<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
(AMENDMENT NO. 1)
CURRENT REPORT
PURSUANT TO SECITON 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) March 26, 1999
---------------
Interiors, Inc.
------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
Delaware 0-24352 13-3590047
- ------------------------------------ ------------------------- ---------------------------------
<S> <C> <C>
(State or Other Jurisdiction of (Commission File Number) (IRS Employer Identification No.)
Incorporation)
</TABLE>
320 Washington Street, Mount Vernon, New York 10553
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (914) 665-5400
--------------
- -------------------------------------------------------------------------------
(Former Name of Former Address, if Changed Since Last Report)
<PAGE>
The Registrant hereby amends its Current Report on Form 8-K as filed
with the Commission on March 9, 1998 to include the financial statements and pro
forma financial information set forth below which was omitted from the filing
pursuant to Items 7(a)(4) and 7(b)(2).
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired
Financial Statements of Petals, Inc. ("Petals") are appended as an
exhibit to this Report.
(b) Pro Forma Financial Information
Pro Forma Financial Information with respect to acquisition of Petals
is appended as an exhibit to this Report.
(c) Exhibits
Financial Statements for Petals for the years ended December 31, 1998
and December 31, 1997. Pro Forma Financial Information with respect to
acquisition of Petals, Inc.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: INTERIORS, INC.
June [4], 1999 By: /s/ Richard Belenski
----------------------
Richard Belenski
Chief Financial Officer
3
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
99.1 Financial Statements for Petals, Inc. for the years ended
December 31, 1998 and December 31, 1997
99.2 Pro Forma Financial Information with respect to acquisition
of Petals, Inc.
<PAGE>
99.1 Financial Statements for Petals, Inc. for the year(s) ended December 31,
1998 and December 31, 1997.
<PAGE>
PETALS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE>
TABLE OF CONTENTS
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 1
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheets 2
Statements of Operations 3
Statements of Stockholders' Equity 4
Statements of Cash Flows 5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6-12
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Petals, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Petals, Inc.
(formerly "Petals Factory Outlet of Delaware, Inc.") (a Delaware corporation)
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Petals, Inc. and subsidiaries
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
New York, New York
March 26, 1999
-1-
<PAGE>
PETALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---- ----
CURRENT ASSETS:
<S> <C> <C>
Cash $ 1,948,661 $ 1,131,524
Accounts receivable, less allowance for doubtful
accounts of $39,000 and $46,599 in 1998 and
1997, respectively 482,399 753,869
Inventories, net 7,111,062 6,949,169
Prepaid catalog costs 1,318,039 475,289
Prepaid income taxes and refunds 32,470 58,843
Other prepaid expenses 74,769 89,954
------------ ------------
Total current assets 10,967,400 9,458,648
PROPERTY AND EQUIPMENT, net (Note 3) 929,033 781,807
DEFERRED CHARGES, net of accumulated amortization
of $362,564 and $570,771 in 1998 and 1997,
respectively 386,281 454,809
OTHER 73,288 17,353
------------ ------------
Total assets $ 12,356,002 $ 10,712,617
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------ ---- ----
CURRENT LIABILITIES:
Accounts payable $ 4,180,148 $ 3,859,400
Accrued expenses and other current liabilities 1,078,937 928,920
Income taxes payable - 1,209
Current portion of long-term debt 2,720,000 -
Current portion of capitalized lease obligation 106,393 157,261
Due to former stockholders' 1,700,000 -
------------ ------------
Total current liabilities 9,785,478 4,946,790
------------ ------------
LONG-TERM LIABILITIES:
Long-term subordinated debt - 2,720,000
Capitalized lease obligation, less current
portion and other long-term liabilities 281,360 232,232
------------ ------------
Total long-term liabilities 281,360 2,952,232
------------ ------------
COMMITMENTS (Note 11)
STOCKHOLDERS' EQUITY: (Note 12)
Common stock, no par value, 2,000 shares
authorized, 571 shares issued and
outstanding at December 31, 1998 and 1997 53,000 53,000
Additional paid-in capital 3,839,855 3,839,855
Treasury stock (1,700,000) -
Retained earnings/accumulated (deficit) 96,309 (1,079,260)
------------ -------------
Total stockholders' equity 2,289,164 2,813,595
------------ ------------
Total liabilities and stockholders' equity $ 12,356,002 $ 10,712,617
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
-2-
<PAGE>
PETALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET SALES $39,552,260 $39,844,759 $41,301,218
COSTS OF GOODS SOLD 16,816,929 16,333,684 17,232,816
----------- ----------- -----------
Gross margin 22,735,331 23,511,075 24,068,402
----------- ----------- -----------
