
Amortization expense for the period ended March 23, 1998 and the year
ended March 28, 1997 amounted to $102,021 and $244,816, respectively.
13
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 9 - OBLIGATION UNDER CAPITAL LEASE
The Company leases certain equipment under a capital lease which
expires in May 2001. The minimum future commitments under this
noncancelable lease as of March 23, 1998 are as follows:
Period ended March 28,
1999 $ 6,528
2000 6,528
2001 6,528
2002 1,088
-------
Total minimum lease payments 20,672
Less amount representing interest 3,768
-------
Present value of net minimum lease payments 16,904
Less current portion 4,618
-------
$12,286
=======
In connection with the merger, the obligations of the Company
have been assumed by Artmaster Studios (see Note 3).
14
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 10 - NOTE PAYABLE STOCKHOLDERS
At March 28, 1997, the Company was obligated to two stockholders
under notes payable totaling $500,000 bearing interest at 10%
per annum. The first note, in the amount of $400,000 required
monthly principal and interest payments based on a three year
amortization schedule, with final payment of principal and
interest due on October 22, 1997. The second note, in the amount
of $100,000, required payments of principal and interest in six
equal quarterly installments commencing July 1, 1997. The notes
were secured by all the assets of the Company. As of March 23,
1998, all the notes were fully paid off (see Note 3).
Total interest expense incurred on these notes payable for the
period ended March 23, 1998 and the year ended March 28, 1997
amounted to $54,167 and $37,500, respectively.
NOTE 11 - CONTRIBUTION PLAN
The Company provides a defined contribution 401(k) plan to
substantially all employees. Employees may contribute up to 15%
of gross wages subject to the IRS annual limit. The Company
matches employee contribution on an elective basis. Effective
January 1, 1996, the Company suspended its employer matching
contributions to the plan.
NOTE 12 - INCOME TAXES
The income tax provision at March 23, 1998 and March 28, 1997
consists of state taxes of $800, all of which is current.
At March 23, 1998, the Company had net operating loss
carryforwards of approximately $8,473,400 and $4,400,700 for
federal and California tax purposes, respectively. These
carryovers will expire through 2018. In addition, the merger
discussed in Note 3 included an ownership change which caused
utilization of the net operating loss carryforwards to be
subject to annual statutory limitations.
Deferred tax assets: Federal California
----------- ----------
Net operating loss carryforward $ 8,473,400 $4,400,700
Effective tax rate 34% 8.84%
---------- ---------
Deferred tax benefit 2,881,000 389,000
Valuation allowance (2,881,000) (389,000)
----------- ----------
Deferred tax asset $ -- $ -
=========== ==========
15
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 13 - COMMITMENTS
Facility Leases
The Company leases office, show room and manufacturing
facilities under both cancelable and noncancelable operating
leases, with terms ranging from monthly to five years. Certain
leases require payment of various expenses incidental to the use
of the property, and contain inflation escalation clauses. Most
leases have renewal options.
The base monthly rental at March 23, 1998 amounts to $37,219,
inclusive of leases on monthly terms.
The minimum leases commitments at March 23, 1998 are as follows:
Period ended March 28,
- ----------------------
1999 $342,500
2000 347,000
2001 107,900
2002 35,200
--------
$832,600
========
Facilities rent expense for the period ended March 23, 1998 and
year ended March 28, 1997 amounted to $447,782 and $441,325,
respectively.
Equipment Leases
The Company also leases certain equipment under various
operating leases expiring through 2002. The base monthly rental
at March 23, 1998, amounts to $2,334.
The minimum lease commitments at March 23, 1998 are as follows:
Period ended March 28,
- ----------------------
1999 $28,000
2000 23,300
2001 14,600
2002 10,000
-------
$75,900
=======
Equipment rent expense for the period ended March 23, 1998 and
year ended March 28, 1997 amounted to $21,962 and $12,893,
respectively.
In connection with the merger, the Company's commitments have
been assumed by Artmaster Studios (see Note 3).
16
<PAGE>
MERCHANDISE SALES, INC. DBA ARTMASTER STUDIOS
NOTES TO THE FINANCIAL STATEMENTS
NOTE 14 - RELATED PARTY TRANSACTIONS
During the year ended March 28, 1997, certain officers of the
Company elected to forgo a portion of their salaries in exchange
for either a note payable or equity in the Company. Two officers
elected to exchange their salaries for 19,245 shares of common
stock with a value of $21,169, while three officers elected to
accept notes totaling $11,808. As of March 23, 1998 the notes
were paid off.
