<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended MARCH 31, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _______________________to______________________
Commission file number 0-24352
INTERIORS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3590047
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
320 WASHINGTON STREET, MOUNT VERNON, NEW YORK 10553
(Address of Principal Executive Offices)
(914) 665-5400
(Issuer's Telephone Number, Including Area Code )
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act 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__
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of May 20, 1999, the
registrant had 31,415,247 and 2,455,000 outstanding shares of Class A Common
Stock and Class B Common Stock, respectively.
Transitional Small Business Disclosure Format (check one) Yes ______ No X
<PAGE>
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q, 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 the acquisitions;
hiring and retaining upper management personnel; capital requirements;
identification of growth opportunities; implementation of cost and accounting
controls; and the possible volatility of stock prices.
<PAGE>
INTERIORS, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheet as of March 31, 1999............................ 3
Consolidated Statement of Operations for the Three Months Ended
March 31, 1999 and 1998............................................ 4
Consolidated Statement of Operations for the Nine Months Ended
March 31, 1999 and 1998............................................ 5
Consolidated Statement of Changes in Stockholders' Equity for the
Nine Months Ended March 31, 1999................................... 6
Consolidated Statement of Cash Flows for the Nine Months Ended
March 31, 1999 and 1998............................................ 7
Notes to Consolidated Financial Statements................................. 9
Item 2. Management's Discussion and Analysis or Plan of Operation.......... 12
PART II OTHER INFORMATION
Item 2. Changes in Securities.............................................. 16
Item 5. Other Information.................................................. 17
Item 6. Exhibits and Reports on Form 8-K................................... 18
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERIORS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 12,002,653
Accounts receivable, net 14,333,219
Inventories 21,370,705
Other current assets 5,852,153
------------
Total current assets 53,558,730
INVESTMENT IN AFFILIATES 4,718,489
PROPERTY AND EQUIPMENT, net 9,782,438
OTHER ASSETS 35,323,032
------------
Total assets $103,382,689
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt 18,491,481
Accounts payable and accrued liabilities 21,913,268
------------
Total current liabilities 40,404,749
MINORITY INTEREST IN SUBSIDIARY 746,154
LONG TERM DEBT 10,081,140
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Preferred stock, $.01 par value, 5,300,000 shares
authorized, 2,135,537 shares issued and outstanding 21,355
Class B Preferred stock, $.01 par value, 200,000 shares
authorized, issued and outstanding 2,000
Class C Preferred stock, $.01 par value, 6,527 shares
authorized, issued and outstanding 65
Class A common stock, $.001 par value, 60,000,000 shares
authorized, 29,503,303 shares issued, 27,921,796 shares outstanding 29,503
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 64,692,213
Accumulated deficit (8,724,822)
Notes receivable (2,555,100)
------------
Total stockholders' equity 52,150,646
------------
Total liabilities and stockholders' equity $103,382,689
============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-3-
<PAGE>
INTERIORS, INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $19,465,116 $ 2,389,000
COST OF GOODS SOLD 12,957,708 1,378,000
----------- -----------
Gross profit 6,507,408 1,011,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,863,212 700,000
----------- -----------
Income (loss) from operations (355,804) 311,000
OTHER EXPENSE (INCOME)
Amortization of goodwill 117,951 -
Interest expense 644,062 257,000
Financing charges - noncash 512,346 -
Consulting and management fees (507,500) -
Minority interest (58,838)
Gain on legal settlement 0 -
----------- -----------
Total other expense 708,021 257,000
Income (loss) from operations
before (benefit) provision for income taxes and extraordinary item (1,063,825) 54,000
PROVISION FOR INCOME TAXES 2,607 2,000
----------- -----------
Income (loss) from operations before extraordinary item (1,066,432) 52,000
EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT OF DEBT (113,013) -
----------- -----------
NET INCOME $(1,179,445) $ 52,000
----------- -----------
EARNINGS PER COMMON SHARE:
(RESTATED FOR 1998)
BASIC
Income (loss) from continuing operations (1,066,432) 52,000
Preferred dividends (607,688) (13,173
----------- -----------
Net income (loss) from continuing operations attributable to
common shares before extraordinary item (1,674,120) 38,827
Extraordinary loss from early extinguishment of debt (113,013) -
----------- -----------
Net income (loss) (1,787,133) 38,827
=========== ===========
Net Earnings Per Common Share - Basic:
Earnings from continuing operations (0.07) 0.01
Extraordinary loss from early extinguishment of debt (0.01) 0.00
----------- -----------
Net Earnings Per Common Share - Basic: (0.08) 0.01
=========== ===========
DILUTED
Income (loss) from continuing operations (1,066,432) 52,000
Preferred dividends (607,688) (13,173)
----------- -----------
Net income from continuing operations attributable to
common shares before extraordinary item (1,674,120) 38,827
Extraordinary loss from early extinguishment of debt (113,013) -
----------- -----------
Net income (loss) (1,787,133) 38,827
=========== ===========
Net Earnings Per Common Share - Diluted:
Earnings from continuing operations (0.07) 0.01
Extraordinary gain from early extinguishment of debt (0.00) 0.00
----------- -----------
Net Earnings Per Common Share - Diluted: (0.07) 0.01
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION
BASIC 22,699,648 6,689,000
DILUTED 24,606,346 7,158,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements
-4-
<PAGE>
INTERIORS, INC.