OPERATING EXPENSES:
Selling and shipping 16,664,677 17,560,133 19,999,455
General and administrative 3,453,472 3,826,425 4,284,063
Depreciation and amortization 374,129 472,717 535,707
----------- ----------- -----------
Total operating expenses 20,492,278 21,859,275 24,819,225
----------- ----------- -----------
Income (loss) from operations 2,243,053 1,651,800 (750,823)
----------- ----------- -----------
Interest expense, net 527,605 602,300 652,708
----------- ----------- -----------
Income (loss) before income taxes 1,715,448 1,049,500 (1,403,531)
INCOME TAXES (Note 6) 17,622 61,178 187,374
----------- ----------- -----------
Net income (loss) $ 1,697,826 $ 988,322 $(1,590,905)
=========== =========== ===========
PER SHARE INFORMATION (Note 8):
Net income (loss) per common share:
Basic and diluted $ 2,999.69 $ 1,730.86 $ (2,786.17)
=========== =========== ===========
Common shares used in computing per share amounts:
Basic and diluted 566 571 571
=========== =========== ===========
PRO FORMA INFORMATION (Note 9):
Income (loss) before income taxes $ 1,715,448 $ 1,049,500 $(1,403,531)
Pro forma income taxes 686,179 419,800 (564,570)
----------- ----------- -----------
Pro forma net income (loss) $ 1,029,269 $ 629,700 $ (838,961)
=========== =========== ===========
PRO FORMA PER SHARE INFORMATION (Notes 8 and 9):
Pro forma net income (loss) per common share:
Basic and diluted $ 1,818.50 $ 1,102.80 $ (1,469.28)
=========== =========== ===========
Common shares used in computing pro forma per shares amounts:
Basic and diluted $ 566 $ 571 $ 571
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
PETALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Additional Earnings/
Common Paid-in Treasury Accumulated
Stock Capital Stock (Deficit) Total
----- ------- ----- --------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 $53,000 $3,839,855 $ - $ (476,677) $ 3,416,178
Net loss - - - (1,590,905) (1,590,905)
------- ---------- ----------- ----------- -----------
BALANCE, December 31, 1996 53,000 3,839,855 - (2,067,582) 1,825,273
Net income - - - 988,322 988,322
------- ---------- ----------- ----------- -----------
BALANCE, December 31, 1997 53,000 3,839,855 - (1,079,260) 2,813,595
Shareholder distribution - - - (522,257) (522,257)
Purchase of stock from shareholders - - (1,700,000) - (1,700,000)
Net income - - - 1,697,826 1,697,826
------- ---------- ----------- ----------- -----------
BALANCE, December 31, 1998 $53,000 $3,839,855 $(1,700,000) $ 96,309 $ 2,289,164
======= ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
PETALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,697,826 $ 988,322 $ (1,590,905)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization 374,129 472,717 535,707
Amortization of deferred charges 500,082 522,176 462,239
Gain on disposal of assets - - (195)
Provision for doubtful accounts 62,312 40,472 11,483
Allowance for returned merchandise 50,000 (156,000) 87,500
Deferred taxes - - 640,200
Change in-
Accounts receivable 209,159 (230,638) 1,068,003
Inventories, net (161,893) 580,144 (614,325)
Prepaid catalog costs (842,750) 865,319 (291,075)
Income tax refund 29,887 407,037 (465,880)
Other prepaid expenses 11,671 (25,123) (123)
Other assets (55,935) (2,130) 27,004
Accounts payable 320,748 (1,144,847) 1,447,095
Accrued expenses and other current liabilities 100,017 (8,841) 511,771
Income taxes payable (1,209) (17,197) (111,046)
Other long-term liabilities (145,881) (47,400) 214,140
------------ ------------ ------------
Total adjustments 450,337 1,255,689 3,522,504
------------ ------------ ------------
Net cash provided by operating activities 2,148,163 2,244,011 1,931,599
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (211,924) (195,730) (301,588)
Proceeds from disposal of equipment - - 975
Tax distribution (522,256) - -
(Increase) in deferred charges (431,554) (382,673) (639,711)
------------ ------------ ------------
Net cash used in investing activities (1,165,734) (578,403) (940,324)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subordinated debt - 1,250,000 1,500,000
Repayment of subordinated debt - (280,000) (750,000)
Proceeds from revolving line of credit 1,725,000 7,595,000 5,800,000
Repayment of revolving line of credit (1,725,000) (10,020,000) (6,275,000)
Bank overdrafts - - (154,481)
Principal payments under capitalized lease obligations (165,292) (145,860) (121,887)
------------ ------------ ------------
Net cash used in financing activities (165,292) (1,600,860) (1,368)
------------ ------------ ------------
Net increase in cash 817,137 64,748 989,907
CASH, beginning of year 1,131,524 1,066,776 76,869
------------ ------------ ------------
CASH, end of year $ 1,948,661 $ 1,131,524 $ 1,066,776
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 581,723 $ 611,694 $ 659,630
============ ============ ============
Income taxes $ 16,486 $ 39,854 $ 24,095
============ ============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
The Company entered into capital leases for new equipment during 1998, 1997 and
1996 in the amounts of $309,434, $33,338 and $31,922, respectively.
