UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For Six Month Period Ended December 31, 1997.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to .
Commission File No. 0-24352
INTERIORS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3590047
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
320 Washington Street, Mt. Vernon, New York 10553
(Address of principal executive offices) (zip code)
Issuer's Telephone Number: (914) 665-5400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
The number of shares outstanding of the issuer's Class A Common Stock and Class
B Common Stock as of February 11, 1998 was 6,240,822 and 469,750, respectively.
Transitional Small Business Disclosure Format (check one). Yes . No
X .
<PAGE>
INTERIORS, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Balance Sheet as of December 31, 1997..........................................2
Statements of Operations -
For the Three Months Ended December 31, 1997 and 1996.(Consolidated)...........3
For the Six Months Ended December 31, 1997 and 1996 (Consolidated).............4
Statement Changes in Stockholders Equity -
For the Six Months Ended December 31, 1997.....................................5
Statements of Cash Flows -
For the Six Months Ended December 31, 1997 and 1996.(Consolidated)............ 6
Notes to Consolidated Financial Statements.....................................7
Item 2. Management's Discussion and Analysis.................................15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................20
Item 2. Changes in Securities................................................22
Item 3. Defaults Upon Senior Securities......................................22
Item 4. Submission of Matters to a Vote of Security Holders..................22
Item 5. Other Information....................................................22
Item 6. Exhibits and Reports on Form 8-K.....................................22
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements included herein have been prepared by
Interiors, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
statements include all adjustments necessary to present fairly the financial
condition of the Company as of December 31, 1997 and the results of operations
for the six month period ended December 31, 1997 and 1996.
The Company's results of operations during the six months ended December 31,
1997 are not necessarily indicative of any future results. It is suggested that
the financial statements included in this report be read in conjunction with the
financial statements and notes thereto in the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1997.
1
<PAGE>
INTERIORS, INC.
BALANCE SHEET
(unaudited)
December 31, 1997
<TABLE>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash 328,261
Accounts receivables -
Trade, net allowance of $268,000 1,677,947
Inventories 1,490,015
Prepaid expenses and other current assets 962,814
---------
Total current assets 4,459,037
---------
INVESTMENTS
Investments 3,976,679
---------
Total investments 3,976,679
---------
PROPERTY AND EQUIPMENT, at cost
Machinery and equipment 1,607,386
Furniture and fixtures 144,297
Leasehold improvements 213,010
---------
Total property and equipment, at cost 1,964,693
Less- Accumulated depreciation and
amortization 1,280,771
---------
Net property and equipment 683,922
OTHER ASSETS 250,549
----------
Total assets $9,370,187
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of
long-term debt 1,978,620
Accounts payable and accrued liabilities 2,285,904
---------
Total current liabilities 4,264,524
---------
NON-CURRENT LIABILITIES:
Notes Payable 890,000
Loan Payable 16,415
----------
Total non-current liabilities 906,415
----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
5,300,000 shares authorized,
1,147,060 shares issued and outstanding 11,471
Class A common stock, $.001 par value,
30,000,000 shares authorized,
5,091,241 shares issued and outstanding 5,091
Class B common stock, $.001 par value,
2,500,000 shares authorized,
469,750 shares issued and outstanding 470
Additional paid-in-capital 13,418,908
Accumulated deficit (8,798,812)
Treasury Stock (380)
Notes receivable (437,500)
----------
Total stockholders' equity 4,199,248
----------
Total liabilities and stockholders' equity $9,370,187
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet
2
<PAGE>
INTERIORS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(unaudited)
<TABLE>
1997 1996
---- ----
<S> <C> <C>
NET SALES $2,318,083 $873,865
COST OF GOODS SOLD 1,441,213 504,251
---------- ---------
Gross profit from continuing operations 876,870 369,614
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 547,923 384,102
---------- ---------
Operating expenses 547,923 384,102
Income (loss) from continuing operations
before interest and provision for taxes 328,947 (14,488)
INTEREST EXPENSE (including financing charges) 113,312 83,010
---------- ---------
Income (loss) from continuing operations
before provision for taxes 215,635 (97,498)
PROVISION FOR INCOME TAXES 13,000 9,973
---------- ---------
Income (loss) from continuing operations 202,635 (107,471)
DISCONTINUED OPERATIONS (Note 3)
Loss from operations of discontinued operations 0 0
Loss from discontinued operations 0 0
---------- ---------
NET INCOME (LOSS) $202,635 ($107,471)
========== =========
BASIC EARNINGS PER SHARE
CONTINUING OPERATIONS $0.04 ($0.03)
DISCONTINUED OPERATIONS $0.00 $0.00
---------- ---------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $0.04 ($0.03)
========== =========
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 5,560,991 4,261,435
DILUTED EARNINGS PER SHARE
CONTINUING OPERATIONS $0.04 ($0.03)
DISCONTINUED OPERATIONS $0.00 $0.00
---------- ---------
NET INCOME ( LOSS) PER SHARE OF COMMON STOCK $0.04 ($0.03)
========== =========
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 5,560,991 4,261,435
The accompanying notes are an integral part of these financial statements
</TABLE>
3
<PAGE>
<TABLE>
INTERIORS, INC.
STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(unaudited)
1997 1996
---- ----
<S> <C> <C>
NET SALES $3,835,865 $2,053,035
COST OF GOODS SOLD 2,397,416 1,125,704
--------- ---------
Gross profit from continuing operations 1,438,449 927,331
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 889,092 872,173
--------- ---------
Operating expenses 889,092 872,173
Income (loss) from continuing operations
before interest and provision for taxes 549,357 55,158
INTEREST EXPENSE (including financing charges) 225,814 160,250
--------- ---------
Income (loss) from continuing operations
before provision for taxes 323,543 (105,092)
PROVISION FOR INCOME TAXES 13,000 9,973
--------- ---------
Income (loss) from continuing operations 310,543 (115,065)
DISCONTINUED OPERATIONS (Note 3)
Loss from operations of discontinued operat 0 0
---------- ---------
Loss from discontinued operations 0 0
---------- ---------
NET INCOME (LOSS) $310,543 ($115,065)
========== =========
BASIC EARNINGS PER SHARE
CONTINUING OPERATIONS $0.06 ($0.03)
DISCONTINUED OPERATIONS $0.00 $0.00
---------- ---------
NET INCOME (LOSS) PER SHARE OF COMMON STOCK $0.06 ($0.03)
========== =========
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 5,560,991 4,261,435
DILUTED EARNINGS PER SHARE
CONTINUING OPERATIONS $0.06 ($0.03)
DISCONTINUED OPERATIONS $0.00 $0.00
---------- ---------
NET INCOME ( LOSS) PER SHARE OF COMMON STOCK $0.06 ($0.03)
========== =========
WEIGHTED AVERAGE NUMBER OF SHARES USED
IN COMPUTATION 5,560,991 4,261,435
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
<TABLE>
INTERIORS, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
(unaudited)
Series A Class A Class B
Additional Retained
Preferred Stock Common Stock Common Stock Paid-In Earnings Treasury Note
---------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount Capital (Deficit) Stock Receivable Total
--------- --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1997 1,147,060 $11,471 5,261,241 $5,261 1,769,750 $1,770 $13,216,636 ($8,679,208) ($600) ($437,500) $4,117,830
Paid in capital
adjustment 21,022 21,022
Infinity shares
sold by UCC (220,000) (220) 180,000 220 180,000
Conversion of Class
B Common shares into
Class A 50,000 50 (50,000) (50)
Escrow shares (1,250,000)(1,250) 1,250
Dividends declared
December, 1997 (430,147) (430,147)
Net income through
December 31, 1997 310,543 310,543
--------- ------- --------- ------ ----------- ------ ----------- ----------- ----- --------- ----------
BALANCE, December
31, 1997 1,147,060 $11,471 5,091,241 $5,091 469,750 $ 470 $13,418,908 ($8,798,812) ($380) ($437,500) $4,199,248
========= ======= ========= ====== =========== ====== =========== =========== ===== ========= ==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
<TABLE>
INTERIORS, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
(unaudited)
SIX MONTHS ENDED
DECEMBER 31
------------------
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES: ---- ----
<S> <C> <C>
Net Income (loss) $310,543 ($115,065)
Adjustments to reconcile net Income (loss) to net cash used in
operating activities:
Depreciation and amortization 312,058 331,836
Provision for issuance of stock 15,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, trade (731,119) 227,698
Decrease (increase) in inventories 30,814 (616,475)
Decrease (increase) in prepaid expenses and other current assets (64,423) (123,851)
Decrease (increase) in other assets 12,691 165,220
Increase (decrease) in accounts payable and accrued expenses (245,516) (837,126)
-------- --------
Net cash used in operating activities (374,952) (952,763)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,039) (306,013)
Investment in Decor Group, Inc. (826,000)
-------- --------
Net cash used in investing activities (1,039) (1,132,013)
-------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 787,761
Repayments of debt and capitalized lease obligations (354,917) (37,008)
Net proceeds from sale of Series A preferred stock, common stocks,
and warrants
Net proceeds from exercise of common stock warrants 1,292,642
Net proceeds from exercise of common and preferred stock options 825,000
-------- ---------
Net cash provided by financing activities 432,844 2,080,634
-------- ---------
Net Increase (decrease) in cash 56,853 (4,142)
CASH, beginning of period 271,408 4,142
-------- ---------
CASH, end of period $328,261 $0
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for-
Interest $159,388 $119,095
Taxes $5,973
NON-CASH FINANCING ACTIVITIES:
The accompanying notes are an integral part of these financial statements
</TABLE>
6
<PAGE>
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the Company
without audit, in accordance with generally accepted accounting principles, and
pursuant to the rules and regulations of the Securities and Exchange Commission.
All adjustments (of normal recurring nature) which are, in the opinion of
management, necessary for a fair presentation of the results of the interim
period have been included. The results of operations for the six months ended
December 31, 1997 are not necessarily indicative of those to be expected for the
entire year. The Company, for the six months ended December 31, 1997 and 1996,
used the gross profit method to value inventory.
2. ACQUISITIONS AND STRATEGIC ALLIANCES
The Company's long-term plan for growth includes in part either the acquisition
of or entering into strategic alliances with unrelated companies in the
decorative accessories industry to maximize market potential. For this purpose,
pursuant to a March 3, 1996 agreement relating to the capitalization of Decor
Group, Inc., (Decor), Decor issued to the Company 250,000 shares of its Series
A Non-Voting Convertible Preferred Stock and an option to purchase 10,000,000
shares of its Series B Non-Convertible Voting Preferred Stock (the Option
Shares) in exchange for issuance to Decor by the Company of 200,000 shares of
its Class A Common stock, (registered in 1997) and 200,000 shares of its Series
A Convertible Preferred stock (also registered in 1997) and a guarantee with
respect to certain indebtedness should such indebtedness become necessary. Also,
the Company exercised its option to purchase the Option Shares in September
1996, for total cash consideration of $2,000. Concurrent with the exercise of
this option, the Company executed a Voting Agreement (the Voting Agreement ) to
vest the power to vote the Option Shares in a Voting Trust (the Voting Trust.)
The Voting Agreement will expire upon the earlier of February 7, 2007 or upon
the Company's repayment in full of its obligations to BH Funding, LLC, (Note 3)
but in no event earlier than December 31, 1997. The Voting Trust comprises three
individuals: the Company's President and Chief Executive Officer (and also the
Chairman of the Board of Decor), and two Directors of Decor. As part of the
Company's investment in Decor, during the months of August and September 1996,
the Company purchased 54,934 shares of Decor's Series C Non-Voting, Convertible,
Preferred Stock at a cost of $824,000. In the formation of Decor, the Company's
intention was to create an affiliate with a corporate identity clearly separate
and distinct from that of the Company. Decor was organized for the purpose of
acquiring the business operations of unrelated companies. On November 12, 1996,
(the Effective Date ) a public offering by Decor of certain of its securities
was declared effective by the Securities and Exchange Commission. Subsequent to
the effective date of Decor's initial public offering, the Company owned
approximately 79.6% of the total voting stock of Decor. In December 1996, Decor
declared and issued a dividend on its common stock payable in the form of two
(2) shares of common stock for each one (1) share of common stock held as of the
record date of December 16, 1996. Each share of Decor's Series A and Series C
Preferred stock are convertible into three (3) shares of Decor=s common stock
effective December 16, 1996. During February 1997, the Company sold its entire
holdings of Series A Convertible Preferred Stock to an independent investor.
After the conversion by the subsequent holder to common stock, the Company owned
approximately 77.5% of the total voting stock of Decor. During 1997, Decor
reverse split its common stock issuing one new common share in exchange for
three prior owned common shares. As of December 31, 1997, the holding in Decor
is recorded on the Company's financial statements at the market value on
November 12, 1996, the Measurement Date of the Company's trading securities
previously transferred to Decor during March 1996, plus acquisition costs less
the proportionate value of the securities sold during February 1997. On November
5, 1997 two of the Voting Trustees resigned from the Voting Trust (the Company's
CEO remains the sole Voting Trustee).
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
(EPS), replacing the presentation of currently required primary EPS with a
presentation of basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both basic EPS and diluted EPS on
the face of the statement of income. Effective for the six months ended December
31, 1996 the Company has adopted the provisions of SFAS 128 for all periods
presented.
On October 20, 1997, the Company issued a letter of intent whereby it will
acquire the remaining shares of Decor Group, Inc. it does not currently own.
