<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
(x) Quarterly Report Under Section 13 pr 15(d) of the Securities Exchange
Act of 1934 For Six month Period Ended December 31, 1998,
Or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period From _______to________.
Commission File No. 0-24362
INTERIORS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-3590047
-------------------
(State or other Jurisduction of (I.R.S. Employer
Incorporation or organization) Identification No.)
320 Washington Street, Mt. Vernon, New York 10553
---------------------------------------------------
(Address of principal executive offices) (zip code)
Issuer's Telephone Number (914) 665-5400
----------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
The number of shares outstanding of the issuer's Class A Common Stock and Class
B Common Stock as of February 18, 1999 was 21,075,071 and 1,105,000
respectively
Transitional Small Business Disclosure Format (check one) Yes ____ No X
<PAGE>
INTERIORS, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements................................ 1
Consolidated Balance Sheet as of December 31, 1998....................... 2
Consolidated Statements of Operations -
For the Three Months Ended December 31, 1998 and 1997............ 3
Consolidated Statements of Operations -
For the Six Months Ended December 31, 1998 and 1997.............. 4
Consolidated Statement Changes in Stockholders' Equity For the
Six months Ended December 31, 1998............................... 5
Consolidated Statements of Cash Flows -
For the Six months Ended December 31, 1998 and 1997.............. 6
Notes to Consolidated Financial Statements............................... 8
Item 2. Management's Discussion and Analysis............................ 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 16
Item 2. Changes in Securities............................................ 16
Item 3. Defaults Upon Senior Securities.................................. 16
Item 4. Submission of Matters to a Vote of Security Holders.............. 16
Item 5. Other Information................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................. 16
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
The condensed financial statements included herein have been prepared by
Interiors, Inc. without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
statements include all adjustments necessary to present fairly the financial
condition of the Company as of December 31, 1998 and the results of operations
for the six month period and three month period ended December 31, 1998 and
1997.
The Company's results of operations during the six months ended December 31,
1998 are not necessarily indicative of any future results. It is suggested that
the financial statements included in this report be read in conjunction with
the financial statements and notes thereto in the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1998.
<PAGE>
INTERIORS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 673,031
Accounts receivable, net 6,946,326
Inventories 8,399,446
Other current assets 6,214,300
------------
Total current assets 22,233,103
INVESTMENT IN AFFILIATES 4,466,679
PROPERTY AND EQUIPMENT, net 1,513,375
OTHER ASSETS 21,092,966
------------
Total assets $49,306,123
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and current maturities of long-term debt 12,665,106
Accounts payable and accrued liabilities 8,190,979
------------
Total current liabilities 20,856,085
LONG TERM DEBT 5,287,530
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,300,000 shares
authorized, 596,711 shares issued and outstanding 5,967
Class A common stock, $.001 par value, 60,000,000 shares
authorized, 19,756,007 shares issued, 18,256,007
shares outstanding 19,756
Class B common stock, $.001 par value, 2,500,000 shares
authorized, 1,105,000 shares issued and outstanding 1,105
Treasury stock (1,317,023)
Additional paid-in-capital 32,946,079
Accumulated deficit (7,545,376)
Notes receivable (948,000)
------------
Total stockholders' equity 23,162,508
------------
Total liabilities and stockholders' equity $49,306,123
============
The accompanying notes are an integral part of this consolidated balance sheet.
-2-
<PAGE>
INTERIORS, INC.
