SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: June 30, 1999
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________ to _________
Commission file number 0-24352
INTERIORS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3590047
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
320 Washington Street
Mt. Vernon, New York 10553
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(Address of Principal (Zip Code)
Executive Offices)
Issuer's telephone number, including area code: (914) 665-5400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.001 par value per share
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(Title or Class)
Series A 10% Cumulative Convertible Preferred Stock, $.01 par value per share
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(Title or Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|
The issuer's revenue for the fiscal year ended June 30, 1999, was
$80,433,426. The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, computed by reference to the
closing price of such stock on October 8, 1999 was approximately $42,739,249.
As of October 8, 1999, the registrant had outstanding 31,378,067 shares of
Class A Common Stock, $.001 par value per share ("Class A Shares"), and
2,455,000 shares of Class B Common Stock, $.001 par value per share ("Class B
Shares").
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement of the registrant, which is to
be filed with the Securities and Exchange Commission (the "Commission") within
120 days of the end of the fiscal year, are incorporated by reference into Part
III of this Annual Report on Form 10-KSB.
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INTERIORS, INC.
1999 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Description of Business..............................................1
Item 2. Description of Properties...........................................11
Item 3. Legal Proceedings...................................................11
Item 4. Submission of Matters to a Vote of Security Holders.................12
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.............................................................13
Item 6. Management's Discussion and Analysis or Plan of Operations..........15
Item 7. Financial Statements and Supplementary Data.........................19
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure................................................19
Items 9, 10, 11 & 12.........................................................20
Item 13. Exhibits, Financial Statements and Reports on Form 8-K.............20
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PART I
Item 1. Description of Business.
Overview
Interiors, Inc., a Delaware corporation ("Interiors" or the "Company"),
is a designer, manufacturer and marketer of a broad range of decorative
accessories for the residential, commercial, institutional and contract markets,
including museum-quality traditional and contemporary picture frames, framed
wall mirrors, oil paintings and prints under glass, portable and installed
lighting and lighting fixtures, sculptures and decorative tabletop accessories
and silk floral and tree arrangements. Interiors primarily markets its products
to retailers in the home furnishings industry, including furniture stores, home
furnishings centers, catalog retailers, home improvement centers, department
stores and lighting retailers. The Company's silk flower and tree arrangements,
as well as other accessories, are also sold directly to consumers through a
direct mail catalogue, and the Company has recently begun marketing several
products through the internet. The Company also provides design, merchandising
and leasing services to the homebuilding industry. The Company believes that it
has a unique competitive advantage in serving a broad range of customers because
of the breadth and depth of its product lines as well as its ability to
coordinate design among several product lines.
Interiors' goal is to become the premier, national single-source
provider of decorative accessories to the home furnishings industry. To achieve
this goal, Interiors has begun consolidating the highly fragmented decorative
accessories industry, rapidly establishing its national presence through the
acquisition, integration, and growth of established, well-regarded manufacturers
of decorative accessories. The Company's business strategy was developed in
response to changing demands of large retailers, who seek to increase
"single-sourcing" of inventory purchases in order to reduce distribution and
related expenses, including styling costs associated with coordinating related
products from multiple vendors. Interiors intends to integrate and optimize the
operations of acquired companies by consolidating into regional operating units
with centralized management, which the Company believes will lead to better
product design and greater efficiency in manufacturing, shipping and inventory
management, resulting in increased sales.
Prior to 1998, Interiors had two primary operating divisions: its
custom framing division, A.P.F. Master Framemakers, which is engaged in the
manufacture of antique and contemporary picture and mirror frames for museums,
art galleries, designers, collectors and frame retailers; and its wholesale
division, which manufacturers and markets a line of high-end traditional and
contemporary mirrors sold through upscale retail furniture and department
stores.
Since early 1998, the Company has been rapidly acquiring additional
businesses in the decorative accessories industry, which it operates as
corporate subsidiaries or divisions, and has significantly expanded its product
lines. In March 1998, the Company acquired the businesses of Henlor, Inc.
("Henlor"), its subsidiary Vanguard Studios, Inc. ("Vanguard"), and Merchandise
Sales, Inc. ("MSI"; d/b/a Artmaster Studios, Inc., "Artmaster"), manufacturers
of framed mirrors, paintings and prints, lighting products, sculptures and
tabletop accessories, with combined annual sales of approximately $20.2 million.
In July 1998, the Company acquired the businesses of Windsor Art, Inc.
("Windsor"), a manufacturer of framed paintings, prints and mirrors, with annual
sales of approximately $12.7 million. In August 1998, the Company acquired Troy
Lighting, Inc. ("Troy"), a manufacturer of lighting products, with annual sales
of $12.5 million. In February 1999,the Company acquired Model Home Interiors,
Inc. ("Model Home"), a company that provides design, merchandising and leasing
services to the homebuilding industry with annual sales of approximately $12.3
million, and Stylecraft Lamps, Inc. ("Stylecraft"), a manufacturer of portable
lighting products and fixtures with annual sales of approximately $25.4 million.
In March 1999, the Company acquired a 51% interest in CSL Lighting
Manufacturing, Inc. ("CSL"), a publicly-traded manufacturer of lighting fixtures
with annual sales of approximately $12.3 million, and Petals, Inc., a
manufacturer of decorative artificial flower and tree arrangements, with annual
sales of approximately $42.0 million. As a result of these transactions, the
Company's current business includes the design, manufacture and distribution of
a broad range or decorative accessories.
Interiors was originally incorporated in New York in October 1990 under
the name A.P.F. Holdings, Inc., which subsequently merged with and into
Interiors, Inc., a Delaware corporation, in March 1994. A.P.F. Holdings, Inc.
was formed for the purpose of acquiring the assets of the picture framing
business previously operated by a subsidiary of Collectors' Guild International,
a New York corporation formed in 1976.
The Company's principal executive offices are located at 320 Washington
Street, Mt. Vernon, New York 10553; its telephone number is (914) 665-5400.
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Industry
According to the most recent Universe Study conducted by Home Accents
Today, domestic retail sales of home furnishings accessories totaled $54 billion
in 1998. The two categories most relevant to the Company are wall decor and
portable lamps, which together accounted for 21.3% of total industry sales, or
$11.5 billion, in 1998. Wall decor consists of three segments: framed art,
framed mirrors and miscellaneous wall objects such as metal sculpture. The
Company has strong product lines in each of these categories. The market for
wall decor has been growing rapidly in recent years. Retail sales of wall decor,
which were $3.8 billion in 1997, increased by 13% in 1998 to $4.3 billion. Home
Accents Today's Universe Study estimated growth for 1999 at 10%, resulting in
anticipated total sales in excess of $4.8 billion in 1999. This represents a
compound annual growth rate of 11.5% since 1997.
The growth in the decorative accessory industry is being driven in part
by demographic changes. The "baby boomer" generation, which represents the
largest population group in the country, is entering their 40s and 50s, their
peak earnings years. The baby boomers have traded up from starter homes into
their dream homes, and are spending more on home improvements, additions, and
furnishings to make their homes more luxurious. Management believes that
Interiors' products appeal to the tastes and quality expectations of the baby
boomer generation.
The manufacturing sector of the decorative accessory industry is highly
fragmented and is composed predominately of small companies with limited product
lines. Over the last 20 years, the retail distribution channels for their
products has shifted from local independent retailers to large, national and
regional retailers in the mass and specialty markets that strive to attain
superior economics of scale and marketing leverage. The Company believes that
the manufacturing sector of the industry is under pressure to consolidate from
these large retailers. These retailers seek increased "single-sourcing" of
inventory purchases, particularly in product categories that do not account for
a significant percentage of their sales. Single-sourcing allows the retailers to
reduce distribution and related expenses, including styling costs associated
with coordinating related products from multiple vendors. Additionally, these
retailers are placing additional burdens on their suppliers by insisting that
suppliers communicate via electronic data interchange ("EDI"), hold inventory to
ensure quick delivery, and drop-ship inventory to each store in the retailer's
chain and, in many instances, directly to the retailer's customers.
The Company also believes that these retailers give preference to
vendors offering coordinated accessories. Coordinated accessories help satisfy
the consumer's preference for one-stop-shopping, whereby the consumer can
purchase furniture, floor coverings, window treatments and accessories from one
retailer in coordinated styles. Consumers find this approach preferable to
attempting to achieve consistent styling of accessories from several retailers.
Management believes that compliance with the demands of retailers and consumers
is very costly for many small manufacturers of decorative accessories. As a
result, the Company believes that many of these manufacturers are receptive to
being acquired by larger manufacturers such as the Company.
The Company, through the acquisition and consolidation of manufacturers
and distributors of decorative accessories, as well as internal growth, intends
to capitalize on both the fragmented nature of the manufacturing sector of this
industry and changing demands of retailers and consumers. Management believes
that increasing the breadth and depth of its product offerings will enhance the
Company's ability to expand its wholesale operations as it develops the
capability to market "whole room" packages of decorative accessories to
retailers in the mass and specialty markets. In addition, management believes
that the operations of acquired businesses can be consolidated into regional
operating units with centralized management, eliminating operating and
management redundancies which should help Interiors improve its cash flow and
operating margins. There can be no assurance, however, that Interiors will be
able to successfully integrate the operations, facilities and management of
acquired businesses or realize any benefits from any such acquisitions.
Acquisition and Expansion Strategy
The Company's strategic objective is to become the premier, national
single-source provider of decorative accessories to the home furnishings
industry. Key elements of the Company's strategy to accomplish this objective
are to (i) continue its role as an acquirer of independent manufacturers of
decorative accessories; (ii) integrate the operations of its operating divisions
and capture economies of scale; (iii) expand the Company's product lines through
acquisition and internal growth; and (iv) expand into new markets.
Continue Growth Through Acquisitions. The Company has rapidly
established a national presence and critical customer mass by acquiring several
established, well-regarded companies which design, manufacture and distribute
decorative accessories in selected regions throughout the United States. The
Company intends to continue its acquisition strategy by acquiring additional
manufacturers of decorative accessories in order to deepen and broaden its
market presence and to expand its product
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offerings. Given the increasing pressure from large retailers to consolidate,
the Company believes that smaller manufacturers of decorative accessories will
continue to be attracted to, and benefit from, the growth opportunity provided
by the Company. As part of its growth strategy, management intends to generally
pursue companies with annual revenues ranging from $5 million to $25 million, a
moderate- to premium-priced product line, a positive reputation in the
marketplace and profitable operations.
Integrate Operations and Capture Economies of Scale. To support the
growth of its business, the Company has implemented a continuing program
designed to maximize operating efficiencies by reducing manufacturing costs,
increasing inventory turnover and enhancing its management information systems.
As a result of this program, the Company seeks to integrate and optimize the
operations of the companies it acquires by (i) consolidating operations into
regional operating units with centralized management, (ii) providing the
acquired companies with material requirements planning software, which better
determines inventory requirements, (iii) linking ordering systems through EDI,
which permits the computerized receipt of customer orders, billing and exchange
of information with customers, and (iv) providing the acquired companies with
the Company's integrated support services. Management believes that the
centralization of these functions will lead to increased sales, better product
design, and greater efficiency in manufacturing, shipping and inventory
management. The Company also has significant opportunities for cross-marketing
the products of its various operating units.
Expand Product Lines. Interiors continuously introduces new products to
complement new trends in interior design and decorating. As the Company grows,
management intends to centralize and coordinate product design throughout the
Company. Management believes that the Company's acquisitions and integration
activities will also enhance the Company's ability to design and manufacture new
products which are coordinated with products from the Company's other product
lines. Interiors also intends to pursue licensing arrangements by seeking and
forming strategic alliances with designer labels (i.e., product brands with
national or international recognition) which are expected to either (i) grant
the Company the right to develop, market and sell certain of the Company's
products under the designer label's brand name or (ii) grant a designer label
the right to market and sell certain of the Company's products under the
designer label's brand name. Although the Company does not currently have any
licensing arrangements with designer labels, such licensing arrangements would
be expected to bolster the Company's product development efforts.
Expand Into New Markets. The Company intends to expand the distribution
of its products into new domestic and international markets. Initially, the
Company intends to focus on those markets in which it already has achieved some
market penetration or for which access is facilitated through existing
distribution channels and relationships. Currently, the Company principally
sells home furnishings and accessory items through the domestic wholesale market
and, to a more limited extent, the domestic retail market. The Company intends
to expand its business by increasing the Company's retail sales through direct
marketing and catalogue sales through its Petals subsidiary, and to include
design, merchandising and leasing services to the hospitality and assisted
living industries through its subsidiary, Habitat Solutions, Inc. In addition,
the Company intends to expand its domestic and international business by
establishing an Internet presence through Interiors' interactive website,
interiors.com, which is currently operational and expected to be enhanced.
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Acquisition History
Set forth below is a list of the Company's acquisitions within the past
three fiscal years along with the date of acquisition, trade or brand names and
product categories related to each acquired company, and the approximate amount
of aggregate annual sales for the businesses acquired in the full year prior to
acquisition:
<TABLE>
<CAPTION>
Approximate
Date Company Trade or Brand Names Product Categories Annual Sales
- ---- ------- -------------------- ------------------ ------------
<S> <C> <C> <C> <C>
March 1998 Vanguard Serengeti International; Framed mirrors, $13.4 million
Vanguard Studios; Lee paintings and prints;
Reynolds lighting products;
sculptures and
tabletop accessories
March 1998 Artmaster Renaissance; Artmaster Framed mirrors, $6.8 million
Studios paintings and prints;
lighting products
July 1998 Windsor Windsor; Dolbi Cashier Framed paintings and $12.7 million
prints; framed mirrors
August 1998 Troy Troy-Lite Lighting products $12.5 million
February 1999 Model Home Model Home Interiors Design and, $12.3 million
merchandising
February 1999 Stylecraft Stylecraft Lamps Lighting products $25.4 million
March 1999 CSL(1) Creative Systems Lighting products $12.3 million
Lighting, Ortek
March 1999 Petals Petals Silk floral and tree $42.0 million
arrangements
</TABLE>
- ------------
(1) The Company acquired a 51% interest in CSL.
Vanguard. On March 10, 1998, the Company consummated the transactions
contemplated by a merger agreement among the Company, an acquisition subsidiary
of the Company, Henlor, and the shareholders of Henlor. Pursuant to the
agreement, the Company's acquisition subsidiary merged with and into Henlor with
Henlor continuing as the surviving corporation. Henlor also merged with its
subsidiary Vanguard Studios, Inc. ("Vanguard"). The merger consideration paid by
the Company consisted of (i) a cash payment of $705,621, (ii) an 8% promissory
note in the aggregate principal amount of $794,379 due December 1, 2000 and
(iii) the issuance of 299,581 Class A Shares to the former shareholders of
Henlor, which shares are subject to adjustment on March 10, 2000 to the extent
such shares are worth more than $1,000,000 or less than $250,000.
Artmaster. On March 23, 1998, the Company consummated the transactions
contemplated by a merger agreement among the Company, Artmaster, MSI and certain
shareholders of MSI. Pursuant to the agreement, MSI merged with and into
Artmaster, with Artmaster continuing as the surviving corporation. The merger
consideration paid by the Company consisted of a 10% subordinated note of the
Company in the amount of $537,248 and 779,302 Class A Shares (the "MSI Merger
Shares"). In addition, the Company agreed to repay indebtedness of MSI owed to
certain creditors of MSI in the aggregate amount of $1,022,752 (which payment
consisted of a cash payment of $750,000 and a 10% subordinated promissory note
in the amount of $272,752). The Company repaid the $272,752 and $537,248
promissory notes on July 31, 1998 and March 31, 1999, respectively. In May,
1999, the former shareholders of MSI transferred the MSI Merger Shares to
Aberdeen Avenue, LLC in consideration for $1,250,000, and the Company was
released from all continuing obligations under the merger agreement.
Windsor. On July 30, 1998, the Company consummated the transactions
contemplated by a stock purchase agreement between the Company and Bentley
International, Inc. ("Bentley"), a publicly-traded Missouri corporation.
Pursuant to the agreement, the Company purchased all of the issued and
outstanding shares of Windsor. The purchase price consisted $1,706,992 in cash
and two secured subordinated 8% promissory notes, one in the amount of $3.3
million and the other in the amount of $2.0 million (collectively, the "Windsor
Notes"). Concurrently with the purchase of the shares of Windsor, the Company
purchased 150,000 shares of common stock of Bentley and a warrant to purchase
300,000 shares of common stock of Bentley in exchange for the issuance of
1,500,000 Class A Shares (the "Windsor Shares"). One of the Windsor Notes, in
the amount of $3.3 million, was
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repaid on September 30, 1998. The other Windsor Note, in the amount of $2.0
million, and the Windsor Shares were repurchased by the Company for aggregate
consideration of $2,643,000 on December 1, 1998. In addition, an officer of
Bentley agreed to terminate his consulting agreement with Windsor. The Windsor
Shares were retired by the Company on February 22, 1999.
Troy. On August 14, 1998, the Company consummated the transactions
contemplated by a July 2, 1998 merger agreement among the Company, Troy, and the
former shareholders of Troy. Pursuant to the agreement, a wholly-owned
subsidiary of the Company merged with and into Troy, with Troy continuing as the
surviving corporation. The merger consideration paid by the Company consisted of
a cash payment of $250,000 and the issuance of 650,000 Class A Shares (the "Troy
Merger Shares"). In addition, the Company agreed to cause Troy to repay
$1,700,000 in indebtedness to certain former shareholders of Troy. On or about
July 31, 1999, the former shareholders of Troy agreed to sell the Troy Merger
Shares to Dominion Capital Fund, Ltd., Dominion Investment Fund, LLC and
Sovereign Partners, L.P. (collectively, the "Troy Purchasers") for $1,000,000.
Contemporaneously therewith, the Company and the Troy Purchasers entered into a
letter agreement pursuant to which the Troy Purchasers agreed not to sell or
otherwise transfer the Troy Merger Shares until December 25, 1999. If the Troy
Merger Shares are worth less $1,150,500 based on the sixty-day average of the
Class A Shares following such date, the Company must either pay cash or issue
additional Class A Shares to the Troy Purchasers in the amount of the shortfall.
Model Home. On February 26, 1999, the Company consummated the
transactions contemplated by a merger agreement among the Company, Model Home
and a wholly owned subsidiary of the Company. Pursuant to the Agreement, the
Company's wholly owned subsidiary merged with and into Model Home, with Model
Home continuing as the surviving corporation erger. The purchase price paid by
the Company consisted of a cash payment of $2.0 million, promissory notes
aggregating $230,766 and Class A Shares having a fair market value of $2,300,000
(the "MHI Merger Shares") on the eighteenth month anniversary of the closing.
Additionally, the Company agreed to issue Class A Shares with a maximum fair
market value of $2,000,000 (the "Earnout Shares") upon the attainment of certain
earnings goals by Model Home. The Merger Shares are being held in escrow as
security for the mutual obligations of the parties under the merger agreement.
Stylecraft. On February 22, 1999, the Company consummated the
transactions contemplated by a stock purchase agreement among the Company and
the former shareholders of Stylecraft pursuant to which the Company acquired all
of the outstanding capital stock of Stylecraft for $10,319,000 in cash.
CSL. On March 2, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement between the Company and CSL. Pursuant
to the agreement, the Company acquired 1,191,752 newly-issued shares of common
stock, par value $.001 per share, of CSL (the "CSL Shares"), representing
approximately 51% of the issued and outstanding shares of common stock of CSL,
pursuant to the March 1, 1999. The purchase price for the CSL Shares consisted
of $600,000 in cash paid to CSL and the issuance of 1,927 shares of Series C
Preferred Stock, par value $.01 per share ("Series C Preferred Shares"), to
certain creditors of CSL in exchange for the cancellation of debt of CSL having
a principal amount of $1,027,500. In conjunction with the transaction, three
designees of the Company were added to the CSL board of directors, and CSL
entered into a standstill agreement, which prohibited the Company and its
affiliates from acquiring any additional shares of common stock of CSL for a
period of 150 days from the closing date.
Petals. On March 23, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement among the majority stockholders of
Petals and the Company pursuant to which the Company acquired Petals in exchange
for the cancellation of $2,440,000 of debt owed by Petals to one of the
stockholders, an aggregate of $4,000,000 in cash and a 8% convertible note in
the original principal amount of $2,000,000 due March 23, 2001. The note is
convertible into Class A Shares at $2.00 per share. The Company also issued an
aggregate of 100,000 three-year warrants to purchase Class A Shares at an
exercise price of $3.50 per share to the minority stockholders (the "Petals
Warrants"). In connection with the transaction, Petals redeemed the interests of
the minority stockholders for aggregate consideration of approximately $3.9
million in cash and $262,500 paid over nine months as severance payments.
Products
The Company manufactures and distributes an assortment of decorative
accessories for the home furnishing industry, including picture frames and
framed mirrors, paintings and prints, sculptures and tabletop accessories,
portable and fixed lighting products and artificial flower and tree
arrangements. The Company's products, brand names and price positioning are
described below.
Picture Frames and Framed Mirrors. Interiors is a leader in producing
high-end, custom frames for paintings, prints and mirrors. The Company also
restores frames. The Company's frames are primarily reproductions of antique
frames made to
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look as distressed as genuine frames from that period would look today.
Customers select any combination of elements from the Company's library of
approximately 1,500 elements to generate the frame style best suited for the
picture or mirror and/or their decorating needs. These elements have been
collected over decades, mostly through the Company's restoration activities, and
primarily represent features from antique frames, many of which cannot be
replicated. The Company's skilled craftspeople hand produce the frame based on
the elements selected by the customer. Frame prices range from $300 to $52,000,
but typically are between $800 and $4,000.
Picture frames and mirror frames are made with the same tools, dies and
molds. Mirror frames differ from picture frames in that mirror frames are
constructed in the traditional design, with a top that is different from the
sides and bottom. In comparison, picture frames have the same design throughout
the four sides of the frame. The Company's mirror prices range from $1,000 to
$8,000. The Company's picture frames and framed mirrors are sold primarily under
the trade name of A.P.F. Master Framemakers.
Framed Paintings and Prints. The Company produces framed hand-painted
oil paintings on artist canvas and framed paper prints. The Company's line of
framed hand-painted oil paintings is available in over 500 designs. These large
canvases come in a variety of subjects including floral, abstracts, landscapes,
seascapes, and figurative subjects. The Company also sells prints, both
proprietary and non-proprietary, that are framed and placed under glass. Frames
and mats for both products are carefully selected to complement current trends
in interior design. Retail prices for the Company's framed paintings and prints
range from $70 to $600. The Company's framed art is sold primarily under the
trade names of Vanguard Studios, Artmaster Studios, Lee Reynolds and Windsor.
Lighting Products. The Company manufactures lamps which are available
in over 350 styles. The Company's portable lamps are manufactured with bases
made of metal, crystal and hand-painted hydrocal, a plaster composition that can
be finished to resemble stone, ceramic or metal. Additionally, the Company
designs and manufactures formed and decorated metal lamps, both portable and
fixed. The Company's lighting products generally are contemporary and do not
compete with commodity or imported lighting. The Company's lighting products are
sold primarily under the trade names Stylecraft Lamps, Vanguard Studios,
Artmaster Studios and Troy Lighting.
Silk Flower and Tree Arrangements. The Company designs and manufactures
high-quality silk flower and tree arrangements utilizing unique stems and other
components. The Company's silk flower business, Petals, started over 65 years
ago, was a pioneer in the industry and has enjoyed a very satisfied and loyal
customer following ever since. The Company's products can be used to decorate
homes, apartments and offices. Petals is constantly introducing many original
creations to meet the changing demands of its customers. The main avenue for
distribution of its silk flower and tree arrangements is through direct
mail-order sales. The Company is the leading mail-order catalogue source for
decorative artificial flowers and accessories for the home. Catalogues are
approximately 56 pages and contain over 200 different floral designs and
accessories. The catalogue is published and updated 4 times a year to coincide
with the major seasons of Spring, Summer, Fall and Christmas. Petals also has
five retail locations throughout the New York metropolitan area.
Sculptures and Tabletop Accessories. The Company manufactures and
distributes hand-crafted hydrocal sculptures and tabletop accessories. The
Company's products in this category sell for $75 to $200 at retail. The
Company's sculptures and tabletop accessories are sold primarily under the trade
names of Vanguard Studios and Serengeti International.
Design, Merchandising and Leasing Services. The Company provides
design, purchasing, installation and leasing services to the homebuilding
industry. The Company's experienced team of designers create specific interior
designs to be used in model homes by homebuilders. The designs are created to
promote the sale of new homes by highlighting both the features of the homes and
targeting specific consumer markets. The Company purchases and installs in the
model homes all of the furniture and decorative accessories, many of which are
designed and manufactured by the Company, and either resells or leases the
furniture and accessories to homebuilders.
Raw Materials and Suppliers
The primary raw materials used by Interiors in manufacturing and
distributing its products are wood, hydrocal, composite resins, paint, glass,
plexiglass, corrugated packaging materials, matboards, gold leaf, metal and silk
flower components. The Company purchases its raw materials from a wide variety
of domestic and foreign suppliers. Interiors has at least two, and often more,
suppliers for each item used in its manufacturing process, and has chosen to
limit the majority of its purchases to those vendors with whom it has developed
long-term relationships. Interiors believes that there are a relatively large
number of other suppliers of raw materials available, which enable Interiors to
obtain competitive prices for its raw materials. Interiors does not anticipate,
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nor has it experienced, any difficulty in obtaining any of its raw materials,
and is not dependent upon any one supplier. Interiors generally does not enter
into long-term contracts with its suppliers. Significant increases in the costs
of raw materials could have a negative effect on Interiors' gross margins for
its products if Interiors were unable to build these costs into the prices of
its products or to offset such raw material cost increases through cost
reductions.