Interiors, Inc. would be the surviving corporation and all the outstanding
shares of Decor would be canceled. The merger consideration to be delivered by
Interiors, Inc. to the stockholders of Decor Group, Inc. for the shares of
common stock outstanding at the date of closing of the proposed transaction will
be an aggregate $10 million of common stock of Interiors, Inc. subject to a fair
market value adjustment which as of the date of this filing would revise the
purchase price to approximately $4,000,000 for the publicly traded Decor common
stock. There can be no assurance that the proposed transaction will be
completed.
In May 1996, the Company entered into a two year Management Services Agreement
with Decor whereby the Company will advise Decor on the manufacturing, sale,
marketing and distribution of Decor's products as well as providing Decor with
accounting and administrative services and advice on strategic planning of joint
ventures, acquisitions, and other long term initiatives. Pursuant to this
agreement, the Company will be paid on an annual basis the greater of (1)
$75,000 or (2) 1.5% of excess cashflow as defined in the agreement. The Company
and Decor amended this agreement to increase this payment to $90,000 per annum.
Additional transfers of funds from Decor to the Company will be subject to the
attainment by Decor of excess cash flow totaling $4,000,000 per year through
December 31, 1999. At December 31, 1997, the Company has accrued approximately
$96,000 of fees pursuant to this agreement. The Company received $50,000 in cash
pursuant to this for the quarter ending 12/31/97.
Decor entered into an asset purchase agreement (the Agreement) during March,
1996, with Artisan House, Inc. (Artisan House) to purchase substantially all
of the operating assets, and assume certain liabilities, of Artisan House for an
aggregate purchase price of $3,526,400, subject to certain adjustments. Decor
completed the Artisan House acquisition on November 18, 1996. Artisan House,
located in Los Angeles, California and founded in 1964, is engaged in the
design, manufacturing, and marketing of wall, table and freestanding metal
sculptures. Management believes that Artisan House's products bridge the gap
between high priced gallery art and mass produced decorative pieces. Artisan
House products retail from approximately $100 to over $400. The primary goal of
Artisan House is to supply a broad spectrum of design driven sculpture and
decorative accessories at moderate prices.
The Company entered into an agreement effective June 1, 1997, with Photo-To-Art,
Ltd. (P-2-A), a company which converts photographs into large-scale canvas oil
paintings, whereby the Company agreed to sell certain assets related to P-2-A's
process, 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. The agreement was amended as
of June 30, 1997 using the cost method of accounting to reflect an increase in
value to $1,140,000. Such amounts are reflected as an investment on the
Company's balance sheet as of December 31, 1997. P-2-A subleases 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, under the
current supply contract, sales to P-2-A for the six months ended December 31,
1997 were approximately $186,000.
On January 7, 1997 the Company entered into a letter of intent to acquire
Henlor, Inc. a privately held Los Angeles based manufacturer of wall decor and
related decorative accessories whose revenues for the twelve months ending
November 1997 was approximately $13 million. The payment terms for the purchase
calls for $1 million in cash at closing, $500,000 in a 3-year 8% note with
quarterly amortization commencing one year after the closing and $500,000 in
Company stock, restricted for two years from the closing.
Pursuant to a March 31, 1996 agreement relating to the capitalization of Decor,
Laurie Munn, wife of the Company's President and Chief Executive Officer
purchased and was issued certain shares of the Common Stock of Decor. As of
September 30, 1997, Ms. Munn was issued 100,000 shares of the outstanding common
shares of Decor, adjusted to reflect reverse splits and stock dividends as of
this date.
3. NOTES PAYABLE
At December 31, 1997, the Company has aggregate notes payable of approximately
$2,869,000. The components of these notes are discussed below.
The Company has outstanding secured formula based financing with United Credit
Corporation totaling approximately $1,636,000 at December 31, 1997. Interest is
determined at an annual rate of 16% plus related fees. The Company signed an
agreement in February, 1997, whereby it agreed to issue 100,000 shares of Class
A common stock to this lender. These shares have, to date, not been issued.
The Company has outstanding secured financing with the Bank of New York totaling
approximately $355,000 at December 31, 1997. The collateral consists of the
Company's machinery, equipment and inventory. Interest is determined at an
annual rate of prime plus 1%, (9.50% as of the date of this filing.) The Company
has agreed to reduce the outstanding principal by $10,000 per month commencing
December 1, 1997. (Previously the amount per month was $5,000.)
During November 1997 the Company received $250,000 in a loan from Ekistics Corp.
This loans is due December 31, 1998 and bears 12% interest. The loan is
collaterlized by and convertible into 50,000 shares of Photo-To-Art Ltd. common
stock. Common stock was acquired by the Company as part of its investment in
Photo-To-Art Ltd.
The Company received $600,000 of loans from BH Funding in February 1997. This
loan is to be repaid with interest on April 28, 1999. Interest is determined at
an annual rate of 15%. This loan is secured by all of the Company's Preferred
Stock in Decor. The Company paid $100,000 on January 13, 1998 toward the
reduction of principal on this loan. (See Recent Developments).
The Company had outstanding secured financing with Infinity Investors, Ltd.
totaling approximately $188,000 at September 30, 1997. The Company payed
principal and interest of $7,500 per month calculated at an annual rate of 15%
against the unpaid principal balance. This loan was secured by 600,000 shares of
the Company's Class A common stock (the "Infinity Collateral"). United Credit
Corporation, the Company's senior secured lender, 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 Infinity Collateral. The
Company consented to United Credit Corporation'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 United
Credit's disposal of the Infinity Collateral . This debt reduction totalled
$180,000 as of December 31, 1997.
The Company received a $100,000 demand loan from Laurie Munn, wife of the
Company's President and Chief Executive Officer during March 1997, at an annual
interest rate of 6.5%. This debt was repaid in October 1997.
4. COMMITMENTS AND CONTINGENCIES
The litigation relating to the termination of the 1995 employment agreement
between Ann Stevens and the Company has been settled by the execution during
July 1996, of an employment severance agreement (the "Agreement"). Pursuant to
the Agreement, the Company paid Ms. Stevens $63,000 for accrued and unpaid
compensation upon execution of the Agreement. Subsequently, for a period of
seven years, the Company will make bi-weekly payments to Ms. Stevens to total
$72,000 for the first year, $70,000 for each of the next three years, and
$50,000 for each of the final three years. As additional compensation, the
Company paid Ms. Stevens for reimbursement for certain expenses in the
approximate amount of $6,000 and $50,000 in various installments during the four
months ending December 1996.