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
NET SALES $42,727,862 $ 6,225,000
COST OF GOODS SOLD 27,918,196 3,775,000
----------- -----------
Gross profit 14,809,666 2,450,000
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,824,966 1,590,000
----------- -----------
Income from operations 984,700 860,000
OTHER EXPENSE (INCOME)
Amortization of goodwill 310,535 -
Interest expense 1,628,490 483,000
Financing charges - noncash 949,687 -
Consulting and management fees (627,500) -
Minority interest (58,838) -
Gain on legal settlement (82,488) -
----------- -----------
Total other expense (income) 2,119,886 483,000
Income (loss) from operations
before (benefit) provision for income taxes and extraordinary item (1,135,186) 377,000
(BENEFIT) PROVISION FOR INCOME TAXES 12,596 15,000
----------- -----------
Income (loss) from operations before extraordinary item (1,147,782) 362,000
EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT OF DEBT 1,257,529 0
----------- -----------
NET INCOME $ 109,747 $ 362,000
----------- -----------
EARNINGS PER COMMON SHARE:
(RESTATED FOR 1998)
BASIC
Income (loss) from continuing operations (1,147,782) 362,000
Preferred dividends (744,366) (299,938)
----------- -----------
Net income (loss)from continuing operations attributable to
common shares before extraordinary item (1,892,148) 62,062
Extraordinary gain from early extinguishment of debt 1,257,529 -
----------- -----------
Net income (loss) (634,619) 62,062
=========== ===========
Net Earnings Per Common Share - Basic:
Earnings from continuing operations (0.10) 0.01
Extraordinary gain from early extinguishment of debt 0.07 0.00
----------- -----------
Net Earnings Per Common Share - Basic: (0.03) 0.01
=========== ===========
DILUTED
Income (loss) from continuing operations (1,147,782) 362,000
Preferred dividends (744,366) (299,938
----------- -----------
Net income (loss) from continuing operations attributable to
common shares before extraordinary item (1,892,148) 62,062
Extraordinary gain from early extinguishment of debt 1,257,529 -
----------- -----------
Net income (loss) (634,619) 62,062
=========== ===========
Net Earnings Per Common Share - Diluted:
Earnings from continuing operations (0.09) 0.01
Extraordinary gain from early extinguishment of debt 0.06 0.00
----------- -----------
Net Earnings Per Common Share - Diluted: (0.03) 0.01
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION
BASIC 19,271,239 5,839,000
DILUTED 20,663,487 6,161,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements
-5-
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred Stock Preferred Stock Preferred Stock
--------------------------------------------------------------------
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1998 679,438 $6,794
Class B Common Shares issued
Series B Preferred Shares Issued 200,000 $2,000
Series C Preferred Shares Issued 4,500 $45
Conversion of Class B to Class A Common
Conversion of Preferred to Class A Common (827,086) (8,271)
Escrow shares
CSL Acquisition 2,027 20
Troy Lighting Acquisition
Windsor Art Acquisition
MHI Acquistion
Exercise of Class WA Warrants
Exercise of Class WB Warrants
Exercise of Class WC Warrants 2,144,485 21,445
Warrants issued with convertible debentures
Warrants issued for debt offerings
Shares issued for services rendered
Shares issued in connection with settlement 10,000 100
Escrow shares issued to outside investor
Shares issued in connection with employment agreement
Discount incurred with convertible notes
Class A shares issued, convertible notes
Stock Dividend
Windsor Art extinguishment of debt
Shares reissued to outside investor
Retirement of escrow shares
Preferred shares issued-conversion of promissory notes 128,700 1,287
Shares reissued on conversion of debt
Finance charges connected with 12% promissory notes
Net income through March 31, 1999
---------- ------- -------- ------ ------ ------
BALANCE, March 31, 1999 2,135,537 $21,355 200,000 $2,000 6,527 $65
========== ======= ======== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional
----------------------------------------------------- Paid-In
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1998 19,614,857 $19,615 2,105,000 $2,105 $21,751,749
Class B Common Shares issued 1,725,000 1,725 1,605,375
Series B Preferred Shares Issued 2,003,000
Series C Preferred Shares Issued 4,499,955
Conversion of Class B to Class A Common 125,000 125 (125,000) (125)
Conversion of Preferred to Class A Common 2,481,258 2,481 5,790
Escrow shares 5,000,000 5,000 (5,000)
CSL Acquisition 2,026,980
Troy Lighting Acquisition 650,000 650 974,350
Windsor Art Acquisition 1,500,000 1,500 2,528,719
MHI Acquistion 1,056,342 1,056 2,298,944
Exercise of Class WA Warrants 447,192 447 670,341
Exercise of Class WB Warrants 2,704,632 2,705 5,406,559
Exercise of Class WC Warrants 2,144,485 2,144 11,771,079
Warrants issued with convertible debentures 1,000,000
Warrants issued for debt offerings 75,000
Shares issued for services rendered 178,314 178 306,522
Shares issued in connection with settlement 34,900
Escrow shares issued to outside investor 1,250,000 1,250 (1,250,000) (1,250) 1,200,020
Shares issued in connection with employment agreement 100,000 100 130,900
Discount incurred with convertible notes 159,717
Class A shares issued, convertible notes 1,710,653 1,711 1,803,774
Stock Dividend 165,570 166 258,538
Windsor Art extinguishment of debt
Shares reissued to outside investor 2,500,000 2,500 2,772,480
Retirement of escrow shares (12,500,000) (12,500) 12,500
Preferred shares issued-conversion of promissory notes 706,563