The accompanying notes are an integral part of these statements.
-5-
<PAGE>
PETALS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Petals, Inc. (formerly "Petals Factory Outlet of Delaware, Inc.") and
subsidiaries (the "Company") sell artificial decorative floral arrangements on a
retail basis to consumers, through mail order catalog operations, throughout the
United States and through retail stores located in the Northeast.
Principles of Consolidation
The consolidated financial statements include the accounts of Petals, Inc.
("Parent") and subsidiaries. All material intercompany balances and transactions
have been eliminated.
Revenue Recognition
Sales through mail order operations are recorded at the time of shipment. At
such time, a provision for anticipated merchandise returns is recorded based
upon the Company's historical experience. Retail sales are recorded at the point
of sale.
Inventories
Inventories are valued at the lower of cost (determined by the first-in,
first-out method) or market.
Depreciation and Amortization
Depreciation is provided utilizing straight-line and accelerated methods over
the related asset's estimated useful life, as indicated in Note 3. Amortization
of leasehold improvements is provided on a straight-line basis over the shorter
of the improvement's estimated useful life or lease term.
Income Taxes
The Company changed its tax status from a C Corporation to a subchapter "S"
Corporation effective January 1, 1997. As a result, in lieu of federal and
certain state corporate income taxes, the stockholders are taxed on their
proportionate shares of income, or receive the benefit of any losses
individually. At December 31, 1996, all deferred tax assets were written off as
there is no future tax benefit to the Company as discussed in Note 6.
Prepaid Catalog Costs
Prepaid catalog costs consist of capitalized costs associated with the
production of both catalogs issued in the current year and catalogs to be issued
in the following year. The costs of catalogs issued are amortized over the
periods in which related revenues are anticipated to be generated, which are
generally less than one year.
-6-
<PAGE>
Deferred Charges
The cost of photographs used in catalogs is deferred and amortized over a period
of three years.
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.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets according to the provisions of
Statement of Financial Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS No. 121"),
which requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. The adoption of SFAS No. 121, in 1997, did not
have a material effect on the Company's results of operations, cash flows or
financial position.
Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", which
requires companies to report all changes in equity during a period, except those
resulting from investment by owners and distribution to owners, in a financial
statement for the period in which they are recognized. Comprehensive income is
the total of net income and all nonowner changes in equity (or other
comprehensive income) such as unrealized gains/losses on securities
available-for-sale, foreign currency translation adjustments and minimum pension
liability adjustments. Comprehensive and other comprehensive income must be
reported on the face of the annual financial statements or in the case of
interim reporting, in the footnotes to the financial statements. For the years
ended December 31, 1998, 1997 and 1996, the Company's operations did not give
rise to items includible in comprehensive income which were not already included
in net income. Therefore, the Company's comprehensive income is the same as its
net income for all periods presented.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999 and will not require retroactive restatement of prior period financial
statements. This statement requires the recognition of all derivative
instruments as either assets or liabilities in the balance sheet measured at
fair value. Derivative instruments will be recognized as gains or losses in the
period of change. If certain conditions are met where the derivative instrument
has been designated as a fair value hedge, the hedge items may also be marked to
market through earnings thus creating an offset. If the derivative is designed
and qualifies as a cash flow hedge, the changes in fair value of the derivative
instrument may be recorded in comprehensive income. The Company does not
presently make use of derivative instruments.
-7-
<PAGE>
Reclassification
Certain amounts in the financial statements for prior periods have been
reclassified to conform to the current year presentation.
2. INVENTORIES, NET
Inventories, net at December 31, 1998 and 1997 are comprised of the following:
1998 1997
---- ----
Raw materials $ 4,153,673 $ 3,936,553
Work in process 32,251 62,018
Finished goods 2,925,138 2,950,598
--------------- ---------------
$ 7,111,062 $ 6,949,169
============= =============
3. PROPERTY AND EQUIPMENT, net
At December 31, 1998 and 1997, property and equipment consists of the following:
<TABLE>
<CAPTION>
Estimated Useful
1998 1997 Lives in Years
---- ---- --------------
<S> <C> <C> <C>
Furniture and fixtures $ 1,022,499 $ 1,017,232 3-10
Automotive equipment 9,190 20,015 5
Machinery and equipment 651,039 596,716 5-10
Computer equipment 639,836 531,731 5
Signs and fences 35,143 30,426 5-10
Leasehold improvements 605,195 574,099 Shorter of useful
life or lease term
Computer software costs 444,016 433,481 5
Property held under capital leases 984,000 711,381 5-7
----------- -----------
4,390,918 3,915,081
Less- Accumulated depreciation and amortization 3,461,885 3,133,274
----------- -----------
$ 929,033 $ 781,807
=========== ===========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1998,
1997 and 1996 amounted to $374,129, $472,717 and $535,707, respectively.