The Company also entered into a non-compete agreement with Ms. Stevens for which
the Company will make bi-weekly payments to Ms. Stevens to total $25,000 per
year for seven years, plus automobile and insurance costs for five years. As of
June 30, 1996, the Company issued to Ms. Stevens 50,000 shares of the Company's
Class A Common Shares, which were previously committed to Ms. Stevens pursuant
to her 1995 employment agreement. As of June 30, 1996, the Company issued
1,250,000 shares of its Class B Common Shares (the "Escrow Shares") to Michael
Levine, Esq., attorney of Ms. Stevens, as escrow agent (the AEscrow Agent"). The
Escrow Agent shall abstain from voting the Escrow Shares for any purpose, except
in the event of either the failure by the Company to adhere to the payment
provisions noted above or the financial insolvency of the Company. If either
event occurs, Ms. Stevens will be in a position to elect replacement Directors.
Once the payment provisions in the severance and non-compete agreements are
satisfied, the Escrow Agent shall return the Escrow Shares to the Company. In
February 1997, the terms of the agreement with Ms. Stevens were modified to
provide for additional payments of approximately $550 per month over 18 months,
and to provide for approximately $6,000 as reimbursement for legal expenses.
During November 1997 the Company added 2,500,000 Common A shares to the Escrow
shares under the same terms and conditions of the original Escrow shares
agreement.
On January 9, 1998 Laurie Munn, wife of the Company's President and CEO,
obtained an option to purchase the above 1,250,000 Escrowed Shares which
requires payment upon exercise of the option of $500 plus a secured $500,000
Note (to be collateralized by the purchased shares) with interest at 6.5%
payable in five equal annual installments. 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 market value of such shares at the time of the purchase.
Approximately $51,000 of the purchase price is due in May of 1998. The balance
is due in annual installments through January 2005 at an interest rate of 6.6%.
The purchased stock is the collateral for this obligation.
Effective January 1, 1998 the Company entered into a five-year employment
agreement (the "Agreement") with its President and Chief Executive Officer. The
Agreement provides for an annual base salary of $150,000 commencing July 1, 1997
with annual increases of 10%. Such increases will be subject to the attainment
of profitable results of operations by the Company. In addition, the Agreement
grants the Chief Executive Officer an option to purchase at any time during the
Agreement term 150,000 shares of the Company's Series A, 10% Cumulative
Convertible Preferred Stock at a price of $2.50 per share and 250,00 shares of
Class A or Class B Common Stock at $.50 per share during the first year of
employment. This Agreement further allows additional purchases of 150,000 shares
of Common stock per year for each of the four remaining years of the Agreement
at an exercise cost which increases approximately 10% each year from the above
$.50 per share. The Agreement also contains a non-compete clause and provides
the Chief Executive Officer with life insurance and the use of an automobile.
Presently, the Chief Executive Officer draws an annual salary of $150,000.
On April 1, 1995, the Company entered into a Consulting Agreement with Morris
Munn, father of Max Munn, the Company's President and Chief Executive Officer
under which he will provide the Company with: design and fabrication of new
molds for sculpture; recommend, and implement improvements in antiquing,
woodworking, gilding and carving processes; and attend trade shows for frame
making and mold making. Fees under the agreement are payable at $54,000 per
annum for one year renewable at the Company's option. On June 30, 1996, Morris
Munn's Consulting Agreement was extended for five (5) years. Pursuant to the
terms of this new agreement, the Company agreed to issue to Morris Munn an
option to purchase up to 350,000 shares of the Company's Preferred Shares at a
net exercise price of $2.25 per share. The Preferred Shares issuable upon the
exercise of the Option were registered for sale to the public under a
Registration Statement in Form S-8 filed with the Securities and Exchange
Commission on July 3, 1996. The Option was fully exercised during July to
September 1996 generating net proceeds to the Company totaling $787,500. In
addition, the new agreement provides for bi-weekly payments to Morris Munn
totaling $54,000 per year for five years. In exchange, Morris Munn has agreed to
assist the Company with marketing, acquisitions, divestitures, joint ventures
and other strategic initiatives. In conjunction with the issuance of the Option,
the Company recorded charges against earnings of $87,500 at June 30, 1996.
During March 1997, the Company modified its agreement with Morris Munn to
provide additional monthly payments of $975 over two years for the rental of
certain machinery used by the Company in its production processes.
On February 19, 1997, the employment by the Company of Michael J. Amore as its
Vice President and Chief Financial Officer was terminated. Mr. Amore had
provided consulting services to the Company subsequent to February 19, 1997.
Beginning May 6, 1997, the Company provided Mr. Amore with severance payments
totaling approximately $10,000 over five weeks. No other liabilities exist
pursuant to Mr. Amore's separation from the Company.
Except as otherwise set forth herein, the Company has no material commitments
for capital expenditures. In order to fund growth over the long term, the
Company anticipates possible future issuance of its securities resulting in
further dilution to its securityholders
Disclosure of the Company's current legal matters are reflected at Part II, Item
1. - Legal Proceedings.
5. SHAREHOLDERS' EQUITY
In August 1995, the Company agreed to issue, at a future date, 60,000 Class A
Common shares in settlement of all current and future liabilities under a
two-year Marketing and Organizational Agreement (the "Marketing Agreement") with
a consulting firm dated January 4, 1994. The Company's Board of Directors
approved the issuance of such shares in November 1995. In conjunction with the
issuance of these shares, approximately $105,000 of charges against earnings
were recorded during the year ended June 30, 1996. On January 14, 1997, these
shares were registered by the Company with the Securities and Exchange
Commission on Form S-8.
In September 1995, the Company issued 460,000 shares of Series A, 10% Cumulative
Convertible Preferred Stock ("Preferred Stock") and 230,000 Redeemable Class WC
Warrants ("Warrants") to purchase Preferred Stock at the exercise price of $5.50
per share. The net proceeds from this Offering were approximately $1,633,000,
including over-allotments. Each share of Preferred Stock is convertible,
commencing one year from the date of issue, subject to adjustment, into three
shares of Class A Common Stock of the Company. As of the date of this filing,
independent holders of 92,940 shares of Preferred Stock have converted such
shares into 278,820 shares of the Company's Class A Common Stock.
In September 1995, the Company lowered the exercise price of the Company's Class
WA Warrant to $1.50 per share and arranged to place 180,000 shares of the
Company's Class A shares which were previously sold pursuant to a ARegulation S"
private placement into escrow. These shares were sold in January 1996 to
unrelated parties pursuant to a restructuring of a note payable by the Company
to the holder of these shares as discussed below. On July 16, 1996, the Company
filed a Registration Statement with the Securities and Exchange Commission to
register the Class WA Warrants and underlying Common A Shares. The Commission
declared this Registration Statement effective on July 19, 1996. Through the
date of this filing, 704,412 of the Company's Class WA Warrants were exercised
at $1.50 per warrant, generating proceeds to the Company totaling $1,056,618. Of
these proceeds, $811,500 was used to purchase 54,100 shares (adjusted for a
1-for-2 reverse split effected in October 1996) of Decor Group, Inc.'s Series C
Non-Voting, Convertible, Preferred Stock. The balance of the proceeds was
retained by the Company for working capital needs, for the repayment to Decor of
outstanding loans of $50,000, and for the provision of additional loans to
Decor. At September 30, 1997, the balance of loans to Decor totals $110,000. On
May 7, 1997, the Company announced that it would extend the exercise period of
its Class WA Warrant to June 22, 1998.