Shares reissued on conversion of debt 375,000 375 644,625
Finance charges connected with 12% promissory notes 48,833
Net income through March 31, 1999
------------ -------- ----------- ------ -----------
BALANCE, March 31, 1999 29,503,303 29,503 2,455,000 $2,455 $64,692,213
============ ======== =========== ====== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
<PAGE>
<TABLE>
<CAPTION>
Retained
Earnings Treasury Note
(Deficit) Stock Receivable Total
--------- ----- ---------- -----
<S> <C> <C> <C> <C>
BALANCE, June 30, 1998 ($8,575,865) $0 ($948,000) $12,256,398
Class B Common Shares issued (1,607,100)
Series B Preferred Shares Issued 2,005,000
Series C Preferred Shares Issued 4,500,000
Conversion of Class B to Class A Common 0
Conversion of Preferred to Class A Common 0
Escrow shares 0
CSL Acquisition 2,027,000
Troy Lighting Acquisition 975,000
Windsor Art Acquisition 2,530,219
MHI Acquistion 2,300,000
Exercise of Class WA Warrants 670,788
Exercise of Class WB Warrants 5,409,264
Exercise of Class WC Warrants 11,794,668
Warrants issued with convertible debentures 1,000,000
Warrants issued for debt offerings 75,000
Shares issued for services rendered 306,700
Shares issued in connection with settlement 35,000
Escrow shares issued to outside investor 1,200,020
Shares issued in connection with employment agreement 131,000
Discount incurred with convertible notes 159,717
Class A shares issued, convertible notes 1,805,485
Stock Dividend (258,704) 0
Windsor Art extinguishment of debt (1,317,023) (1,317,023)
Shares reissued to outside investor 2,774,980
Retirement of escrow shares
Preferred shares issued-conversion of promissory notes 707,850
Shares reissued on conversion of debt 645,000
Finance charges connected with 12% promissory notes 48,833
Net income through March 31, 1999 109,747 109,747
----------- ----------- ----------- -----------
BALANCE, March 31, 1999 ($8,724,822) ($1,317,023) ($2,555,100) $52,150,646
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements
-6-
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------------------
1999 1998
-----------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 109,747 $ 362,000
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 1,175,834 494,000
NBV of rental property disposed 177,300 -
Provision for losses on accounts receivable 54,494 -
Non-cash financing charge 1,490,000 -
Provision for issuance of stock 341,700 -
Minority interest in subsidiary 746,154 -
CHANGES IN ASSETS AND LIABILITIES: -
Decrease (increase) in accounts receivable, (184,303) (17,000)
Decrease (increase) in inventories (644,821) (76,000)
Decrease (increase) in prepaid expenses and other current assets (1,921,659) 229,000
Decrease (increase) in other assets 389,412 (199,000)
Increase (decrease) in accounts payable and accried expenses (647,392) $ (95,000)
------------ -----------
Net cash used in operating activities 1,086,466 698,000
------------ -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (750,824) (124,000)
Acquisition of Bentley International (2,106,767) (1,828,000)
Acquisition of Troy Lighting (2,190,513) -
Acquisition of MHI (2,274,587) -
Acquisition of CSL (703,406) -
Acquisition of Stylecraft Lamps (10,573,311) -
Acquisition of Petals (6,865,121) -
------------ -----------
Net cash used in investing activities (25,464,529) (1,952,000)
------------ -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 16,342,147 2,928,000
Sale of Treasury Stock - 180,000
Repayments of debt and capitalized lease obligations (13,768,624) (470,000)
Net proceeds from exercise of common stock warrants 17,874,720 84,000
Net proceeds from sale of common and preferred stock 10,730,000 -
------------ -----------
Net cash provided by financing activities 31,178,243 2,722,000
------------ -----------
Net increase (decrease) in cash 6,800,180 1,468,000
CASH, beginning of period 5,202,473 271,000
------------ -----------
CASH, end of period $ 12,002,653 $ 1,739,000
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 1,361,408 $ 216,000
Taxes 17,304 15,000
NON-CASH FINANCIAL ACTIVITIES:
Conversion of Series A Preferred Stock to Class A Common Stock 5,790 -
Stock issuance for promissory notes 1,805,485 -
Stock issuance for services 306,700 345,000
Stock issuance in connection with acquisitions 5,302,000 1,750,000
Stock issuance in connection with legal settlement 35,000 -
Stock issuance per employment agreement 131,000 -
Common Stock issued for preferred dividends 258,703 -
Class A Common Stock repurchased in conjunction with early extinguishment of debt (1,317,023) -
Debt issuance in connection with acquisitions 2,230,766 1,604,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-7-
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------------------------
1999 1998
----------------------------------------
<S> <C> <C>
Supplemental disclosure of cash flows related
to acquisitions:
Fair value of assets acquired,
excluding cash $ 39,280,986 $ 4,670,570
Issuance of common stock (5,302,000) (1,750,000)
Issuance of notes payable (2,230,766) (1,604,379)
Payments in connection with acquisitions,
net of cash acquired (22,886,899) (1,709,818)
Liabilities assumed $ 26,035,829 $ 6,051,947
Supplemental disclosure of non cash
items from investing and financing activities:
Issuance of common stock in connection
with acquisitions $ 5,302,000 $ 1,750,000
Issuance of debt in connection
with acquisitions 2,230,766 1,604,379
Issuance of warrants in connection
with private placements 75,000 -
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 an integral part of these consolidated statements.