Manufacturing
All of the Company's products are either manufactured directly by the
Company or specifically on its behalf. The Company operates six manufacturing
and distribution facilities located in California (2), Florida, Mississippi, and
New York (2). Approximately 90% of the Company's finished products are
manufactured at its production facilities. The balance of the Company's products
and certain components and raw materials utilized by the Company are
manufactured primarily in Mexico, China, Taiwan and Europe. The Company's
manufacturing and distribution systems are run by well-trained and experienced
production personnel.
The Company's manufacturing processes vary greatly among product lines,
and include metal fabrication and welding, wood cutting and joining, finishing
processes (including painting, polishing and etching), hydrocal casting,
electrification, silk screening and hand painting. Certain of the Company's
manufacturing processes utilize sophisticated computerized equipment, including
mat cutting, metal cutting and acetate generation, and advanced primer and paint
application systems. The Company emphasizes cost-efficiencies in the
manufacturing process and seeks to improve its manufacturing processes through
capital expenditures in facilities and equipment.
The Company's distribution facilities are located adjacent to its
manufacturing facilities. Interiors is currently investing in sophisticated
computer systems to code and track inventory and to coordinate and monitor
loading and shipment of products to retailers. The Company believes that
coordination of the manufacturing, packaging and distribution functions will
allow for greater quality control and production efficiencies.
Sales and Marketing
The Company's primary customers are domestic retailers in the home
furnishings industry, including furniture stores, home furnishings centers,
catalog retailers, home improvement centers, department stores and lighting
retailers. In addition, the Company's custom frame division markets its products
to museums, art galleries, designers, interior decorators and custom frame
retailers. The Company also sells artificial flower and tree arrangements direct
to consumers through catalogs and five retail stores. The design, merchandising
and leasing services are marketed primarily to home builders. In the fiscal year
ended June 30, 1999, the Company sold products to over 3,000 home furnishings
and specialty accounts.
Each of the Company's product lines is marketed and sold through a
network of independent manufacturers' representatives, who are often agencies
employing a number of sales personnel. These representatives are paid on a
commission-only basis, which the Company believes makes them highly motivated.
None of the Company's present manufacturers' representatives are exclusive to
the Company, and any representative could terminate its relationship with the
Company at any time for any reason. In addition, manufacturers' representatives
typically represent and distribute other non-competing decorative accessories.
Given the large number of accounts, the Company believes that the use of
independent representatives is an effective and cost-efficient means to
distribute its products. The Company's manufacturer's representatives are
supported by an in-house team of sales and marketing personnel. Each of the
Company's product lines is managed by a National Sales Manager or Vice President
of Sales and Marketing who works exclusively with that product line. In
addition, the Company maintains an in-house support staff consisting of order
entry personnel as well as pre-sale and post-sale customer service personnel.
To supplement its sales efforts to the home furnishings industry and
specialty account customers, the Company uses a variety of means to advertise
and promote its products, including product brochures, trade shows and
cooperative advertising with some of its accounts. Participation in trade shows,
particularly the semi-annual shows in High Point, North Carolina, is an
important element of Interiors' marketing efforts. In addition, the Company
operates sixteen showrooms in five cities around the country.
The Company believes that one of the primary ways it distinguishes
itself from its competitors is through customer service. A critical element of
the Company's customer service is on-time delivery of products to its customers.
Retailers are pursuing a number of strategies to deliver the highest-quality,
lowest-cost products to their customers. A growing trend among retailers is to
purchase on a "just-in-time" basis in order to reduce inventory costs and
increase returns on investment. As retailers shorten their lead times for
orders, manufacturers need to more closely anticipate consumer buying patterns.
The Company supports
7
<PAGE>
its retail customers' "just-in-time" inventory strategies through investments in
supporting inventory, improved forecasting systems, more responsive
manufacturing and distribution capabilities and electronic manufacturing,
communications and distribution capabilities. Customer service also involves
customer contact with the Company's top-level decision makers, which permits
early recognition of market trends and timely response to customer problems.
Competition
The decorative accessories industry is highly competitive, and includes
a large number of domestic and foreign manufacturers, none of which dominate the
market. A number of the companies which compete directly with the Company are
well established and may have financial and other resources equal to, or greater
than, those of the Company. Interiors believes that it is the largest
manufacturer of premium picture and mirror frames (as well as other wall decor)
in the United States. Interiors maintains a strong competitive advantage in this
market due to its extensive collection of tools, dies, and molds developed over
decades from restoration of genuine antique frames. Interiors believes that it
would be extremely difficult for a competitor to build a comparable collection
of these elements. In addition, Interiors has a work force of skilled crafts
people that would be difficult to replicate. Interiors also believes that it
dominates a niche market for mass production of hand-painted oil paintings on
artist canvasses.
The rapid growth of high-volume retailers, together with changes in
consumer shopping patterns, have contributed to a significant consolidation of
the domestic home furnishings retail industry and the formation of dominant
multi-category retailers. Other trends among retailers are to require
manufacturers to maintain or reduce product prices or deliver products with
shorter lead times, or for the retailers to import generic products directly
from foreign sources. The combination of these market influences creates a
highly competitive environment in which the Company's largest customers
continuously evaluate which product suppliers to use, resulting in pricing
pressures and the need for ongoing improvements in customer service. Management
believes that the competition in the decorative accessories industry is
generally a function of timeliness of delivery, price, quality, reliability,
product design, product availability and customer service. Interiors believes
that it competes favorably with other companies due to its (i) dedicated
distribution channels, (ii) established vendor relationships, (iii) broad range
of product offerings, (iv) strong name recognition, (v) relative market share,
(vi) highly efficient, low cost manufacturing capabilities and (vii) experienced
management team.
Intellectual Property Rights
Many of the Company's products and their designs, as well as the design
of many of the tools, dies and molds used in manufacturing certain of the
Company's products, are proprietary to Interiors. In addition, the Company has
sought to establish certain proprietary rights with respect to the marks under
which its products and product categories are marketed. Consequently, the
business of the Company is dependent, to a certain extent, on the Company's
ability to establish and protect its intellectual property rights with respect
to its products, designs, trademarks and tradenames under which it does
business.
The Company believes that it owns or has the right to use all designs
and proprietary technology necessary to manufacture and market its existing and
planned products. Designs with respect to its products are generally created by
employees and artists on a work-for-hire basis (i.e., the design automatically
becomes the property of the Company upon creation) or purchased or licensed from
independent designers on a consulting or royalty basis. The Company has no
knowledge that it is infringing on any existing copyright, trademark or patent
such that it would be liable for material damages or be prevented from
manufacturing or marketing its products. In the event the Company's right to
market any of its products were to be successfully challenged, the Company may
be required to discontinue certain products and the Company's business and
prospects may be adversely affected if acceptable alternative products were not
available.
8
<PAGE>
Regulatory Matters
Interiors is subject to a wide range of federal, state and local laws
and regulations relating to protection of the environment, worker health and
safety and the emission, discharge, storage, treatment and disposal of hazardous
materials. These laws include the Clean Air Act of 1970, as amended, the
Resource Conservation and Recovery Act, the Federal Water Pollution Control Act
and the Comprehensive Environmental, Response, Compensation and Liability Act.
Certain of the Company's operations use materials containing chemicals that are
considered hazardous under various environmental laws. Accordingly, management
closely monitors the Company's environmental performance at all of its
manufacturing facilities. Management believes that the Company is in substantial
compliance with all environmental laws. While the Company may be required to
make capital investments at some of its facilities to ensure compliance,
Interiors believes that it will continue to meet all applicable requirements in
a timely fashion and that any investment required to meet these requirements
will not materially affect its financial condition or results of operations.
However, legal and regulatory requirements in these areas have been increasing,
and there can be no assurance that significant costs and liabilities will not be
incurred in the future due to regulatory noncompliance. See "Management's
Discussions and Analysis or Plan of Operations."
Employees
As of June 30, 1999, the Company employed approximately 1,036 full-time
persons, approximately 141 of whom were subject to collective bargaining
agreements. The Company and its subsidiaries are party to two collective
bargaining agreements which expire in the years 2002 and 2003. None of the
Company's employees have been on strike, or threatened to strike, since the
Company's inception and the Company believes that its relations with its
employees are generally good.
Directors and Executive Officers
The following table sets forth the directors and executive officers of
the Company and their respective ages and positions:
<TABLE>
<CAPTION>
Name Age Position(s) Held with the Company
-------------------- ----- ----------------------------------------------------------
<S> <C> <C>
Max Munn 55 President, Chief Executive Officer, Chairman of the
Board, and Director
Richard P. Belenski 44 Executive Vice President of Finance and Administration,
and Chief Financial Officer
Dennis D'Amore 50 Executive Vice President and President of Decorative
Accessory Group
Todd R. Langner 44 Executive Vice President of Sales and Marketing
James P. McCorry 54 President of Habitat Solutions, Inc. (a subsidiary of
the Company)
David A. Schwartz 32 General Counsel, Executive Vice President and Secretary
Roger Lourie 54 Director
Richard Josephberg 52 Director
</TABLE>
9
<PAGE>
Management Biographies
Brief biographies of the directors, executive officers, and key
personnel of the Company are set forth below. All Directors hold office until
their resignation, retirement, removal, disqualification, death or until their
successors have been elected and qualified. Vacancies in the existing Board of
Directors are filled by majority vote of the remaining directors. Officers of
the Company serve at the will of the Board of Directors.
Max Munn has been a director of Interiors since March 1994 and Chairman
of the Board and President since September 1995. At various times since
September 1995, Mr. Munn was Chief Financial Officer of Interiors. Mr. Munn
previously held the positions of Executive Vice President, Operations and
Secretary of Interiors from February 1994 through September 1995. Mr. Munn
served as Vice President of A.P.F. Holdings, Inc. from May 1993 until A.P.F.
Holdings, Inc. merged with Interiors in March 1994. Since June 1996, Mr. Munn
has served as a director and officer of Decor Group, Inc., a publicly-traded
affiliate of Interiors, and since March 1999, Mr. Munn has served as a director
and an officer of CSL Lighting Manufacturing, Inc., a publicly-traded affiliate
of Interiors.
Richard P. Belenski has served as Chief Financial Officer of Interiors
since October 19, 1998. Mr. Belenski has over 20 years experience in the
management of retail, direct marketing and manufacturing companies. From
December 1996 through October 1998, Mr. Belenski was Vice President and Chief
Financial Officer of Petals, Inc. From October 1986 through May 1996, Mr.
Belenski served as Vice President of Finance and Chief Financial Officer for
operating divisions of the J. Crew Group, Inc., an international catalog and
retail company with total revenues of $900 million. Mr. Belenski was also
Director of Budgeting and Financial Analysis at Lincoln Center for the
Performing Arts, Inc. from March 1985 through October 1996 and held management
positions with J.C. Penney Company, Inc. from February 1978 through August 1980.
Since March 1999, Mr. Belenski has served as a director of CSL Lighting
Manufacturing, Inc., a publicly-traded affiliate of Interiors. Mr. Belenski
received a BA degree from Lycoming College in 1977 and holds an MBA from
Fairleigh Dickinson University.
Dennis D. D'Amore has served as Executive Vice President of Interiors
and President of Interiors' Decorative Accessories Division since June 1998.
Since March 1997, Mr. D'Amore has served as President and Chief Financial
Officer of Decor Group, Inc., a publicly-traded affiliate of Interiors, and
since March 1999, Mr. D'Amore has served as an officer of CSL Lighting
Manufacturing, Inc., a publicly-traded affiliate of Interiors. From 1991 through
1996, Mr. D'Amore was a general business consultant to various private and
public companies in a wide range of industries. From 1989 to 1991, Mr. D'Amore
served as Vice President of Sales and Marketing for Lasco Bathware, a division
of Tomkins Industries. From 1988 to 1989, Mr. D'Amore served as President of
Colford-D'Amore, a management consulting firm. From 1981 to 1988, Mr. D'Amore
served as Executive Vice President and General Manager of Water Jet Corporation.
Todd R. Langner was appointed Executive Vice President of Sales and
Marketing of Interiors in August 1998. From 1990 to 1998, Mr. Langner was
President of Troy Lighting and Chief Operating Officer since March, 1994. From
1988 to 1990 Mr. Langner served as Vice President Sales and Marketing for
Hinkley Lighting and President of its subsidiary, LuminArt. From 1982 to 1988,
Mr. Langner was Vice President Sales, Marketing and Product Development for
Forecast Lighting. From 1979 to 1982, Mr. Langner served as Marketing Manager of
Illuminating Experiences. Mr. Langner holds a Bachelor of Science Degree in
Journalism and Public Relations from the University of Florida.
James J. McCorry was appointed President of Habitat Solutions, Inc., a
subsidiary of Interiors, in July 1998. Since 1996, Mr. McCorry has served as the
Executive Vice President, Chief Operating Officer and Chief Financial Officer of
Plaid Clothing Group, Inc. From 1994 through 1995, Mr. McCorry served as the
Senior Vice President, Chief Financial and Chief Operating Officer of Warnaco
Group, Inc., Warners/Intimates Group. In addition, Mr. McCorry served as the
Chief Financial Officer and Vice President of Operations and Administration of
Sara Lee Corp., Aris Isotoner Division.
David A. Schwartz, has served General Counsel, Secretary and Executive
Vice President of Interiors since February 1999. From April 1996 until January
1999, Mr. Schwartz served as Corporate Counsel and Assistant Secretary for
Complete Management, Inc. Since March 1999, Mr. Schwartz has served as a
director and officer of CSL Lighting Manufacturing, Inc., a publicly-traded
affiliate of Interiors.
Roger Lourie has served as a director of Interiors since May 1995.
Since 1980, Mr. Lourie has been a General Partner of Tremont Associates, a
private equity investment fund, and since 1980 has served as President of Misty
Ridge Associates, another private equity investment fund. Mr. Lourie is also
Chairman of the Board of Pneumatic Tool, Inc., a tool manufacturer and
Devon-Adair Publishing, Inc., a book publisher. Mr. Lourie received a B.S.
degree in engineering from Rensselaer Polytechnic Institute of Technology and
M.B.A. and M.I.A. degrees from Columbia University in New York.
10
<PAGE>
Richard Josephberg has served as a director of Interiors since October
1995. Since 1986, Mr. Josephberg has served as the Chairman of Josephberg Grosz
& Co., Inc., a New York-based investment banking firm specializing in providing
private institutional capital to emerging growth companies. From 1969 through
1975, Mr. Josephberg served as a consultant with Goldman Sachs & Co.
Additionally, from 1985 through 1990, Mr. Josephberg served as a member of the
New York Stock Exchange. Mr. Josephberg received a B.B.A. degree from the
University of Cincinnati, and attended the M.B.A. program at Bernard Baruch
Graduate School of Business in New York.
There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse the Company or any of its subsidiaries.
Item 2. Description of Properties.
Interiors' headquarters are located in Mount Vernon, New York, in
leased facilities consisting of 70,000 square feet of manufacturing and
warehouse space together with executive offices and a showroom. The facility is
occupied under a five-year lease expiring at the end of 2001 with a five-year
renewal option. The Company also owns approximately fifteen acres located in
Hernando, Mississippi, where it has a manufacturing and distribution facility.
As of June 30, 1999, the Company owned or leased the manufacturing facilities
listed in the table below.
<TABLE>
<CAPTION>
Location Primary Use Approximate Size (sq. ft)
-------- ----------- -------------------------
<S> <C> <C>
City of Industry, California Manufacturing; Distribution 98,000
Vernon, California Manufacturing; Distribution 235,000
Longwood, Florida Manufacturing; Distribution 70,000
Hernando, Mississippi Manufacturing; Distribution 150,000
Mount Vernon, New York Manufacturing; Executive Offices 70,000
Portchester, New York Warehouse 65,000
White Plains, New York Manufacturing; Distribution 85,000
</TABLE>
- ------------
In addition, the Company leases showroom facilities in High Point,
North Carolina (five showrooms), San Francisco, California (four showrooms), New
York, New York (one showroom) and Dallas, Texas (six showrooms). The showroom
sizes range from 1,500 square feet to approximately 9,800 square feet. In
addition, the Company has five retail outlets located in the New York
metropolitan area.
Interiors believes that its facilities are well-maintained and adequate
for its current requirements, and that suitable additional space will be
available as needed to accommodate anticipated growth of its operations in the
foreseeable future.
Item 2. Legal Proceedings.
Interiors is subject to claims and litigation arising in the ordinary
course of its business. In management's opinion, Interiors is not presently a
party to any such litigation or claims the outcome of which would have a
material adverse effect on its financial position or its results of operations.
Item 3. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.
11
<PAGE>
PART II
Item 4. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Class A Shares have been traded on the Nasdaq Small Cap
Market ("NASDAQ") under the symbol INTXA since June 23, 1994. Prior to that
date, there was no public market for the Company's Class A Shares. The Class B
Shares are not traded on any public market. The high and low bid prices of the
Class A Shares on NASDAQ set forth below represent inter-dealer prices without
retail markups, markdowns or commissions, and may not necessarily represent
actual transactions:
Fiscal Year Ending June 30, 1999 High Low
---- ---
First Quarter..................................... $2.19 $ .94
Second Quarter.................................... $1.94 $ .69
Third Quarter .................................... $4.50 $1.38
Fourth Quarter.................................... $2.25 $1.06
Fiscal Year Ending June 30, 1998 High Low
---- ---
First Quarter .................................... $1.63 $ .75
Second Quarter ................................... $1.53 $ .97
Third Quarter .................................... $2.50 $ .97
Fourth Quarter ................................... $2.03 $1.69
As of August 31, 1999, there were 190 holders of record of the
Company's Class A Shares and one holder of record of the Company's Class B
Shares. On September 29, 1999, the last reported sale price on the NASDAQ for
the Company's Class A Shares was $1.19.
The Company has never declared or paid cash dividends on its Class A
Shares or Class B Shares. The Company intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate
declaring or paying any cash dividends in the foreseeable future. The Company's
ability to pay dividends is limited by factors the Board of Directors deems
relevant, including results of operations, financial condition and capital and
surplus requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, pursuant to the Company's
Certificate of Designations Rights and Preferences, (a) the Company's Series A
Preferred Shares are entitled to a dividend, prior to any payment of dividends
on the Class A Shares, of $0.50 per share per annum payable in cash or Class A
Shares in semi-annual installments of $0.25 per share, (b) the Company's Series
B Preferred Stock, par value $.01 per share ("Series B Preferred Shares"), are
entitled to a dividend, prior to any payment of dividends on the Class A Shares,
at a rate of 8% per year, and (c) the Company's Series C Preferred Shares are
entitled to a dividend, prior to any payment of dividends on the Class A Shares,
at a rate of 7% per year.
Unregistered Offerings
On or about October 7, 1998, the Company issued 125,000 Class A Shares
to Laurie Munn upon conversion of 125,000 Class B Shares. The issuance of the
Class A Shares was exempt from registration under Section 4(2) of the Securities
Act, as a transaction by the issuer not involving any public offering because
(i) the offering was limited to one person, (ii) such person had sophisticated
representatives, (iii) such person had a pre-existing relationship with the
Company and access to information that would be required in a registration
statement and (iv) the offering was made through direct negotiations and did not
include general advertising or solicitation.
On or about October 22, 1998, the Company issued 10,000 Series A
Preferred Shares to SJP Contractors of New York, Inc. in settlement of
litigation against the Company. The issuance of the Series A Preferred Shares
was exempt from registration under Section 4(2) of the Securities Act, as a
transaction by the issuer not involving any public offering because (i) the
offering was limited to one person, (ii) such person had sophisticated
representatives, (iii) such person had a pre-existing relationship with the
Company and (iv) the offering was made through direct negotiations and did not
include general advertising or solicitation.
On or about October 22, 1998, the Company issued 10,000 Class A Shares
to Jules L. Marx in settlement of litigation against the Company's Chief
Executive Officer. The issuance of the Class A Shares was exempt from
registration under Section 4(2) of the Securities Act, as a transaction by the
issuer not involving any public offering because (i) the offering was limited to
one person, (ii) such person had sophisticated representatives, (iii) such
person had a pre-existing relationship with the Company and (iv) the offering
was made through direct negotiations and did not include general advertising or
solicitation
12
<PAGE>
On or about November 23, 1998, the Company issued 10,000 Class A Shares
to Roger Lourie, a director of the Company, and 10,000 Class A Shares to various
designees named by Richard Josephberg, a director of the Company. These shares
were issued as compensation for serving as a member of the Board of Directors
and valued at the fair market value on the date of issuance. The issuance of the
Class A Shares was exempt from registration under Section 4(2) of the Securities
Act, as a transaction by the issuer not involving any public offering because
(i) the offering was limited to one person, (ii) such person had a pre-existing
relationship with the Company and access to information that would be required
in a registration statement and (iii) the offering was made through direct
negotiations and did not include general advertising or solicitation.
On November 23, 1998, the Company issued 15,000 Class A Shares to JG
Partners LP in connection with certain investment banking services provided by
Josephberg Grosz & Co., Inc. ("Josephberg Grosz"), an affiliate of Richard
Josephberg, a director of the Company. These shares were valued at the fair
market value on the date of issuance. The issuance of the Class A Shares was
exempt from registration under Section 4(2) of the Securities Act, as a
transaction by the issuer not involving any public offering because (i) the
offering was limited to one person, (ii) such person had a pre-existing
relationship with the Company and access to information that would be required
in a registration statement and (iii) the offering was made through direct
negotiations and did not include general advertising or solicitation.
On March 11, 1999, the Company issued 10,000 Class A Shares to Roger
Lourie, a director of the Company, and 10,000 Class A Shares to various
designees named by Richard Josephberg, a director of the Company. These shares
were issued as compensation for serving as a member of the Board of Directors
and were valued at the fair market value on the date of issuance. The issuance
of the Class A Shares was exempt from registration under Section 4(2) of the
Securities Act, as a transaction by the issuer not involving any public offering
because (i) the offering was limited to two persons, (ii) such persons had a
pre-existing relationship with the Company and access to information that would
be required in a registration statement and (iii) the offering was made through
direct negotiations and did not include general advertising or solicitation.
On April 28, 1999, the Company issued 4,650 Class A Shares to JG
Capital Inc. and 5,350 Class A Shares to various designees named by Richard
Josephberg, a director of the Company, in connection with certain investment
banking services provided by Josephberg Grosz, an affiliate of Mr. Josephberg.
These shares were valued at the fair market value on the date of issuance. The
issuance of the Class A Shares was exempt from registration under Section 4(2)
of the Securities Act, as a transaction by the issuer not involving any public
offering because (i) the offering was limited to one person, (ii) such person
had a pre-existing relationship with the Company and access to information that
would be required in a registration statement and (iii) the offering was made
through direct negotiations and did not include general advertising or
solicitation.
No underwriters were engaged by the Company in connection with any of
the issuances described above and, accordingly, no underwriting discounts or
commissions were paid.
13
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operations.
Overview
Interiors, Inc., a Delaware corporation (the "Company"), is a designer,
manufacturer and marketer of a broad range of decorative accessories for the
residential, commercial, institutional and contract markets, including
museum-quality traditional and contemporary picture frames, framed wall mirrors,
hand-painted oil paintings and prints under glass, portable and installed
lighting and lighting fixtures, sculptures and decorative tabletop accessories,
and silk floral and tree arrangements. The Company's goal is to become the
premier, national single-source provider of decorative accessories to the home
furnishings industry. To achieve this goal, the Company has begun consolidating
the highly fragmented decorative accessories industry, rapidly establishing its
national presence through the acquisition, integration and growth of
established, well-regarded manufacturers of decorative accessories.
Results of Operations
Comparison of Fiscal Years Ended June 30, 1999 and 1998
Net Sales for the fiscal year ended June 30, 1999 were $80,433,426
compared to $13,447,234 for the fiscal year June 30, 1998, an increase of
$66,986,192 or approximately 498%. The increase in net sales was primarily due
to the Company's acquisitions in March 1998 of Vanguard and Artmaster, which
added approximately $9,498,000 in additional net sales, the acquisition in
August 1998 of Windsor, which added approximately $12,533,000 in additional net
sales, the acquisition in August 1998 of Troy, which added approximately
$12,073,000 in additional net sales, the acquisition in February 1999 of MHI,
which added approximately $5,368,000 in additional net sales, the acquisition in
February 1999 of Stylecraft, which added approximately $13,946,000 in additional
net sales, the acquisition in March 1999 of Petals, which added approximately
$11,371,000 in additional net sales and the acquisition of an interest in March
1999 of CSL which added approximately $3,113,000 in additional net sales.
Cost of goods sold for the twelve months ended June 30, 1999 increased
to $50,449,519 from $8,268,922 for the same period in 1998, an increase of
$42,180,597. Cost of goods sold includes the costs directly related to the
recognition of the Company's net sales. The increase in cost of goods sold was
primarily due to the Company's acquisitions of Vanguard and Artmaster, which
added approximately $7.0 million in additional cost, the acquisition of Windsor,
which added approximately $8.7 million in additional cost, the acquisition of
Troy, which added approximately $8.6 million in additional cost, the acquisition
of MHI, which added approximately $2.7 million in additional cost, the
acquisition of Stylecraft, which added approximately $9.2 million in additional
cost, the acquisition of Petals, which added approximately $4.6 million in
additional cost, and the acquisition of an interest of CSL, which added $1.9
million in additional cost.
As a percentage of net sales, cost of goods sold for the fiscal year
ended June 30, 1999 increased to 62.7% from 61.4% for the same period of the
prior year. The concomitant decrease in profit margin resulted primarily from
the acquisition of additional businesses with alternative margin structures.