4. REVOLVING LINE OF CREDIT
In 1994, the Company entered into a loan agreement with a bank which provided
for borrowings up to $3,500,000 in the form of revolving credit loans. During
1997, the Company amended the loan agreement to provide for borrowings up
$5,500,000. Borrowings under the loan agreement are limited by a borrowing base
calculation on eligible accounts receivable and inventory and are collateralized
by accounts receivable, equipment, inventory and goods, and certain other
assets. Borrowings bear interest at the bank's prime rate plus 1/2%. The prime
rate was 7.75% and 8.5% at December 31, 1998 and 1997, respectively. The loan
agreement has financial covenants which require that the Company maintain
minimum levels of net worth and leverage ratios. Additionally, the loan
agreement has a minimum additional subordinated debt covenant, which requires
the Company to fund any net loss greater than an amount as defined in the loan
agreement. During 1998, the Company amended the loan agreement and extended the
maturity to July 31, 1999. At December 31, 1998, there were no borrowings
outstanding under the line of credit.
-8-
<PAGE>
The Company received Bank consent to purchase all of the shares of capital stock
from two minority stockholders for a purchase price of $1,700,000. Additionally,
the bank agreement stipulates that the majority stockholders will not dispose of
any of their issued and outstanding voting shares of the Company. Upon
consummation of the transaction described in Note 12, the line of credit was
terminated.
Included in the agreement, the Bank agrees to issue, at the request of the
Company, one or more letters of credit which, in aggregate of the face amount,
shall not exceed at any one time (a) the commitment less the principal balance
of all outstanding advances on the revolving line of credit or (b) $500,000. The
expiration date of any letter of credit shall not be more than nine months after
the date of issuance or after the maturity date of the revolving line of credit
(whichever is earlier). At December 31, 1998, there are approximately $23,000 of
letters of credit outstanding.
5. SUBORDINATED DEBT
In 1994, the Company entered into a subordinated debt agreement with its
stockholders whereby the $1,000,000 of borrowings under this agreement are
subordinated to the revolving line of credit discussed in Note 4. The original
subordinated debt provides for interest payable quarterly at 12% per annum. At
December 31, 1998, the Company had additional subordinated debt of approximately
$1,720,000, with interest payable monthly at 20% per annum to an affiliate of
the majority stockholders. At December 31, 1998, the subordinate debt is due on
demand and has been included in current liabilities in the accompanying balance
sheet.
6. INCOME TAXES
The components of the provision for income taxes consist of the following at
December 31,:
1998 1997 1996
---- ---- ----
Federal:
Current $ - $ - $ (362,265)
Deferred - - (177,337)
-------- -------- ----------
- - (539,602)
-------- -------- ----------
State:
Current 17,622 61,178 (90,567)
Deferred - - (44,334)
-------- -------- ----------
17,622 61,178 (134,901)
Subchapter "S" election - - 861,877
-------- -------- ----------
$ 17,622 $ 61,178 $ 187,374
======== ======== ==========
Effective January 1, 1997, the Company changed its tax status from a C
Corporation to a subchapter "S" Corporation. As a result, the Company's
write-off of deferred tax assets totaled $861,877 in 1996, which is included in
the provision for income taxes on the accompanying consolidated statements of
operations.
In 1993, the Company purchased certain net assets of Corham, Inc. In connection
with this transaction, the Company acquired, for income tax purposes, a customer
list which has been assigned a value of approximately $4,850,000. The remaining
unamortized portion for tax purposes is approximately $3,072,000. Effective
January 1, 1997, the individual stockholders are entitled to the tax benefit
relating to the acquisition of this asset.
-9-
<PAGE>
7. CAPITALIZED LEASE OBLIGATIONS
The Company is the lessee of certain equipment under capital leases expiring
through 2002. The assets and liabilities under capital leases are recorded at
the lower of the present value of minimum lease payments or the fair market
value of the asset. The assets are depreciated over their estimated useful
lives. Depreciation of assets under capital leases is included in depreciation
expense in the accompanying statements of operations.
Minimum future lease payments under capital leases as of December 31 are as
follows:
1999 $ 135,697
2000 107,943
2001 102,476
2002 81,643
---------
Total minimum lease payments 427,759
Less- Amount representing interest 60,866
---------
Present value of net minimum lease payments $ 366,893
=========
Interest rates on capitalized leases vary from 8.25% to 12.75% and are imputed
based on the lower of the Company's incremental borrowing rate at the inception
of each lease or the lessor's implicit rate of return.
8. NET INCOME PER COMMON SHARE
In accordance with SFAS No. 128, "Earnings Per Share", basis earnings per common
shares amounts were computed by dividing net earnings by the weighted average
number of common shares outstanding, excluding any potential dilution. Diluted
earnings per share has not been presented, as there were no common stock
equivalents outstanding for the periods presented.