-8-
<PAGE>
INTERIORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
1. BASIS OF PRESENTATION
The financial statements included herein are unaudited and have been
prepared by Interiors, Inc., a Delaware corporation (the "Company"), in
accordance with generally accepted accounting principles and pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, these statements include all adjustments necessary to present
fairly the financial condition of the Company and its subsidiaries as of March
31, 1999 and the results of operations of the Company and its subsidiaries for
the three and nine-month periods ended March 31, 1999 and 1998.
The Company's results of operations during the nine months ended March
31, 1999 are not necessarily indicative of any future results. The financial
statements included in this report should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended June 30, 1998, as amended.
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share" for the year ended June 30, 1998. 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. SFAS No. 128 requires
the presentation of both basic EPS and diluted EPS on the income statement.
Earning per share amounts for the same periods in prior years have been restated
to conform with the provisions of SFAS No. 128. 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, of the Company ("Series A
Preferred Shares"). Basic EPS and diluted EPS for the three and six months ended
December 31, 1997 have been restated to reflect the Series A Preferred Shares
dividend deduction.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure About Segment of an Enterprise and Related Entities," which is
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires that a public business enterprise report certain financial and
descriptive information about its operating segments. At March 31, 1999, the
adoption of SFAS 131 would not have a material effect on the Company's financial
statements.
2. ACQUISITIONS AND STRATEGIC ALLIANCES
On February 22, 1999, the Company acquired all of the outstanding
capital stock of Stylecraft Lamps, Inc., a Tennessee corporation ("Stylecraft"),
pursuant to a Stock Purchase Agreement dated August 27, 1998 by and among the
Company and former shareholders of Stylecraft. The purchase price paid to the
shareholders was $10,319,000 in cash, which was financed by a secured line of
credit from Austin Financial Services, Inc. ("Austin Financial"), the private
placement 4,500 shares of 7% Series C Convertible Preferred Stock, par value
$.01 per share, of the Company ("Series C Preferred Shares") having a
liquidation value of $4,500,000, and working capital of the Company.
On February 26, 1999, the Company acquired Model Home Interiors, Inc., a
Maryland corporation ("MHI"), pursuant to an Agreement and Plan of Merger dated
December 31, 1998 by and among the Company, MHI Acquisition Corp. ("Newco") and
MHI. Pursuant to the agreement, Newco merged with and into MHI with MHI
continuing as the surviving corporation and a wholly owned subsidiary of the
Company. The purchase price paid consisted of (i) $2,000,000 in cash, (ii)
promissory notes in the principal amount of $230,766 and (iii) Class A Shares
having a fair market value of $2,300,000, subject to adjustment on the August
26, 2000. The Company also agreed to issue Class A Shares having a fair market
value of up to $2,000,000 to former shareholders of MHI upon the attainment of
certain earnings goals by MHI. The cash portion of the purchase price was
financed by a secured line of credit from NationsBank, N.A. ("NationsBank"). In
addition, the Company delivered into escrow (i) 974,835 Class A Shares to secure
its obligation to deliver $2,300,000 in shares on the August 26, 2000 and (ii)
81,507 Class A Shares to secure its obligation to repay $230,766 in promissory
notes.
On March 2, 1999, the Company acquired 1,191,752 newly-issued shares
(the "CSL Shares") of common stock, par value $.01 per share (the "CSL Common
Stock") of CSL Lighting Manufacturing, Inc., a Delaware corporation ("CSL"),
representing approximately 51.0% of the outstanding shares of CSL Common Stock
pursuant to a Stock Purchase Agreement dated as of March 1, 1999 by and between
the Company and CSL. The Company acquired the CSL Shares from CSL in exchange
for (i) 1,927 Series C Preferred Shares having a liquidation value of $1,927,000
issued to certain creditors of CSL for the cancellation of CSL
9
<PAGE>
debt with a principal amount of $1,027,500 and (ii) $600,000 in cash. In
addition, the Company issued 100 Series C Preferred Shares with a liquidation
value of $100,000 as a fee in connection with this transaction.
On March 26, 1999, the Company acquired all of the outstanding shares of
capital stock (the "Petals Shares") of Petals, Inc., a Delaware corporation
("Petals"), pursuant to the Purchase Agreement dated December 11, 1999 by and
among the Company and former shareholders of Petals. The purchase price paid for
the Petals Shares and the forgiveness of $2,440,000 of debt owed by Petals to a
former shareholder consisted of $4,000,000 in cash and the issuance of an 10%
convertible debenture due March 26, 2001 in the principal amount of $2,000,000
(the "Petals Note"). The Petals Note is convertible into Class A Shares at a
conversion price of $2.00 per share. In addition, the Company issued three-year
warrants to purchase an aggregate of 100,000 Class A Shares at an exercise price
of $3.50 to former shareholders of Petals (the "Petals Warrants"). The cash
portion of the purchase price was paid from the Company's working capital.