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
NET SALES $12,856,276 $2,318,083
COST OF GOODS SOLD 8,117,754 1,441,213
------------ -----------
Gross profit 4,738,522 876,870
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,169,810 547,923
------------ -----------
Income from operations 568,712 328,947
OTHER EXPENSE (INCOME)
Amortization of goodwill 111,486 -
Interest expense 554,445 113,312
Financing charges - noncash 347,191 -
Consulting and management fees (22,500) -
Gain on legal settlement (82,488) -
------------ -----------
Total other expense (income) 908,134 113,312
Income (loss) from operations
before (benefit) provision for income taxes and extraordinary item (339,422) 215,635
(BENEFIT) PROVISION FOR INCOME TAXES 24,903 13,000
------------ -----------
Income (loss) from operations before extraordinary item (364,325) 202,635
EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT OF DEBT 1,370,542 -
------------ -----------
NET INCOME $ 1,006,217 $ 202,635
------------ -----------
EARNINGS PER COMMON SHARE:
(RESTATED FOR 1997)
BASIC
Income from continuing operations (364,325) 202,635
Preferred dividends (68,339) (143,383)
------------ -----------
Net income from continuing operations attributable to
common shares before extraordinary item (432,664) 59,252
Extraordinary gain from early extinguishment of debt 1,370,542 -
------------ -----------
Net income 937,878 59,252
============ ===========
Net Earnings Per Common Share - Basic:
Earnings from continuing operations (0.02) 0.01
Extraordinary gain from early extinguishment of debt 0.07 0.00
------------ -----------
Net Earnings Per Common Share - Basic: 0.05 0.01
============ ===========
DILUTED
Income from continuing operations (364,325) 202,635
Preferred dividends (68,339) (143,383)
------------ -----------
Net income from continuing operations attributable to
common shares before extraordinary item (432,664) 59,252
Extraordinary gain from early extinguishment of debt 1,370,542 -
------------ -----------
Net income 937,878 59,252
============ ===========
Net Earnings Per Common Share - Diluted:
Earnings from continuing operations (0.02) 0.01
Extraordinary gain from early extinguishment of debt 0.07 0.00
------------ -----------
Net Earnings Per Common Share - Diluted: 0.05 0.01
============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION
BASIC 17,402,571 5,560,991
DILUTED 18,278,266 5,560,991
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-3-
<PAGE>
INTERIORS, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
NET SALES $23,262,746 $3,835,865
COST OF GOODS SOLD 14,960,488 2,397,416
------------ -----------
Gross profit 8,302,258 1,438,449
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 6,961,754 889,092
------------ -----------
Income from operations 1,340,504 549,357
OTHER EXPENSE (INCOME)
Amortization of goodwill 192,584 -
Interest expense 984,428 225,814
Financing charges - noncash 437,341 -
Consulting and management fees (120,000) -
Gain on legal settlement (82,488) -
------------ -----------
Total other expense (income) 1,411,865 225,814
Income (loss) from operations
before (benefit) provision for income taxes and extraordinary item (71,361) 323,543
(BENEFIT) PROVISION FOR INCOME TAXES 9,989 13,000
------------ -----------
Income (loss) from operations before extraordinary item (81,350) 310,543
EXTRAORDINARY GAIN FROM EARLY EXTINGUISHMENT OF DEBT 1,370,542 0
------------ -----------
NET INCOME $ 1,289,192 $ 310,543
------------ -----------
EARNINGS PER COMMON SHARE:
(RESTATED FOR 1997)
BASIC
Income from continuing operations (81,350) 310,543
Preferred dividends (136,678) (286,765)
------------ -----------
Net income from continuing operations attributable to
common shares before extraordinary item (218,028) 23,778
Extraordinary gain from early extinguishment of debt 1,370,542 -
------------ -----------
Net income 1,152,514 23,778
============ ===========
Net Earnings Per Common Share - Basic:
Earnings from continuing operations (0.02) 0.00
Extraordinary gain from early extinguishment of debt 0.10 0.00
------------ -----------
Net Earnings Per Common Share - Basic: 0.08 0.00
============ ===========
DILUTED
Income from continuing operations (81,350) 310,543
Preferred dividends (136,678) (286,765)
------------ -----------
Net income from continuing operations attributable to
common shares before extraordinary item (218,028) 23,778
Extraordinary gain from early extinguishment of debt 1,370,542 -
------------ -----------
Net income 1,152,514 23,778
============ ===========
Net Earnings Per Common Share - Diluted:
Earnings from continuing operations (0.01) 0.00
Extraordinary gain from early extinguishment of debt 0.09 0.00
------------ -----------
Net Earnings Per Common Share - Diluted: 0.08 0.00
============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION
BASIC 14,037,887 5,560,991
DILUTED 14,927,519 5,560,991
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
-4-
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Series A Class A Class B
Preferred Stock Common Stock Common Stock
------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1998 679,438 $6,794 19,614,857 $19,615 2,105,000 $2,105
Class B Common Shares issued 375,000 375
Conversion of Class B to Class A Common 125,000 125 (125,000) (125)
Conversion of Preferred to Class A Common (142,727) (1,427) 428,181 428
Escrow shares 5,000,000 5,000
Troy Lighting Acquisition 650,000 650
Windsor Art Acquisition 1,500,000 1,500
Exercise of Class WA Warrants 240,517 241
Warrants issued with convertible debentures
Warrants issued for services rendered
Shares issued for services rendered 35,398 35
Shares issued in connection with settlement 10,000 100