In March 1998, the Company received a cash advance of $1,022,752
from Interiors. The cash advance is unsecured, non-interest
bearing and due on demand. All funds received from the cash
advance were used in conjunction with the merger discussed in
Note 3.
NOTE 15 - REDEMPTION OF CAPITAL STOCK
During the year ended March 28, 1997, the Company redeemed 4,577
shares of its common stock for $1,614.
NOTE 16 - NON-CASH FINANCING ACTIVITIES
The Company's non-cash financing activities are as follows:
March 23, March 28,
1998 1997
-------- -----------
Issuance of common stock for
notes receivable - related parties (Note 7) $ -- $ 126,880
======== ==========
Capital contributions from forgiveness
of notes payable - shareholders (Note 4) $ -- $4,942,065
======== ==========
Capital lease obligation for equipment (Note 9) $ -- $ 23,944
======== ==========
Issuance of common stock in lieu of wages (Note 14) $ -- $ 21,169
======== ==========
Issuance of notes payable -
related parties in lieu of wages (Note 14) $ -- $ 11,808
======== ==========
Forgiveness of notes receivable -
related parties (Note 7) $126,880 $ --
======== ==========
17
<PAGE>
EXHIBIT 4 - PRO FORMA FINANCIAL INFORMATION
The following Pro Forma Combined Financial Information as of June 30, 1997 and
the year then ended and as of March 31, 1998 and for the nine months then ended
for Interiors, Inc. and comparable periods for the Combined Companies has been
prepared to reflect the combined financial position and the results of
operations of Interiors, Inc. ("Interiors") , Henlor, Inc. and subsidiaries DBA
Vanguard Studios ("Vanguard"), Merchandise Sales, Inc. DBA Artmaster Studios
(Artmaster) and Decor Group, Inc. (Decor) as if the combination, described in
Note 1, had been effective as of June 30,1997 and July 1, 1996 (for one year
operations), March 31,1998, July 1, 1997 (for nine months operations),
respectively. The acquisitions of Vanguard and Artmaster and the probable
acquisition of Decor have been accounted for as purchases and the excess of
purchase price over fair value of assets acquired, $7,456,000 if the
acquisitions had all occurred as of June 30, 1997, will be reflected as an
intangible asset and will be amortized over fifteen years.
The Pro Forma Combined Financial Information is unaudited and not necessarily
indicative of the consolidated results which actually would have occurred if
the combination had been consummated at the beginning of the periods presented,
nor does it purport to represent the future financial position and results of
operations for future periods.
1
<PAGE>
Pro Forma Historical Financial Information for Interiors and Combined Companies
<TABLE>
<CAPTION>
BALANCE SHEET Interiors Vanguard Artmaster Decor Adjustments Combined
6/30/97 7/31/97 3/28/97 3/31/97
$(000) $(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 271 $ 72 $ 87 $ 170 $ 600
Accounts receivable, net 947 1,932 454 1,118 4,451
1,521 1,799 612 960 256 a 5,147
Inventories
Other current assets 898 112 79 106 1,195
Total current assets 3,637 3,915 1,232 2,353 11,393
INVESTMENTS 3,977 (2,837) c 1,140
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 1,546 1,059 350 258 3,213
Furniture and fixtures 144 357 41 122 664
Leasehold improvments 213 829 180 137 1,359
Land and Building 247 247
Total property and equipment 1,904 2,492 571 517 5,483
Less-Accumulated depreciation 1,019 1,977 414 401 3,810
Net property and equipment 885 515 157 116 1,673
PURCHASE PRICE IN EXCESS OF BOOK
VALUE OF ACQUIRED COMPANIES 2,026 7,456 abc 9,482
OTHER ASSETS 263 131 261 814 (127) b 1,343
Total assets $ 8,762 $ 4,561 $ 1,650 $ 5,309 $ 25,031
</TABLE>
The accompanying notes and management's assumptions to the Pro Forma
Combined Financial Information are an integral part of these statements
2
<PAGE>
Pro Forma Historical Financial Information for Interiors and Combined Companies
(in thousands)
<TABLE>
<CAPTION>
BALANCE SHEET Interiors Vanguard Artmaster Decor Adjustments Combined
6/30/97 7/31/97 3/28/97 3/31/97
$(000) $(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes & Current Maturities of LTD $ 1,637 $ 2,421 $ 4 $ 362 271 a $ 4,695
Accounts payable and accrued liabilities 2,100 1,346 666 569 955 abc 5,636
Due to related parties 463 (463) b
Total current liabilities 3,737 3,768 1,133 931 10,331
NON-CURRENT LIABILITIES:
Notes & Loans Payable 908 464 31 651 4,318 ab 6,373
Due to related parties 294 52 (347) ab
Total non current liabilities 908 758 84 651 6,373
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock 11 2 (2) c 11
Common Stock 7 1 1 1 abc 9
Additional paid-in-capital 13,217 90 668 6,459 (3,010) abc 17,424
Retained deficit (8,679) (55) (236) (956) 1,246 abc (8,679)
Other items (438) (1,779) 1,779 c (438)
Total stockholders' equity 4,118 35 433 3,727 8,327
Total liabilities and stockholders' equity $ 8,762 $ 4,561 $ 1,650 $ 5,309 $ 25,031
</TABLE>
The accompanying notes and management's assumptions to the Pro Forma
Combined Financial Information are an integral part of these statements.