3. NOTES PAYABLE
On March 17, 1998, the Company issued 15% convertible subordinated notes
due March 17, 2001 in the principal amount of $1,270,000 (the "15% Notes"), and
warrants to purchase 27,000 Class A Shares at an exercise price of $2.00 ("WB
Warrants") and warrants to purchase 271,700 Series A Preferred Shares at an
exercise price of $5.50 ("WC Warrants"). As of March 31, 1999, 15% Notes in the
aggregate principal amount of the $630,000 were converted into Class A Shares,
and all WB Warrants and WC Warrants issued in connection with the 15% Notes were
either exercised by the holders thereof or redeemed by the Company. For a
discussion of the Company's redemption of the WB Warrants and WC Warrants, see
"Shareholders' Equity."
On March 19, 1998, the Company issued 6% convertible notes due March 19,
2000 in the principal amount of $1,700,000 (the "6% Notes") and warrants to
purchase 198,333 Class A Shares at an exercise price of $1.75 per share (the "6%
Note Warrants"). As of March 31, 1999, holders of the 6% Notes had converted the
entire principal amount, plus accrued and unpaid interest, into 1,575,588 Class
A Shares and exercised 23,333 6% Note Warrants.
On March 23, 1998, as consideration for the acquisition of Merchandise
Sales, Inc., dba Artmaster Studios ("Artmaster"), the Company issued two 10%
subordinated promissory notes in the principal amount of $272,752 and $537,248.
On July 31, 1998, the Company repaid the $272,752 promissory note, including
accrued and unpaid interest, and on March 31, 1999, the Company repaid the
$537,248 promissory note, including accrued and unpaid interest.
In July 1998, the Company issued two 24.5% secured promissory notes to
United Credit Corporation ("United Credit") in the aggregate principal amount of
$2,000,000. The proceeds from these notes were used to finance the acquisitions
of Windsor Art, Inc. ("Windsor") in July 1998 and Troy Lighting Inc. ("Troy") in
August 1998. As of March 31, 1999, the Company had repaid both promissory notes.
In July and August of 1998, the Company issued 7% redeemable convertible
debentures in the principal amount of $3,000,000 (the "Convertible Debentures"),
and warrants to purchase an aggregate of 1,339,286 Class A Shares (the "CD
Warrants"). In addition, the Company issued warrants to purchase 112,500 Class A
Shares at an exercise price of $2.10 per share (the "Finder Warrants") as a fee
in connection the issuance of the debentures. The CD Warrants and Finder
Warrants have been recorded as a debt discount at fair market value to be
amortized over the term of the Convertible Debentures. In March 1999, the
Company redeemed all of the outstanding Convertible Debentures in consideration
for $2,600,000 in cash, plus accrued and unpaid interest. The Company recorded
an extraordinary gain from early extinguishment of debt equal to $400,000 in
connection with the redemption of the Convertible Debentures. As of March 31,
1999, holders of the Convertible Debentures had exercised 803,572 CD Warrants.
As of December 31, 1998, the Company owed Bank of New York approximately
$214,00. As of March 31, 1999, the Company repaid the entire outstanding loan
balance and all its obligations and the security for this loan were released.
In January 1999, the Company issued in a private placement to five
accredited investors 12% convertible demand notes in the aggregate principal
amount of $686,000 (the "12% Notes"). The 12% Notes are convertible into Class A
Shares at $1.125 per share. As of April 30, 1999, 12% Notes in the amount of
$186,00, plus accrued and unpaid interest, had been converted into 169,954 Class
A Shares.
In January 1999, the Company issued a 24.5% secured promissory note due
October 25, 1999 to the Landis Brothers Corporation in the principal amount of
$1,000,000 (the "Landis Note"). On April 1, 1999, the Landis Note was amended to
change the interest rate to 16% per year.
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4. SHAREHOLDERS' EQUITY.
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 $10.00 per share ("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 Series B Preferred Shares consist of 200,000
shares, all of which are issued and outstanding. See "Item 2. Changes in
Securities."
On February 9, 1999, the Company issued to Pauline Raschella, an
employee of Windsor, an incentive bonus of 100,000 Class A Shares. See "Item 2.
Changes in Securities."
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. See "Item 2. Changes in Securities."
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, 26,666 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. See "Item 2. Changes in
Securities."
On March 20, 1999, the Company redeemed 919,251 WB Warrants and 171,020
WC Warrants for aggregate consideration of $10,902.71 or $0.01 per warrant. As a
result of the redemption, there are no longer any outstanding WB Warrants or WC
Warrants. During the three-month period ended March 31, 1999, an amount of WB
Warrants and WC Warrants were exercised at $2.00 and $5.50, respectively,
resulting in the issuance of 2,696,632 Class A Shares and 2,152,485 Series A
Preferred Shares, and the Company received gross proceeds of approximately $17.2
million. See "Item 2. Changes in Securities."
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto included elsewhere
in this Quarterly Report.
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,
and framed hand-painted oil paintings, framed prints under glass, portable and
installed lighting and lighting fixtures, sculptures and decorative tabletop
accessories, and silk flower, plant and tree arrangements. The Company primarily
markets its products to retailers, home improvement centers, department stores
and lighting retailers. The Company believes that it has a unique competitive
advantage in serving a broad range of customers because of the breadth and depth
of its product lines as well as its ability to coordinate design among several
product lines.
The 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. 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. The Company intends to integrate and optimize
the operations of acquired companies by consolidating into regional operating
units with centralized management, which management believes will lead to better
product design and greater efficiency in manufacturing, shipping and inventory
management, resulting in increased sales.