Escrow shares issued to outside investor 1,250,000 1,250 (1,250,000) (1,250)
Shares issued, employment agreement 100,000 100
Discount incurred, convertible notes
Class A shares issued, convertible notes 646,484 647
Preferred shares subscribed to by outside investor 50,000 500
Stock Dividend 165,570 165
Windsor Art extinguishment of debt
Shares reissued to outside investor 2,500,000 2,500
Retirement of escrow shares (12,500,000) (12,500)
Net income through December 31, 1998
======== ====== =========== ======= ========== ======
BALANCE, December 31, 1998 596,711 $5,967 19,756,007 $19,756 1,105,000 $1,105
======== ====== =========== ======= ========== ======
</TABLE>
<TABLE>
<CAPTION>
Additional Retained
Paid-In Earnings Treasury Note
Capital (Deficit) Stock Receivable Total
------- --------- ----- ---------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1998 $21,751,749 ($8,575,865) $0 ($948,000) $12,256,398
Class B Common Shares issued 397,125 397,500
Conversion of Class B to Class A Common
Conversion of Preferred to Class A Common 999
Escrow shares (5,000)
Troy Lighting Acquisition 974,350 975,000
Windsor Art Acquisition 2,528,719 2,530,219
Exercise of Class WA Warrants 362,785 363,026
Warrants issued with convertible debentures 1,000,000 1,000,000
Warrants issued for services rendered 75,000 75,000
Shares issued for services rendered 42,443 42,478
Shares issued in connection with settlement 34,900 35,000
Escrow shares issued to outside investor 1,200,020 1,200,020
Shares issued, employment agreement 130,900 131,000
Discount incurred, convertible notes 159,717 159,717
Class A shares issued, convertible notes 999,354 1,000,001
Preferred shares subscribed to by outside investor 249,500 250,000
Stock Dividend 258,538 (258,703)
Windsor Art extinguishment of debt (1,317,023) (1,317,023)
Shares reissued to outside investor 2,772,480 2,774,980
Retirement of escrow shares 12,500
Net income through December 31, 1998 1,289,192 1,289,192
=========== =========== =========== ========= ===========
BALANCE, December 31, 1998 $32,946,079 ($7,545,376) ($1,317,023) ($948,000) $23,162,508
=========== =========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1998 1997
-------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income $ 1,289,192 $ 310,543
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization 705,209 312,058
Provision for losses on accounts receivable (20,507) -
Non-cash financing charge 437,341 -
Provision for issuance of stock 77,478 -
CHANGES IN ASSETS AND LIABILITIES:
Decrease (increase) in accounts receivable, trade 627,319 (731,119)
Decrease (increase) in inventories (1,336,914) 30,814
Decrease (increase) in prepaid expenses and other current assets (3,066,669) (64,423)
Decrease (increase) in other assets (1,325,143) 12,691
Increase (decrease) in accounts payable and accrued expenses (383,538) (245,516)
--------------------------
Net cash used in operating activities (2,996,232) (374,952)
--------------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (137,430) (1,039)
Acquisition of Bentley International (2,106,767) -
Acquisition of Troy Lighting (2,190,513) -
--------------------------
Net cash used in investing activities (4,434,710) (1,039)
--------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 7,250,180 787,761
Repayments of debt and capitalized lease obligations (7,623,593) (354,917)
Net proceeds from exercise of common stock warrants 363,026 -
Net proceeds from sale of common and preferred stock 4,225,000 -
--------------------------
Net cash provided by financing activities 4,214,613 432,844
--------------------------
Net increase (decrease) in cash (3,216,329) 56,853
CASH, beginning of period 3,889,360 271,408
--------------------------
CASH, end of period $ 673,031 $ 328,261
==========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest $ 733,347 $ 159,388
Taxes 1,853 -
NON-CASH FINANCIAL ACTIVITIES:
Conversion of Series A Preferred Stock to Class A Common Stock 999 -
Stock issuance for promissory notes 1,000,000
Stock issuance for services 42,478 -
Stock issuance in connection with acquisitions 975,000 -
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)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
INTERIORS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(UNAUDITED)
SIX MONTHS ENDED
DECEMBER 31
----------------------
1998 1997
----------------------
Supplemental disclosure of cash flows related
to acquisitions:
Fair value of assets acquired,
excluding cash $ 8,532,567 $ -
Issuance of common stock (750,000) -
Payments in connection with acquisitions,
net of cash acquired (4,096,230) -
Liabilities assumed $ 7,043,778 $ -
Supplemental disclosure of non cash
items from investing and financing activities:
Issuance of common stock in connection
with acquisitions $ 750,000 $ -
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 397,500 -
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE>
INTERIORS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 1998
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by the
Company without audit, in accordance with generally accepted
accounting principles, and pursuant to the rules and regulations of
the Securities and Exchange Commission. All adjustments (of normal
recurring nature) which are, in the opinion of management, necessary
for a fair presentation of the results of the interim period have been
included. The results of operations for the six months ended December
31, 1998 are not necessarily indicative of those to be expected for
the entire year. The Company, for the six months and three months
ended December 31, 1998 and 1997 used the gross profit method to value
inventory.