3
<PAGE>
Pro Forma Historical Financial Information for Interiors and Combined Companies
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS Interiors Vanguard Artmaster Decor Adjustments Combined
yr. end 9mo. end yr. end yr. end
6/30/97 7/31/97 3/28/97 3/31/97
<S> <C> <C> <C> <C> <C> <C>
SALES AND OTHER REVENUES: $(000) $(000) $(000) $(000) $(000) $(000)
Net sales $ 4,652 $ 9,700 $ 8,292 $ 2,003 $ (75) c $ 24,573
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 2,003 25,857
EXPENSES:
Cost of goods sold 3,076 6,099 5,955 991 16,120
Selling, general, and administrative 2,570 3,380 2,477 1,527 (75) c 9,879
Amortization of Intangibles 98 441 abc 539
Total Expenses 5,646 9,479 8,432 2,616 26,538
Income (loss) from operations 291 222 (140) (613) (681)
GAIN ON SALE OF 201 201
INVESTMENT
OTHER INCOME (EXPENSE), Net 0 163 8 170
INTEREST EXPENSE (405) (321) (125) (243) (297) ab (1,391)
Income (loss) from operations
before (benefit) provision for taxes 87 64 (257) (856) (1,701)
(BENEFIT) PROVISION FOR TAXES (19) 4 1 (15)
Income (loss) from operations $ 106 $ 60 $ (258) $ (856) $ (1,686)
Basic EPS $ .02 ($ .25)
Diluted EPS $ .02 ($ .25)
Shares (000) 4,527 2,308 6,836
Shares (000) 4,527 2,308 6,836
</TABLE>
The accompanying notes and management's assumptions to the Pro Forma
Combined Financial Information are an integral part of these statements.
4
<PAGE>
PRO FORMA INTERIM FINANCIAL INFORMATION FOR INTERIORS AND COMBINED COMPANIES
<TABLE>
<CAPTION>
BALANCE SHEET Interiors Decor Adjustments Combined
3/31/98 12/31/97
<S> <C> <C> <C> <C>
ASSETS $(000) $(000) $(000) $(000)
CURRENT ASSETS:
Cash $ 1,739 $ 23 $ - $1,762
Accounts receivable, net 3,164 789 - 3,953
Inventories 4,230 884 - 5,114
Other current assets 984 194 - 1,178
Total current assets 10,117 1,890 - 12,007
INVESTMENTS 3,977 - (2,837) c 1,140
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 2,078 242 - 2,320
Furniture and fixtures 209 291 - 500
Leasehold improvements 345 - - 345
Total property and equipment, at cost 2,632 533 - 3,165
Less-Accumulated depreciation 1,420 431 - 1,851
Net property and equipment 1,212 102 - 1,314
OTHER ASSETS 1,083 21 - 1,104
PURCHASE PRICE IN EXCESS OF BOOK
VALUE OF ACQUIRED COMPANIES
5,836 2,200 3,181 c 11,217
Total assets $ 22,225 $ 4,214 $ 344 c $ 26,783
</TABLE>
The accompanying notes and management's assumptions to the Pro Forma
Combined Financial Information are an integral part of these statements.