Selling, general and administrative expenses increased to $28,964,186
for the fiscal year ended June 30, 1999 compared to $3,982,779 for the fiscal
year 1998, an increase of $24,981,407. General and administrative expenses
represent overhead and administrative expenses excluding costs directly related
to operations and the recognition of the Company's net sales. The increase in
general and administrative expenses was primarily due to the Company's
acquisitions of Vanguard and Artmaster, which added approximately $4.1 million
in additional expenses, the acquisition of Windsor, which added approximately
$2.7 million in additional expenses, the acquisition of Troy, which added
approximately $3.4 million in additional expenses, the acquisition of MHI, which
added approximately $2.3 million in additional expenses, the acquisition of
Stylecraft, which added approximately $2.0 million in additional expenses, the
acquisition of Petals, which added approximately $5.2 million in additional
expenses, and the acquisition of an interest of CSL, which added $1.2 million in
additional expenses.
As a percentage of net sales, selling, general and administrative
expenses for the twelve month period ended June 30, 1999 increased to 36.0% from
29.6% for the same period of the prior year. This increase primarily resulted
from acquisitions of new businesses with alternative cost structures.
Interest expense and non-cash financing charges increased to $4,185,220
for the fiscal year ended June 30, 1999 from $863,057 for the same period in
1998 principally due to financing activities associated with the Company's
acquisitions.
14
<PAGE>
Other income reported for the twelve month period ended June 30, 1999
increased to $559,599 from $335,000 of other income for the same period of 1998.
During the third quarter of fiscal 1999, the Company recorded an impairment loss
of its entire investment, approximately $3.3 million, in Decor Group, Inc.
("Decor"), a publicly-traded corporation that designs and manufactures metal
sculptures, because the Company believes that, based on Decor's current
financial condition its investment has been permanently impaired. The Company
has established reserves for the uncollectibility of its entire receivable,
approximately $1.0 million, owed to the Company from Decor and the possibility
that the Company would be required to pay up to $300,000 pursuant to its
guaranty of approximately $580,000 of indebtedness of Decor owed to Austin
Financial. During the fourth quarter of fiscal 1999, the Company recorded an
impairment loss of its entire investment, approximately $1.1 million, in
Photo-To-Art, Ltd. ("Photo-to-Art"), a company that converts photographs into
paintings, because the Company believes that, based on Photo-to-Art's current
financial condition its investment has been permanently impaired. The Company
has established reserves for the uncollectibility of $250,000 of its receivable,
approximately $325,000, owed to the Company from Photo-to-Art. During the twelve
month period ended June 30, 1999, the Company also had an extraordinary gain
from early extinguishment of debt in the amount of $870,264.
The Company reflected income tax expense of 200,000 for fiscal year 1999
and a tax benefit of $108,000 for the year ended June 30, 1998. The benefit
recorded is net of the various state income tax requirements and is primarily as
a result of net operating losses accumulated since the Company's inception and
available to offset future taxable income. The decrease in the benefit rate
primarily results from an increase in the Company's state income tax rate for
the year ended June 30, 1999 as compared to June 30, 1998.
Comparison of Fiscal Years Ended June 30, 1998 and 1997
Net sales from operations for the fiscal year ended June 30, 1998,
increased by $8,651,000, or 180%, to $13,447,000 from $4,796,000 for the fiscal
year ended June 30, 1997. Sales increased by $6,130,000 as a result of the
Company's acquisitions of Vanguard and MSI during March 1998. Net sales for the
A.P.F. Master Framemakers division increased $2,665,000 for the year ended June
30, 1998, due to increased sales to a major wholesale customer. For the year
ended June 30, 1997, net sales includes $144,000 of non-cash royalties and
commissions recognized as a result of a settlement of previously reserved
receivables.
Cost of goods sold as a percentage of net sales was 61% for the year
ended June 30, 1998, and 64% for the year ended June 30, 1997. The cost of sales
for the A.P.F. Master Framemakers division declined from approximately 64% as of
June 30, 1997 to 59% as of June 30, 1998. The cost of goods sold improved at the
A.P.F. Master Framemakers division as a result of increased sales to a major
wholesale customer and increases in factory productivity. The Company's cost of
goods sold was further improved due to the acquisitions of Vanguard and MSI. As
a result of the acquisitions, the Company recorded rapid sales growth in the
fourth quarter of fiscal 1998. During this period, the Company achieved savings
in the cost of raw materials and direct labor as a percentage of sales as a
result of manufacturing synergies resulting from the consolidation of
manufacturing facilities of these two subsidiaries.
Selling, general and administrative expenses as a percentage of net
sales totaled 30.4% for the year ended June 30, 1998, versus 53.6% for the year
ended June 30, 1997. The reduction in the ratio of selling, general, and
administrative expenses as a percentage of net sales for the year ended June 30,
1998 versus the prior period resulted primarily the increase in sales, the
containment of the growth of administrative personnel which led to reduced
salaries, benefits and travel expenses as a percentage of sales. Furthermore,
discretionary spending for such items as stationery and supplies, advertising,
and consulting fees were curtailed. These cost containment's were achieved
during the same periods that sales grew rapidly as a result of the above
acquisitions.
Interest expense as a percentage of net sales totaled approximately
4.1% for the year ended June 30, 1998, versus approximately 8.4% for the year
ended June 30, 1997. Interest expense was approximately $152,000 higher in the
year ended June 30, 1998 versus the year ended June 30, 1997, due largely to new
debt to finance acquisitions.
Other income (expense) from consulting and management fee income
decreased $805,000 from fiscal 1997 to 1998. During 1997, the Company reflected
$1,140,000 in revenues as a result of its non-cash transactions (sale of certain
assets and other goods and services) with an affiliate. For the fiscal year
ended June 30, 1998, the Company has recognized an aggregate of $335,000 in
other income for consulting and management services rendered to affiliates.
15
<PAGE>
The Company reflected income tax benefits of approximately $108,000 and
$19,000, respectively, for the years ended June 30, 1998 and 1997. The benefit
recorded in each year is net of the various state income tax requirements and is
primarily as a result of net operating losses accumulated since the Company's
inception and available to offset future taxable income. The decrease in the
benefit rate primarily results from an increase in the Company's state income
tax rate for the year ended June 30, 1998 as compared to June 30, 1997.
For the year ended June 30, 1998, the Company realized net income of
approximately $634,000 ($0.04 per share), versus net income of approximately
$106,000 (($0.09) per share) for the year ended June 30, 1997.
Due to declining revenues and high operating costs, on December 16,
1996, the Board of Directors decided to dissolve and discontinue Italia. On
December 27, 1996, a Notice of Public Auction was distributed by the Company,
advising all interested parties that a public auction of all the assets of
Italia consisting of molds, equipment, models, and inventory listed in a
Security Agreement entered into between Italia as a debtor and United Credit
Corporation, as secured party, was to occur. The auction took place on January
10, 1997 and the Company was the successful bidder, thereby acquiring all the
assets of Italia in consideration of a payment of $2,000 and the assumption by
the Company of the liabilities of Italia to United Credit Corporation, which as
December 31, 1996 totaled approximately $806,000. Due to its preexisting
relationship with the Company coupled with the evaluation of the Company's
prospects and financial condition on a going forward basis, United Credit
Corporation approved of this transaction. Since the financial statements of
Italia are consolidated into those of the Company, Italia's liabilities have
already been reflected on the Company's historical consolidated financial
statements. At June 30, 1997, the Company made the adjustments necessary to
properly state the remaining assets and liabilities of Italia. These adjustments
included approximately $586,000 write-offs of debt recorded based on the advice
of the Company's legal counsel (as the Company is not legally liable for such
liabilities. Furthermore, the Company wrote-off approximately $534,000 in assets
related to its Italia subsidiary, which were not considered to benefit the
Company's future operations. The write-off of the assets is reflected in the
"cost of goods sold" and "selling, general and administrative expenses"
components of the June 30, 1997 statement of income. In addition a general
reserve on $56,000 was recorded and included on the Company's historical
consolidated financial statements.
Liquidity and Capital Resources
During the fiscal year ended June 30, 1999, the Company has primarily
used its cash to support operating activities, to fund acquisitions and for
capital expenditures. The Company's primary sources of cash during this period
have been the proceeds raised by (a) the private placement of two 24.5% secured
promissory notes issued to United Credit in the aggregate principal amount of
$2,000,000, (b) the private placement of five 12% convertible demand notes
aggregating $686,000 (the "12% Notes"), which are convertible into Class A
Shares at $1.125 per share, (c) the private placement of a secured promissory
note due October 25, 1999 (the "Landis Note") issued to the Landis Brothers
Corporation ("Landis"), which currently bears interest at a rate of 16% per
annum, (d) the issuance of Series B Preferred Shares, which raised approximately
$2.0 million, (e) the issuance of Series C Preferred Shares, which raised
approximately $4.5 million, and (e) the exercise of the Company's warrants to
purchase Class A Shares ("WB Warrants") and warrants to purchase Series A
Preferred Shares ("WC Warrants"), which raised approximately $18.2 million. In
addition, as discussed below, the Company currently has formula based secured
financing arrangements with Austin Financial Services, Inc. ("Austin"),
NationsBank ("NationsBank") and Finova Growth Finance (f/k/a United Credit,
"Finova"). At June 30, 1999, the Company had working capital of $19,183,047.
Net cash provided by operating activities during fiscal year 1999 was
$1,932,035, principally due to depreciation and amortization and non-cash
financing charges.
Net cash used in investing activities during fiscal year 1999 was
$29,258,607, primarily due to the acquisitions of Vanguard, Artmaster, Windsor,
Troy, MHI, Stylecraft and Petals.
Net cash provided by financing activities during fiscal year 1999 was
$33,499,659, primarily due to proceeds raised from the issuance of debt and the
exercise of the WB Warrants and WC Warrants.
The Company has secured formula based financing arrangements with
several lenders relating to the operations of its subsidiaries. As of September
27, 1999, the Company owed Austin Financial approximately $10,529,000 at an
annual rate equal to prime plus 2.0% (10.25% as of the date of this filing), and
could borrow approximately an additional $3,271,000, relating to the operations
of Windsor, Troy, Vanguard and Stylecraft. As of September 27, 1999, the Company
owed NationsBank approximately $2,513,000 at an annual rate equal to prime
(8.25% as of the date of this filing), and could borrow approximately an
additional $1,487,000, relating to the operations of MHI. As of September 27,
1999, the Company owed Finova approximately $565,000 at
16
<PAGE>
an annual rate equal to prime plus 8.0% (16.25% as of the date of this filing),
and could borrow approximately an additional $935,000, relating to the
operations of the Company's A.P.F. Master Framemakers division. The Company's
obligations owed to Finova are personally guaranteed by Max Munn, the Chairman,
President and Chief Executive Officer of the Company, and his spouse. The
Company is currently seeking to replace these financing arrangements in an
effort to reduce its overall interest expense. There can be no assurance,
however, that the Company will be able to obtain sufficient financing on terms
that are equal to or more favorable than its current arrangements.
On March 20, 1999, the Company redeemed 916,591 WB Warrants and 103,610
WC Warrants for aggregate consideration of $10,202.01 or $0.01 per warrant. As a
result of the redemption, there are no longer any outstanding WB Warrants or WC
Warrants. Prior to redemption, an amount of WB Warrants and WC Warrants were
exercised at $2.00 and $5.50, respectively, resulting in the issuance of
2,796,032 Class A Shares and 2,322,355 Series A Preferred Shares, and the
Company received gross proceeds of approximately $18.2 million. In connection
with the redemption, the Company paid a fee of $175,000.
As of June 30, 1999, the Company had accrued but unpaid dividends of
$133,256 on it Series A Preferred Shares.
During fiscal year 1999, the Company conducted an active acquisition
program using both cash, stock and debt as consideration in its transactions. In
order to accomplish additional acquisitions, the Company anticipates that it
will required to pay additional cash, issue additional securities and/or incur
additional debt.
The Company believes that its current cash, cash flow from operations,
and available lines of credit will enable it to meet its working capital and
capital expenditure requirements through the first quarter of fiscal 2001.
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 supplied
and other operating costs could adversely effect the Company's operations. The
Company, however, believes that it should be able to increase prices to offset
increases in cost of goods sold or other operating costs.
Sales Variations
The Company's net sales are not generally subject to seasonal
fluctuations experienced by certain retailers, however, the Company does
experience some minor variations in the level of sales during the year. The
first quarter of the Company's fiscal year (July through September) is generally
the Company's slowest sales period due to the fact that the summer is typically
when retailers are in their slowest purchasing period. During this time, certain
of the Company's warehouses and factories closes for three to five days to take
annual physical inventories and to consolidate vacation periods for certain of
the Company's employees.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields will need to accept four digit entries to distinguish 21st century dates
from 20th century dates. As a result, in less than one year, computer systems
and software used by many companies may need to be upgraded to comply with Year
2000 requirements. The Company has begun a full evaluation of its Year 2000
compliance needs with respect to its computer system and has authorized funding
of approximately $100,000 and contracted with a Year 2000 consulting service to
meet those needs. The Company is currently in the process of restructuring its
computer systems in order to prevent disruptions in operations involving the
transition of dates from 1999 to 2000 and expects to be fully Year 2000
compliant by such time. If due to an unforseen circumstance, the Company cannot
achieve complete Year 2000 compliance by the year 2000, the Company is prepared
to institute temporary computer modifications which will allow it to transition
from the year 1999 to the year 2000 with only minor disruptions. These
disruptions are not anticipated to have any material effect on Interiors'
operations. Under a worst case scenario, however, system failure or
miscalculation could result in an inability to process transactions, send
invoices, accept customer orders, provide customers with products and services,
or engage in similar normal business activity. The Company has not completed its
assessment of potential Year 2000 related problems among third parties upon
which it relies, including its suppliers and customers. Substantial business
interruptions at key suppliers or major customers could have a material adverse
effect on the Company
As Year 2000 preparations continue, the Company may discover additional
Year 2000 problems, may not be able to develop, implement or test remediation or
contingency plans, or may find that the costs of these activities exceed current
expectations
17
<PAGE>
and become material. The foregoing factors, individually or in the aggregate,
could materially adversely affect the Company's operating results and could make
comparison of historic operating results and balances difficult or not
meaningful.
Forward Looking Statements
When used in this Annual Report on Form 10-KSB, the words "may,"
"will," "should," "expect," "believe," "anticipate," "continue," "estimate,"
"project," "intend" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act regarding events, conditions and
financial trends that may affect the Company's future plans of operations,
business strategy, results of operations and financial condition. The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements pursuant to the safe harbor established in the Private Securities
Litigation Reform Act of 1995. Prospective investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such forward-looking statements should, therefore, be considered in
light of various important factors, including those set forth herein and others
set forth from time to time in the Company's reports and registration statements
filed with the Securities and Exchange Commission. The Company disclaims any
intent or obligation to update such forward-looking statements.
In particular, in connection with certain past acquisitions the Company
has disclosed expected additions to its revenues from such transactions. Such
revenue forecasts are forward-looking information and as such are inherently
subject to risk and uncertainty. Important factors, including those set forth
below, could cause the Company's actual results from these transactions to
differ materially and adversely from the projections, or the additional revenues
from these transactions could be offset by a diminution of other revenues.
Accordingly, there can be no assurance that the Company will achieve the
projected revenues, or, if attained, what effect such revenues will have on the
Company's net earnings or earnings per share. In addition, the Company is
particularly susceptible to various factors that may affect future results, such
as: risks relating to the integration in connection with acquisitions; hiring
and retaining upper management personnel; capital requirements; identification
of growth opportunities; implementation of cost and accounting controls; the
issuance of securities that may be dilutive to current equity holders,
maintaining high levels of debt and the possible volatility of stock prices.
Item 7. Financial Statements and Supplementary Data.
Reference is made to the Index to Consolidated Financial Statements on
page F-1 for the Company's consolidated financial statements and notes thereto.
Supplementary schedules for the Company have been omitted as not required or not
applicable because the information required to be presented is included in the
financial statements and related notes.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
18
<PAGE>
Item 7. FINANCIAL STATEMENTS
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
----
Report of Independent Public Accountants.....................................F-2
Consolidated Financial Statements:
Consolidated Balance Sheet as of June 30, 1999...............................F-3
Consolidated Statements of Operations for the
years ended June 30, 1999 and 1998.......................................F-4-F-5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1999 and 1998........................F-6-F-7
Consolidated Statements of Cash Flows for
the years ended June 30, 1999 and 1998...................................F-8-F-9
Notes to Consolidated Financial Statements.............................F-10-F-31
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Interiors Inc.:
We have audited the accompanying consolidated balance sheet of Interiors, Inc.,
(a Delaware corporation) and subsidiaries, as of June 30, 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the two years in the period ended June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interiors, Inc. and
subsidiaries as of June 30, 1999 and the results of their operations and their
cash flows for each of the two years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
October 13, 1999
F-2
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 1999
<TABLE>
<S> <C>
Assets
Current Assets:
Cash and cash equivalents .................................................................. $ 6,910,013
Accounts receivable, net of allowance for doubtful accounts of $792,985 .................... 14,464,499
Inventories ................................................................................ 22,971,573
Other current assets ....................................................................... 3,474,473
------------
Total current assets ................................................................... 47,820,558
------------
Investment in Affiliates ........................................................................ --
Property and Equipment, net ..................................................................... 11,902,445
Goodwill, Net ................................................................................... 32,261,841
Other Assets .................................................................................... 1,781,029
------------
Total assets ........................................................................... 93,765,873
============
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current maturities of long-term debt ..................................... 7,653,960
Accounts payable and accrued liabilities ................................................... 23,027,682
------------
Total current liabilities .............................................................. 29,101,114
------------
Long Term Debt .................................................................................. 17,092,869
Other Long Term Liabilities ..................................................................... 938,880
Minority Interest in Subsidiary ................................................................. 54,713
Commitments and Contingencies (See Note 11)
Manditorily Redeemable Series B Preferred Stock ................................................. 1,001,000
Stockholders' Equity:
Preferred stock, $.01 par value, 5,300,000 shares authorized, 1,272,577 shares issued and
outstanding
Series A Convertible Redeemable Preferred Stock, $.01 par value, 2,870,000 shares
authorized, 1,066,050 shares issued and outstanding .................................. 10,660
Series B Convertible Redeemable Preferred Stock, $.01 par value, 200,000 shares
authorized, 200,000 shares issued and outstanding .................................... 1,000
Series C Convertible Redeemable Preferred Stock, $.01 par value 6,527 shares
authorized, 6,527 shares issued and outstanding ...................................... 65
Class A common stock, $.001 par value, 60,000,000 shares
Authorized, 30,173,459 shares issued and outstanding ..................................... 30,173
Class B common stock, $.001 par value, 2,500,000 shares
Authorized, 2,455,000 shares issued and outstanding ...................................... 2,455
Treasury stock ............................................................................. (1,317,023)
Additional paid-in-capital ................................................................. 65,530,022
Accumulated deficit ........................................................................ (17,048,703)
Notes receivable ........................................................................... (3,211,880)
------------
Total stockholders' equity ............................................................. 43,996,769
------------
Total liabilities and stockholders' equity ...................................................... $ 93,765,873
============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
F-3
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Statements Of Operations
For the Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net Sales .......................................................................... $ 80,433,426 $ 13,447,234
Cost of Goods Sold ................................................................. 50,449,519 8,268,922
------------ ------------
Gross profit ................................................................. 29,983,907 5,178,312
------------ ------------
Selling, General, and Administrative Expenses ...................................... 28,964,186 4,024,821
Income (loss) from operations ................................................ 1,019,721 1,153,491
------------ ------------
Other Expenses (Income)
Interest expense ............................................................. 2,992,861 557,341
Financing charges - noncash .................................................. 1,192,359 405,716
Impairment loss on investments and non-operating receivables ................. 6,088,372 --
Consulting and management fees ............................................... (442,100) (335,000)
Minority interest ............................................................ (117,499)
------------ ------------
Total other expense (income) ............................................. 9,713,993 628,057
------------ ------------
Income (loss) before provision (benefit) for income taxes and extraordinary
item ......................................................................... (8,694,272) 525,434
Provision (Benefit) for Income Taxes ............................................... 200,000 (108,240)
------------ ------------
Income (loss) before extraordinary item ...................................... (8,894,272) 633,674
Extraordinary Gain from Early Extinguishment of Debt ............................... 870,264 --
Net (Loss) Income .................................................................. $ (8,024,008) $ 633,674
============ ============
Earnings Per Common Share:
Basic
Income (loss) before extraordinary item ...................................... (8,024,008) 633,674
Preferred dividends .......................................................... (518,265) (339,719)
Accreted preferred dividends ................................................. (832,000) --
------------ ------------
Net income (loss) attributable to common shares before extraordinary item .... (9,374,273) 293,955
Extraordinary gain from early extinguishment of debt, net .................... 870,264 --
------------ ------------
Net income (loss) ............................................................ (8,504,009) 293,955
============ ============
Net earnings per common share - basic:
Earnings from continuing operations .......................................... (0.43) 0.04
Extraordinary gain from early extinguishment of debt ......................... 0.04 0.00
------------ ------------
Net earnings per common share - basic ........................................ (0.39) 0.04
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Statements Of Operations (continued)
For the Years Ended June 30, 1999 and 1998
<TABLE>
<S> <C> <C>
Diluted
Income (loss) before extraordinary item ..................................... (8,024,008) 633,674
Preferred dividends ......................................................... (518,265) (339,719)
Accreted preferred dividends ................................................ (832,000) --
----------- -----------
Net income from continuing operations attributable to common shares before
extraordinary item .......................................................... (9,374,273) 293,955
Extraordinary gain from early extinguishment of debt, net ................... 870,264 --
----------- -----------
Net income (loss) ........................................................... (8,504,009) 293,955
=========== ===========
Net earnings per common share - diluted:
Earnings from continuing operations ......................................... (0.43) 0.04
Extraordinary gain from early extinguishment of debt ........................ 0.04 0.00
----------- -----------
Net earnings per common share - diluted: .................................... (0.39) 0.04
=========== ===========
Weighted average number of shares used in computation of earnings per share
Basic ....................................................................... 22,035,755 7,251,193
Diluted ..................................................................... 22,035,755 8,154,083
Weighted average number of shares used in computation of earnings per share from
extraordinary gain
Basic ....................................................................... 22,035,755 7,251,193
Diluted ..................................................................... 23,480,512 8,154,083
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Class A
Series A Series B Series C -------
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 1,147,060 11,471 5,261,241 5,261
Sale of Treasury Stock
Conversion of preferred stock to
common stock (517,622) (5,177) 1,552,866 1,553
Class B Common Shares issued
Escrow shares 7,500,000 7,500
Class A Common Shares issued for
services rendered 226,670 227
Common stock issued in connection
with acquisitions 1,078,883 1,079
Exercise of Class WA Warrants, net of
expenses 2,607,116 2,607
Warrants issued in connection with
convertible debt
Stock dividends declared December,
1997 530,331 530
Conversion of Class B Common shares
into Class A Common shares 394,750 395
Issuance of Preferred Stock 50,000 500
Conversion of promissory notes to
Class A common 463,000 463
Beneficial Conversion Adjustment
Net income through June 30, 1998
Balance, June 30, 1998 679,438 6,794 19,614,857 19,615
Class B Common Shares issued
Series B Preferred Shares issued, net
of expenses 100,000 1,000
Series C Preferred Shares issued, net
of expenses 4,500 45
Conversion of Class B to Class A
Common 125,000 125
Conversion of Preferred to Class A
Common (1,945,743) (19,457) 5,837,229 5,837
Escrow shares 5,000,000 5,000
CSL acquisition 2,027 20
Troy Lighting acquisition 650,000 650
Windsor Art acquisition 1,500,000 1,500
MHI acquisition 1,056,342 1,056
<CAPTION>
Additional
Class B Paid in Accumulated Treasury Note
Common Stock Capital (Deficit) Stock Receivable Total
------------ ------- -------- ----- ---------- -----
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 1,769,750 1,770 13,216,636 (8,679,208) (600) (437,500) 4,117,830
Sale of Treasury Stock 479,400 600 480,000
Conversion of preferred stock to
common stock 3,624
Class B Common Shares issued 730,000 730 510,270 (510,500) 500
Escrow shares (7,500)
Class A Common Shares issued for
services rendered 350,993 351,220
Common stock issued in connection
with acquisitions 1,748,921 1,750,000
Exercise of Class WA Warrants, net of
expenses 3,775,567 3,778,174
Warrants issued in connection with
convertible debt 200,000 200,000
Stock dividends declared December,
1997 529,801 (530,331)
Conversion of Class B Common shares
into Class A Common shares (394,750) (395)
Issuance of Preferred Stock 249,500 250,000
Conversion of promissory notes to
Class A common 694,537 695,000
Beneficial Conversion Adjustment
Net income through June 30, 1998 633,674 633,674
Balance, June 30, 1998 2,105,000 2,105 21,751,749 (8,575,865) 0 (948,000) 12,256,398
Class B Common Shares issued 1,725,000 1,725 2,004,225 1,607,100) 398,850
Series B Preferred Shares issued, net
of expenses 1,003,000 1,004,000
Series C Preferred Shares issued, net
of expenses 4,479,955 4,480,000
Conversion of Class B to Class A
Common (125,000) (125) 0
Conversion of Preferred to Class A
Common 13,620 0
Escrow shares (5,000) 0
CSL acquisition 1,926,980 1,927,000
Troy Lighting acquisition 974,350 975,000
Windsor Art acquisition 2,529,750 2,531,250
MHI acquisition 2,298,944 2,300,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(continued)
F-6
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity (continued)
For the Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Class A
Series A Series B Series C -------
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of Class WA Warrants 240,517 240
Exercise of Class WB Warrants 2,796,032 2,796
Exercise of Class WC Warrants 2,322,355 23,223
Exercise of other warrants 826,905 827
Warrants issued with convertible
debentures
Warrants issued in Petals acquisition
Shares issued for services rendered 181,167 181
Shares issued in connection with
settlement 10,000 100 10,000 10
Escrow shares transferred to outside
investor 1,250,000 1,250
Shares issued in connection with
employment agreement 100,000 100
Discount incurred with convertible
notes
Class A shares issued, convertible
notes 2,130,900 2,131
Stock Dividend 344,510 345
Windsor Art extinguishment of debt
Escrow shares transferred to outside
investor
Shares issued for Stylecraft finance
charges 10,000 10
Retirement of escrow and Windsor
shares (11,500,000) (11,500)
Finance charges connected with 12%
promissory notes
Stock options issued to officer
Deferred financing expense
Net income (loss) through June 30,
1999
Balance June 30, 1999 1,066,050 10,660 100,000 1,000 6,527 65 30,173,459 30,173
<CAPTION>
Class B Additional Accumulated Treasury Note
Common Stock Paid in Capital (Deficit) Stock Receivable Total
------------ --------------- --------- ----- ---------- -----
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Exercise of Class WA Warrants 360,536 360,776
Exercise of Class WB Warrants 5,589,268 5,592,064
Exercise of Class WC Warrants 12,573,380 (381,800) 12,214,803
Exercise of other warrants 1,150,482 1,151,309
Warrants issued with convertible
debentures 1,000,000 1,000,000
Warrants issued in Petals acquisition 50,000 50,000
Shares issued for services rendered 342,729 342,910
Shares issued in connection with
settlement 42,300 42,410
Escrow shares transferred to outside
investor (1,250,000) (1,250) 1,200,020 1,200,020
Shares issued in connection with
employment agreement 124,900 125,000
Discount incurred with convertible
notes 728,439 728,439
Class A shares issued, convertible
notes 1,932,869 1,935,000
Stock Dividend 448,485 (448,830) 0
Windsor Art extinguishment of debt (1,317,023) (1,317,023)
Escrow shares transferred to outside
investor 2,774,980 (274,980) 2,500,000
Shares issued for Stylecraft finance
charges 16,240 16,250
Retirement of escrow and Windsor
shares 11,500 0
Finance charges connected with 12%
promissory notes 48,833 48,833
Stock options issued to officer 75,000 75,000
Deferred financing expense 82,488 82,488)
Net income (loss) through June 30,
1999 (8,024,008) (8,024,008)
Balance June 30, 1999 2,455,000 2,455 65,530,022 (17,048,703) (1,317,023) (3,211,880) 43,996,769
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flow From Operating Activities:
Net Income (Loss) ................................................................ (8,024,008) $ 633,674
Adjustments To Reconcile Net Income (Loss) To Net Cash Used In Operating Activities: .. --
Depreciation and amortization .................................................... 2,223,046 741,722
NBV of rental property disposed .................................................. 599,112 --
Gain on equipment disposal ....................................................... 3,211 --
Provision for losses on accounts receivable ...................................... 31,402 228,160
Impairment loss on investments and other non-operating receivables ............... 6,088,372 --
Non-cash financing charge ........................................................ 1,192,359 405,716
Minority interest in subsidiary .................................................. 54,694 --
Changes In Assets and Liabilities: .................................................... --
Decrease (increase) in accounts receivable, trade ................................ (162,583) (416,843)
Decrease (increase) in inventories ............................................... (1,697,095) (138,960)
Decrease (increase) in prepaid expenses and other current assets ................. (886,293) (539,347)
Decrease (increase) in other assets .............................................. 834,023 (1,354,345)
Increase (decrease) in accounts payable and accrued expenses ..................... (2,181,853) 102,456
----------- -----------
Net cash used in operating activities ............................................ (1,932,035) (337,767)
----------- -----------
Cash Flow From Investing Activities:
Capital expenditures ............................................................. (4,226,220) (237,255)
Acquisition of Bentley International ............................................. (2,277,056) --
Acquisition of Troy Lighting ..................................................... (2,343,837) --
Acquisition of MHI ............................................................... (2,188,028) --
Acquisition of CSL ............................................................... (678,323) --
Acquisition of Stylecraft Lamps .................................................. (10,623,838) --
Acquisition of Petals ............................................................ (6,921,305) --
Business acquisitions net of stock issued ........................................ (1,828,000)
----------- -----------
Net cash used in investing activities ............................................ (29,258,607) (2,065,255)
----------- -----------
Cash Flow From Financing Activities:
Net proceeds from issuance of debt ............................................... 19,363,230 3,142,796
Repayments of debt and capitalized lease obligations ............................. (16,368,893) (846,602)
Net proceeds from exercise of common and preferred stock warrants ................ 19,320,302 3,873,174
Net proceeds from sale of common and preferred stock options ..................... 10,185,020 --
Net cash provided by financing activities ........................................ 32,499,659 6,169,368
----------- -----------
Net increase in cash ............................................................. 1,309,017 3,766,346
Cash, beginning of year .......................................................... 5,600,996 269,244
----------- -----------
Cash, end of year ................................................................ 6,910,013 $ 4,035,590
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for - ................................................ --
Interest ......................................................................... $ 3,014,847 $ 449,554
Taxes ............................................................................ $ 13,396 $ 19,943
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows (continued)
For the Years Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
June 30,
--------------------------
1999 1998
----------- ----------
<S> <C> <C>
Non-Cash Financial Activities:
Conversion of Series A Preferred Stock to Class A Common Stock ............. 13,620 --
Stock issuance for financing charges ........................................ 65,073 --
Stock issuance for services ................................................ 342,910 --
Stock issance in connection with legal settlement ........................... 42,410
Stock issuance per employment agreement ..................................... 125,000
Debt Financing Costs ........................................................ 351,220
Debt issued for services rendered ........................................... 45,000
Common Stock repurchased in conjunction with early extinguishment of debt ... (1,317,023)
Debt and Guarantee Reduction Through Treasury Stock Issuance ................ 480,000
Stock Issuance Financed by note or Short-Term Receivable .................... 760,500
Debt Discount-Warrants Issued ............................................... 200,000
Promissory Note Conversion .................................................. 1,935,000 695,000
Common Stock issued for preferred dividends ................................. 448,830 530,531
Supplemental disclosure of cash flows related to acquisitions:
Fair value of assets acquired, excluding cash ................................ 41,263,434 4,670,570
Issuance of common stock ..................................................... (5,806,250) (1,750,000)
Issuance of preferred stock .................................................. (2,027,000)
Issuance of notes payable .................................................... (2,230,766) (1,604,379)
Issuance of warrants ......................................................... 50,000
Payments in connection with acquisitions, net of cash required ............... (23,466,981) (1,709,818)
Liabilities assumed ......................................................... 27,442,410 6,051,947
Supplemental disclosure of non cash items from investing activities:
Issuance of common stock in connection with acquisitions ..................... 5,806,250 1,750,000
Issuance of preferred stock in connection with acquisitions .................. 2,027,000
Issuance of debt in connection with acquisitions ............................. 2,230,766 1,604,379
Issuance of warrants in connection with convertible debentures .................... 1,000,000
Issuance of Class B Common Shares in connection with Laurie Munn debt guarantees .. 2,455,000
</TABLE>
The accompanying notes are in integral part of these consolidated financial
statements.