In December 1995, pursuant to the terms of a promissory note, the holder of such
note converted the note into 80,000 shares of Preferred Stock. Also in December
1995, and pursuant to the terms of another promissory note, 35,000 shares of the
Company's Class A Common Stock were issued to the lender. Approximately $25,000
was charged against earnings during the quarter ended December 1995 in
conjunction with the issuance of these shares.
In January 1996, the Company's Board of Directors elected to lower the exercise
price of the Company's Class WB Warrant to $2.00 per Class A Common share,
subject to the filing and effectiveness of a Registration Statement with the
Securities and Exchange Commission. Such Registration Statement was filed with
the Commission on July 16, 1996 and declared effective on July 19, 1996. Through
the date of this filing, 118,012 of the Company's Class WB Warrants were
exercised at an exercise price of $2.00 per option generating proceeds to the
Company of $236,024. These proceeds were used by the Company to support working
capital needs and for the provision of loans to Decor Group, Inc.
In February 1996, the Company's Board of Directors declared a stock dividend
equivalent to $0.25 per share to its Series A 10% Cumulative Convertible
Preferred Stockholders of record as of the close of business on February 23,
1996 (the record date.) Payment was made on March 1, 1996 by the issuance of
0.10231 of a share of the Company's Class A Common Stock for each share of
Series A Preferred Stock held of record on the record date. Accordingly, 55,247
shares of the Company's Class A Common Stock was issued for this purpose.
Retained earnings was charged $165,741 in March 1996 in conjunction with the
issuance of these shares. The Company has declared a record date of December 10,
1997 for a dividend on its Series A 10% Cumulative Convertible Preferred Stock
for the six month periods ending September 1996, March 1997 and September 1997.
The dividend ($.75 per Preferred Share) was paid on January 10, 1998 in the form
of the Company's Common A Shares. Accordingly, shares of the Company's Class A
Common Stock was issued for this purpose. Retained earnings was charged $286,765
in December 1997 in conjunction with the issuance of these shares.
In February 1996, the Company's Board of Directors approved the issuance to Sol
Munn of 150,000 shares of the Company's Class A Common Stock, in consideration
for past consulting services provided. These shares, bearing a two year
restrictive legend, were issued on April 12, 1996. In conjunction with the
issuance of these shares, approximately $54,000 of charges were recorded against
earnings during the year ended June 30, 1996.
In April 1996, the Company's investment banking firm arranged for the private
placement of 175,000 shares of the Company's Common A Stock and 50,000 shares of
the Company's Series A Preferred Stock. These shares, all bearing a restrictive
legend, were issued on April 24, 1996 to various independent investors (the
"Investors") generating gross proceeds of $431,251. The Company realized net
proceeds of $310,609 which was used to pay certain outstanding liabilities.
Commencing thirty (30) days following the date of the close of the private
placement, any of the Investors had the right to demand in writing (the "Demand
Notice") that the Company file a registration statement with the Securities and
Exchange Commission (the "Commission") which shall cover the shares and allow
the Investor to sell the shares to the public. Within fifteen (15) days
following receipt of the Demand Notice, the Company was required to file such
registration statement and use its best efforts to have such registration
statement declared effective by the Commission and such state securities
regulators as reasonably requested by the Investor.
Laurie Munn, wife of the Company's CEO obtained certain options on the Escrow
Shares and in addition purchased 730,000 shares of Class A Common stock (See
"Commitments and Contingencies").
On April 4, 1996, the Company's Board of Directors resolved to issue 250,000
shares of the Company's Class B Common Stock to Laurie Munn, wife of the
Company's President and Chief Executive Officer. This issuance is in
consideration for a down payment of $250, Ms. Munn's 6.6% note to the Company
providing for principal of $437,500 to be paid to the Company in five equal
annual installments of $105,561.90, and Ms. Munn's 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.
Effective June 30, 1996, the Company entered into a consulting agreement with
Morris Munn, father of the Company's President and Chief Executive Officer, in
exchange for certain services. (See "Commitments and Contingencies.") As part of
this agreement, the Company issued 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. (See "Liquidity and Capital Resources.") In conjunction with
the issuance of the options to Mr. Munn, the Company recorded charges against
earnings totaling $87,500 at June 30, 1996.
In January 1998 the Company entered into an Employment Agreement with its
President and CEO (See "Commitments and Contingencies").
Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
"Settlement"), a former executive of the Company, the Company issued to Ms.
Stevens 50,000 shares of the Company's Class A Common Stock. Also pursuant to
the Settlement, the Company issued to Michael Levine as escrow agent (the
"Escrow Agent") 1,250,000 unregistered shares of the Company's Class B Common
shares and 2,500,000 Class A Common shares (the "Escrow Shares".) The Escrow
Shares shall not be voted by the Escrow Agent, unless the Company defaults on
its obligations under the agreement. Upon satisfaction of such obligations, the
Escrow Shares shall be returned by the Escrow Agent to the Company. (See "Legal
Proceedings".) In conjunction with the issuance of the Company's shares to Ms.
Stevens, the Company recorded charges against earnings totaling $71,400 at June
30, 1996.
During September 1996 and September 1997, pursuant to the Company's Director
Stock Option Plan, the Company issued (per year): 10,000 shares of its Class A
Common shares to Roger Lourie, an outside director of the Company, and 10,000
shares of its Class A Common shares to various individuals named by Richard
Josephberg, also an outside director of the Company. These shares bear a
restrictive legend. Pursuant to the issuance of these shares, $15,000 was
charged against earnings at December 31, 1996.
During February 1997, the Company entered into an agreement with BH Funding, LLC
("BH") providing for certain advisory services to be performed by BH for the
Company over five years. The Company issued to BH 100,000 shares of its Class A
Common shares and 100,000 shares of its Series A Preferred shares in
consideration for such services. (See "Notes Payable" or "Recent Developments").
Other than services provided by the Company's investment banking firm, no
services have been provided at the Company's direction by any consultant or
advisor with respect to the issuance or sale of the Company's equity securities.
6. INCOME TAXES
For the six months ended December 31, 1997 the income tax provision is offset by
a corresponding reduction in the valuation associated with the Company's
deferred tax assets. For the six months ended December 31, 1996 the income tax
benefit generated has been offset by a corresponding valuation allowance.