RESULTS OF OPERATIONS
Comparison of Nine Months Ended March 31, 1999 and 1998
Net Sales for the nine months ended March 31, 1999 were $42,727,812 as
compared to $6,225,000 for the same period in 1998, an increase of
$36,502,812.12. The increase in net sales was primarily due to the Company's
acquisitions of Henlor, Inc., including its subsidiary Vanguard Studios, Inc.
("Vanguard"), and Merchandise Sales, Inc., dba Artmaster Studios ("Artmaster")
in March 1998, which added approximately $12.7 million in additional net sales,
the acquisition of Windsor Art, Inc. ("Windsor") in July 1998, which added
approximately $9.2 million in additional net sales, the acquisition of Troy
Lighting Inc. ("Troy") in August 1998, which added approximately $8.8 million in
additional net sales, the acquisition of Model Home Interiors, Inc. ("MHI") in
February 1999, which added approximately $1.0 million in additional net sales,
the acquisition of Stylecraft Lamps, Inc. ("Stylecraft") in February 1999, which
added approximately $3.9 million in additional net sales, and the acquisition of
Petals, Inc. ("Petals") in March 1999, which added approximately $1.4 million in
additional net sales.
Cost of goods sold for the nine months ended March 31, 1999 increased to
$27,928,196 from $3,775,000 for the same period in 1998, an increase of
$24,153,196. 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 $8.1 million in additional cost, the acquisition of Windsor,
which added approximately $6.2 million in additional cost, the acquisition of
Troy, which added approximately $6.3 million in additional cost, the acquisition
of MHI, which added approximately $508,000 in additional cost, the acquisition
of Stylecraft, which added approximately $3.0 million in additional cost, and
the acquisition of Petals, which added approximately $510,000 in additional
cost.
As a percentage of net sales, cost of goods sold for the nine month
period ended March 31, 1999 increased to 65.3% from 60.6% 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 $13,824,966
for the nine months ended March 31, 1999 as compared to $1,590,000 for the same
period in 1998, an increase of $12,234,966. 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
$1.8 million in additional expenses, the acquisition of Troy, which added
approximately $2.4 million in additional expenses, the
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acquisition of MHI, which added approximately $495,577 in additional expenses,
the acquisition of Stylecraft, which added approximately $643,146 in additional
expenses, and the acquisition of Petals, which added approximately $341,248 in
additional expenses.
As a percentage of net sales, selling, general and administrative
expenses for the nine month period ended March 31, 1999 increased to 32.3% from
25.5% 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 $2,578,177
for the nine months ended March 31, 1999 from $483,000 for the same period in
1998 principally due to financing activities associated with the Company's
acquisitions.
Other (expense) income reported for the nine month period ended March
31, 1999 increased to $458,291 of income from zero for the same period of 1998.
In addition, the Company had an extraordinary gain from early extinguishment of
debt in the amount of $400,000 during the three month period ended March 31,
1999.
Comparison of the Three Months Ended March 31, 1999 and 1998
Net Sales for the three months ended March 31, 1999 were $19,465,116 as
compared to $2,389,000 for the same period in 1998, an increase of $17,076,116.
The increase in net sales was primarily due to the Company's acquisitions of
Vanguard and Artmaster in March 1998, which added approximately $3.9 million in
additional net sales, the acquisition of Windsor in July 1998, which added
approximately $3.4 million in additional net sales, the acquisition of Troy in
August 1998, which added approximately $3.3 million in additional net sales, the
acquisition of MHI in February 1999, which added approximately $1.0 million in
additional net sales, the acquisition of Stylecraft in February 1999, which
added approximately $3.9 million in additional net sales, and the acquisition of
Petals in March 1999, which added approximately $1.3 million in additional net
sales.
Cost of goods sold for the three months ended March 31, 1999 increased
to $12,967,708 from $1,378,000 for the same period in 1998, an increase of
$11,589,708. 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 $2.6 million in additional cost, the acquisition of Windsor,
which added approximately $2.3 million in additional cost, the acquisition of
Troy, which added approximately $2.6 million in additional cost, the acquisition
of MHI, which added approximately $507,964 in additional cost, the acquisition
of Stylecraft, which added approximately $2,953,546 in additional cost, and the
acquisition of Petals, which added approximately $510,406 in additional cost.
As a percentage of net sales, cost of goods sold for the three month
period ended March 31, 1999 increased to 66.6% from 57.7% 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 $6,863,212 for
the three months ended March 31, 1999 as compared to $700,000 for the same
period in 1998, an increase of $6,163,212. 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 $1.4 million
in additional expenses, the acquisition of Windsor, which added approximately
$711,518 in additional expenses, the acquisition of Troy, which added
approximately $911,254 in additional expenses, the acquisition of MHI, which
added approximately $495,577 in additional expenses, the acquisition of
Stylecraft, which added approximately $643,146 in additional expenses, and the
acquisition of Petals, which added approximately $341,248 in additional
expenses.
As a percentage of net sales, selling, general and administrative
expenses for the three month period ended March 31, 1999 increased to 35.3% from
29.3% 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 $1,156,408
for the three months ended March 31, 1999 from $257,000 for the same period in
1998 principally due to financing activities associated with the Company's
acquisitions.
Other expense (income) reported for the three month period ended March
31, 1999 increased to $448,387 of income from zero for the same period of 1998.
In addition, the Company had an extraordinary gain from early extinguishment of
debt in the amount of $400,000 during the three month period ended March 31,
1999.