F-9
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Organization
Organization
Interiors, Inc., a Delaware corporation ("Interiors" or the "Company") ,
is a designer, manufacturer and marketer of a broad range of decorative
accessories for the residential, commercial, institutional and contract markets,
including museum-quality traditional and contemporary picture frames, framed
wall mirrors, oil paintings and prints under glass, portable and installed
lighting and lighting fixtures, sculptures and decorative tabletop accessories
and silk floral and tree arrangements. Interiors primarily markets its products
to retailers in the home furnishings industry, including furniture stores, home
furnishings centers, catalog retailers, home improvement centers, department
stores and lighting retailers. The Company's silk flower and tree arrangements,
as well as other accessories, are also sold directly to consumers through a
direct mail catalogue, and the Company has recently begun marketing several
products through the internet. The Company also provides design, merchandising
and leasing services to the homebuilding industry. The Company believes that it
has a unique competitive advantage in serving a broad range of customers because
of the breadth and depth of its product lines as well as its ability to
coordinate design among several product lines. The Company has consumated
several acquisitions during fiscal years 1999 and 1998. While management
believes that it operates in one overall business segment, as our businesses are
integrated and we acquire new businesses, we will be better able to assess our
segment reporting requirements. During the period of integration and growth,
including the installation of an enterprise wide software system, we are
managingthe business on a geographic basis. Following is certain financial
information available on a geographic basis for our decorateive home furnishings
businessess:
Net Sales: 1999 1998
---- ----
West Coast Operations $ 43,347,074 $ 6,129,820
Stylecraft 13,945,725 --
Petals 11,370,712 --
APF 6,401,438 7,317,414
Other 5,368,477 --
------------- ------------
Total $ 80,433,426 $ 13,447,234
============= ============
Gross Margin: 1999 1998
---- ----
West Coast Operations $ 3,209,937 $ 2,203,826
Stylecraft 4,708,948 --
Petals 6,734,122 --
APF 2,684,527 2,974,486
Other 2,646,373 --
------------- ------------
Total $ 29,983,907 $ 5,178,312
============= ============
The Company from time to time entered into transactions with related
parties. To the extent that the Company is unable to attract and retain
qualified independent persons to serve on its board of directors, conflicts of
interest may arise due to these relationships. See Note 12 - "Related Party
Transactions."
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated statements of operations, stockholders' equity and cash
flows include the accounts of Interiors, Inc. and its wholly-owned and majority
owned subsidiaries, which are included from their respective dates of
acquisition. Accordingly, significant intercompany accounts and transactions
have been eliminated in the consolidation. See Note 4 - "Acquisitions and
Dispositions."
Revenue Recognition
Revenue is recognized at the time finished goods, whether standard product
or custom work is shipped or acceptance (for a small portion of 1998 revenue) is
acknowledged by the customer. Payments received for merchandise not yet shipped
or accepted are reflected within prepaid sales and customer deposits, current
liabilities. Historically, sales returns have not been significant.
Cash and Cash Equivalents
The Company classifies as cash and cash equivalents on deposit in banks
and cash invested temporarily in various instruments with maturities of three
months or less at time of purchase.
Inventories
Inventories are valued at the lower of cost or market, with cost
determined using the first-in, first-out method. Finished goods consists of
those items available for shipping.
F-10
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment In Affiliates
The Company accounts for its investment in affiliates under the cost
method.
Property and Equipment
Property and equipment is stated at cost. The cost of additions and
improvements and the costs incurred in the construction of castings and the
related master molds are capitalized and expenditures for repairs and
maintenance are expensed in the period incurred. Depreciation and amortization
of property and equipment is provided utilizing straight-line and accelerated
methods over the estimated useful lives of the respective assets as follows:
YEARS
-------------
Machinery and equipment.............................. 3 10
Furniture and fixtures............................... 7 10
Building and Improvements............................ 7 40
Leasehold improvements are amortized over the shorter of the remaining
term of the lease or the useful life of the improvement utilizing the
straight-line method.
Income Taxes
The Company uses the liability method of accounting for income taxes.
Under this method, deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying enacted statutory tax rates to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. Deferred income taxes have been provided for
the temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities. See Note 14 - "Provision
(Benefit) For Income Taxes."
Goodwill and Other Long-lived Assets
In connection with acquisitions amounts were paid in excess of the fair
market value of the net identifiable assets acquired. These amounts have been
recorded as goodwill and are being amortized over 40 years. The Company
continually reviews its long-lived assets for events or changes in circumstances
that might indicate the carrying amount of the assets may not be recoverable.
The Company assesses the recoverability of assets by determining whether the
depreciation of such assets over their remaining lives can be recovered through
projected undiscounted cash flows. The amount of impairment if any, is measured
based on projected discounted future cash flows using a discount rate reflecting
the Company's average cost of funds. At June 30, 1999, no such impairment of
assets was indicated. Amortization of goodwill was $529,000 and $42,042 in
fiscal year 1999 and 1998, respectively. Accumulated amortization was $571,000
and $42,042 at June 30, 1999 and 1998, respectively.
Deferred Financing Costs
Debt financing costs are deferred and amortized over the term of the
related debt.
Use of 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
F-11
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments, the Company has determined the estimated
fair value of its financial instruments using appropriate market information and
valuation methodologies. Considerable judgement is required to develop the
estimates of fair value; thus, the estimates are not necessarily indicative of
the amounts that could be realized in a current market exchange. The Company's
financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable and debt. The carrying value of these assets and liabilities is
a reasonable estimate of their fair market value at June 30, 1999 and 1998.
Earnings Per Common Share
In accordance with SFAS No. 128, net earnings per share amounts ("basic
EPS") were computed by dividing net earnings by the weighted average number of
common shares outstanding, and excluding any potential dilution.
For purposes of this calculation, common shares include both Class A
Common Stock, par value $.001 per share, of the Company ("Class A Shares") and
Class B Common Stock, par value $.001 per share, of the Company. Net earnings
per diluted share amounts ("diluted EPS") were computed assuming potential
dilution from the exercise of outstanding stock options, warrants and other
securities. All periods presented include a deduction for the dividend
requirement of the Company's 10% Series A Cumulative Convertible Preferred
Stock, par value $.01 per share ("Series A Preferred Stock"), Series B Preferred
Stock, par value $.01 per share ("Series B Preferred Stock"), and Series C
Preferred Stock, par value $.01 per share ("Series C Preferred Stock").
F-12
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net earnings is as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1999 Year Ended June 30, 1998
----------------------------------------------- ----------------------------------------------
Income Shares Per Share Income Shares Share
(Numerator) (Denominator) Amounts (Numerator) (Denominator) Amounts
------------- --------------- ----------- -------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Net Earnings................. $(8,024,088) $ 633,674
Less: Dividends
On Preferred Stock........... (518,265) (339,719)
Less: Accreted Preferred
Dividends.................... (832,000)
Basic EPS 293,955 7,528,882(1) $0.04
Net Earnings Attributable To
Common Stock................. (9,374,273) 22,035,755 $ (0.43)
902,890(2)
Effect Of Dilutive Securities
Stock Warrants & Options.....
Diluted EPS
Net Earnings Attributable To
Common Stock And Assumed
Warrant Exercises............ $(9,374,273) 22,939,677 $ (0.3) $293,955 8,154,083 $0.04
</TABLE>
Conversion of shares of Series A Preferred Shares is not assumed for computation
purposes since effect would be antidilutive.
(1) 7,500,000 shares that were held in escrow and issued during the year were
not included in Basic EPS computation as their ultimate status was
uncertain. These shares were retired by the Company during fiscal year
1999.
(2) Conversion of cumulative preferred stock and dilutive securities not
assumed for computation purposes since effect would be antidilutive.
Reclassifications
Certain balances in 1998 have been reclassified to conform with current
year presentation.
F-13
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fourth Quarter Adjustments
The Company recorded approximately $1,800,000 in fiscal year 1999 fourth
quarter adjustments primarily related to the write-off of the Company's
investment in Photo-2-Art of approximately $1,000,000 million and professional
service fees of approximately $500,000.
The Company recorded approximately $550,000 of adjustments during the
fourth quarter of fiscal year 1998. The adjustment related primarily to
write-offs of certain other assets, along with related amortization expense
interest expense and certain other selling general and administrative expenses.
Recent Accounting Pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 requires that an
entity recognize all derivatives as either assets or liabilities on the
statement of financial position and measure those instruments at fair value. At
June 30, 1999, adoption of SFAS No. 133 would not have a material effect on the
Company's financial statements.
3. Investment In Affiliates
(a) In the formation of Decor Group, Inc. ("Decor"), a separate
publicly-traded corporation, the Company's intention was to create a company
with a corporate identity separate and distinct from that of the Company.
Accordingly, pursuant to a March 3, 1996 agreement, Decor issued to the Company
83,333 shares of Series A Non-Voting Convertible Preferred Stock (sold by
Interiors in February 1997 and later reacquired in January 1999 for $190,000)
and an option to purchase 6,666,667 shares of Series B Non-Convertible Voting
Preferred Stock (the "Option Shares") in exchange for 200,000 Class A Shares,
200,000 Series A Preferred Shares (both of which have subsequently been sold by
Decor) and a guarantee with respect to certain indebtedness should such
indebtedness become necessary. During the months of August and September 1996,
the Company purchased 18,311 shares of Decor's Series C Non-Voting Convertible
Preferred Stock, which is convertible into three shares of Decor's common stock,
at a cost of $824,000. Effective with the Company's acquisition of the Option
Shares in September 1996 for total cash consideration of $2,000, the Company
executed a Voting Agreement (the "Voting Agreement") to vest the power to vote
the Option Shares in a Voting Trust until the repayment of certain indebtedness.
The Voting Agreement terminates upon the earlier of repayment of such
indebtedness or February 20, 2007 and is still in effect. On November 12, 1996,
Decor completed an initial public offering of certain of its securities. The
proceeds of such offering were used to acquire the net assets of Artisan House,
Inc., a designer and manufacturer of wall hangings. All Decor related
disclosures have been adjusted to reflect subsequent reverse stock splits and/or
stock dividends. The Company has terminated its agreement dated April 1998 to
acquire the common stock of Decor.
The Company's holding in Decor is recorded on the Company's financial
statements under the cost method of accounting. The cost method has been used by
Interiors as it is subject to the Voting Agreement and it presently has no
residual common equity interest and the minority interest in Decor's profits and
losses is 100%. During the third quarter of fiscal 1999, the Company recorded an
impairment loss of its entire investment, approximately $3.3 million, in Decor
because the Company believes that, based on Decor's current financial condition
its investment has been permanently impaired. The Company has established
reserves for the uncollectibility of its entire receivable, approximately $1.0
million, owed to the Company from Decor and the possibility that the Company
would be required to pay up to $300,000 pursuant to its guaranty of
approximately $580,000 of indebtedness of Decor owed to Austin Financial. See
Note 12 - "Related Party Transactions."
(b) The Company consummated certain transactions during the year ended
June 30, 1997, with Photo-To-Art, Ltd. ("Photo-to-Art"), a company that converts
photographs into paintings, whereby the Company agreed to sell certain canvas
related assets as well as other goods and services to Photo-to-Art consisting of
consulting services related to day-today operations and raising capital, as well
as certain contractual reimbursements of administrative expenses by Photo-to-Art
to the Company. Interiors also received $50,000 in cash for use
F-14
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of its mailing lists. The contract required that the stated aggregate cash
selling price on the assets and other goods and services transferred to
Photo-to-Art, $1,140,000, must be reinvested in Photo-to-Art equity. Such
amounts are reflected as a cost basis investment on the Company's balance sheet.
The Company owns 270,000 shares of Photo-to-Art stock and 120,000 warrants to
purchase additional stock at $4.50 per share. The valuation ascribed to this
transaction by the Company was comparable to the values received by unrelated
investors in private placement transactions between those investors and
Photo-to-Art. During the fourth quarter of fiscal 1999, the Company recorded an
impairment loss of its entire investment, approximately $1.1 million, in
Photo-to-Art because the Company believes that, based on Photo-to-Art's current
financial condition its investment has been permanently impaired, in addition, a
250,000 reserve has been recorded against non-operating receivables from
Phont-2-Art. The Company has established reserves for the uncollectibility of
$250,000 of its receivable, approximately $325,000, owed to the Company from
Photo-to-Art. See Note 12 - "Related Party Transactions."
The Company evaluates its cost basis investments for recoverability on a
quarterly and annual basis. It is the Company's policy to review all available
financial data as well as discuss each investment's operations with respective
company management. Should available information at any reporting date indicate
impairment in the carrying value of either of the Company's cost investments, an
adjustment would be recorded
4. Acquisitions and Dispositions
Vanguard. On March 10, 1998, the Company consummated the transactions
contemplated by a merger agreement among the Company, an acquisition subsidiary
of the Company, Henlor, Inc. ("Henlor"), and the shareholders of Henlor.
Pursuant to the agreement, the Company's acquisition subsidiary merged with and
into Henlor with Henlor continuing as the surviving corporation. Henlor also
merged with its subsidiary Vanguard Studios, Inc. ("Vanguard"). The merger
consideration paid by the Company consisted of (i) a cash payment of $705,621,
(ii) an 8% promissory note in the aggregate principal amount of $794,379 due
December 1, 2000 and (iii) the issuance of 299,581 Class A Shares to the former
shareholders of Henlor, which shares are subject to adjustment on March 10, 2000
to the extent such shares are worth more than $1,000,000 or less than $250,000.
This acquisition has been accounted for under the purchase method of accounting
and the results of the operations have been included in the consolidated
financial statements since the date of acquisition. The excess of purchase price
over the fair values of net assets acquired was approximately $3.0 million and
has been recorded as goodwill in the consolidated balance sheet, and is being
amortized on a straight-line basis over forty years.
Artmaster. On March 23, 1998, the Company consummated the transactions
contemplated by a merger agreement among the Company, Merchandise Sales, Inc.
("MSI"), Artmaster Studios, Inc. ("Artmaster"), and certain shareholders of MSI.
Pursuant to the agreement, MSI merged with and into Artmaster, with Artmaster
continuing as the surviving corporation. The merger consideration paid by the
Company consisted of a 10% subordinated note of the Company in the amount of
$537,248 and 779,302 Class A Shares (the "MSI Merger Shares"). In addition, the
Company agreed to repay indebtedness of MSI owed to certain creditors of MSI in
the aggregate amount of $1,022,752 (which payment consisted of a cash payment of
$750,000 and a 10% subordinated promissory note in the amount of $272,752). The
Company repaid the $272,752 and $537,248 promissory notes on July 31, 1998 and
March 31, 1999, respectively. In May, 1999, the former shareholders of MSI
transferred the MSI Merger Shares to Aberdeen Avenue, LLC in consideration for
$1,250,000, and the Company was released from all continuing obligations under
the merger agreement. This acquisition has been accounted for under the purchase
method of accounting and the results of the operations have been included in the
consolidated financial statements since the date of acquisition. The excess of
purchase price over the fair values of net assets acquired was approximately
$3.8 million and has been recorded as goodwill in the consolidated balance
sheet, and is being amortized on a straight-line basis over forty years.
Windsor. On July 30, 1998, the Company consummated the transactions
contemplated by a stock purchase agreement between the Company and Bentley
International, Inc. ("Bentley"), a publicly-traded Missouri corporation.
Pursuant to the agreement, the Company purchased all of the issued and
outstanding shares of Windsor Art, Inc. ("Windsor"). The purchase price
consisted of $1,706,992 in cash and two secured subordinated 8% promissory
notes, one in the amount of $3.3 million and the other in the amount of $2.0
million (collectively, the "Windsor Notes"). Concurrently with the purchase of
the shares of Windsor, the Company purchased 150,000 shares of common stock of
Bentley and a warrant to purchase 300,000 shares of common stock of Bentley in
exchange for the issuance of 1,500,000 Class A Shares (the "Windsor Shares").
One of the Windsor Notes, in the amount of $3.3 million, was repaid on September
30, 1998. The other Windsor Note, in the amount of $2.0 million, and the Windsor
Shares were repurchased by the Company for aggregate consideration of $2,643,000
on December 1, 1998. In addition, an officer of Bentley agreed to terminate his
consulting agreement with Windsor. The Windsor Shares were retired by
F-15
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company on February 22, 1999. This acquisition has been accounted for under
the purchase method of accounting and the results of the operations have been
included in the consolidated financial statements since the date of acquisition.
The excess of purchase price over the fair values of net assets acquired was
approximately $8.2 million and has been recorded as goodwill in the consolidated
balance sheet, and is being amortized on a straight-line basis over forty years.
Troy. On August 14, 1998, the Company consummated the transactions
contemplated by a July 2, 1998 merger agreement among the Company, Troy
Lighting, Inc. ("Troy"), and the former shareholders of Troy. Pursuant to the
agreement, a wholly-owned subsidiary of the Company merged with and into Troy,
with Troy continuing as the surviving corporation. The merger consideration paid
by the Company consisted of a cash payment of $250,000 and the issuance of
650,000 Class A Shares (the "Troy Merger Shares"). In addition, the Company
agreed to cause Troy to repay $1,700,000 in indebtedness to certain former
shareholders of Troy. On or about July 31, 1999, the former shareholders of Troy
agreed to sell the Troy Merger Shares to Dominion Capital Fund, Ltd., Dominion
Investment Fund, LLC and Sovereign Partners, L.P. (collectively, the "Troy
Purchasers") for $1,000,000. Contemporaneously therewith, the Company and the
Troy Purchasers entered into a letter agreement pursuant to which the Troy
Purchasers agreed not to sell or otherwise transfer the Troy Merger Shares until
December 25, 1999. If the Troy Merger Shares are worth less $1,150,500 based on
the sixty-day average of the Class A Shares following such date, the Company
must either pay cash or issue additional Class A Shares to the Troy Purchasers
in the amount of the shortfall. This acquisition has been accounted for under
the purchase method of accounting and the results of the operations have been
included in the consolidated financial statements since the date of acquisition.
The excess of purchase price over the fair values of net assets acquired was
approximately $3.3 million and has been recorded as goodwill in the consolidated
balance sheet, and is being amortized on a straight-line basis over forty years.
Model Home. On February 26, 1999, the Company consummated the transactions
contemplated by a merger agreement among the Company, Model Home Interiors, Inc.