Item 2. Management's Discussion
The following discussion should be read in conjunction with the information
contained in the financial statements of the Company (the "Financial
Statements") and the Notes (the ANotes") thereto appearing elsewhere herein and
in conjunction with the Management's Discussion and Analysis set forth in the
Company's Form 10-KSB for the fiscal year ended June 30, 1997, which discussion
is incorporated herein by reference.
Results of Operations
Period Ended December 31, 1997 as Compared to Period Ended December 31, 1996.
The Company's net sales from operations for the 6 months ended December 31, 1997
increased by $1,783,000 or 86.8% to $3,836,000 from $2,053,000 for the period
ended December 31, 1996. The growth in revenue was the result of an increase in
sales to a large customer and in it's custom frame division, as well as the
implementation of an approximate 5% price increase initiated in June 1997.
The Company's cost of goods sold as a percentage of net sales increased to 62.5%
for the six months ended December 31, 1997, from 54.8% for the six months ended
December 31, 1996. Cost of goods sold for the current period was approximately
$2,397,000 versus $1,126,000 for the prior period. This increase in percentage
was due to an increase in labor costs arising from a staff build up in
anticipation of substantial growth in shipments for the subsequent period. The
Company elected to conservatively estimate its current work-in-progress. The
Company used the gross profit method to value inventory during the six months
ended December 31, 1997 and 1996.
The Company's selling, general and administrative expenses as a percentage of
net sales totaled 23.2% for the six months ended December 31, 1997, versus 42.5%
for the six months ended December 31, 1996. To achieve this reduction in the
ratio of selling, general, and administrative expenses as a percentage of net
sales for the six months ended December 31, 1997 versus the prior period, the
Company has taken certain measures to reduce expenses. For example, reductions
of administrative personnel have led to reduced salaries, benefits, and travel
expenses. Also discretionary spending for such items as stationery and supplies,
advertising, and consulting fees has been curtailed. Interest expense as a
percentage of net sales totaled approximately 5.9% for the six months ended
December 31, 1997, versus approximately 7.8% for the six months ended December
31, 1996. Interest expense increased approximately $65,000 for the six months
ended December 31, 1997 in comparison to the six months ended December 31, 1996
because of new loans.
For the quarter ended December 31, 1997, the Company realized net income of
approximately $203,000 or $0.04 per share, versus net loss from operations of
approximately ($107,000) or ($0.03 per share) for the quarter ended December 31,
1996. For the six months ended December 31, 1997, the Company realized net
income of approximately $311,000 ($.06 per share), versus a net loss from
continuing operations of approximately $107,000 ($.03 per share) for the six
months ended December 31, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS') No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per share
("EPS"), replacing the presentation of currently required primary EPS with a
presentation of basic EPS. For entities with complex capital structures, the
statement requires the dual presentation of both basic EPS and diluted EPS on
the face of the statement of income. Effective for the six months ended December
31, 1996 the Company has adopted the provisions of SFAS 128 for all periods
presented.
Liquidity and Capital Resources
Management believes that future cash flow from operations will be sufficient to
support the Company's operations. However, Company management continues to
implement what it believes to be the changes deemed necessary to further
increase positive cash flow and profitability. Specific action taken as of the
date of this filing include seeking either the acquisition of or entering into
strategic alliances with unrelated companies in the decorative accessories
industry. (See "Acquisitions and Strategic Alliances."). On October 20, 1997,
the Company entered into a letter of intent whereby it will acquire the
remaining shares of Decor Group, Inc. it does not currently own, and on January
7, 1998, the Company entered into a letter of intent to acquire a Los Angeles
manufacturer of wall decor. (See . "Acquisitions and Strategic Alliances."). The
Company has also begun to implement a marketing program meant to increase
revenues of its Master Framemakers Division. No assurances can be given that
these measures will generate the fiscal improvement sought by the Company.
On June 1, 1997 the Company entered into an agreement (the "Agreement"), with
P-2-A which amended an earlier supply agreement. The Agreement provides for the
sale of certain manufacturing equipment and related assets, consulting services,
as well as certain contractual reimbursements of General and Administrative
expenses by P-2-A to the Company aggregating $1,140,000. The Company agreed that
the $1,140,000 due to the Company would be used to fund the purchase from P-2-A
of 270,000 shares of P-2-A's common stock and 120,000 of P-2-A's common stock
purchase warrants for an aggregate purchase price of $1,140,000. The Company
effectively owns approximately 4.5% of P-2-A after this transaction.
Additionally, P-2-A will pay the Company $50,000 for the non-exclusive right to
utilize the Company's existing mail-order customer list. P-2-A also agreed to
sublease approximately 21,000 square feet of office and manufacturing space from
the Company at an annual rental rate of $63,000 per year plus rent escalations.
The term of the sublease is from June 1, 1997 to December 31, 2001. Prior to
this Agreement P-2-A was purchasing certain stretching and framing services from
the Company
As of December 31, 1997, the Company reflected cash balances of approximately
$328,000 as compared to cash balances of approximately $271,000 at June 30,
1997, representing an increase of $57,000. Net cash used in operating activities
was approximately $375,000 at December 31, 1997, as compared to net cash used in
operating activities of approximately $953,000 at December 31, 1996. The net
cash used in operating activities during the six months ended December 31, 1997
was primarily a result of net income of approximately $311,000 as well as the
following approximate changes from continuing operations: decrease in accounts
payable and accrued expenses of $246,000, decrease in inventories of $31,000,
and an increase in accounts receivable of $731,000 and other assets of $13,000.
The decreases in inventory, accounts payable, and accrued expenses were largely
due to increased sales at the Company's A.P.F. Master Framemakers division (see
"Results of Operations"). The accounts receivable change was due to significant
growth of sales to a large customer.
Net cash generated in investing activities during the six months ended December
31, 1997 totaled $1,000 versus approximately $1,132,000 for the six months ended
December 31, 1996. During the six months ended December 31, 1997, the Company
invested $1,000 to acquire equipment, versus approximately $306,000 used to
acquire equipment and other assets during the six months ended December 31,
1996.
Net cash provided by financing activities totaled approximately $433,000 during
the six months ended December 31, 1997 as debt was paid off, versus
approximately $2,081,000 during the six months ended December 31, 1996. During
the current period, funding was the result of an increase in United Credit
Corporation asset based borrowing in the approximate net amount $402,000 The
primary source of the prior year's financing was the conversion of the Company's
stock warrants. Bank of New York debt decreased from $380,000 as of June 30,
1997 to $355,000 as of December 31, 1997. The debt continues to be amortized at
the rate of $10,000 per month commencing December 1, 1997. The liability to
Infinity Investors, Ltd. in the amount of $188,000 was entirely paid off during
the current quarter.