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LIQUIDITY AND CAPITAL RESOURCES
Since the beginning of the fiscal year, 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 the private placement of two 24.5% secured promissory
notes in July 1998 issued to United Credit in the aggregate principal amount of
$2,000,000, the 12% Notes and the Landis Note, the issuance of Series B
Preferred Shares in January 1999 and Series C Preferred Shares in March 1999,
and the exercise of the Company's WB Warrants and WC Warrants. In addition, as
discussed below, the Company currently has formula based secured financing
arrangements with Austin Financial, Capital Business Credit Corporation
("Capital Business Credit"), NationsBank and United Credit. At March 31, 1999,
the Company had working capital of $13,153,981.
Net cash provided by operating activities during the first nine months
of fiscal 1999 was $1,086,466, principally due to depreciation and amortization
and non-cash financing charges.
Net cash used in investing activities during the first nine months of
fiscal 1999 was $25,464,529, primarily due to the acquisitions of Vanguard,
Artmaster, Windsor, Troy, MHI, Stylecraft and Petals.
Net cash provided by financing activities during the first nine months
of fiscal 1999 was $31,178,243, 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 May 17,
1999, the Company owed Austin Financial approximately $8,206,000 at an annual
rate equal to prime plus 5.5% (13.25% as of the date of this filing), and could
borrow approximately an additional $5,281,000, relating to the operations of
Windsor, Troy and Stylecraft. As of May 17, 1999, the Company owed Capital
Business Credit approximately $1,973,000 at an annual rate equal of 10.25% plus
related fees, and could borrow approximately an additional $65,000, relating to
the operations of Vanguard. As of May 17, 1999, the Company owed NationsBank
approximately $2,472,000 at an annual rate equal to prime (7.75% as of the date
of this filing), and could borrow approximately an additional $1,479,000,
relating to the operations of MHI. As of May 17, 1999, the Company owed United
Credit approximately $33,000 at an annual rate equal to prime plus 8.0% (15.75%
as of the date of this filing), and could borrow approximately an additional
$779,000, relating to the operations of the Company's A.P.F. Master Framemakers
division. 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.
As of March 31, 1999, the Company had accrued but unpaid dividends of
$533,884 on it Series A Preferred Shares, $29,808 on its Series B Preferred
Shares and $51,322 on its Series C Preferred Shares. See "Item 2. Changes in
Securities."
From March 1998 through the middle of 1999, the Company has 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
shares of stock 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 third quarter of fiscal 2000.
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,
however, the Company 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.
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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
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 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.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
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 Series B Preferred Shares consist of 200,000 shares, all of which are issued
and outstanding. The issuance of Series B Preferred Shares and Series B Warrants
was exempt from registration under Section 4(2) of the Securities Act of 1933,
as amended (the "Securities Act"), as a transaction by the issuer not involving
a public offering. 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 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), 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 also redeem the Series B Warrants for $0.1 each. 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 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.
On February 9, 1999, the Company issued to Pauline Raschella, an
employee of Windsor, an incentive bonus of 100,000 Class A Shares. The issuance
was exempt from registration under Section 4(2) of the Securities Act, as a
transaction by the issuer not involving a public offering.
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 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. 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 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 issuance of Series C Preferred Shares was exempt from registration
under Section 4(2) of the Securities Act, as a transaction by the issuer not
involving a public offering. 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
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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.
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. The issuance was exempt from registration under Section
4(2) of the Securities Act, as a transaction by the issuer not involving a
public offering.
On March 11, 1999, the Company issued to Maria Matos, a former employee
of the Company, 26,666 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 executive search services. Each issuance was exempt from
registration under Section 4(2) of the Securities Act, as a transaction by the
issuer not involving a public offering.
On March 20, 1999, the Company redeemed 919,251 WB Warrants and 171,020
WC Warrants for aggregate consideration of $10,902.71 or $0.01 per warrant. As a
result of the redemption, there are no longer any outstanding WB Warrants or WC
Warrants. During the three-month period ended March 31, 1999, an amount of WB
Warrants and WC Warrants were exercised at $2.00 and $5.50, respectively,
resulting in the issuance of 2,696,632 Class A Shares and 2,152,485 Series A
Preferred Shares, and the Company received gross proceeds of approximately $17.2
million.
ITEM 5. OTHER INFORMATION.
On April 23, 1999, the Company, Artmaster, Laurie Munn and a
representative of the former shareholders of Artmaster entered into a mutual
general release pursuant to which the shareholders paid the Company $65,000 in
satisfaction of indemnification claims, and the Company allowed the shareholders
to transfer 779,302 Class A Shares being held in escrow to Aberdeen Ave. LLC for
$1,250,000.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Stock Purchase Agreement dated August 27, 1998 by and among Interiors,
Inc., Jimmy D. Webster, Jr., Bettye Jo Webster and Henry L. Gray (1)
2.2 Purchase Agreement dated December 11, 1999 by and among Interiors,
Inc. 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 (2)
11 Computation of Earnings per Share
27 Financial Data Schedule
99.1 Stock Purchase Agreement dated as of March 1, 1999 by and between
Interiors, Inc. and CSL Lighting Manufacturing, Inc. (3)
99.2 Standstill Agreement dated March 1, 1999 by and between Interiors,
Inc. and CSL Lighting Manufacturing, Inc. (3)
99.3 Agreement and Plan of Merger dated December 31, 1998 by and among MHI
Acquisition Corp., Interiors, Inc. and Model Home Interiors, Inc. (4)
(1) Incorporated by reference to the Form 8-K filed March 9, 1999.