("Model Home" or "MHI") and a wholly owned subsidiary of the Company. Pursuant
to the Agreement, the Company's wholly owned subsidiary merged with and into
Model Home, with Model Home continuing as the surviving corporation merger. The
purchase price paid by the Company consisted of a cash payment of $2.0 million,
promissory notes aggregating $230,766 and 1,056,342 shares of Class A Shares
having a fair market value of $2,300,000 (the "MHI Merger Shares") on the
eighteenth month anniversary of the closing. Additionally, the Company agreed to
issue Class A Shares with a maximum fair market value of $2,000,000 (the
"Earnout Shares") upon the attainment of certain earnings goals by Model Home.
The Merger Shares are being held in escrow as security for the mutual
obligations of the parties under the merger agreement. This acquisition has been
accounted for under the purchase method of accounting and the results of the
operations have been included in the consolidated financial statements since the
date of acquisition. The excess of purchase price over the fair values of net
assets acquired was approximately $225,000 and has been recorded as goodwill in
the consolidated balance sheet, and is being amortized on a straight-line basis
over forty years.
Stylecraft. On February 22, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement among the Company and the former
shareholders of Stylecraft Lamps, Inc. ("Stylecraft") pursuant to which the
Company acquired all of the outstanding capital stock of Stylecraft for
$10,319,000 in cash. This acquisition has been accounted for under the purchase
method of accounting and the results of the operations have been included in the
consolidated financial statements since the date of acquisition. The excess of
purchase price over the fair values of net assets acquired was approximately
$5.4 million and has been recorded as goodwill in the consolidated balance
sheet, and is being amortized on a straight-line basis over forty years.
CSL On March 2, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement between the Company and CSL Lighting
Manufacturing, Inc. ("CSL"). Pursuant to the agreement, the Company acquired
1,191,752 newly-issued shares of common stock, par value $.001 per share, of CSL
(the "CSL Shares"), representing approximately 51% of the issued and outstanding
shares of common stock of CSL, pursuant to the March 1, 1999. The purchase price
for the CSL Shares consisted of $600,000 in cash paid to CSL and the issuance of
1,927 Series C Preferred Shares to certain creditors of CSL in exchange for the
cancellation of debt of CSL having a principal amount of $1,027,500. In
conjunction with the transaction, three designees of the Company were added to
the CSL board of directors, and CSL entered into a standstill agreement, which
prohibited the Company and its affiliates from acquiring any additional shares
of common stock of CSL for a period of 150 days from the closing date. This
acquisition has been accounted for under the purchase method of accounting and
the results of the operations have been included in the consolidated financial
statements since the date of acquisition. The excess of purchase price over the
fair values of net assets acquired was approximately $2.5 million and has been
recorded as goodwill in the consolidated balance sheet, and is being amortized
on a straight-line basis over forty years.
F-16
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petals. On March 23, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement among the majority stockholders of
Petals, Inc. ("Petals") and the Company pursuant to which the Company acquired
Petals in exchange for the cancellation of $2,440,000 of debt owed by Petals to
one of the stockholders, an aggregate of $4,000,000 in cash and a 8% convertible
note in the original principal amount of $2,000,000 due March 23, 2001. The note
is convertible into Class A Shares at $2.00 per share. The Company also issued
an aggregate of 100,000 three-year warrants to purchase Class A Shares at an
exercise price of $3.50 per share to the minority stockholders (the "Petals
Warrants"). In connection with the transaction, Petals redeemed the interests of
the minority stockholders for aggregate consideration of approximately $3.9
million in cash and $262,500 paid over nine months as severance payments. This
acquisition has been accounted for under the purchase method of accounting and
the results of the operations have been included in the consolidated financial
statements since the date of acquisition. The excess of purchase price over the
fair values of net assets acquired was approximately $5.2 million and has been
recorded as goodwill in the consolidated balance sheet, and is being amortized
on a straight-line basis over forty years.
Following are selected pro forma statements of income which reflect these
transactions as if they occurred at the beginning of each year ended June 30,
1999 and 1998.
June 30,
1999 1998
------------- -------------
Net Revenues.................... $ 141,239,000 $ 140,358,000
Net Income (Loss)............... (8,377,000) 2,406,000
EPS Basic....................... (.36) .23
EPS Diluted..................... (.36) .21
F-17
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Inventories
The components of inventory are as follows:
June 30, 1999
-------------
Raw Materials..................................... $ 9,657,146
Work in Process................................... 738,325
Finished Goods.................................... 12,576,102
-------------
Total:....................................... $ 22,971,573
=============
6. Other Current Assets
The components of other current assets are as follows:
June 30, 1999
-------------
Prepaid Expenses.................................. $ 2,100,442
Due From Affiliates............................... 78,954(1)
Other............................................. 1,076,925(2)
-------------
Total:....................................... $ 3,474,473
=============
(1) Due from affiliates represents amounts owed from Photo-to-Art. See Note 12
- "Related Party Transactions."
(2) Included in other current assets are amounts due from the Company's
employees, salespeople and officer. During fiscal year 1999, the Company
made advances aggregating $458,057 to the Company's Chief Executive
Officer. As of September 15, 1999, this entire amount was repaid to the
Company.
7. Property and Equipment, net
The components of property and equipment are as follows:
June 30, 1999
-------------
Machinery and Equipment........................... $ 7,379,868
Furniture and Fixtures............................ 5,894,746
Leasehold Improvements............................ 2,814,545
Buildings and Improvements ....................... 83,892
Accumulated Depreciation and Amortization......... $ (4,275,606)
-------------
Total:....................................... $ 20,280,873
=============
Depreciation expense was $590,346 and $485,000 for the years ended June
30, 1999 and 1998, respectively.
F-18
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Accounts Payable and Accrued Liabilities
June 30, 1999
-------------
Accounts Payable.................................. $ 12,644,753
Salaries and Employee Benefits.................... 1,706,877
Rent.............................................. 34,484
Deferred Rent..................................... 147,256
Union Dues and Benefits........................... 87,865
Professional Fees................................. 737,660
Insurance......................................... 241,204
Interest.......................................... 868,550
Royalties & Commissions........................... 362,167
Income, Sales and PayrollTaxes.................... 1,274,693
Other............................................. 4,895,176
-------------
Total:....................................... $ 23,027,683
=============
9. Notes Payable
June 30, 1999
-------------
Notes Payable
Bank lines of credit(a)................................. $ 18,400,000
15% Convertible Demand Notes (b)........................ 686,000
15% Convertible Note - Morgan Steel (c)................. 250,000
12% Convertible Demand Notes (d)........................ 140,000
12% Promissory Note - Ekistics (e)...................... 250,000
10% Convertible Debenture - Petals (f).................. 2,000,000
8% Promissory Note - Vanguard (g)....................... 375,000
8% Promissory Notes -MHI (h)............................ 231,000
Promissory Note - Landis (i)............................ 1,000,000
Other notes payable (j)................................. 1,415,000
-------------
Total.......................................... 24,747,000
-------------
Less current portion.................................... 7,654,000
-------------
Long term portion....................................... $ 17,093,000
=============
(a) The Company has secured formula based financing arrangements with several
lenders relating to the operations of its subsidiaries. As of June 30,
1999, the Company owed Austin Financial Services, Inc. approximately
$11,060,000 at an annual rate equal to prime plus 2.0% (10.25% as of the
date of this filing), and could borrow approximately an additional
$840,000, relating to the operations of Windsor, Troy and Stylecraft. As
of June 30, 1999, the Company owed NationsBank, N.A. approximately
$3,908,000 at an annual rate equal to prime (8.25% as of the date of this
filing), and could borrow approximately an additional $92,000, relating to
the operations of MHI. As of June 30, 1999, the Company owed Finova
Capital Corp. approximately $641,000 at an annual rate equal to prime plus
8.0% (16.25% as of the date of this filing), and could borrow
approximately an additional $359,000, relating to the operations of the
Company's A.P.F. Master Framemakers division. The Company's obligations
owed to Finova Capital Corp. are personally guaranteed by Max Munn,
Chairman, President and Chief Executive Officer of the Company, and his
spouse. As of June 30, 1999 the Company owed Capital Business Credit
approximately $1,210,000 at an annual rate of prime plus 2.50% (10.75% as
of the date of this filing) and could borrow approximately an additional
$8,000 relating to the operations of Vanguard.
(b) Issued to five accredited investors and convertible into Class A Shares at
$1.125 per share.
F-19
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) Issued to Morgan Steel Ltd., due April 16, 2001 and convertible into Class
A Shares at $1.75 per share. Warrants to purchase 15,000 Class A Shares
and 15,000 Series A Preferred Shares were issued in connection with this
note.
(d) Issued to four accredited investors and convertible into Class A Shares at
$1.50 per share.
(e) Issued to Ekistics Corp. and due December 31, 1998. On October 8, 1999,
the Company repaid Ekistics Corp. the outstanding principal, plus all
accrued interest.
(f) Issued to DMB Property Ventures LP in connection with the acquisition of
Petals, Inc. The note is due March 23, 2001 and convertible into Class A
Shares at $2.00 per share.
(g) Issued in connection with the acquisition of Vanguard Studios, Inc. The
note is due December 1, 2000 and requires quarterly principal payments of
$62,500, plus interest.
(h) Issued in connection with the acquisition of Model Home Interiors, Inc.
The notes are due February 16, 2000.
(i) Issued to the Landis Brothers Corporation ("Landis"), due October 25, 1999
and personally guaranteed by Max Munn, Chairman President and Chief
Executive Officer of the Company, and his spouse. Effective September 27,
1999, the maturity date was extended to October 25, 2000 and the interest
rate was set at prime plus 8%; provided, however, as long as the prime
rate does not exceed 8.25%, the rate of the note shall be 16%.
(j) Includes $598,000 of capital lease obligations.
During the twelve month period ended June 30, 1999, the Company had an
extraordinary gain from early extinguishment of debt in the amount of $870,264.
In connection with the convertible notes and related warrants issued debt
discount was recorded, to be amortized over the life on the related debt.
Favorable conversion features, when applicable to the notes described above were
recorded and are being expensed through the date of the earliest conversion
period.
Aggregate maturities of notes payable over the next five years (inclusive
of aggregate amounts due under financing agreements, which are classified as
current) are as follows:
2000......................................... $ 7,654,000
2001......................................... 6,811,000
2002......................................... 10,154,000
2003......................................... 90,000
2004......................................... 38,000
-----------
Total................................... $24,747,000
===========
On December 1, 1998, the Company purchased 1,500,000 shares of Class A
Common Stock with a market value of approximately $1,965,000, a promissory note
with unpaid principal and accrued interest of approximately $2,053,000 and a
consulting agreement for approximately $848,000 from a third party. These items
totaling $4,866,000 were purchased for approximately $2,580,000 in cash and
other consideration totaling approximately $2,634,00. The Company extinguished
its entire debt to the seller resulting in an extraordinary gain of $1,371,000
for early extinguishment of debt.
In March 1999, the Company redeemed all of its 7% redeemable convertible
debentures in the principal amount of $3,000,000 (the "Convertible Debentures")
in consideration for $2,600,000 in cash, plus accrued and unpaid interest. The
Company recorded an extraordinary loss from early extinguishment of debt equal
to $500,000 in connection with the redemption of the Convertible Debentures
after considering expenses and certain warrants.
F-20
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Shareholders Equity
Description of Securities
Common Stock
Class A Shares. The Certificate of Incorporation of the Company authorizes
the issuance of up to 60,000,000 Class A Shares. Each Class A Share is entitled
to one non-cumulative vote per share on all matters on which stockholders' may
vote at meetings of stockholders. The Class A Shares are not convertible into
any other securities of the Company.
Class B Shares. The Certificate of Incorporation of the Company authorizes
the issuance of up to 2,500,000 Class B Shares. Each Class B Share is entitled
to five non-cumulative votes per share on all matters on which stockholders may
vote at meetings of stockholders. The Class B Shares are convertible on a
one-for-one basis at any time after issuance at the option of the holder into
Class A Shares.
The holders of Class A Shares and Class B Shares (collectively, "Common
Stock"): (i) have equal ratable rights to dividends from funds legally available
therefor, when, as and if declared by the Board of Directors of the Company;
(ii) are entitled to share ratably in all of the assets of the Company available
for distribution to holders of Common Stock, upon liquidation, dissolution or
winding up of the affairs of the Company; and (iii) do not have preemptive or
subscription rights and there are no redemption or sinking fund provisions
applicable thereto. All shares of Common Stock issued and outstanding are duly
authorized, fully paid and non-assessable. Except as otherwise required by law,
the holders of Common Stock shall vote together as a single class on all
matters.
Preferred Stock
The Certificate of Incorporation of the Company authorizes the issuance of
up to 5,300,000 shares of Preferred Stock, $.01 par value per share. Of this
amount 2,870,000 shares have been designated as Series A 10% Cumulative
Convertible Preferred Stock (the "Series A Preferred Shares"), 200,000 shares
have been designated Series B Preferred Stock ("Series B Preferred Shares") and
6,527 shares have been designated Series C Preferred Stock ("Series C Preferred
Shares"). The Board of Directors is authorized to issue shares of Preferred
Stock from time to time in one or more series and, subject to the limitations
contained in the Certificate of Incorporation and any limitations prescribed by
law, to establish and designate any such series and to fix the number of shares
and the relative conversion rights, voting rights and terms of redemption
(including sinking fund provisions) and liquidation preferences. If shares of
Preferred stock are issued with voting rights, such issuance could affect the
voting rights of the holders of the Company's Class A Shares by increasing the
number of outstanding shares having voting rights, and by the creation of class
or series voting rights. Shares of Preferred Stock with conversion rights could
potentially increase the number of Class A Shares outstanding. Issuance of
Preferred Stock could, under certain circumstances, have the effect of delaying
or preventing a change in control of the Company and may adversely affect the
rights of holders of Class A Shares. Also, Preferred Stock could have
preferences over the Class A Shares (and other series of stock) with respect to
dividends and liquidation rights.
Series A Preferred Shares
The Series A Preferred Stock consists of 2,870,000 shares. After September
17, 2000, each Series A Preferred Share is redeemable by the Company in whole or
in part at $5.50 per share upon 30 days prior written notice. Each Series A
Preferred Share is convertible, subject to adjustment, into three Class A Shares
of the Company. The Series A Preferred Stock is entitled to a dividend, prior to
any payment of dividends on the Class A Shares or Class B Shares, of $0.50 per
share per annum payable in semi-annual installments of $0.25 per share. If the
dividend on the Series A Preferred Shares is not paid, it accumulates until paid
in full to date. The Company may elect to pay the dividend either in cash or in
Class A Shares, which Class A Shares shall be issued for such purposes on the
basis of the average closing prices of the Class A Shares for the ten business
days prior to the date of declaration of the dividend. The Series A Preferred
Shares shall not have any right to vote except to the extent, if any, required
by Delaware law. Upon liquidation of the Company, each Series A Preferred Share
is entitled to receive $5.00 plus accrued and unpaid dividends before any
payment is made to the holders of Common Stock.
F-21
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 31, 1998 and May 24, 1999, the Company's Board of Directors
declared stock dividends equivalent to $0.25 per share on its Series A Preferred
Shares to stockholders of record as of the close business on September 30, 1998
and June 10, 1999, respectively. Accordingly, a total of 344,510 Class A Shares
were issued for this purpose and accumulated deficit was charged $448,830 in
conjunction with the issuance of these securities.
As of June 30, 1999, the Company has not declared or established a record
date for a dividend for its Series A Preferred Shares for the $0.25 dividend due
September 1, 1999. Cumulative but unpaid dividends on Series A Preferred Shares
as of June 30, 1999 total approximately $133,256.
Series B Preferred Shares
On January 22, 1999, in order to provide it with additional working
capital, the Company completed a private placement with one accredited investor
of newly designated Series B Preferred Shares and redeemable three year warrants
to purchase up to 2,000,000 Class A Shares at an exercise price of $0.75 per
share (the "Series B Warrants"). The Company received $2,020,000 of gross
proceeds from the sale of the Series B Preferred Shares and Series B Warrants.
The Company incurred expenses of $15,000 in connection with the issuance of
these securities. The Series B Preferred Shares consist of 200,000 shares, all
of which are issued and outstanding. The holders of the Series B Preferred
Shares were granted certain registration rights with respect to the underlying
Class A Shares issuable upon conversion of the Series B Preferred Shares or
exercise of the Series B Warrants. The Series B Warrants were valued at fair
market value on the date of issuance.
The Series B Preferred Shares rank in parity with the Company's Series A
Preferred Shares with respect to dividends and liquidation, pays an 8% annual
dividend, payable quarterly in cash or by the issuance of additional shares of
Series B Preferred Shares, and is convertible by the holder at any time on or
after January 31, 2000 into Class A Shares at a conversion price of $2.35 per
share. Under certain limited conditions relating to a sale of the Company,
through merger, sale of substantially all of its assets or tender offer, the
Series B Preferred Shares may be converted into Class A Shares by the holder
prior to January 31, 2000. The conversion price and the number of Class A Shares
issuable upon conversion of the Series B Preferred Shares is subject to
adjustment to protect the holder against dilution.
In the event that the average price of the Class A Shares, as traded on
NASDAQ or another national securities exchange, for the 12 trading days
immediately prior to January 1, 2000 (the "Anniversary Price") shall be less
than 140% of the conversion price in effect ($3.30 per share, based on the $2.35
per share conversion price), but exceed the conversion price, the Company has
the right to redeem the Series B Preferred Shares prior to January 31, 2000, for
a price equal to the sum of $10 per share, plus accrued and unpaid dividends,
plus a premium of $5.00 per share, prorated over the period from January 22,
1999 to the date of redemption. In such event, the Company may redeem for $0.1
each a number of Series B Warrants equal to 2.5% of the outstanding Series B
Warrants for each 1% that the Anniversary Price exceeds the conversion price. In
the event that such Anniversary Price shall be less than the conversion price,
the holder of the Series B Preferred Shares shall have the right, during the 30
days ending January 31, 2000, to compel the Company to redeem and repurchase up
to 50% of the Series B Preferred Shares for a redemption price equal to $10 per
share, plus accrued and unpaid dividends. In such event, the Company may redeem
a number of Series B Warrants equal to 200% of the Class A Shares into which the
redeemed Series B Preferred Shares could have been converted. In the event that
the Anniversary Price shall exceed 140% of the conversion price of the Series B
Preferred Shares then in effect, the Company shall also have the right after
January 1, 2000 to redeem all of the Series B Warrants for $.01 each, and a
lesser number of Series B Warrants in pro-rata amounts if such Anniversary Price
exceeds the conversion price, but is less than 140% of such conversion price.
Series C Preferred Shares
On February 18, 1999, in order to provide it with the capital resources to
complete pending acquisitions, the Company completed a private placement with
four accredited investors of 6,427 newly designated Series C Preferred Shares.
The Series C Preferred Shares have a liquidation value of $1,000 per share. In
consideration for the issuance of 4,500 Series C Preferred Shares, the Company
received $4,500,000 in gross proceeds. The Company incurred expenses of $20,000
in connection with the issuance of these securities. In addition, two of the
purchasers of the Series C Preferred Shares, who were also holders of $1,027,500
of 7%
F-22
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
notes previously issued to them by CSL Lighting Manufacturing, Inc., an
affiliate of the Company, canceled such notes in exchange for the issuance of
1,927 Series C Preferred Shares. The Company also issued 100 Series C Preferred
Shares as a fee in connection with the acquisition of CSL. The holders of the
Series C Preferred Shares were granted certain registration rights with respect
to the underlying Class A Shares issuable upon conversion of the Series C
Preferred Shares.
The Series C Preferred Shares rank in parity with the Company's Series A
Preferred Shares and Series B Preferred Shares with respect to dividends and
upon liquidation, pays a 7% cumulative annual dividend, payable quarterly in
cash, and is convertible at any time on or before October 15, 1999 at a
conversion price per share equal to 120% of the average closing bid prices of
the Class A Shares for the five trading days immediately prior to conversion, or
at any time from and after October 16, 1999, at a conversion price per share
equal to 100% of the average closing bid prices of the Company's Class A Shares
for the five trading days immediately prior to conversion. The conversion price
and the number of Class A Shares issuable upon conversion of the Series C
Preferred Shares is subject to adjustment to protect the holders against
dilution. However, in no event may the aggregate number of Class A Shares
issuable upon conversion of all Series C Preferred Shares exceed 19.9% (or
approximately 4,275,000 Class A Shares) of the issued and outstanding Class A
Shares and Class B Shares at the date of issuance of the Series C Preferred
Shares. In the event that such limitation on the maximum number of Class A
Shares issuable shall, based on the conversion price then in effect, not permit
the holders to convert all shares of Series C Preferred Shares into Class A
Shares, the remaining Series C Preferred Shares shall be redeemed by the Company
for their $1,000 per share liquidation value, plus accrued and unpaid dividends,
either by the payment in cash or by the issuance of a 15% demand note. At the
end of three years from their effective date of issuance (January 31, 2002), the
Series C Preferred Shares shall be subject to mandatory conversion into Class A
Shares at the conversion price then in effect; provided, that the Class A Shares
are then traded on NASDAQ or another national securities exchange at a price of
$1.00 or more. If such conditions are not met, any unconverted Series C
Preferred Shares are subject to redemption at the option of the holders at
$1,571 per share, plus accrued dividends.
Subsequent to the date of these financial statements, the Company
exchanged approximately $5.0 million of the Series C Preferred Stock into
secured notes due September 2004. See Note 15 - "Subsequent Events."
Equity Transactions
During the fiscal year ended June 30, 1999, the Company issued shares to
certain persons for a variety of reasons. These shares were valued at the fair
market value on the date of issuance for purposes of the consolidated financial
statements.
On July 7, 1998, holders of WA Warrants to purchase Class A Common Stock
at $1.50 per warrant exercised such warrants resulting in the issuance of
240,517 shares of Class A Common Stock and total proceeds of $360,776.
On or about October 7, 1998, the Company issued 125,000 Class A Shares to
Laurie Munn upon conversion of 125,000 Class B Shares. On or about October 22,
1998, the Company issued 10,000 Series A Preferred Shares to SJP Contractors of
New York, Inc. in settlement of litigation against the Company. On or about
October 22, 1998, the Company issued 10,000 Class A Shares to Jules L. Marx in
settlement of litigation against the Company's Chief Executive Officer.
On November 11, 1998, the Company issued 44,431 Class A Shares to James
McCorry as a bonus. On November 16, 1999, the Company issued 38,820 Class A
Shares to Todd Langner as a bonus. On or about November 23, 1998, the Company
issued 10,000 Class A Shares to Roger Lourie, a director of the Company, and
10,000 Class A Shares to various designees named by Richard Josephberg, a
director of the Company. On November 23, 1998, the Company issued 15,000 Class A
Shares to JG Partners LP in connection with certain investment banking services
provided by Josephberg Grosz & Co., Inc. ("Josephberg Grosz"), an affiliate of
Richard Josephberg, a director of the Company.
On December 31, 1998, the Company declared a $0.25 dividend on its Series
A Preferred Stock for holders of record at September 30, 1998. This dividend was
paid in 165,576 shares of the Company's Class A Common Stock.
On January 22, 1999, in order to provide it with additional working
capital, the Company completed a private placement with one accredited investor
of newly designated shares of Series B Preferred Stock, par value of $0.01 and
liquidation value of
F-23
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$10.00 per share, and redeemable three year warrants to purchase up to 2,000,000
Class A Shares at an exercise price of $0.75 per share. The Company received
$2,020,000 of gross proceeds from the sale of the Series B Preferred Shares and
Series B Warrants. The Series B Preferred Shares consist of 200,000 shares, all
of which are issued and outstanding.
On February 9, 1999, the Company issued to Pauline Raschella, an employee
of Windsor, an incentive bonus of 100,000 Class A Shares.
On February 18, 1999, in order to provide it with the capital resources to
complete the Stylecraft and CSL acquisitions, the Company completed a private
placement with five accredited investors of 6,527 shares of newly created Series
C Preferred Shares. The Series C Preferred Shares have a liquidation value of
$1,000 per share. In consideration for the issuance of 4,500 Series C Preferred
Shares, the Company received $4,500,000 in gross proceeds. In addition, two of
the purchasers of the Series C Preferred Shares, who were also holders of
$1,027,500 of 7% notes previously issued to them by CSL, canceled such notes in
exchange for the issuance of an additional 1,927 shares of the Company's Series
C Preferred Shares. The Company issued 100 shares of Series C Preferred shares
as consideration for expenses incurred relating to the acquisition of CSL.
On March 1, 1999, the Company issued to Earley Kielty and Associates,
Inc., an executive search firm, 26,666 Class A Shares in connection with a
search related to MHI. On March 11, 1999, the Company issued to Maria Matos, a
former employee of the Company, 10,000 Class A Shares as a severance payment. On
such date, the Company also issued to Judith E. Schneider, 6,250 Class A Shares
in consideration for certain consulting services. On March 11, 1999, the Company
issued 10,000 Class A Shares to Roger Lourie, a director of the Company, and
10,000 Class A Shares to various designees named by Richard Josephberg, a
director of the Company.
On March 20, 1999, the Company redeemed 916,591 WB Warrants and 103,610 WC
Warrants for aggregate consideration of $10,202.01 or $0.01 per warrant. As a
result of the redemption, there are no longer any outstanding WB Warrants or WC
Warrants. Prior to redemption, an amount of WB Warrants and WC Warrants were
exercised at $2.00 and $5.50, respectively, resulting in the issuance of
2,796,032 Class A Shares and 2,322,355 Series A Preferred Shares, and the
Company received gross proceeds of approximately $18.2 million. In connection
with the redemption, the Company paid a fee of $175,000.