5
<PAGE>
PRO FORMA INTERIM FINANCIAL INFORMATION FOR INTERIORS AND COMBINED COMPANIES
<TABLE>
<CAPTION>
BALANCE SHEET Interiors Decor Adjustments Combined
3/31/98 12/31/97
$(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes & Current Maturities of LTD $ 5,067 $ 566 $ - $ 5,633
Accounts payable and accrued liabilities 4,822 785 125 c 5,732
Due to related parties - -
Total current liabilities 9,889 1,351 - 11,365
NON-CURRENT LIABILITIES:
Notes & Loans Payable 5,295 623 - 5,918
Total non current liabilities 5,295 623 - 5,918
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock 8 2 (2) c 8
Common Stock 18 0 1 c 19
Additional paid-in-capital 16,810 6,547 (4,089) c 19,268
Retained deficit (8,847) (3,647) 3,647 c (8,847)
Other items (948) (661) 661 c (948)
Total stockholders' equity 7,041 2,240 - 9,500
Total liabilities and stockholders' equity $ 22,225 $ 4,214 $ 344 $ 26,783
</TABLE>
The accompanying notes and management's assumptions to the Pro Forma
Combined Financial Information are an integral part of these statements.
6
<PAGE>
PRO FORMA INTERIM FINANCIAL INFORMATION FOR INTERIORS AND COMBINED COMPANIES
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS Interiors Vanguard Artmaster Decor Adjustment Combined
9 mo. to 7 mo. to 9 mo. to 9 mo. to
3/31/98 2/28/98 12/23/97 12/31/97
$(000) $(000) $(000) $(000) $(000) $(000)
<S> <C> <C> <C> <C> <C> <C>
SALES AND OTHER REVENUES: $ 6,225 $ 7,832 $ 5,469 $ 3,797 $ (45) c $ 23,278
EXPENSES:
Cost of goods sold 3,775 5,205 3,556 1,894 - 14,430
Selling, general, and administrative 1,597 2,573 1,949 3,314 (45) c 9,388
Amortization of Intangibles 86 451 abc 537
Total Expenses 5,372 7,778 5,505 5,294 - 24,355
Income (loss) from operations 853 54 (36) (1,497) - (1,077)
LOSS ON SALE OF INVESTMENT (1,113) 1,113 c 0
OTHER INCOME (EXPENSE), Net 7 (3) 37 5 - 46
INTEREST INCOME (EXPENSE), Net (483) (217) (104) (78) (259) abc (1,140)
Income (loss) from operations
before (benefit) provision for taxes 377 (166) (103) (2,683) - (2,171)
PROVISION FOR TAXES 15 - - 9 - 24
Net Income (loss) from operations $ 362 $ (166) $ (103) $ (2,692) $ - $ (2,195)
Basic EPS $ .06 $ (.27)
Diluted EPS $ .06 $ (.26)
Basic Shares (000) 5,839 2,308 8,147
Diluted Shares (000) 6,161 2,308 8,469
</TABLE>
The accompanying notes and management's assumptions to the Pro Forma
Combined Financial Information are an integral part of these statements.
7
<PAGE>
INTERIORS, INC. and Combined Companies
As of June 30, 1997 and for the year then ended as of March 31, 1998 and for
the nine months then ended for Interiors, Inc.; as of comparable periods for
the Combined Companies
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
PRO FORMA COMBINED FINANCIAL INFORMATION
1. Basis of Presentation
On March 10, 1998 Interiors acquired Vanguard. On March 23, 1998 Interiors
acquired Artmaster. On April 21, 1998 Interiors and Decor agreed on terms for
Interiors to acquire the outstanding Common Stock of Decor. These acquisitions
and probable acquisition have been accounted for as purchases. The excess of
purchase price over fair value of assets acquired of $7,456,000, if the
acquisitions had all occurred as of June 30, 1997, is reflected as an
intangible asset and is being amortized over fifteen years.
The above Pro Forma Combined Financial Information as of June 30, 1997 and the
year then ended and as of March 31, 1998 and for the nine months then ended for
Interiors, Inc. and comparable periods for the Combined Companies has been
prepared to reflect the combined financial position and the results of
operations of Interiors, Inc. ("Interiors") , Henlor, Inc. and subsidiaries DBA
Vanguard Studios ("Vanguard"), Merchandise Sales, Inc. DBA Artmaster Studios
(Artmaster) and Decor Group, Inc. (Decor) as if the combination had been
effective as of June 30,1997 and July 1, 1996 (for one year operations), and
March 31, 1998, July 1, 1997 (for nine months operations), respectively.