As of December 31, 1997, the Company's financial position reflected a working
capital surplus of approximately $194,000, versus a working capital deficit of
approximately $99,000 at June 30, 1997. As of December 31, 1997 versus June 30,
1997, there were increases in trade receivables of approximately $731,000, other
assets of $13,000 and a decrease in inventories of approximately $31,000, and a
decrease in current liabilities of approximately $246,000. These changes were
due to increases in sales and debt repayments.
On July 16, 1996, the Company filed a Registration Statement with the Securities
and Exchange Commission to re-register the Class WB Warrants and underlying
Common A Shares issuable if all outstanding Class WA Warrants were exercised.
The Commission declared this Registration Statement effective on July 19, 1996.
Through the date of this filing, 704,412 of the Company's Class WA Warrants were
exercised at $1.50 per warrant, generating gross proceeds to the Company
totaling $1,056,618 net of costs related to professional fees. Of these
proceeds, $811,500 was used to purchase 54,100 shares of Decor Group, Inc.'s
Series C Non-Voting, Convertible, Preferred Stock. The balance of the proceeds
was retained by the Company for working capital needs, and for the provision of
loans to Decor Group, Inc.
On May 7, 1997 the Company announced that it had extended the exercise period of
its Class A Warrants to June 22, 1998.
In January 1996, the Company's Board of Directors elected to lower the exercise
price of the Company's Class WB Warrant to $2.00 per Class A Common share,
subject to the filing and effectiveness of a Registration Statement with the
Securities and Exchange Commission. Such Registration Statement was filed with
the Commission on July 16, 1996 and declared effective on July 19, 1996. This
registration statement registered all Class WB Warrants issuable upon exercise
of all outstanding Class WA Warrants, as well as Class A Common Stock issuable
upon exercise of all potentially outstanding warrants. As of the date of this
filing, 118,012 of the Company's Class
WB Warrants were exercised generating gross proceeds of $236,024. These
proceeds were retained by the Company to support working capital needs, and for
the provision of loans to Decor Group, Inc.
In February 1996, the Company's Board of Directors declared a stock dividend
equivalent to $0.25 per share to its Series A 10% Cumulative Convertible
Preferred Stockholders of record as of the close of business on February 23,
1996 (the record date.) Payment was made on March 1, 1996 by the issuance of
0.10231 of a share of the Company's Class A Common Stock for each share of
Series A Preferred Stock held of record on the record date. Accordingly, 55,247
shares of the Company's Class A Common Stock was issued for this purpose.
Retained earnings was charged $165,741 in March 1996 in conjunction with the
issuance of these shares. The Company has declared a record date of December 10,
1997 for a dividend on its Series A 10% Cumulative Convertible Preferred Stock
for the six-month period ending September 1996, March 1997 and September 1997.
The dividend ($.75 per Preferred share) was paid on January 10, 1998 in the form
of the Company's Common A Shares. Accordingly, shares of the Company's Class A
Common Stock was issued for this purpose. Retained earnings was charged $430,147
in December 1997 in conjunction with the issuance of these shares.
In February 1996, the Company's Board of Directors approved the issuance to Sol
Munn of 150,000 shares of the Company's Class A Common Stock, in consideration
for past consulting services provided. The Company registered these securities
with the Securities and Exchange Commission during July 1997. These shares,
which bear a two-year lock-up restrictive legend pursuant to an agreement
between VCR Capital, Inc. and Sol Munn, were issued on April 12, 1996.
In April 1996, the Company's investment banking firm arranged for the private
placement of 175,000 shares of the Company's Common A Stock and 50,000 shares of
the Company's Series A Preferred Stock. These shares, all of which bore a
restrictive legend, were issued on April 24, 1996 to various independent
investors generating gross proceeds of $431,251. The Company realized net
proceeds of $310,609 which was used to pay certain outstanding liabilities.
These shares were registered by the Company with the SEC on August 13, 1997.
During September 1996, the Company issued 10,000 shares of its Class A Common
shares to Roger Lourie, an outside director of the Company, and 10,000 shares of
its Class A Common shares to various individuals named by Richard Josephberg,
also an outside director of the Company. These shares bear a restrictive legend.
Pursuant to the issuance of these shares, approximately $15,000 was charged
against earnings at June 30, 1997.
The Company had outstanding secured financing with Infinity Investors, Ltd.
totaling approximately $186,000 at September 30, 1997 due March 15, 1998. This
loan was paid in full during December 1997 (see Notes Payable). In connection
with this loan, the Company also issued an option to purchase 25,000 Class A
Common shares at $2.50 per share.
In February 1997 the Company received a loan from BH Funding, LLC ("BH") in the
aggregate principal amount of $600,000 to be utilized to repay certain
indebtedness of the Company and for continued operating expenses. The Company in
order to collateralize the loan to BH pledged and assigned to BH and granted to
BH a continuing security interest in the Company's 20,000,000 shares of Series B
Non-Convertible Preferred Stock of Decor, and the Company's 54,934 shares of
Series C Convertible Preferred Stock of Decor. Simultaneously with the loan to
the Company, BH purchased all of the Company's Series A Convertible Preferred
Stock holdings in Decor Group, Inc., a total of 250,000 shares. The loan is to
be repaid to BH Funding, LLC with interest on April 28, 1999. In addition, the
Company entered into a Consulting Agreement with BH whereby BH would agree to
provide consulting and other services to the Company in exchange for 100,000
shares of each of the Company's Series A Convertible Preferred stock and Class A
Common stock (the "Consulting Shares"). The Company prepaid $100,000 of the
principal due BH Funding on December 13, 1997.
In connection with this agreement, the fair market value of these shares on the
date of issuance (less the proceeds received) was allocated as follows: $350,000
as acquisition consulting on the Decor transaction; $350,000 as additional
financing costs on the loan (to be amortized over the life of the loan using the
effective interest method); and $25,000 as additional expense of the Company's
sale of its 250,000 Series A Convertible Preferred Stock holdings in Decor
Group, Inc.
As of December 31, 1997, the Company had various unpaid New York State taxes of
approximately $170,000. In July, 1997, the Company entered into a 24-month
payout agreement with New York State to fully satisfy this obligation.
Except as otherwise set forth herein, the Company has no material commitments
for capital expenditures. In order to fund growth over the long term, the
Company anticipates possible future issuance of its securities resulting in
further dilution to its securityholders.
The Company operates pursuant to a policy that generally precludes acceptance of
goods on a non-cash basis (sometimes known as barter transactions).
Refer to the ALegal Proceeding" section for discussion of litigation and related
commitments.
Impact of Inflation
The Company does not believe that inflation has had a material adverse effect on
sales or income during the past several years. Increases in supplies and other
operating costs could adversely affect the Company's operations. However, the
Company believes it could increase prices to offset increases in cost of goods
sold or other operating costs.