On April 28, 1999, the Company issued 4,650 Class A Shares to JG Capital
Inc. and 5,350 Class A Shares to various designees named by Richard Josephberg,
a director of the Company, in connection with certain investment banking
services provided by Josephberg Grosz, an affiliate of Mr. Josephberg, in
connection with the acquisition of Stylecraft.
On May 24, 1999 the Company declared a $0.25 dividend on its Series A
Preferred Stock for holders of record at June 10, 1999. This dividend was paid
in 178,934 shares of the Company's Class A Common Stock
During fiscal year 1999, an aggregate of 1,945,743 shares of Series A
Preferred Stock were converted into 5,837,229 shares of Class A Common Stock.
During fiscal year 1999, the Company issued 375,000 Class B Shares having
a fair market value of $397,500 to Laurie Munn, wife of the Company's Chief
Executive Officer, in consideration for her personal guarantee of $5,300,000 of
the Company's obligations in connection with its acquisitions of Windsor and
Troy. In addition, the Company issued 1,350,000 Class B Shares to Ms. Munn upon
the exercise of an option. The exercise price for the option was $1,350 in cash
and a promissory note in the amount of $1,607,000. The note bears interest at a
rate of 6.5% per annum and matures on December 8, 2005. As of June 30, 1999, Ms.
Munn owes the Company approximately $2.6 million, all of which is secured by a
lien, which is subordinate to liens held by Landis and Finvoa Credit, on
2,455,000 Class B shares, and Ms. Munn guarantees debt of the Company in the
amount of $2.4 million.
During fiscal year 1999, the Company issued an aggregate of 3,206,342
shares of its Class A Common Stock relating to its various acquisitions. In
addition, the Company retired 1.5 million shares of Class A Common Stock that
was being held in escrow related to the acquisition of Windsor. See Note 4 -
"Acquisitions and Dispositions."
During fiscal year 1999, 3,750,000 shares of Class A Common Stock were
transferred out of escrow to an accredited investor as collateral for the
$500,000 paid to Ann Stevens as part of the Company's settlement agreement with
Stevens. Of these
F-24
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shares, 1,250,000 shares were converted from shares of Class B Common Stock
previously held in escrow and 2,500,000 shares of Class A Common Stock were
issued out of such escrow. Total proceeds resulting from the transfer was
$3,975,000, of which $3,700,020 was paid in cash and $274,980 was paid by
satisfying a promissory note. In addition, the Company retired 10,000,000 shares
of Class A Common Stock previously held in such escrow.
During fiscal year 1999, holders of 6% Convertible Notes issued in March
and April 1998 with a principal amount of $1,700,000 and holders of 12%
Convertible Demand Notes with a principal amount of 235,000 issued in March
1998, converted these notes into an aggregate of 2,130,900 shares of Class A
Common Stock.
During fiscal year 1999, other warrants were exercised at prices ranging
from $1.38 to $1.75 resulting in the issuance of 826,905 Class A Shares and
total proceeds of $1,151,309.
No underwriters were engaged by the Company in connection with any of the
issuance's described above and, accordingly, no underwriting discounts or
commissions were paid.
Warrants and Other
On July 7, 1998 WA Warrants were exercised at $1.50 resulting in the
issuance of 240,517 Class A Shares and total proceeds of $360,776.
On March 20, 1999, the Company redeemed 916,591 WB Warrants and 103,610 WC
Warrants for aggregate consideration of $10,202.01 or $0.01 per warrant. As a
result of the redemption, there are no longer any outstanding WB Warrants or WC
Warrants. Prior to redemption, an amount of WB Warrants and WC Warrants were
exercised at $2.00 and $5.50, respectively, resulting in the issuance of
2,796,032 Class A Shares and 2,322,355 Series A Preferred Shares, and the
Company received gross proceeds of approximately $18.2 million. In connection
with the redemption, the Company paid a fee of $175,000.
During fiscal year 1999, other warrants were exercised at prices ranging
from $1.38 to $1.75 resulting in the issuance of 826,905 Class A Shares and
total proceeds of $1,151,309.
The Company has outstanding options and warrants to purchase 8,116,239
Class A Shares at prices ranging from $0.75 to $3.25.
Stock Option Plans
The 1994 Plan. On June 20, 1994, the Company adopted the Interiors, Inc.
1994 Stock Option and Appreciation Rights Plan (the "1994 Plan"), which, as
amended, currently provides for the granting of options to officers, employees
and consultants to purchase not more than an aggregate of 250,000,000 Class A
Shares. Directors of the Company are not eligible to participate in the 1994
Plan. The 1994 Plan provides for the grant of options intended to qualify as
"incentive stock options" under the Internal Revenue Code of 1986, as amended
(the "Code") as well as options which do not so qualify.
The Director Plan. On June 20, 1994 the Board of Directors approved the
1994 Director Stock Option and Appreciation Rights Plan (the "Director Plan"),
which, as amended, currently provides for the granting of options to directors
to purchase not more than an aggregate of 750,000 Class A Shares. The Director
Plan was adopted to provide an incentive to Directors through automatic and
discretionary grants of stock options. The Director Plan provides for the grant
of options intended to qualify as "incentive stock options" under the Code as
well as options which do not so qualify.
The Director Plan provides that on the second Monday of May of each year
each person who is then a director of the Company shall be automatically granted
an option to purchase 10,000 of the Company's Class A Shares, subject to
adjustment as provided for by the Director Plan. The aggregate number of shares
for which options may be issued pursuant to the Director Plan is 250,000 shares.
The exercise price for options granted under the Director Plan must be equal to
the fair market value per Class A Share on the date of grant. Each option
granted under the Director Plan expires ten years after the date of grant,
unless a less period is specified by the option committee administering the
plan.
F-25
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The status of the Company's stock option plans is summarized below as of
June 30, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------------
1999 1998
------------------------- -------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year ......... 877,500 $1.76 350,000 $2.25
Granted........................................... 4,320,025 1.41 527,500 1.44
Exercised......................................... -- -- --
Terminated........................................ 890,000 1.77 -- --
Options outstanding at end of year................ 4,307,525 1.41 877,500 1.76
Exercisable at end of year........................ 163,025 1.04 191,083 2.03
Weighted average fair value of options granted ... 1.20 1.09
</TABLE>
Of the 4,307,525 options outstanding as of June 30, 1999:
(a) 63,025 options have exercise prices of $0.001, weighted average fair
market values on the date of grant of $1.16 and remaining
contractual lives of 9.5 years.
(b) 1,494,500 options have exercise prices ranging from $1.00 to $2.13,
weighted average exercise prices of $1.46, weighted average fair
market values on the dates of grant of $1.29 and weighted average
remaining contractual lives of 9.5 years.
(c) 2,750,000 options (including options to purchase 250,000 Series A
Preferred Shares, each of which is convertible into three Class A
Shares) were granted outside of the Company's stock option plans.
These options are not exercisable until November 2008, however,
275,000 of the options may become exercisable each year that the
Company reaches certain specified earnings targets. Exercise prices
for these options range from $1.19 to $3.63 and increase at a rate
of 10% per annum. As of June 30, 1999: 2,500,000 of these options
have exercise prices of $1.19, fair market values on the dates of
grant of $.98 and remaining contractual lives of 11.5 years; 250,000
options have exercise prices of $3.63, fair market values on the
date of grant of $2.88 and remaining contractual lives of 11.5
years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumption used for those options granted in 1999 and 1998, respectively:
Dividend yield of 0%, expected volatility of 91% and 83%, risk-free interest
rates ranging from 0% to 6%, and expected lives of 10 years and 5 years,
respectively.
The Company accounts for its plans under APB Opinion No. 25, "Accounting
for Stock Issued to Employees", under which no compensation cost is recognized
for options granted at or above fair market value on the date of grant.
Compensation expense of $75,000, in connection with the issuance of incentive
stock options to an officer of the Company, has been charged to income for the
year-ended June 30, 1999. Had compensation expense been determined based upon
fair values at the grant dates for options granted under those plans in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"the
Company's net income (loss) would have been reduced as follows:
F-26
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended June 30,
-------------------------
1999 1998
----------- -----------
Net Earnings Attributable to Common Stock
before Extraordinary Gain ......................... (9,374,273) $ 293,955
Pro Forma ......................................... (9,914,547) (177,505)
Basic EPS As Reported ............................. (0.43) $ .04
Pro Forma ......................................... (0.45) $ (.02)
Diluted EPS As Reported ........................... (0.43) $ .04
Pro Forma ......................................... (0.45) $ (.02)
11. Commitments and Contingencies
Operating Leases
The Company's headquarters are located in Mount Vernon, New York, in
leased facilities consisting of 70,000 square feet of manufacturing and
warehouse space together with executive offices and a showroom. The facility is
occupied under a five-year lease expiring at the end of 2001 with a five-year
renewal option. As of June 30, 1999, the Company owned or leased the
manufacturing facilities listed in the table below.
<TABLE>
<CAPTION>
Location Primary Use Approximate Size (sq. ft)
- -------- ----------- -------------------------
<S> <C> <C>
City of Industry, California Manufacturing; Distribution 98,000
Vernon, California Manufacturing; Distribution 235,000
Longwood, Florida Manufacturing; Distribution 70,000
Hernando, Mississippi Manufacturing; Distribution 150,000
Mount Vernon, New York Manufacturing; Executive Offices 70,000
Portchester, New York Warehouse 65,000
White Plains, New York Manufacturing; Distribution 85,000
</TABLE>
In addition, the Company leases showroom facilities in High Point, North
Carolina (five showrooms), San Francisco, California (four showrooms), New York,
New York (one showroom) and Dallas, Texas (six showrooms). The showroom sizes
range from 1,500 square feet to approximately 9,800 square feet. In addition,
the Company has five retail outlets located in the New York metropolitan area.
The approximate future minimum lease payments per fiscal year under
operating leases exclusive of sublease income are as follows:
2000............................................. $ 5,096,000
2001............................................. 4,622,000
2002............................................. 4,264,000
2003............................................. 3,196,000
2004............................................. 1,562,000
Thereafter....................................... 5,284,000
-----------
Total....................................... $24,024,000
===========
Union Agreement
The Company and its subsidiaries are party to two collective bargaining
agreements. None of the Company's employees have been on strike, or threatened
to since the Company's inception and the Company believes its relationship with
all of its personnel is satisfactory. The Company owes a union approximately $
114,347 as of this filing and has agreed to retire this amount through monthly
payments of approximately $11,000.
Information Systems
F-27
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has contracted for the installation of company-wide enterprise
software from a third party vendor. Such commitment is between $1.5 million and
2.0 million. Except as otherwise set forth herein, the Company has no material
commitments for capital expenditures.
Consulting Arrangements
Refer to Note 13 for discussion of these arrangements.
Legal Proceedings
The Company is subject to claims and litigation and other claims arising
in the ordinary course of its business. In management's opinion, Interiors is
not presently a party to any such litigation or claims the outcome of which
would have a material adverse effect on its financial position or its results of
operations.
12. Related Party Transactions
From time to time, the Company has entered into transactions with parties
related to the Company. The Company believes that all transactions with related
parties were entered into on terms no more or less favorable to the Company than
could have been obtained from unrelated third parties.
During fiscal year 1999, the Company generated management fees in the
amount of $115,000 in connection with the provision of management services to
Decor Group, Inc., a publicly-traded affiliate of the Company ("Decor"). The
Company owns 83,333 shares of Series A Non-Voting Convertible Preferred Stock,
6,666,667 shares of Series B Non-Convertible Voting Preferred Stock and 18,311
shares of Series C Non-Voting Convertible Preferred Stock of Decor. Such
ownership amounts to approximately 78% of the voting securities of Decor and is
subject to the Voting Agreement. Messrs. Munn and D'Amore are directors of
Decor. As of June 30, 1999, Decor owes the Company $1,005,542. The Company has
established reserves for the uncollectibility of this entire receivable and the
possibility that the Company would be required to pay up to $300,000 pursuant to
its guaranty of approximately $580,000 of indebtedness of Decor owed to Austin
Financial.
During fiscal year 1999, the Company loaned CSL an aggregate of $355,000
in exchange for two 6.75% promissory notes due April 30, 2001 and convertible
into common stock of CSL at $0.345 per share. In addition, the Company generated
management fees in the amount of approximately $200,000 in connection with the
provision of certain management services to CSL. The Company owns 51% of the
outstanding common stock of CSL, and Messrs. Munn, Belenski and Schwartz are
directors of CSL. As of June 30, 1999, CSL owes the Company $362,804. The
Company has guaranteed debt of CSL owed to Coast Business Credit in the amount
of approximately $1.6 million as of June 30, 1999.
During fiscal year 1999, the Company loaned $275,000 to Photo-to-Art, Ltd.
("Photo-to-Art"). In addition, the Company was paid $76,320 from Photo-to-Art in
connection with the sublease of certain space in the Company's facility located
in Mount Vernon and $215,771 for the purchase of merchandise. The Company owns
270,000 shares, or approximately 0.5%, of the common stock of Photo-to-Art and
warrants to purchase 120,000 common shares of Photo-to-Art at $4.50 per share.
As of June 30, 1999, Photo-to-Art owes the Company $325,000 for which a $250,00
reserve has been established. The Company has established reserves for the
uncollectibility of $250,000 of this receivable. Max Munn, the Company's
Chairman, President and Chief Executive Officer, has guaranteed debt of
Photo-to-Art of approximately $180,000.
During fiscal year 1999, the Company earned $375,000 of management fees
from an entity that was subsequently acquired for general management services.
During fiscal year 1999, the Company issued 375,000 Class B Shares to
Laurie Munn, wife of the Company's Chief Executive Officer, in consideration for
her personal guarantee of $5,300,000 of the Company's obligations in connection
with its acquisitions of Windsor and Troy. In addition, the Company issued
1,350,000 Class B Shares to Ms. Munn upon the exercise of an option. The
exercise price for the option was $1,350 in cash and a promissory note in the
amount of $1,606,500. The note bears
F-28
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interest at a rate of 6.5% per annum and matures on December 8, 2005. As of June
30, 1999, Ms. Munn owes the Company $2,555,100, plus accrued interest, all of
which is secured by a lien, which is subordinate to liens held by the Landis and
Finvoa Credit, on 2,455,000 Class B Shares, and Ms Munn guarantees debt of the
Company in the amount of $2.4 million.
During fiscal year 1999, the Company paid Morris Munn, father of the
Company's Chief Executive Officer, $64,405 for consulting services pursuant to a
five-year agreement commencing June 30, 1996.
During fiscal year 1999, the Company caused the payment of $500,000 to Ann
Stevens, a former executive of the Company and sister of the Company's President
and Chief Executive Officer to extinguish all of the Company's obligations under
a settlement agreement.
In connection with certain investment banking services provided during
fiscal year 1999 by Josephberg Grosz, an affiliate of Richard Josephberg, a
director of the Company, the Company issued (a) a four-year warrant to purchase
135,000 Class A Shares at $1.75 per share, 4,650 Class A Shares and $30,000 cash
to JG Capital, Inc., (b) 15,000 Class A Shares to JG Partners, LP (c) 5,350
Class A Shares to various designees named by Richard Josephberg. The shares were
valued at the fair market value on the date of issuance.
During fiscal year 1999, the Company made advances aggregating $458,057 to
the Company's Chief Executive Officer. As of September 15, 1999, this entire
amount was repaid to the Company.
The Company will not permit loans or other transactions among the Company
and the officers, directors, principal shareholders, or affiliates of any of
them for other than bona fide business purposes or on terms no less favorable
than could be obtained from third parties, unless approved by a majority of the
disinterested directors and the independent directors, if any, of the Company.
13. Profit Sharing and Deferred Compensation Plans
In July 1991, the Company started a qualified Profit Sharing Plan for all
nonunion employees and a nonqualified Deferred Compensation Plan for certain key
employees. The Company has not made any contributions to the Qualified Profit
Sharing Plan or the Deferred Compensation Plan since its initial contribution
during the fiscal year ended June 30, 1992.
14. Provision For Income Taxes
The income tax provision consists of:
Years Ended June 30,
----------------------
1999 1998
--------- ---------
Current Income Taxes:
Federal.................................. $ -- $
State and Local.......................... 200,000 52,543
Deferred Income Tax...................... -- (160,783)
--------- ---------
Total............................... $ 200,000 $ 108,240
========= =========
The benefit from the Company's net operating loss ("NOL") carry forward
for Federal income tax purposes is approximately $3,600,000 (which expires
through 2011). The deferred tax asset of approximately $3,839,000 is comprised
primarily of net operating losses and reserves. The utilization of such NOL's
maybe limited in the future due to changes in ownership.
F-29
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The majority of the Company's deferred tax assets are reserved resulting
in a net deferred tax asset of approximately $200,000. There has been no change
in the valuation allowance during the year ended June 30, 1999. The recorded
valuation allowance was reduced by $161,000 for the year ended June 30, 1998
The reduction of the valuation allowance in both 1999 and 1998 was
calculated at the statutory federal income tax rate. State income taxes have
been recorded based upon the applicable state requirements.
15. Subsequent Events
As of September 30, 1999, the Company entered into a transaction with the
holders of its Series C Preferred Shares and other investors pursuant to which
$5,027,000 principal amount, plus accrued and unpaid dividends, of the Company's
outstanding Series C Preferred Shares were exchanged for Secured Convertible
Notes due September 30, 2004 and bearing interest at 17% per annum (the "Secured
Notes"). The Secured Notes have an aggregate principal amount of $13,361,588,
are secured by the Company's ownership of common stock of Petals and convertible
after September 30, 2000 into Class A Shares at the fair market value of such
securities at the time of conversion. Interest on the Secured Notes is not
payable until the earlier of a redemption, conversion or default of such
securities, however, the Company is required to pay a administrative fee in
connection with the Secured Notes equal to 1% of the outstanding principal
amount of the securities per month until the earlier of a redemption, conversion
or default of such securities. In connection therewith, the Company issued
1,000,000 warrants to purchase Class A Shares at an exercise price of $2.00 per
share (the "Secured Note Warrants"). At any time, the Company may redeem the
Secured Notes at their face value plus all accrued and unpaid interest, and the
Secured Note Warrants at $0.25 per warrant. The Company received aggregate
proceeds of $7.5 million, and after paying an investment banking fee equal to 3%
and other fees and expenses, the Company received net proceeds of approximately
$7.2 million in the transaction.
F-30
<PAGE>
PART III
Items 9, 10, 11 & 12 are incorporated by reference from the Company's
definitive Proxy Statement to be filed by the Company with the Commission within
120 days of the end of the fiscal year.
Item 13. Exhibits, Financial Statements and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements:
The Financial Statements are incorporated herein as part of
Item 8 of this Report.
2. Exhibits:
See Index on Page 23 of this Report.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the last quarter of
fiscal year ended June 30, 1999:
(1) Current Report on Form 8-K reporting "Item 2 Acquisition or
Disposition of Assets" as filed with the Commission on April 9,
1999;
(2) Current Report on Form 8-K/A reporting "Item 2 Acquisition or
Disposition of Assets" and including the required financial
statements as filed with the Commission on May 10, 1999; and
(3) Current Report on Form 8-K/A reporting "Item 2 Acquisition or
Disposition of Assets" and including the required financial
statements as filed with the Commission on June 7, 1999.
19
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
INTERIORS, INC.
By: /s/ MAX MUNN
----------------------------------
Name:Max Munn
Title: President, Chairman and
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.
Signature Title Date
- --------- ----- ----
/s/ MAX MUNN President, Chairman, Chief October 13, 1999
- ----------------------- Executive Officer, and Director
Max Munn
/s/ RICHARD P. BELENSKI Executive Vice President October 13, 1999
- ----------------------- Finance and Administration,
Richard P. Belenski and Chief Financial Officer
/s/ ROGER LOURIE Director October 13, 1999
- -----------------------
Roger Lourie
/s/ RICHARD JOSEPHBERG Director October 13, 1999
- -----------------------
Richard Josephberg
20
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
--- ----------------------
2.1 Stock Purchase Agreement, dated as of March 1, 1999, by and between
Interiors, Inc. ("Interiors") and CSL Lighting Manufacturing, Inc.
("CSL"). (1)/
2.2 Agreement and Plan of Merger dated December 31, 1998 by and between
MHI Acquisition Corp., Interiors and Model Home Interiors, Inc. (2)/
2.3 Stock Purchase Agreement dated August 27, 1998 by and among
Interiors, Jimmy D. Webster, Jr., Bettye Jo Webster and Henry L.
Gray. (3)/
2.4 Agreement and Plan of Merger, dated July 2, 1998, by and among Troy
Acquisition Corp., Interiors, Troy, Barry R. Jackson, and Todd R.
Langner ("Langner"). (4)/
2.5 Stock Purchase Agreement dated July 7, 1998, by and between
Interiors and Bentley. (5)/
2.6 Purchase Agreement dated December 11, 1999 by and among Interiors,
and Mark N. Sklar, Drew M. Brown, the Bennett Dorrance Trust, the
Bennett Dorrance, Jr. Trust, the Ashley Dorrance Trust, the
Dorrance 1995 Issue Trust and DMB Property Ventures Limited
Partnership. (6)/
3.1 Certificate of Incorporation of Interiors. (7)/
3.2 Certificate of Ownership and Merger between Interiors, Inc. and
A.P.F. Holdings, Inc. (7)/
3.3 Certificate of Amendment of Certificate of Incorporation of
Interiors. (8)/
3.4 Certificate of Designations, Rights and Preferences of Series A
Preferred Stock. (8)/
3.5 Certificate for Restoration, Renewal and Revival of the Certificate
of Incorporation. (9)/
3.6 Certificate of Merger of Interiors, Inc. into Interiors Holdings,
Inc. (9)/
3.7 By-Laws of Interiors. (7)/
3.8 Certificate of Designations, Rights and Preferences of Series B
Preferred Stock. (10)/
3.9 Certificate of Designations, Rights and Preferences of Series C
Preferred Stock. (10)/
4.1 Specimen Class A Preferred Stock Certificate. (8)/
4.2 Specimen Class A Common Stock Certificate. (8)/
4.3 Specimen Class B Common Stock Certificate. (8)/
21
<PAGE>
4.4 7% Convertible Debenture due July 26, 2001, dated July 27, 1998, in
the amount of $500,000, issued by Interiors to Dominion Capital
Fund, Ltd. ("Dominion"). (9)/
4.5 7% Convertible Debenture due July 26, 2001, dated July 27, 1998, in
the amount of $500,000, issued by Interiors to Sovereign Partners,
L.P. ("Sovereign"). (9)/
4.6 7% Convertible Debenture due July 29, 2001, dated July 30, 1998, in
the amount of $1,250,000, issued by Interiors to RBB Bank AG ("RBB").
(9)/
4.7 Common Stock Purchase Warrant A to Purchase 214,286 Shares of Common
Stock of Interiors, dated July 27, 1998, issued by Interiors to
Dominion. (9)/
4.8 Common Stock Purchase Warrant A to Purchase 214,286 Shares of Common
Stock of Interiors, dated July 27, 1998, issued by Interiors to
Sovereign. (9)/
4.9 Common Stock Purchase Warrant A to Purchase 535,714 Shares of Common
Stock of Interiors, dated July 30, 1998, issued by Interiors to RBB.
(9)/
4.10 Common Stock Purchase Warrant B to Purchase 50,000 Shares of Common
Stock of Interiors, dated July 27, 1998, issued by Interiors to
Cardinal Capital Management Inc. ("Cardinal"). (9)/
4.11 Common Stock Purchase Warrant B to Purchase 62,500 Shares of Common
Stock of Interiors, dated July 30, 1998, issued by Interiors to
Cardinal. (9)/
4.12 Registration Rights Agreement, dated July 27, 1998, by the Holders
listed therein and Interiors. (9)/
4.13 Common Stock Purchase Warrant A to Purchase 187,500 Shares of Common
Stock of Interiors, dated August 25, 1998, issued by Interiors to
Sovereign. (9)/
4.14 Common Stock Purchase Warrant A to Purchase 187,500 Shares of Common
Stock of Interiors, dated August 25, 1998, issued by Interiors to
Dominion. (9)/
4.15 7% Convertible Debenture due August 24, 2001, in the amount of
$375,000, issued by Interiors to Sovereign. (9)/
4.16 7% Convertible Debenture due August 24, 2001, in the amount of
$375,000, issued by Interiors to Dominion. (9)/
4.17 Registration Rights Agreement, dated August 25, 1998, by the
Holders listed therein and Interiors. (9)/
4.18 Escrow Agreement dated July 2, 1998 by and among Buyer, U.S. First
Trust, a national association, and Barry R. Jackson. (10)/
4.19 The Windsor Art, Inc. Voting Trust Agreement No. 1 dated July 30,
1998 by and among Lloyd R. Abrams and Max Munn, Buyer and Bentley.
(10)/
4.20 Series B Warrant to purchase up to 2,000,000 Class A Shares issued
to Seaside Partners, L.P. (10)/
4.21 Form of 12% Convertible Promissory Notes. (10)/
<PAGE>
4.22 Form of Registration Rights Agreement by and among Interiors and
minority shareholders of Petals. (10)/
4.23 Form of Warrant to Purchase Class A Shares issued to minority
shareholders of Petals. (10)/
4.24 10% Convertible Promissory Note dated March 23, 1999 in the amount
of $2,000,000 issued to majority shareholder of Petals. (10)/
10.1 Security Agreement, dated November 13, 1990, between Interiors and
United Credit Corporation and amendments thereto dated November 13,
1990, January 7, 1992 , October 11, 1991, December 15, 1992 and June
23, 1993. (7)/
10.2 Standstill Agreement, dated as of March 1, 1999, by and between
Interiors, Inc. ("Interiors") and CSL Lighting Manufacturing, Inc.