9. PRO FORMA NET INCOME
Pro forma net income for the twelve months periods ended December 31, 1998, 1997
and 1996 includes the pro forma effect of a C corporation income tax provisions
as if the Company was treated as C corporation for the entire period.
10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for
reporting information about operating segments and related disclosures about
products and services, geographic areas and major customers. The Company's
operating segments are mail order catalog and retail stores with revenues being
primarily generated in the United States. The accounting policies of the
operating segments are the same as those described in the Summary of Significant
Accounting Policies.
-10-
<PAGE>
<TABLE>
<CAPTION>
Segment information is as follows:
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues (1):
Mail order $ 34,237,374 $ 34,726,805 $ 35,699,081
Retail stores 5,314,886 5,117,954 5,602,137
------------ ------------ ------------
39,552,260 39,844,759 41,301,218
Income from operations (1):
Mail order 1,448,617 1,036,425 (1,264,375)
Retail stores 794,436 615,375 513,552
------------ ------------ ------------
2,243,053 1,651,800 (750,823)
Interest expense net 527,605 602,300 652,708
------------ ------------ ------------
Income before taxes $ 1,715,448 $ 1,049,500 $ (1,403,531)
============ ============ ============
As of December 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
Total assets (1):
Mail order $ 11,380,317 $ 9,916,319 $ 11,953,947
Retail stores 975,685 796,298 715,645
------------ ------------ ------------
12,356,002 10,712,617 12,669,592
Expenditure for additions to fixed assets:
Mail order 198,939 187,538 298,988
Retail stores 12,985 8,192 2,600
------------ ------------ ------------
$ 211,924 $ 195,730 $ 301,588
============ ============ ============
</TABLE>
- ----------
(1) After elimination of intersegment transactions
11. COMMITMENTS
The Company leases administrative and warehouse facilities from a related party
for a period of five and one-half years ending June 30, 2003, with the option
for early withdrawal at June 30, 2001. The lease term provides for an annual
rental equivalent to $1,050,000.
The Company currently leases sales and warehouse facilities under leases
expiring at various dates through June 2003. The leases require additional
payments for increases over the base year rent for real estate taxes and
operating expenses. The leases provide for three ten-year renewal options under
the same terms. In addition, one lease provides for a percentage rental equal to
6% of gross sales in excess of a gross sales base.
Minimum future rental commitments under all the operating leases, including the
related party lease, as of December 31 are as follows:
1999 $ 1,860,218
2000 1,666,442
2001 1,618,478
2002 1,434,782
2003 and thereafter 846,233
-----------
$ 7,426,153
===========
-11-
<PAGE>
Total rent expense incurred for the years ended December 31, 1998, 1997 and
1996, was $1,764,400, $1,629,250 and $1,686,060, respectively. None of these
amounts represent contingent rentals.
Litigation
In the normal course of business, the Company is party to various claims and/or
litigation. Management and the Company's legal counsel believe that the
settlement of all such claims and/or litigation, considered in the aggregate,
will not have a material adverse effect on the Company's financial position and
results of operations.
Tax Distributions
The Board of Directors has authorized the Company to make distributions to the
stockholders, for the payment by such stockholders, of taxes due on the
Company's S Corporation earnings. For fiscal year 1999, the Company will
distribute approximately $750,000.
12. STOCKHOLDERS EQUITY
On December 11, 1998, the majority stockholders of the Company entered into a
Purchase Agreement to sell their share of the Company to Interiors, Inc. In
accordance with the stockholders agreement, in February 1999, two of the four
minority stockholders put their shares of capital stock back to the Company for
$1,700,000. This transaction was effective prior to year end and accordingly the
Company recorded the amounts due to the former stockholders as a current
liability in the accompanying balance sheet.
On March 17, 1999, the remaining minority stockholders agreed to sell back to
the Company all of their shares for approximately $2,150,000 in cash and an
additional $262,500 paid over nine months in settlement of their employment
agreements with the Company.
On March 23, 1999, Interiors, Inc. consummated the acquisition of the shares
from the majority stockholders and the Company redeemed the capital stock of the
remaining minority stockholders. As a result, Interiors, Inc. acquired 100% of
the outstanding capital stock of the Company. At such time, the Company became a
wholly-owned subsidiary of Interiors, Inc.
-12-
<PAGE>
EXHIBIT 99.2 PRO FORMA FINANCIAL INFORMATION
The following Pro-Forma Combined Financial Information as of June 30, 1998 and
the year then ended and as of December 31, 1998 and for the six 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. and subsidiaries as if the combination described
had been effective as of July 1, 1997 for one year operations ending June 30,
1998 and for six months operations ending December 31, 1998. The acquisitions of
Stylecraft, Petals, Model Homes, CSL and the probable acquisition of Decor have
been accounted for as purchases as if the acquisitions had all occurred as of
July 1, 1997 for the fiscal year ending June 30, 1998 and as purchases as if the
acquisitions had all occurred as of July 1, 1998 for the interim period ending
December 31, 1998. The excess of purchase price over fair value of assets
acquired if the acquisitions had all occurred as of July 1, 1997 or July 1, 1998
is reflected as an intangible asset and is being amortized over forty 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.