This Pro Forma Combined Financial Information should be read in conjunction
with the audited historical financial statements and notes thereto of
Interiors, as of June 30, 1997 and for the year then ended; Vanguard, as of
July 31, 1997 and for the nine months then ended, and Decor as of March 31,
1997 and for the year then ended. It should also be read in conjunction with
the unaudited interim period financial statements and notes thereto of
Interiors, as of March 31, 1998 and for the nine months then ended (Interiors
Form 10QSB); Vanguard, as of February 28, 1998 and for the seven months then
ended and Decor as of December 31, 1997, and for the nine months then ended
(Decor Form 10QSB).
In management's opinion, all material adjustments necessary to reflect the
effects of the combination have been made.
The unaudited Pro Forma Combined Financial Information is not necessarily
indicative of what actual results of operations of the Company would have been
assuming the combination had been completed as of July 1, 1996 and July 1,
1997, respectively, nor is it necessarily indicative of the results of
operations for future periods.
2. Adjustments to Pro Forma Combined Financial Information
Adjustments were made in order to reflect:
(a) The acquisition of Vanguard for a cash payment of $705,621, an 8% Henlor,
Inc. subordinated promissory note in the amount of $794,379, 299,581
unregistered shares of Interiors Common Stock valued at $500,000 and the
repayment of indebtedness of Vanguard owed to the principal shareholders
of Henlor in the amount of $294,379. The cash payments were financed by
debt of $1,000,000, with an assumed interest rate of 15% per annum.
Elimination of related party debt and all equity on Vanguard books as well
as an accrual of $450,000 of acquisition expenses and reserves resulted in
a purchase price in excess of net fair value of assets acquired of
$3,394,000 if the combination occurred as of June 30, 1997. Adjustments
for interest expense at the rates stated above and amortization of
intangibles over 15 years were made to results of operations.
8
<PAGE>
(a) The acquisition of Artmaster for an Interiors, Inc. 10% subordinated
promissory note in the amount of $537,248, 779,302 unregistered shares of
Interiors Common Stock valued at $1,250,000 and the repayment of
indebtedness of Artmaster owed to the principal shareholders of Artmaster
in the amount of $1,022,752 through a cash payment of $750,000 and an
Interiors, Inc. 10 % subordinated promissory note in the amount of
$272,752. The cash payment was indirectly financed by debt of $750,000,
with an assumed interest rate of 15% per annum. Elimination of related
party assets and debt and all equity on Artmaster books as well as an
accrual of $380,000 of acquisition expenses resulted in a purchase price
in excess of net fair value of assets acquired of $2,368,000 if the
combination occurred as of June 30, 1997. Adjustments for interest expense
at the rates stated above and amortization of intangibles over 15 years
were made to results of operations.
(b) The probable acquisition of that portion of Decor not already owned by
Interiors has been proposed as a swap of two Decor shares of Common stock
for one share of Interiors Common Stock. Interiors Common Stock had a
market value of about $2 per share at the time the related agreement was
made, so this value was used for purposes of the Pro Forma Combined
Financial Information. As of December 31, 1997 Decor had 1,709,176 common
shares outstanding and 250,000 series A convertible (at 3 for 1) preferred
stock outstanding, not owned by Interiors. This is equivalent to 2,459,176
shares of Decor, 1,229,588 shares of Interiors or $2,459,176 with
Interiors at $2 per share. Elimination of related party debt and all
equity on Decor books as well as an accrual of $125,000 of acquisition
expenses resulted in a purchase price in excess of net fair value of
assets acquired of $1,694,000 if the combination occurred as of June 30,
1997 and $3,181,000 if it occurred as of March 31, 1998, based on Decor's
December 31, 1997 balance sheet. Adjustments for amortization of
intangibles over 15 years were made to results of operations. During the
nine months ended December 31, 1997 Decor sold Interiors stock it owned
and incurred a loss of $1,113,000. Since a company cannot have a gain or
loss on the sale of its own securities and the Pro Forma Interim Financial
Information Statements of Operations are based on the assumption that
Interiors purchased Decor prior to the sale of stock, the loss has been
eliminated for Pro Forma purposes.
9