("CSL"). (1)/
10.3 1994 Stock Option and Appreciation Rights Plan. (11)/
10.4 1994 Director Stock Option and Appreciation Rights Plan. (12)/
10.5 Revised form of Warrant Exercise Fee Agreement. (11)/
10.6 Consulting Agreement, dated October 1, 1993, between Morris Munn
and Interiors. (11)/
10.7 Employment Agreement, dated November 1, 1998, between Interiors and
Max Munn.
10.8 Promissory Note, dated March 10, 1998, made by Interiors in favor
of Michael H. Greeley ("Greeley"), in the principal sum of
$794,379. (9)/
10.9 Non-Negotiable Promissory Note, dated July 30, 1998, made by
Interiors in favor of Bentley, in the principal sum of $3,300,300.
(5)/
10.10 Non-Negotiable Promissory Note, dated July 30, 1998, made by
Interiors in favor of Bentley, in the principal sum of $2,000,000.
(5)/
10.18 Consulting Agreement, dated July 30, 1998, by and among Windsor,
Lloyd R. Abrams, and Interiors. (5)/
10.19 Securities Purchase and Registration Rights Agreement, dated July
30, 1998, by and among Max Munn, Bentley, and Interiors. (5)/
10.20 Employment Agreement, dated March 10, 1998, by and between Greeley
and Henlor. (13)/
10.21 Employment Agreement, dated August 14, 1998, by and between
Interiors and Langner. (4)/
10.22 Stock Purchase Agreement dated as of July 30, 1999 by and among
Interiors, Barry R. Jackson, U.S. Bank Trust and the entities listed
on Schedule A annexed thereto.
10.23 Letter Agreement dated August 2, 1999 by and among Interiors,
Sovereign, Dominion and Dominion Investment Fund, LLC.
11.1 Statement re: computation of per share earnings.
<PAGE>
21.1 Subsidiaries of the Registrant.
27.1 Financial Data Schedule
99.1 U.S. Patent and Trademark Office Trademark Reg. No. 1,736,623. (7)/
99.2 U.S. Patent and Trademark Office Service Mark Reg. No. 1,783,694.
(7/)
(1)/ Previously filed as an exhibit to Interiors' Current Report on Form 8-K
filed March 4, 1999 (File No. 00-24352), as amended, which exhibit is
incorporated herein by reference.
(2)/ Previously filed as an exhibit to Interiors' Current Report on Form 8-K
filed March 9, 1999 (File No. 00-24352) which exhibit is incorporated
herein by reference.
(3)/ Previously filed as an exhibit to Interiors' Current Report on Form 8-K
filed March 9, 1999 (File No. 00-24352), as amended, which exhibit is
incorporated herein by reference.
(4)/ Previously filed as an exhibit to Interiors' Current Report on Form 8-K
filed August 14, 1998 (File No. 00-24352), as amended, which exhibit is
incorporated herein by this reference.
(5)/ Previously filed as an exhibit to Interiors' Current Report on Form 8-K
filed August 10, 1998 (File No. 00-24352), as amended, which exhibit is
incorporated herein by this reference.
(6)/ Previously filed as an exhibit to Interiors' Current Report on Form 8-K
filed April 9, 1999 (File No. 00-24352), as amended, which exhibit is
incorporated herein by reference.
(7)/ Previously filed as an exhibit to the Registration Statement on Form
SB-2 (the "Registration Statement") (Registration No. 33-77288-NY),
which exhibit is incorporated herein by reference.
(8)/ Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement (Registration No. 33-77288-NY), which exhibit is incorporated
herein by reference.
(9)/ Previously filed as an exhibit to Annual Report on Form 10-KSB for
fiscal year ended June 30, 1998 (File No. 0-24352), which exhibit is
incorporated herein by this reference.
(10)/ Previously filed as an exhibit to Amendment No. 1 to the Registration
Statement on Form S-3 (Registration No. 333-63207), which exhibit is
incorporated herein by reference.
(11)/ Previously filed as an exhibit to Annual Report on Form 10-KSB for
fiscal year ended June 30, 1994 (File No. 0-24352), which exhibit is
incorporated herein by this reference.
(12)/ Previously filed as an exhibit to Amendment No. 3 to the Registration
Statement (Registration No. 33-7728-NY), which exhibit is incorporated
by reference.
(13)/ Previously filed as an exhibit to Current Report on Form 8-K filed
March 10, 1998 (File No. 00-24352), which exhibit is incorporated
herein by reference.
EXHIBIT 10.7
EMPLOYMENT AGREEMENT (the "Agreement") made and entered into as of
November 1, 1998 by and between Interiors, Inc., a Delaware corporation with an
office for the transaction of business in New York located at 320 Washington
Street Mount Vernon, New York 10553, ("Employer"), and Max Munn residing at 67
Tompkins Avenue, Hastings-on-Hudson, New York 10706 ("Employee").
WHEREAS, Employee has been employed by Employer as its President, Chief
Executive Officer and as a member of its Board of Directors, and has rendered
extraordinary service to Employer, and
WHEREAS, the parties wish to enter into an agreement for the employment of
the Employee by the Employer on the terms and conditions specified below
superseding any other employment agreements between Employer and Employee;
Now, therefore, it is mutually agreed as follows:
1. Employment. Employer hereby employs Employee as the President and
Chief Executive Officer of Employer, and of such current and future subsidiaries
of Employer for which Employee shall determine from time to time to act in those
capacities. Employee will report only to Employer's Board of Directors, of which
he is and will continue to be a member, and not to any officer.
2. Compensation. (a) Commencing January 1, 1999, Employee will be
paid as salary for his services hereunder for the Employer, in any capacity
during the term hereof, including without limitation services as an executive,
officer, or member of any committee of the Employer or any subsidiary, affiliate
of division hereof, at the annual rate of $375,000.00. Employee's salary will be
increased not less than annually: (i) by such amounts as Employer's Board of
Directors may determine from time to time, in addition to (ii) mandatory annual
increases of eight percent over his prior year's total salary, cumulatively, for
each year of his employment hereunder for which the Employer will have reported
positive income from operations before interest, taxes, depreciation,
amortization and non cash financing charges as audited by its accountants based
on generally accepted accounting principles consistently applied ("Income From
Operations").
(b) Employee will be paid a bonus equal to 35% of his salary which
may be in effect from time to time for each fiscal year for which the Employer
exceeds the forecasted budgeted Income From Operations, as approved for such
year by Employer's Board of Directors, by 10% or more, provided that the budget
is presented to the Board before the start of the fiscal year covered by that
budget, by the Employee, and the Board shall have approved the budget. However,
the budgeted forecasted Income From Operations for the fiscal year ending June
30, 1999 shall be deemed to have been $1,000,000.00, and Employee's bonus for
such fiscal year will be paid if the Income From Operations will exceed that
amount by 10% or more. In addition, Employee will be paid such annual or other
bonuses from time to time as may be authorized by Employer's
<PAGE>
Board of Directors, and will be entitled to participate in the Employers'
pension, profit sharing and all other benefits and plans as the Company provides
to its senior executives.
3. Term. (a) The term of this Agreement shall be five years from the
date hereof, except that the term shall be automatically extended for an
additional year as of January 1 of each year, commencing January 1, 1999, unless
either party shall have notified the other in writing prior to January 1 in a
given year that the term of this agreement shall not be further extended. By way
of illustration only and not limitation, if neither party has notified the other
in writing before January 1, 2000 that the term of this agreement shall not be
further extended, as of January 1, 2000 the term of this Agreement shall be
extended and continue to December 31, 2004.
(b) In the event that the Employer should commit a material breach
of this Agreement justifying Employee not continuing his employment, including
without limitation by termination of Employee's employment without cause, upon
Employee's termination of employment: (i) Employee's salary for the remaining
balance of this Agreement will be accelerated and will be due and payable on
Employee's demand, in addition to Employee's other remuneration and benefits or
the value thereof, (ii) the provisions of paragraph 8(b) of this Agreement
relating to Employee's stock options shall apply, and (iii) the Employee will
not be obligated to reduce the sum of money he is owed or paid by Employer by
reason of compensation which Employee may earn after Employer's breach.
(c) Employee may be terminated only for cause, which is deemed to be
solely: (i) for a conviction of the Employee of a felony for acts of dishonesty
against Employer, not reversed by appeal, after the expiration either of all
appeals from the conviction or the time to take such appeal or appeals if they
are not taken, or (ii) a determination by an order or judgment of a court, not
reversed by appeal, after the expiration of all appeals, that Employee has
refused, except for reasons of health or breach by Employer, after written
notice given by Employer's Board of Directors to, devote the time and attention
he is required to devote to Employer's business in accordance with paragraph 4
of this Agreement for reasons other than illness or disability. If Employee is
terminated for cause this Agreement shall also be terminated, subject to:
Employer's continuing obligation to indemnify the Employee, and any obligations
of Employer which accrued prior to such termination. In the event that Employee
will become ill or disabled and unable to perform his services for Employer, he
will nonetheless continue to be paid all of his remuneration and benefits under
this Agreement for a period of not less than eighteen months and he will have
the right to resume his duties upon his ability to perform services for Employer
within one year of the commencement of such inability to perform services. If
Employee shall become unable to perform his services for Employer for a period
of more than twelve months by reason of disability, this Agreement will be
terminated except for the benefits Employee is to receive under paragraph 7,
Employer's obligations with respect to Employee's stock options, to indemnify
Employee, to continue to pay insurance premiums and matters of that nature.
4. Duties. Employee will devote substantially all of his working
time and attention to Employer's business, subject to other activities which are
similar or
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<PAGE>
comparable to those: (a) in which he is now engaged, or (b) becomes engaged in
the future provided that it will not interfere with his duties for the Employer.
In no event will Employee consult with, invest in, be employed by or otherwise
act for any business that competes with Employer, except that he may own not
more than 5% of the shares of stock of such competing business which are traded
by the public. Employee will use reasonable efforts to disclose to the Board any
such interests in or acts which potentially violate the above provisions of this
paragraph, and will be given written notice by the Board and not less than 30
days to cure any violation thereof.
5. Stock Options. (a) Employer hereby grants to Employee options,
exercisable for a period commencing ten years from the date of this Agreement
through twelve years from this Agreement's date (unless the period or periods of
exercise are accelerated pursuant to this paragraph), to purchase: (i) up to
2,500,000 shares of Employer's Class A Common Stock, at the closing market price
per share in effect on November 2, 1998, and (b) up to 250,000 shares of
Employer's Series A cumulative convertible preferred stock at the closing market
price per share on November 2, 1998. Notwithstanding the foregoing, ten percent
of the options granted under this Agreement may be exercised commencing at the
time of Employer's issuance of its financial statements for any or all of the
Employer's fiscal years for which the Employer will have reported have reported
Income From Operations of at least $1,000,000, which sum is to be increased by
$100,000 for each successive fiscal year during this Agreement's term. The
options may be exercised (subject to the rights and restrictions specified above
in this paragraph) in whole or in part from the time or times they become
exercisable through twelve years from the date of this Agreement, and they are
assignable by Employee at any time prior to exercise by Employee's giving
written notice of such assignment or assignments to Employer. (The Employee's
assignee or assignees shall have all of the same rights with respect to the
options and the Shares and their registration and resale on or after exercise as
the Employee). Commencing the second year of this Agreement, the exercise price
will increase at the rate of ten percent each year over the initial exercise
price. At Employee's discretion the options will be converted to options for
shares of stock of any entity with which Employer may merge or be consolidated
or which may acquire all or substantially all of Employer's assets.
The Employee shall have the right to convert, in whole or in part,
the options (the "Conversion Right"), at any time after the accrual of
Employee's rights to exercise options, into Shares by tendering to the Employer
written notice or notices of exercise together with advice of the delivery of an
order to a broker to sell part or all of the Shares, subject to such exercise
notice and an irrevocable order to, and an irrevocable commitment by, such
broker to deliver to the Employer (or its transfer agent) sufficient proceeds
from the sale of such Shares to pay the aggregate exercise price of the options
and any withholding taxes. All documentation and procedures to be followed in
connection with such "cashless exercise" shall be approved in advance by the
Employer, which approval shall be expeditiously provided and not unreasonably
withheld.
(b) The Employer agrees, at its sole cost and expense, that:
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<PAGE>
(i) Upon request of the Employee, not more than once a year, the Employer shall
file a registration statement with the U.S. Securities & Exchange Commission
(the "SEC") with respect to registration of the Shares. Employee may make such
request at any time, or from time to time, after issuance of the options for the
Shares.
(ii) If the Employer determines to file with the SEC a Registration Statement in
connection with the proposed issuance for cash of any of the Employer's Common
Stock (an "Employer Offering"), the Employer will give written notice of its
determination to Employee, at least twenty (20) days prior to the anticipated
filing date. (Notice for such purpose by facsimile transmission will be
acceptable). Upon the written request of Employee given within ten (10) days
after the receipt of any such notice from the Employer, the Employer will,
subject to the limitations set forth below, use its best efforts to cause such
number of the Shares as are specified in such written request of Employee to be
included in such registration statement to the extent necessary, to permit the
sale or other disposition by the Employee of the Shares.
(iii) If the Employer's Registration Statement is proposed to be underwritten in
whole or in part, whether or not on a firm commitment or best efforts basis, the
Employee's shares shall be included at Employee's request on the same terms and
conditions as the Employer's Common Stock otherwise being sold through the
underwriter(s), provided, however, that if in the opinion of the managing
underwriter(s) of such Employer Offering, the inclusion of the Securities would
interfere with the successful marketing of the Employer's Common Stock by the
Employer then the Employer and Employee shall reduce pro rata the amount of the
Shares to be included in the Employer Offering to the extent necessary to comply
with the recommendation of such managing underwriter(s) as to the maximum number
of shares to be registered.
(iv) If and whenever the Employer is required by this paragraph to effect the
registration of the Shares under the Securities Act, the Employer will use all
reasonable efforts to:
(a) Prepare and file with the Commission a registration statement with respect
to the Shares and to cause such registration statement to become effective at
the earliest possible time and (by preparing and filing with the Commission such
amendments to such registration statement and supplement to the prospectus
contained therein as may be necessary) to remain effective during the period
required for the distribution of the Shares covered by such registration
statement.
(b) Enter into a written underwriting agreement in form and substance reasonably
satisfactory to the Employer and the managing underwriter(s) if an Employer
Offering is to be underwritten solely or in part, whether or not on a Firm
commitment or best efforts basis.
(c) Furnish to the Employee, in connection with a Employer Offering in which the
Employee is participating such reasonable number of copies of the registration
statement, preliminary prospectus, final prospectuses and other documents as may
reasonably be requested;
(d) Register or qualify the Shares under the securities or "blue sky" laws of
such jurisdictions Are within the United States as the Employer and the managing
underwriter(s) reasonably request, provided that the Employer shall not be
required to consent to general service of process for all purposes in any
jurisdiction where it is not then qualified to do business as a foreign
corporation:
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<PAGE>
(e) Notify the Employee promptly after the Employer shall receive notice
thereof, of the time when such registration statement has become effective or a
supplement to any prospectus forming a part of such registration statement has
been filed.
(f) Notify the Employee, during any period during which the Shares may be
distributed pursuant to a registered offering and a prospectus relating to such
registration statement is required to be delivered under the Securities Act of
the happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances then
existing, not misleading, and at the request of the Employee, prepare and
furnish to the Employee a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that as thereafter delivered
to the purchasers of such Shares. Such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statement truthful in light of the
circumstances then existing, not misleading, and
(g) Furnish, at the request of the Employee, on the date that the Shares are
delivered to the underwriter(s) pursuant to an Underwritten Offering an opinion,
dated such date of the independent counsel representing the Employer for the
purposes of such registration, addressed to the underwriter(s) and to the
Employee to the effect that such registration statement has become effective
under the Securities Act and that to the best knowledge of such counsel (A) no
stop order suspending the effectiveness thereof has been instituted or is
pending or contemplated under the Securities Act, (B) the registration
statement, the related prospectus, and each amendment or supplement thereto, as
of their respective effective or issue dates, compiled as to form in all
material respects with the requirements of the Securities Act and the applicable
rules and regulations of the Commission thereunder (except that such counsel
need express no opinion as to any statistical or other numerical data or
financial statements and notes related thereto contained therein); and (C) in
connection with the preparation of the registration statement, the related
prospectus and each amendment or supplement thereto no facts have come to the
attention of such counsel or that would lead such counsel to believe that either
the registration statement or the prospectus, or any amendment or supplement
thereto, as of their respective effective or issue dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statement therein in light of the
circumstances under which they were made, not misleading (except that such
counsel need express no opinion as to any statistical or other numerical data or
financial statements and the notes related thereto contained therein), and (ii)
such counsel did not become aware of any pending legal or governmental
proceeding applying to the Employer which was not disclosed in the registration
statement or the prospectus, or any amendment or supplement thereto, which has
or might have a material adverse effect upon the business or financial condition
of the Employer, (iii) any other opinions that the underwriters may reasonably
request furnish, and (iv) at the request of the Employee, on the date the shares
are delivered to the underwriter a letter, dated such date, from the independent
public accountants of the Employer, addressed to the Underwriter(s) and to the
Employee, stating that they are Independent public accountants within the
meaning of the Securities Act and the rules and regulations of the Commission
thereunder and that in the opinion of such accountants, the financial
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<PAGE>
statements and other financial data of the Employer included in the registration
statement or the prospectus, or any amendment or supplement thereto, as of their
respective effective or issue dates, complied as to form in all material
respects with the applicable accounting requirements of the Securities Act and
the rules and regulations of the Commission thereunder.
6. Reimbursement. Employer shall reimburse Employee for all
reasonable and necessary expenses incurred by him in performing his duties for
the Employer, including without limitation travel and entertainment expenses.
Such expenses will include the lease of an automobile for, in the Employee's
discretion, up to $1,200 a month, to be increased at the rate of eight percent a
year over each prior year cumulatively. The Employee will chose the automobile,
which at his discretion will be replaced not more than every two years. Employer
also will pay insurance, maintenance and license fees, as well as a car phone.
If the Employee is discharged prior to the conclusion of the automobile's lease,
Employer at Employee's option, either will continue to make the lease payments
for the term of the then existing lease, or will reimburse Employee for the
lease payments on the automobile, or will pay the termination fee under the
lease.
7. Insurance. Employer will furnish Employee and his family with the
same or comparable health insurance as the Employer will provide for its other
senior executive employees. Employer will immediately obtain for Employee and
will pay the premiums on a life insurance policy in the amount of $2,000,000.00
(the type and the beneficiary of which shall be designated by the Employee), and
the cost of a disability insurance policy in the amount of not less than two
thirds of Employees salary. Such policies shall be owned by Employee's
beneficiaries, or by any other person or entity which Employee may designate. In
the event that Employee should become totally and permanently disabled, he will
look first to the proceeds of the disability insurance policy for part of his
compensation, and thereafter for a period of eighteen months for the balance of
his compensation for such period under this Agreement to the Employer. For
purposes of this Agreement (but not the disability insurance policy), the
Employee will not be deemed to be totally and permanently disabled unless he
will be unable by reason of disability to perform his services for Employer for
a period of six consecutive months. Employee shall be entitled to continue to
receive his compensation under this Agreement if he should be deemed totally and
permanently disabled, in accordance with the foregoing provisions of this
paragraph.
8. Change of Control. In the event that there shall be a Change of
Control (as hereinafter defined) of Employer or of any of its material
subsidiaries, Employee will have the right with or without good reason, within
two years after the occurrence of such Change of Control, on 10 days notice, to
terminate his obligations under this Agreement and Employer will then be
required at the time of such termination: (a) to pay the Employee a lump sum
equal to five times Employee's then current annual compensation and all benefits
as if the Agreement had not been terminated, and (b) to deliver to Employee
without cost to him all of the shares of stock which Employee would have been
entitled to receive for the full term of this Agreement if the Employee had not
terminated his obligations and had exercised and paid for all of the stock
options referred to in
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<PAGE>
paragraph "5" of this Agreement (with Employee to be responsible for all tax
withholding). Change of Control for purposes of this paragraph shall be deemed
to occur upon: (i) the election by Employers' stockholders or Board of Directors
of one or more individuals to the Board of Directors of the Employer which
election results in a Board of Directors containing a majority of persons who
were nominated by a party other than the management of the Employer; (ii) a
board of directors election which results in the election of a Chairman of the
Board other than the Employee; (iii) the sale by the Employer of all or
substantially all of its assets in one transaction or a series of transactions,
(iv) the merger or consolidation of the Employer as a result of which the
Employee does not remain the President and Chief Executive Officer and Chairman
of the Board of the surviving or consolidated entity, (v) the accumulation of
15% or more of the voting rights of Employer or its affiliates by any person,
entity or group excluding Employee, or (vi) an adverse change in the Employee's
title, authority, duties, responsibilities or reporting lines as set forth in
Sections "1" and "4" of this Agreement. (Nothing contained in this definition
shall limit or restrict the right of the Employee from participating in any
discussions or voting on any matter referred to in this definition at any
meeting of the Employer's Board of Directors).
9. Vacation. Employee shall be entitled to paid vacations which are
appropriate for persons of his status, annually, to be taken by him at such
times as shall be appropriate in light of his position and which will not
interfere with the performance of his duties. Such vacations will not be less
than 4 weeks a year.
10. Notices. Notices to be given under or with respect to this
Agreement will be sufficient if given in writing and forwarded by Federal
Express to the parties at their addresses specified above, or to such other
addresses as they may give notice of, with copies by Federal Express to the
attorneys whose names appears below:
Interiors, Inc.
320 Washington Street
Mount Vernon, New York 10553
Morris, James, Hitchens & Williams, Esqs.
Attn. Edward M. McNally, Esq.
222 Delaware Avenue
P.O. Box 2306
Wilmington, Delaware
Max Munn
67 Tompkins Avenue
Hastings-on-Hudson, New York 10706
Irvin Rothfarb, Esq.
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<PAGE>
15 West 53rd Street
New York, New York 10019
11. Execution and delivery. This Agreement may be executed in
counterparts, each one of which will be deemed to be an original.
12. Modification. This Agreement contains the entire understanding
of the parties hereto with respect to the subject matter herein contained, and
no amendment or modification or termination thereof shall be valid unless
expressed in a written instrument signed by the party or parties to be charged.
13. Successors and assigns. This Agreement shall not be assignable
by the Employee but it is binding upon and shall inure to the benefit of the
parties hereto and Employee's heirs and personal representative and binding upon
Employer's successors.
14. Legal Fees and Indemnification. (a) In the event that a dispute
shall arise between Employer and Employee with respect to this Agreement or any
provision thereof, Employer will advance to Employee's attorneys monthly the
amount of the attorney's estimated monthly bills for the attorney's services and
all other costs and disbursements, in the amounts of the estimated bills which
the attorney will furnish. In the event that Employer shall fail to comply with
its obligations under this paragraph, Employer will be barred from either
pursuing any claim or lawsuit against Employee or from defending any claim or
lawsuit pursued by Employee against Employer. In the event that Employer will
prevail in any litigation with the Employee, the Employee shall comply with an
order of a court of competent jurisdiction after the conclusion of all appeals
directing the return to Employer of legal fees and expenses advanced by Employer
under this paragraph.
(b) In addition, Employer will indemnify and hold Employee harmless
to the fullest extent permitted by law from any claims, lawsuits and judgments,
including the costs and attorneys fees emanating therefrom, arising out of his
employment hereunder or all other matters related to the Employer and its
subsidiaries. The company shall advance to Executive all expenses, costs and
legal fees for which Executive may properly be indemnified for the defense by an
attorney selected by Executive and approved by the Company, whose approval will
not unreasonably be withheld. A condition precedent to each such advance by the
Company is the undertaking by Executive to repay such advance to the extent it
is ultimately determined by a court of competent jurisdiction that he was not
entitled to indemnification.
16. Applicable Law and Forum Selection. This agreement shall be
governed by the law of Delaware without regard to principles of conflict of
laws. Litigation under or with respect to this Agreement must be brought
exclusively in State Courts of the State of Delaware, except only any claim for
indemnification or contribution which Employee may interpose at his discretion
in any other jurisdiction in which a claim may be asserted against him. Employer
and Employee waive their rights to a jury in any such litigation. 17.
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<PAGE>
17. Severablility. If any provision of this Agreement will be
determined to be unenforceable, it will not effect the enforceability of the
agreements other terms and provisions.
Interiors, Inc.
By: /s/ Richard Belenski
------------------------------------
Chief Financial Officer
/s/ Max Munn
------------------------------------
Max Munn
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STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of this 30 day of July, 1999 (the "Closing Date") by and among Interiors,
Inc., a Delaware corporation ("Interiors"), Barry R. Jackson, an individual (the
"Shareholders' Representative"), U.S. Bank Trust, a national association (the
"Escrow Agent"), and the entities listed on Schedule A annexed hereto
(collectively referred to as the "Buyers").
RECITALS
A. The former shareholders (the "Former Shareholders") of Troy Lighting,
Inc. ("Troy") received 650,000 shares of Interiors Class A Common Stock (the
"Shares") pursuant to an Agreement and Plan of Merger (the "Merger Agreement")
dated July 2, 1998 by and among Troy Acquisition Corp., Interiors and Troy, and
the Former Shareholders.
B. The Escrow Agent is the record owner of the Shares which are held in an
escrow account (the "Escrow Account") pursuant to the terms of that certain
Escrow Agreement dated July 2, 1998 by and among Interiors, the Escrow Agent and
the Shareholders' Representative (the "Escrow Agreement").