In management's opinion, all material adjustments necessary to reflect the
effects of the combination have been made.
<PAGE>
PRO FORMA INTERIM FINANCIAL INFORMATION FOR INTERIORS AND COMBINED COMPANIES
(000's) Omitted
<TABLE>
<CAPTION>
Model
Interiors Stylecraft Petals Homes CSL
BALANCE SHEET 12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash 673 1,934 1,949 65
Accounts receivable, net 6,946 2,613 482 1,243 1,310
Inventories 8,400 3,219 7,111 860 3,492
Other current assets 6,214 110 1,432 130 218
-------------------------------------------------------
Total current assets 22,233 7,876 10,974 2,233 5,085
-------------------------------------------------------
INVESTMENT IN AFFILIATES 4,467
PROPERTY AND EQUIPMENT, net 1,513 1,371 929 4,852 1,004
OTHER ASSETS 21,093 460 34 332
-------------------------------------------------------
Total assets 49,306 9,247 12,363 7,119 6,421
=======================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt 12,665 30 2,826 741 2,197
Accounts payable and accrued liabilities 8,191 3,542 6,959 2,109 2,093
-------------------------------------------------------
Total current liabilities 20,856 3,572 9,785 2,850 4,290
LONG TERM DEBT 5,287 190 282 1,723
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Preferred stock, $.01 par value, 5,300,000 shares
authorized, 596,711 shares issued and outstanding 6
Class C Preferred stock, $.01 par value, 6,427 shares
authorized, issued and outstanding
Class A common stock, $.001 par value, 60,000,000 shares
authorized, 23,285,425 shares issued, 20 5 53 200 12
21,785,425 shares outstanding
Class B common stock, $.001 par value, 2,500,000 shares
authorized, 1,105,000 shares issued and outstanding 1
Treasury stock (1,317) (1,700) (1,218)
Additional paid-in-capital 32,946 34 4,231 16,279
Accumulated deficit (7,545) 5,446 (288) 4,069 (14,665)
Notes receivable (948)
-------------------------------------------------------
Total stockholders' equity 23,163 5,485 2,296 4,269 408
-------------------------------------------------------
Total liabilities and stockholders' equity 49,306 9,247 12,363 7,119 6,421
=======================================================
<CAPTION>
Decor Adjustments Total
BALANCE SHEET 12/31/98
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ab (4,612) 9
Accounts receivable, net 510 13,104
Inventories 622 23,704
Other current assets 656 e (622) 8,138
----------------------------------------
Total current assets 1,788 (5,234) 44,955
----------------------------------------
INVESTMENT IN AFFILIATES e (3,227) 1,240
PROPERTY AND EQUIPMENT, net 81 9,750
OTHER ASSETS 1,623 abcde 17,026 40,568
----------------------------------------
Total assets 3,492 8,565 96,513
========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt 1,301 abc (3,097) 16,663
Accounts payable and accrued liabilities 2,026 abcde (1,513) 23,407
----------------------------------------
Total current liabilities 3,327 (4,610) 40,070
LONG TERM DEBT 513 abcd 11,349 19,344
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Preferred stock, $.01 par value, 5,300,000 shares
authorized, 596,711 shares issued and outstanding 2 e (2) 6
Class C Preferred stock, $.01 par value, 6,427 shares
authorized, issued and outstanding ad 65 65
Class A common stock, $.001 par value, 60,000,000 shares
authorized, 23,285,425 shares issued, abcde (268) 22
21,785,425 shares outstanding
Class B common stock, $.001 par value, 2,500,000 shares
authorized, 1,105,000 shares issued and outstanding 1
Treasury stock bd 2,918 (1,317)
Additional paid-in-capital 6,611 abcde (13,286) 46,815
Accumulated deficit (6,961)abcde 12,399 (7,545)
Notes receivable (948)
----------------------------------------
Total stockholders' equity (348) 1,826 37,099
----------------------------------------
Total liabilities and stockholders' equity 3,492 8,565 96,513
========================================
</TABLE>
<PAGE>
PRO FORMA INTERIM FINANCIAL INFORMATION FOR INTERIORS AND COMBINED COMPANIES
(000's) Omitted
<TABLE>
<CAPTION>
Model
Interiors Stylecraft Petals Homes CSL
12 mo. to 12 mo. to 12 mo. to 12 mo. to 12 mo. to
6/30/98 6/30/98 6/30/98 6/30/98 6/30/98
<S> <C> <C> <C> <C> <C>
NET SALES 54,600 25,400 37,200 9,900 12,400
COST OF GOODS SOLD 35,700 17,900 17,900 5,000 7,800
------------------------------------------------------------