Sales Variations
Although the Company's net sales are not subject to seasonality fluctuations
experienced by certain retailers, the Company experiences some minor variations
in the level of sales during the year. The first quarter of the fiscal year
(i.e., July 1 through September 30) is generally the Company's slowest sales
period due to the fact that the summer period is typically the period when art
galleries are at their slowest purchasing period. During this period, the
Company's warehouse and factory closes for three to five days to take the annual
physical inventory and to consolidate vacation periods for the Company's
employees.
<PAGE>
PART II
OTHER INFORMATION
Item 1 . Legal Proceedings
The Company and its Chief Executive Officer ("CEO") during fiscal year 1996 were
involved in lawsuits with various members of the CEO's immediate family, certain
of whom were Officers and Directors of the Company. All of this litigation has
been settled and all resulting charges were reflected in the fiscal 1996
financial statements. In addition, as a component of the settlement, the Company
entered into various severance and non-compete agreements discussed in Note 12.
The litigation relating to the termination of the 1995 employment agreement
between Ann Stevens and the Company has been settled during July 1996 by the
execution of an employment severance agreement (the "Agreement"). Pursuant to
the Agreement, the Company paid Ms. Stevens $63,000 for accrued and unpaid
compensation upon execution of the Agreement. Subsequently, for a period of
seven years, the Company will make bi-weekly payments to Ms. Stevens to total
$72,000 for the first year, $70,000 for each of the next three years, and
$50,000 for each of the final three years. As additional compensation, the
Company paid Ms. Stevens for reimbursement for certain expenses in the
approximate amount of $6,000 and $50,000 in various installments during the four
months ending December 1996. The Company also entered into a non-compete
agreement with Ms. Stevens for which the Company will make bi-weekly payments to
Ms. Stevens to total $25,000 per year commencing in July 1996, for seven years,
plus automobile and insurance costs for five years. As of June 30, 1996, the
Company issued to Ms. Stevens 50,000 shares of the Company's Class A Common
Shares, which were previously committed to Ms. Stevens pursuant to her 1995
employment agreement. The 50,000 Class A Common Shares are subject to a
Alock-up" agreement with VTR Capital Corporation, the Company's investment
bankers. The Company placed into escrow 1,250,000 shares of its Class B Common
Shares and 2,500,000 Class A Common shares (the "Escrow Shares") with Michael
Levine, Esq., attorney of Ms. Stevens, as escrow agent (the "Escrow Agent"). The
Escrow Agent shall abstain from voting the Escrow Shares for any purpose, except
in the event of either the failure by the Company to adhere to the payment
provisions noted above or the financial insolvency of the Company. If either
event occurs, Ms. Stevens will be in a position to elect replacement Directors.
Once the payment provisions in the severance and non-compete agreements are
satisfied, the Escrow Agent shall return the Escrow Shares to the Company. The
Company paid $36,707 in the quarter ended September 30, 1997 to Ms. Stevens in
compliance with the various settlement related Agreements. The status of the
Escrow shares remain unchanged.
In February 1997, the terms of the agreement with Ms. Stevens were modified to
provide for additional payments of $500 per month over 16 months, and to provide
for $6,000 as reimbursement for legal expenses.
During April and May of 1995, Hide Tashiro commenced two lawsuits, now settled,
in the Supreme Court of New York, Manhattan County, totaling approximately
$300,000, plus interest and attorney's fees, against the Company and others. The
Company claimed that Mr. Tashiro and his affiliates owed a greater amount to the
Company for earned royalties and commissions. In April 1996 the plaintiff's
motions for summary judgment were denied and the court held that there was an
issue of fact to be tried. On June 30, 1997 the Company, Hide Tashiro, Takehisa
Nishijima, and Max Munn, President of the Company, entered into a settlement
agreement (the "Settlement Agreement") whereby the Company issued Mr. Tashiro
300,000 shares (the "Shares") of the Company's unregistered Class A Common Stock
in exchange and satisfaction of all claims. The Settlement Agreement contains
certain restrictions on resale of the Shares commencing in 1999 as well as
providing for certain "piggy-back" registration rights.
In July 1996, Gear Holdings, Inc. brought an action against the Company for the
alleged breach of a licensing agreement. The Company denies that it was a party
to an agreement with Gear, or that any sum of money is owed. The complaint
demands sums Gear would have received under the alleged agreement in a sum to be
determined, but not less than $250,000. The suit has remained dormant since
inception. Management believes this matter will be dismissed with no material
impact to the Company's financial position or results of operations.
In August 1996, a lawsuit, now settled, was brought by The Munn Trust of 1975,
Sol Munn and Evelyn A. Munn, Co-Trustees commenced an action in the Supreme
Court of New York, County of Suffolk against the Company as well as Max Munn,
the Company's President and Chief Executive Officer and Laurie Munn, his wife
for non-payment of $150,000 plus interest. The Company claimed that any
obligations that may have been due were due solely by Mr. and Mrs. Munn. The
Company has not guaranteed such liabilities. This matter has been settled
between all parties and releases exchange without any payment by the Company or
by the Munn Trust.
In August 1996, SJP Contractors of New York, Inc. commenced an action in the
Supreme Court of New York, County of Westchester against the predecessor entity
of the Company, A.P.F. Holdings, Inc., and others for $208,165 for work, labor,
and services allegedly performed in January 1991 for the renovation of the
Company's premises. Management believes that all required payments had been made
in 1991 and no further amounts should be provided for.
In July 1997, an action now settled was brought against the Company in the U.S.
District Court by a former employee of the Company (for an unspecified amount),
who claimed among other things, that she was discharged because she was
pregnant. The settlement did not have a material effect on the Company's results
of operations.
The Company is subject to other claims and litigation in the ordinary course of
business. In management's opinion, such claims are not material to the Company's
financial position or its results of operations.
<PAGE>
Item 2. Changes in Securities
None in addition to those disclosed herein.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of the Security and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
INTERIORS, INC.
Date: February 17, 1998 By: /s/ Max Munn
------------------------------
Max Munn, President and Chief
Executive, Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summmary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to said statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Dec-31-1997
<CASH> 328,261
<SECURITIES> 0
<RECEIVABLES> 1,677,947
<ALLOWANCES> 0
<INVENTORY> 1,490,015
<CURRENT-ASSETS> 4,459,037
<PP&E> 1,964,693
<DEPRECIATION> 1,280,771
<TOTAL-ASSETS> 9,370,187
<CURRENT-LIABILITIES> 1,978,620
<BONDS> 0
0
11,471
<COMMON> 5,561
<OTHER-SE> 4,182,216
<TOTAL-LIABILITY-AND-EQUITY> 9,370,187
<SALES> 3,835,865
<TOTAL-REVENUES> 3,835,865
<CGS> 2,397,416
<TOTAL-COSTS> 889,092
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225,814
<INCOME-PRETAX> 323,543
<INCOME-TAX> 13,000
<INCOME-CONTINUING> 310,543
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 310,543
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