C. The beneficial owners of the Shares are the Former Shareholders, and
the Shareholders' Representative is authorized to act on behalf of the Former
Shareholders in all matters relating to the administration of the Escrow Account
and the Shares.
D. The Former Shareholders, the Shareholders' Representative and Interiors
desire to authorize the Escrow Agent to sell the Shares to Buyers upon the terms
and subject to the conditions set forth herein.
E. Buyers desire to purchase from the Former Shareholders, and the Escrow
Agent, acting pursuant to the authority of the Shareholders' Representative and
Interiors, desires to sell, the Shares to Buyers upon the terms and subject to
the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the parties hereto hereby agree as follows:
1. Purchase and Sale of Shares. For a purchase price of One Million
Dollars ($1,000,000) (the "Purchase Price") and subject to the execution of a
First Amendment to the Escrow Agreement (including all Exhibits annexed thereto)
substantially in the form of Annex A attached hereto (the "Amended Escrow
Agreement"), and the terms set forth herein, the Shareholders' Representative,
on behalf of the Former Shareholders, agrees to sell the Shares to the Buyers
and the Buyers agree to purchase and accept the Shares
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<PAGE>
from the Shareholders' Representative for the Purchase Price. Upon the execution
of this Agreement, if required by the Escrow Agent, the Shareholders'
Representative shall deliver to Escrow Agent duly endorsed stock powers with a
signature guarantee acceptable to Escrow Agent permitting transfer of the Shares
to the Buyers. Buyers shall, upon the execution of this Agreement, pay to the
Escrow Agent, for the benefit of the Former Shareholders, the Purchase Price via
wire transfer of immediately available funds to the Escrow Account.
2. Escrow. On the Closing Date, the Shareholders' Representative, Escrow
Agent, Buyers and Interiors shall execute, in four counterparts, each of which
shall be deemed an original, the Amended Escrow Agreement.
3. Authorization by Interiors and Shareholders' Representative. Each of
Interiors and the Shareholders' Representative hereby authorize the sale of the
Shares by the Escrow Agent to the Buyers upon the terms and subject to the
conditions set forth in this Agreement.
4. Representations and Warranties of the Shareholders' Representative. The
Shareholders' Representative hereby represents and warrants to the Buyers,
Interiors and the Escrow Agent as follows, to the best knowledge of the
Shareholders' Representative:
a. The Shares are beneficially owned by the Former Shareholders. The
Former Shareholders are the only beneficial owners of the Shares. The Shares are
subject to no lien, pledge or encumbrance.
b. Upon delivery of the Shares and payment of the consideration
therefor pursuant to this Agreement, title to the Shares, free and clear of all
liens, encumbrances and pledges, will pass to Buyers.
c. The Shareholders' Representative has the full right, power and
authority to enter into this Agreement, to consummate the transactions
contemplated hereby on his own behalf and on behalf of the Former Shareholders
and to perform his obligations under the Agreement.
d. The Shareholders' Representative has duly executed and delivered
this Agreement, which is a legal, valid and binding obligation of the
Shareholders' Representative and the Former Shareholders, enforceable in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency and similar laws relating to creditors' rights
generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law). The
execution, delivery and performance of this Agreement by the Shareholders'
Representative do not require the consent or approval of any other person,
entity or governmental agency. The Shareholders' Representative has taken all
necessary action or otherwise as is required by such party to enter into this
Agreement and comply with the terms herein.
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<PAGE>
e. The execution, delivery and performance of this Agreement by the
Shareholders' Representative will not conflict with or result in a violation of
any term or provision of, or constitute a default under (with or without the
passage of time, or both), or otherwise give any person a basis for accelerated
or increased rights or termination of nonperformance under, any indenture,
mortgage, deed of trust, loan or credit agreement, lease, license or other
agreement or instrument to which the Shareholders' Representative or the Former
Shareholders are a party or by which the Shareholders' Representative or the
Former Shareholders are bound or affected.
f. Shareholders' Representative, to the best knowledge of the
Shareholders' Representative, and each of the Former Shareholders represent that
each is not an affiliate, as that term is defined in Rule 144 of the Securities
Act of 1933, as amended (the "Securities Act"), of Interiors and has been the
beneficial owner of the Shares for a period of at least one year from the date
each acquired them from Interiors.
g. Pursuant to the Amended Escrow Agreement the Former Shareholders
are not obligated to return the Shares to Interiors.
h. There are no pending claims or claims which have been resolved
and not paid against the escrow account as per the terms of the Merger
Agreement.
i. The Former Shareholders and the Shareholders' Representative are
each sophisticated individuals capable of evaluating the terms hereunder.
5. Representations and Warranties of the Escrow Agent. The Escrow Agent
hereby represents and warrants to Buyers, Interiors and the Shareholders'
Representative as follows:
a. The Escrow Agent has full right, power and authority to enter
into this Agreement, to consummate the transactions contemplated hereby and to
perform its obligations under this Agreement.
b. The execution and delivery by the Escrow Agent of this Agreement,
and the consummation by the Escrow Agent of the transactions contemplated
hereby, have been duly authorized by all necessary action by the Escrow Agent.
c. Escrow Agent is the sole record and legal owner of the Shares.
d. Escrow Agent has no lien, pledge or encumbrance against the
Shares.
e. Upon delivery of the Shares and payment of the consideration
therefor pursuant to this Agreement, good and marketable title to the Shares,
free and clear of all liens, pledges or encumbrances (other than any lien,
pledge or encumbrance created by parties to this Agreement other than Escrow
Agent), will pass to Buyers.
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f. Escrow Agent has duly executed and delivered this Agreement,
which is a legal, valid and binding obligation of Escrow Agent, enforceable in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency and similar laws relating to creditors' rights
generally and by general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law). The
execution, delivery and performance of this Agreement by the Escrow Agent do not
require the consent or approval of any other person, entity or governmental
agency. Escrow Agent has taken all necessary action or otherwise as is required
by Escrow Agent to enter into this Agreement and comply with the terms herein.
g. The execution, delivery and performance of this Agreement by the
Escrow Agent will not (i) conflict with or result in a violation of any term or
provision of or constitute a default under (with or without the passage of time
or both), or otherwise give any person a basis for accelerated or increased
rights or termination of nonperformance under, any indenture, mortgage, deed of
trust, loan or credit agreement, lease, license or other agreement or instrument
to which the Escrow Agent is bound or affected, (ii) result in the violation of
any of the provisions of the articles or certificate of incorporation or bylaws
of the Escrow Agent, (iii) result in the creation or imposition of any lien upon
any property or asset of the Escrow Agent or (iv) otherwise adversely affect the
contractual or other legal rights or privileges of the Escrow Agent.
h. Escrow Agent represents that it is not an affiliate, as that term
is defined in Rule 144 of the Securities Act, of Interiors and has been the
legal owner of the Shares for a period of at least one year from the date it
acquired them from Interiors.
i. There are no pending claims or claims which have been resolved
and not paid against the escrow account as per the terms of the Merger
Agreement.
6. Representations and Warranties of Buyers. Buyers hereby represent and
warrant to the Shareholders' Representative, Interiors and the Escrow Agent as
follows:
a. Buyers have the full right, power and authority to execute and
deliver this Agreement, to consummate the transactions contemplated hereby and
to perform their obligations under this Agreement.
b. The execution and delivery by Buyers of this Agreement, and the
consummation by Buyers of the transactions contemplated hereby, have been duly
authorized by all necessary action by Buyers.
c. This Agreement, upon its execution and delivery by Buyers
(assuming the due authorization, execution and delivery hereof by the other
parties hereto), will constitute the legal, valid and binding obligation of
Buyers enforceable against Buyers in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency and similar
laws relating to creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
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<PAGE>
d. The execution, delivery and performance of this Agreement by the
Buyers will not (i) conflict with or result in a violation of any term or
provision of, or constitute a default under (with or without the passage of
time, or both), or otherwise give any person a basis for accelerated or
increased rights of termination of nonperformance under, any indenture,
mortgage, deed of trust, loan or credit agreement, lease, license or other
agreement or instrument to which the Buyers are a party or by which the Buyers
are bound or affected, (ii) result in the violation of the provisions of the
articles or certificate of incorporation or bylaws of Buyers, (iii) result in
the creation or imposition of any lien upon any property or asset of Buyers or
(iv) otherwise adversely affect the contractual or other legal rights or
privileges of Buyers.
e. Without limiting any Buyers right to transfer the Shares in
compliance with federal and state securities laws, the Shares will be acquired
by Buyers for investment for an indefinite period of time for its own account,
not as a nominee or agent for any other person and not with a view to the sale
or distribution of all or any part thereof, and Buyers have no present intention
of selling, granting any participation in, or otherwise distributing, any or all
of the Shares. Buyers do not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to such
person with respect to any or all of the Shares. The entire legal and beneficial
interest of the Shares is being purchased by Buyers for, and will be held for,
their account and neither in whole nor in part for any other person.
f. Buyers understand that the Shares are not being registered under
the Securities Act, nor registered under any state's securities laws, and that
the Shares must be held indefinitely unless a subsequent disposition thereof
either is registered under the Securities Act and applicable state securities
laws, or is exempt from such registration. Buyers understand that there is no
assurance that such an exemption from registration will ever be available or
that Buyers will ever be able to sell any or all of the Shares.
g. Buyers are able to fend for themselves in the transactions
contemplated by this Agreement relating to its purchase of the Shares, have such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of their investment in Interiors, have the
ability to bear the economic risks of their investment for an indefinite period
of time and have been furnished with and have had access to such information as
Buyers deem necessary and appropriate to enable Buyers to evaluate the financial
risk inherent in making an investment in the Shares together with such
additional information as is necessary to verify the accuracy of the information
supplied. Each of the Buyers is an "accredited investor" as such term is defined
in Rule 501(a) promulgated under the Securities Act.
h. Buyers understand that their purchase of the Shares will be a
speculative investment and represents that they are able, without impairing
their financial condition, to hold the Shares for an indefinite period of time
and to suffer a complete loss on its investment.
i. Buyers understand that the Shares are restricted securities
within the meaning of Rule 144 promulgated under the Securities Act and that the
exemption
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<PAGE>
from registration under Rule 144 will not be available unless (i) a public
trading market then exists for the securities of Interiors, (ii) adequate
information concerning Interiors is then available to the public, and (iii)
other terms and conditions of Rule 144 are complied with.
j. Buyers represent and warrant that: (i) the terms of the purchase
of the Shares were negotiated by the Buyers exclusively with Interiors, (ii)
neither the Shareholders' Representative nor the Former Shareholders in any
manner participated in said negotiations or solicited the purchase of the
Shares, and (iii) except for the matters specifically set forth in this Stock
Purchase Agreement, neither the Shareholders' Representative nor the Former
Shareholders made any representations or provided the Buyers with any
information regarding Interiors or the Shares.
7. Representations and Warranties of Interiors. Interiors hereby
represents and warrants to Buyers, the Escrow Agent and the Shareholders'
Representative as follows:
a. Interiors has full right, power and authority to enter into this
Agreement, to consummate the transactions contemplated hereby and to perform its
obligations under this Agreement.
b. The execution and delivery by Interiors of this Agreement, and
the consummation by Interiors of the transactions contemplated hereby, have been
duly authorized by all necessary action by Interiors.
c. This Agreement, upon its execution and delivery by Interiors
(assuming the due authorization, execution and delivery hereof by the other
parties hereto), will constitute the legal, valid and binding obligation of
Interiors enforceable against Interiors in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency and
similar laws relating to creditors' rights generally and by general principles
of equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
d. The execution, delivery and performance of this Agreement by
Interiors will not (i) conflict with or result in a violation of any term or
provision of or constitute a default under (without or without the passage of
time, or both), or otherwise give any person a basis for accelerated or
increased rights or termination of nonperformance under any indenture, mortgage,
deed of trust, loan or credit agreement, lease, license or other agreement or
instrument to which Interiors is a party or by which Interiors is bound or
affected, (ii) result in the violation of the provisions of the certificate of
incorporation or bylaws of Interiors, (iii) result in the creation or imposition
of any lien upon any property or asset of Interiors or (iv) otherwise adversely
affect the contractual or other legal rights of Interiors.
e. Interiors Class A Common Stock is registered pursuant to Section
12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), has
been subject to the reporting requirements of Section 13 of the Exchange Act for
a period of at least 90 days immediately preceding the date hereof and has filed
all the reports required
-6-
<PAGE>
to be filed thereunder during the 12 months preceding the date hereof (or for
such shorter period that the issuer was required to file such reports); or has
securities registered pursuant to the Securities Act, has been subject to the
reporting requirements of Section 15(d) of the Exchange Act of 1934 for a period
of at least 90 days immediately preceding the date hereof and has filed all the
reports required to be filed thereunder during the 12 months preceding the date
hereof (or for such shorter period that the issuer was required to file such
reports). Interiors will use its best efforts to comply with all provisions of
Rule 144 of the Securities Act for so long as Buyers owns the Shares.
f. Interiors agrees that it shall take all action necessary to have
the Shares transferred into the name of the Buyers, including but not limited
to, instructing its transfer agent to transfer the Shares to the Buyers and
providing an opinion of counsel if one is requested by the Buyers and/or
Interiors' transfer agent.
g. The Shares are owned of record by the Escrow Agent and
beneficially by the Former Shareholders.
h. Upon delivery of the Shares and payment of the consideration
therefor pursuant to this Agreement good and marketable title to the Shares,
free and clear of all liens, encumbrances and pledges (other than liens,
encumbrances or pledges created by Buyers), will pass to Buyers.
i. There are no pending claims or claims which have been resolved
and not paid against the escrow account as per the terms of the Merger
Agreement.
8. Miscellaneous.
a. Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the internal substantive laws (and not the laws
of conflicts) of the State of California.
b. Entire Agreement. This Agreement constitutes the entire agreement
and understanding between the parties hereto with respect to the subject matter
hereof, supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written relating to the
subject matter hereof.
c. Indemnification Among Shareholders' Representative and Buyers.
The Shareholders' Representative covenants and agrees to defend, indemnify and
hold harmless Buyers and each person who controls Buyers within the meaning of
the Securities Act from and against any damages (including reasonable legal fees
and costs of investigation) arising out of or resulting from: (i) any inaccuracy
in or breach of any representation, warranty, covenant or agreement made by the
Former Shareholders in this Agreement or in any writing delivered pursuant to
this Agreement, or (ii) the failure of the Former Shareholders to perform or
observe fully any covenant, agreement or provision to be performed or observed
by the Former Shareholders pursuant to this Agreement. Buyers covenant and agree
to defend, indemnify and hold harmless the Shareholders' Representative
-7-
<PAGE>
from and against any damages (including reasonable legal fees and costs of
investigation) arising out of or resulting from: (i) any inaccuracy in or breach
of any representation, warranty, covenant or agreement made by Buyers in this
Agreement or in any writing delivered pursuant to this Agreement; or (ii) the
failure by Buyers to perform or observe any covenant, agreement or condition to
be performed or observed by it pursuant to this Agreement.
d. Indemnification Among Escrow Agent and Buyers. The Escrow Agent
covenants and agrees to defend, indemnify and hold harmless Buyers and each
person who controls Buyers within the meaning of the Securities Act from and
against any damages arising out of or resulting from: (i) any inaccuracy in or
breach of any representation, warranty, covenant or agreement made by the Escrow
Agent in this Agreement or in any writing delivered pursuant to this Agreement,
or (ii) the failure of the Escrow Agent to perform or observe fully any
covenant, agreement or provision to be performed or observed by the Escrow Agent
pursuant to this Agreement. Buyers covenant and agree to defend, indemnify and
hold harmless the Escrow Agent from and against any damages arising out of or
resulting from: (i) any inaccuracy in or breach of any representation, warranty,
covenant or agreement made by Buyers in this Agreement or in any writing
delivered pursuant to this Agreement; or (ii) the failure by Buyers to perform
or observe any covenant, agreement or condition to be performed or observed by
it pursuant to this Agreement.
e. Indemnification Among Buyers and Interiors. Interiors covenants
and agrees to defend, indemnify and hold harmless Buyers and each person who
controls Buyers within the meaning of the Securities Act from and against any
damages arising out of or resulting from: (i) any inaccuracy in or breach of any
representation, warranty, covenant or agreement made by Interiors in this
Agreement or in any writing delivered pursuant to this Agreement, or (ii) the
failure of Interiors to perform or observe fully any covenant, agreement or
provision to be performed or observed by Interiors pursuant to this Agreement.
Buyers covenants and agrees to defend, indemnify and hold harmless Interiors and
each person who controls Interiors within the meaning of the Securities Act from
and against any damages arising out of or resulting from: (i) any inaccuracy in
or breach of any representation, warranty, covenant or agreement made by Buyers
in this Agreement or in any writing delivered pursuant to this Agreement, or
(ii) the failure by Buyers to perform or observe any covenant, agreement or
condition to be performed or observed by it pursuant to this Agreement.
f. Amendments; Waivers. This Agreement may be amended and the terms
or covenants of this Agreement may be waived, only by a written instrument
executed by all of the parties to this Agreement or, in the case of a waiver, by
the party waiving compliance. No waiver by any party of the breach of any term
or provision contained in this Agreement, in any one or more instances, shall be
deemed to be or construed as a further or continuing waiver of any such breach,
or a waiver of the breach of any other term or covenant contained in this
Agreement.
g. Notice. All notices and other communications which are required
or permitted hereunder or in connection with this Agreement shall be in writing
and
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<PAGE>
shall be deemed to be sufficiently given (a) if delivered personally, upon
delivery, (b) if delivered by registered or certified mail (return receipt
requested), postage prepaid, upon the earlier of actual delivery or upon three
days after being mailed, and (c) if delivered by telecopy, upon confirmation of
transmission by telecopy, in each case to the parties at the following
addresses:
As to the Shareholders' Representative:
Barry R. Jackson
23 West Street
P.O. Box 129
Annapolis, Maryland 21401
Facsimile: (410) 268-3963
With a copy to:
Gerald M. Penner, Esq.
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661
Facsimile: (312) 902-1061
As to Buyers at their respective addresses set forth on
Schedule A:
With a copy to:
The Goldstein Law Group, P.C.
65 Broadway, Tenth Floor
New York, New York 10006
Facsimile: (212) 809-4228
As to Interiors:
Interiors, Inc.
320 Washington Street
Mount Vernon, New York 10553-1017
Attention: Max Munn
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<PAGE>
With a copy to:
DeAnne H. Ozaki, Esq.
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street
Twenty-Third Floor
Los Angeles, California 90071
Facsimile: (213) 627-0705
As to Escrow Agent:
U.S. Bank Trust, N.A.
Global Escrow Depository Services
550 South Hope Street, Suite 500
Los Angeles, California 90071
Attention: Ms. Andrea Freeman
Facsimile: (213) 533-8736
Either party hereto may, by notice given hereunder, designate any further
or different address to which subsequent notices or other communications shall
be sent.
h. Severability. Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
i. Survival. The representations and agreements of the parties set
forth in Sections 3, 4, 5 and 6 of this Agreement shall survive any expiration
or termination of this Agreement.
j. Attorneys' Fees. If any party to this Agreement seeks to enforce
its rights under this Agreement, the prevailing party shall be entitled to
recover reasonable fees, costs and expenses incurred in connection therewith
including, without limitation, the fees, costs and expenses of attorneys,
accountants and experts, whether or not litigation is instituted, and including
such fees, costs and expenses of appeals.
k. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of each of the parties hereto and their respective
successors, heirs and assigns; provided, however, that no party may assign
either this Agreement or any of its rights, interests or obligations hereunder
in whole or in part without the prior written consent of the other parties
hereto, and any such transfer or assignment without said consent shall be void,
ab initio. Subject to the immediately preceding sentence, this Agreement is not
intended to benefit, and shall not run to the benefit of or be enforceable by,
any other person or entity other than the parties hereto and their permitted
successors and assigns.
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<PAGE>
l. Further Assurances. Subject to the terms and conditions of this
Agreement, each of the parties hereto agrees to use all reasonable efforts to
take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable under applicable legal requirements, to
consummate and make effective the transactions contemplated by this Agreement.
If at any time after the execution of this Agreement any further action is
necessary or desirable to carry out the purposes of this Agreement, the Former
Shareholders or the proper officers or directors of Interiors or Buyers, as the
case may be, shall take or cause to be taken all such necessary or convenient
action and execute, and deliver and file, or cause to be executed, delivered and
filed, all necessary or convenient documentation.
m. Counterparts; Facsimile; Amendments. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original.
n. Reliance. It is agreed and understood that each party is entering
into this Agreement based upon, and is relying upon, the representations and
warranties of all other parties to this Agreement.
o. Actions of Shareholders' Representative. All actions, decisions
and instructions of the Shareholders' Representative shall be final, conclusive
and binding upon the Former Shareholders.
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<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have executed or caused
to be executed this Agreement as of the date first above written.
SHAREHOLDERS' REPRESENTATIVE:
/s/ Barry Jackson
-----------------
Barry R. Jackson
ESCROW AGENT:
U.S. Bank Trust,
a national association
By: /s/ illegible
-------------
An Authorized officer
BUYERS:
DOMINION CAPITAL FUND, LTD.
By: /s/ illegible
-------------
An Authorized officer
DOMINION INVESTMENT FUND, LLC
By: /s/ illegible
-------------
An Authorized officer
SOVEREIGN PARTNERS LP
By: /s/ illegible
-------------
An Authorized officer
INTERIORS:
Interiors, Inc.,
a Delaware corporation
By: /s/ Max Munn
-------------
An Authorized officer
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<PAGE>
SCHEDULE A
1. DOMINION CAPITAL FUND, LTD.
c/o Citco Fund Services
Bahamas Financial Center, 3rd Floor
Shirley & Charlotte Streets
CB 13136
Nassau, Bahamas
Telephone: (242) 356-5928
Facsimile: (242) 356-0223
Investment Amount: $400,000 (260,000 shares)
2. DOMINION INVESTMENT FUND, LLC
c/o Citco Fund Services
Bahamas Financial Center, 3rd Floor
Shirley & Charlotte Streets
CB 13136
Nassau, Bahamas
Telephone: (242) 356-5928
Facsimile: (242) 356-0223
Investment Amount: $100,000 (65,000 shares)
3. SOVEREIGN PARTNERS LP
90 Grove Street, Suite #01
Ridgefield, CT 06877
Telephone: (203) 431-8300
Facsimile: (203) 431-8301
Investment Amount: $500,000 (325,000 shares)
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INTERIORS
Max Munn Telephone (914) 665-5400 ext. 801
Chairman and President Facsimile (914) 665-5469
August 2, 1999
To: DOMINION CAPITAL FUND, LTD.
DOMINION INVESTMENT FUND, LLC
SOVEREIGN PARTNERS LP
This letter shall confirm our understanding of the following in connection
with your purchase of an aggregate of 650,000 shares of Interiors, Inc. (the
"Company") Common Stock (the "Shares") from certain former shareholders of Troy
Lighting, Inc.:
1. You agree not to sell the Shares (either directly or indirectly) within
six months of the date herein.
2. The Company shall issue to you (within five business days after the
expiration of the Valuation Period) additional shares of Common Stock
which equal to the result of the following formula:
[($1.77 - Market Price)/ Market Price] X 650,000
Where: Market Price equals average of closing bid prices of Common
Stock during Valuation Period, And Valuation Period equals the sixty
consecutive trading day period commencing on the six month
anniversary of the date of this letter and expiring sixty trading
days thereafter.
3. The Company will register the Additional Shares for resale as soon as
possible after the Valuation Period, either (a) through piggyback rights
on the registration statement currently to be filed for the Series C
Preferred Stock, or (b) we will file a registration statement within 60
days from the expiration of the Valuation Period. The Company will use its
best efforts to cause the registration statement to become effective
within 180 days from the expiration of the Valuation Period. If the
registration statement has not been filed within 60 days from the
expiration of the Valuation Period and/or the registration statement has
not been declared effective within 180 days from the expiration of the
Valuation Period then the Company will be liable for liquidated damages
enforceable by the purchaser. The liquidated damages will be in the amount
of 2% of the value of the Additional Shares for the first 30 days and 2%
for every 30
<PAGE>
day period thereafter until the registration statement has been filed
and/or declared effective. The liquidated damages will be payable in cash
upon demand.
4. Not withstanding the foregoing, in lieu of issuing the Additional Shares,
the Company shall have the option of paying to you the market value of
such Additional Shares (which shall equal the closing bid price of the
Common Stock on the trading day immediately following the expiration of
the Valuation Period. If Company does choose to issue such Additional
Shares, then, at the time it is to file the registration statement, it
must provide you with a written legal opinion that states that you will
not be considered an underwriter due to such issuance.
If the foregoing accurately reflects your understanding, please
acknowledge such by signing below.
Very truly yours,
/s/ Max Munn
Max Munn
Acknowledged and Agreed:
DOMINION CAPITAL FUND, LTD.
By: /s/ illegible
-------------------------------
An Authorized officer
Dated:
----------------------------
DOMINION INVESTMENT FUND, LLC
By: /s/ illegible
-------------------------------
An Authorized officer
Dated:
----------------------------
SOVEREIGN PARTNERS LP
By: /s/ illegible
-------------------------------
An Authorized officer
Dated: August 3, 1999
EXHIBIT 21
Subsidiaries of the Registrant
Habitat Solutions, Inc.
Petals, Inc.
Stylecraft Lamps, Inc.
Troy Lighting, Inc.
Vanguard Studios, Inc.
Windsor Art, Inc.
CSL Lighting Manufacturing, Inc. (51%)