Gross profit 18,900 7,500 19,300 4,900 4,600
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 15,587 5,400 16,800 5,000 6,300
------------------------------------------------------------
Income from operations 3,313 2,100 2,500 (100) (1,700)
OTHER EXPENSE (INCOME)
Amortization of goodwill 42
Interest expense 1,400 600 (100) 400
Financing charges - noncash 306
Consulting and management fees (335)
Minority interest income
------------------------------------------------------------
Total other expense (income) 1,413 0 600 (100) 400
------------------------------------------------------------
Income (loss) from operations
before (benefit) provision for income taxes and extraordinary item 1,900 2,100 1,900 0 (2,100)
(BENEFIT) PROVISION FOR INCOME TAXES (93) (102) (93) 0 0
------------------------------------------------------------
NET INCOME 1,993 2,202 1,993 0 (2,100)
------------------------------------------------------------
Basic EPS 0.12 0.04
Diluted EPS 0.11 0.04
Shares (000) 14,038 3,529 17,567
Shares (000) 14,928 3,529 18,457
<CAPTION>
Decor Adjustments Total
12 mo. to
6/30/98
<S> <C> <C>
NET SALES 5,200 144,700
COST OF GOODS SOLD 3,200 87,500
----------------------------------------------
Gross profit 2,000 57,200
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,600 e (200) 52,487
----------------------------------------------
Income from operations (1,600) 200 4,713
OTHER EXPENSE (INCOME)
Amortization of goodwill abcde 909 951
Interest expense 100 abc 670 3,070
Financing charges - noncash 270 576
Consulting and management fees e 200 (135)
Minority interest income d (1,029) (1,029)
----------------------------------------------
Total other expense (income) 100 1,020 3,433
----------------------------------------------
Income (loss) from operations
before (benefit) provision for income taxes and extraordinary item (1,700) (820) 1,280
(BENEFIT) PROVISION FOR INCOME TAXES 0 0 (288)
----------------------------------------------
NET INCOME (1,700) (820) 1,568
----------------------------------------------
Basic EPS 0.04
Diluted EPS 0.04
Shares (000) 3,529 17,567
Shares (000) 3,529 18,457
</TABLE>
<PAGE>
PRO FORMA INTERIM FINANCIAL INFORMATION FOR INTERIORS AND COMBINED COMPANIES
(000's) Omitted
<TABLE>
<CAPTION>
Model
Interiors Stylecraft Petals Homes CSL
6 mo. to 6 mo. to 6 mo. to 6 mo. to 6 mo. to
12/31/98 12/31/98 12/31/98 12/31/98 12/31/98
<S> <C> <C> <C> <C> <C>
NET SALES 23,263 15,500 22,400 5,700 6,200
COST OF GOODS SOLD 14,960 10,800 10,640 2,850 3,900
----------------------------------------------------
Gross profit 8,302 4,700 11,760 2,850 2,300
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,962 2,450 10,024 2,650 2,000
----------------------------------------------------
Income from operations 1,341 2,250 1,736 200 300
OTHER EXPENSE (INCOME)
Amortization of goodwill 193
Interest expense 984 10 300 150
Financing charges - noncash 437
Consulting and management fees (120)
Minority interest expense
Gain on legal settlement (82)
----------------------------------------------------
Total other expense (income) 1,412 10 300 0 150
----------------------------------------------------
Income (loss) from operations
before (benefit) provision for
income taxes and extraordinary item (71) 2,240 1,436 200 150
(BENEFIT) PROVISION FOR INCOME TAXES 10 157 115 14 20
----------------------------------------------------
Income (loss) from operations before
extraordinary item (81) 2,083 1,321 186 130
EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT OF DEBT 1,371
----------------------------------------------------
NET INCOME 1,289 2,083 1,321 186 130
----------------------------------------------------
Basic EPS 0.08
Diluted EPS 0.08
Shares (000) 14,038
Shares (000) 14,928
<CAPTION>
Decor Adjustments Total
6 mo. to
12/31/98
<S> <C> <C>
NET SALES 2,350 75,413
COST OF GOODS SOLD 1,300 44,450
-----------------------------------
Gross profit 1,050 30,962
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,000 e (70) 25,016
-----------------------------------
Income from operations 50 70 5,947
OTHER EXPENSE (INCOME)
Amortization of goodwill abcde 281 474
Interest expense 50 abc 335 1,829
Financing charges - noncash 437
Consulting and management fees e 70 (50)
Minority interest expense d 88 88
Gain on legal settlement (82)
-----------------------------------