(2) Incorporated by reference to the Form 8-K filed April 9, 1999.
(3) Incorporated by reference to the Form 8-K filed March 4, 1999.
(4) Incorporated by reference to the Form 8-K filed March 9, 1999.
(b) Reports on Form 8-K
On March 4, 1999, the Company filed a Current Report on Form 8-K dated
March 3, 1999 disclosing the Company's investment in CSL Lighting Manufacturing,
Inc. under Item 5. Other Events.
On March 9, 1999, the Company filed a Current Report on Form 8-K dated
March 5, 1999 disclosing the Company's acquisition of Model Home Interiors, Inc.
under Item 5. Other Events.
On March 9, 1999, the Company filed a Current Report on Form 8-K dated
March 9, 1999 disclosing the Company's acquisition of Stylecraft Lamps, Inc.
under Item 2. Acquisition or Disposition of Assets.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: INTERIORS, INC.
May 24, 1999 By: /s/ Max Munn
------------------------------------------
Max Munn
President and Chief Executive
Officer
May 24, 1999 By: /s/ Richard P. Belenski
------------------------------------------
Richard P. Belenski
Chief Financial and Principal
Accounting Officer
19
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Stock Purchase Agreement dated August 27, 1998 by and among Interiors,
Inc., Jimmy D. Webster, Jr., Bettye Jo Webster and Henry L. Gray (1)
2.2 Purchase Agreement dated December 11, 1999 by and among Interiors,
Inc. 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 (2)
11 Computation of Earnings per Share
27 Financial Data Schedule
99.1 Stock Purchase Agreement dated as of March 1, 1999 by and between
Interiors, Inc. and CSL Lighting Manufacturing, Inc. (3)
99.2 Standstill Agreement dated March 1, 1999 by and between Interiors,
Inc. and CSL Lighting Manufacturing, Inc. (3)
99.3 Agreement and Plan of Merger dated December 31, 1998 by and among MHI
Acquisition Corp., Interiors, Inc. and Model Home Interiors, Inc. (4)
(1) Incorporated by reference to the Form 8-K filed March 9, 1999.
(2) Incorporated by reference to the Form 8-K filed April 9, 1999.
(3) Incorporated by reference to the Form 8-K filed March 4, 1999.
(4) Incorporated by reference to the Form 8-K filed March 9, 1999.
<PAGE>
EXHIBIT 11
Interiors, Inc.
Computation of weighted average number of shares
outstanding for the three and nine months ended March 31, 1999
<TABLE>
<CAPTION>
Class A &
Class B Shares vs. Weighted Weighted
Common Note Rec. Basic Diluted
(000) (000) (000) (000)
<S> <C> <C> <C> <C>
Total Common Shares outstanding at June 30, 1998 21,720
Escrow shares at June 30, 1998 (6,250)
Common Shares vs. Note Receivable at June 30, 1998 (980)
Class A Common and Class B Common for EPS at
June 30, 1998 14,490 980 15,007 15,007
Additional Common Shares 13,432 7,693 7,693
Additional Common Shares vs. Note Receivable 1,475
Stock Options and Warrants 1,907
Class A Common and Class B Common at March 31,
1999 27,922 2,455 22,700 24,607
Common Shares vs. Note Receivable at March 31,
1999 2,455
Escrow shares at March 31, 1999 0
Total Common Shares outstanding at March 31, 1999 30,377
<CAPTION>
Class A &
Class B Shares vs. Weighted Weighted
Common Note Rec. Basic Diluted
(000) (000) (000) (000)
Total Common Shares outstanding at June 30, 1998 21,720
Escrow shares at June 30, 1998 (6,250)
Common Shares vs. Note Receivable at June 30, 1998 (980)
Class A Common and Class B Common for EPS at
June 30, 1998 14,490 980 13,224 13,224
Additional Common Shares 13,432 6,047 6,047
Additional Common Shares vs. Note Receivable 1,475
Stock Options and warrants 1,392
Class A Common and Class B Common at March 31,
1999 27,922 2,455 19,271 20,663
Common Shares vs. Note Receivable at March 31,
1999 2,455
Escrow shares at March 31, 1999 0
Total Common Shares outstanding at March 31, 30,377
1999
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,002,653
<SECURITIES> 0
<RECEIVABLES> 14,333,219
<ALLOWANCES> 0
<INVENTORY> 21,370,705
<CURRENT-ASSETS> 53,558,730
<PP&E> 9,782,438
<DEPRECIATION> 0
<TOTAL-ASSETS> 103,382,689
<CURRENT-LIABILITIES> 40,404,749
<BONDS> 0
0
23,420
<COMMON> 31,958
<OTHER-SE> 52,095,268
<TOTAL-LIABILITY-AND-EQUITY> 10,827,294
<SALES> 42,727,862
<TOTAL-REVENUES> 42,727,862
<CGS> 27,918,196
<TOTAL-COSTS> 27,918,196
<OTHER-EXPENSES> 13,366,675
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,578,177
<INCOME-PRETAX> (1,135,186)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,147,782)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,257,529
<CHANGES> 0
<NET-INCOME> 109,747
<EPS-BASIC> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