Total other expense (income) 50 774 2,696
-----------------------------------
Income (loss) from operations
before (benefit) provision for
income taxes and extraordinary item 0 (704) 3,251
(BENEFIT) PROVISION FOR INCOME TAXES 0 316
-----------------------------------
Income (loss) from operations before
extraordinary item 0 (704) 2,935
EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT OF DEBT 1,371
-----------------------------------
NET INCOME 0 (704) 4,306
-----------------------------------
Basic EPS 0.22
Diluted EPS 0.21
Shares (000) 3,529 17,567
Shares (000) 3,529 18,457
</TABLE>
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
(A) THE ACQUISITION OF STYLECRAFT LAMPS, INC. CONSISTED OF A CASH PAYMENT OF
$10,319,000. THE CASH PAYMENT WAS FINANCED BY A $7,000,000 SECURED LINE OF
CREDIT FROM AUSTIN FINANCIAL SERVICES, INC., THE PRIVATE PLACEMENT OF 4,500
SHARES OF INTERIORS 7% SERIES C CONVERTIBLE PREFERRED STOCK, PAR VALUE $.01
PER SHARE, HAVING A LIQUIDATION VALUE OF $4,500,000, AND WORKING CAPITAL OF
THE COMPANY. ELIMINATION OF RELATED PARTY DEBT AND ALL EQUITY ON
STYLECRAFT'S BOOKS AS WELL AS AN ACCRUAL OF $135,000 OF ACQUISITION EXPENSES
RESULTED IN EXCESS OF NET FAIR VALUE OF ASSETS ACQUIRED OF $5,069,000 IF THE
COMBINATION OCCURRED AS OF DECEMBER 31, 1998. ADJUSTMENTS FOR INTEREST
EXPENSE AT THE RATES STATED ABOVE, PREFERRED STOCK DIVIDENDS AND
AMORTIZATION OF INTANGIBLES OVER 40 YEARS WERE MADE TO RESULTS OF
OPERATIONS.
(b) The acquisition of Petals consisted of a $6,730,000 cash payment and the
issuance of an 8% convertible debenture due March 26, 2001 in the principal
amount of $2,000,000. The cash portion of the purchase price was paid from
the Company's working capital and the redemption of WB & WC Warrants.
Elimination of related party debt and all equity on Petals books as well as
an accrual of $116,000 of acquisition expenses resulted in excess of net
fair value of assets acquired of $3,069,000 if the combination occurred as
of December 31, 1998. Adjustments for interest expense at the rate stated
above and amortization of intangibles over 40 years were made to results of
operations.
(c) The acquisition of Model Home Interiors, Inc. consisted of a $2,000,000 cash
payment, $230,766 in promissory notes and Class A Shares having a fair
market value of $2,300,000. The cash portion of the purchase price was
financed by a secured line of credit from NationsBank, N.A at the prime
interest rate. Elimination of related party debt and all equity on MHI's
books as well as an accrual of $200,000 of acquisition expenses resulted in
excess of net fair value of asets acquired of $231,000 if the combination
occurred as of December 31, 1998. Adjustments for interest expense at the
rate stated above and amortization of intangibles over 40 years were made to
operations.
(d) The acquisition of 51% of CSL Lighting Manufacturing, Inc. consisted of a
$600,000 cash payment and the exchange of 1,927 7% Series C Preferred Shares
having a liquidation value of $1,927,000 issued to certain creditors of CSL
for the cancellation of CSL debt with a principal amount of $1,027,000. In
addition, the Company issued 100 7% Series C Preferred Shares with a
liquidation value of $100,000 as a fee in connection with this transaction.
Elimination of related party debt and all equity on CSL's books as well as
the formation of a minority interest and an accrual of $50,000 of
acquisition expenses resulted in excess of net fair value of assets acquired
of $1,894,000 if the combination occurred as of December 31, 1998.
Adjustments for preferred stock dividends and amortization of intangibles
over 40 years were made to operations.
(E) 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, 1998 DECOR HAD 1,959,166 COMMON SHARES
OUTSTANDING AND 250,000 SERIES A CONVERTIBLE (AT 3 FOR 1) PREFERRED STOCK
OUTSTANDING, NOT OWNED BY INTERIORS. THIS IS EQUIVALENT TO 2,709,166 SHARES
OF DECOR, 1,354,583 SHARES OF INTERIORS OR $2,709,166 WITH INTERIORS AT $2
PER SHARE. ELIMINATION OF RELATED PARTY DEBT AND ALL EQUITY ON DECOR'S BOOKS
AS WELL AS AN ACCRUAL OF $200,000 OF ACQUISITION EXPENSES RESULTED IN A
PURCHASE PRICE IN EXCESS OF NET FAIR VALUE OF ASSETS ACQUIRED OF $6,484,000
IF THE COMBINATION OCCURRED AS OF DECEMBER 31, 1998. ADJUSTMENTS FOR
AMORTIZATION OF INTANGIBLES OVER 40 YEARS WERE MADE TO RESULTS OF
OPERATIONS.