For the year ended June 30, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share"
In accordance with SFAS No. 128, net earnings per common 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 and B shares of common stock. Net earnings per
common share amounts assuming "diluted EPS" were computed by
reflecting potential dilution from the exercise of stock options and
warrants. SFAS No. 128 requires the presentation of both basic EPS and
diluted EPS on the income statement. Earnings per share amounts for
the same prior-year periods have been restated to conform with the
provision of SFAS No. 128. All periods presented include a deduction
for the dividend requirement of the Company's Series A Preferred
stock. EPS for the six months and three months ended December 31, 1997
have been restated to reflect the preferred dividend deduction.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131 (SFAS No. 131)
"Disclosures About Segment of an Enterprise and Related," which is
effective for fiscal years beginning after December 15, 1997. This
Statement requires that a public business enterprise report certain
financial and descriptive information about its operating segments. At
December 31, 1998 the adoption of SFAS 131 No. would not have a
material effect on the Company's financial statements.
8
<PAGE>
2. ACQUISITIONS AND STRATEGIC ALLIANCES
On August 27, 1998, the Company entered into a Stock Purchase
Agreement with the shareholders of Stylecraft, Inc., a portable lamp
manufacturer, to purchase all issued and outstanding shares of that
company's common stock. The transaction is scheduled to close on
February 22, 1999. Pursuant to the Stock Purchase Agreement, the
purchase price paid to the shareholders of Stylecraft, Inc. will
consist of a cash payment of $10,319,000. On January 29, 1999, the
Company paid $500,000 of the purchase price to the shareholders of
Stylecraft, Inc., to be applied against the cash payment at the
closing of the purchase.
The purchase of Stylecraft, Inc. will be financed by $5,250,000 of
asset based debt, $2,000,000 raised from a private placement of equity
in the form of preferred stock, $2,319,000 of cash from Interiors and
a $750,000 secured term loan.
On December 11, 1998, the Company entered into a Purchase Agreement
with the majority shareholders of Petals, Inc., a manufacturer and
catalog retailer of silk botanicals and other decorative accessories,
and DMB Property Ventures Limited Partnership (collectively with the
shareholders, the "Sellers"). Pursuant to the Purchase Agreement and
in consideration for the conveyance of the acquired shares and
subordinated debt, the Company will pay to the majority shareholders
$3,560,000 in cash for their outstanding capital stock. Additionally,
the Company will pay DMB $440,000 in cash and deliver to DMB a
convertible debenture in the principal amount of $2,000,000 for the
outstanding principal balance of DMB's Subordinated Debt. On December
14, 1998, the Company paid $100,000 of the purchase price to be
applied against the cash payment at the closing of the purchase and
sale of the acquired shares and the subordinated debt.
In January 1999, the minority stockholders of Petals, Inc. filed two
actions in the Supreme Court of the State of New York claiming, among
other things, that the majority stockholders (the Sellers) had
breached the terms of a Shareholders' Agreement between the parties.
The court has granted temporary restraining orders prohibiting the
Sellers from transferring their interest to the Company. On or about
February 19, 1999, two of the four minority stockholders settled all
of their claims and received approximately $1,800,000 from Petals,
Inc. in exchange for all of the Petals, Inc. shares of stock which
they owned. The remaining minority stockholders (owners of
approximately 16.2% of the outstanding stock of Petals, Inc.) on
February 22, 1999 have agreed in principal to sell all of their
Petals, Inc. stock for approximately $2,000,000 in cash, at which
point the Company can then close on the above acquisition. However,
there can be no assurance that the transaction will be consummated in
accordance with its current terms or otherwise.
On September 9, 1998 Interiors announced the formation of a new
subsidiary, Habitat Solutions, Inc. for the purpose of acquiring and
consolidating regional firms that provide merchandising and design
services to the homebuilding, lodging and hospitality industries. On
January 7, 1999 Interiors, through Habitat Solutions, Inc., formed MHI
Acquisitions Corp. and signed an agreement of merger between MHI
Acquisition Corp. and Model Home Interior, Inc. (MHI) a Bellesville,
Maryland based provider of design, merchandising and leasing services
to the homebuilding industry. Under the terms of the merger agreement,
Interiors, through its subsidiary, will pay the former shareholders of
MHI $2,000,000 in cash, between $2,300,000 and $4,300,000 in common
stock of Interiors over the next three years based on MHI achieving
certain earning targets and will assume $231,766 of short term debt.
The transaction is expected to close on or about February 28, 1999.
The Company has established basic electronic linking arrangements with
Internet search engines and portals designed to potentially drive
Internet traffic to the Interiors.com web site which is currently
under development.
3. NOTES PAYABLE
At December 31, 1998, the Company has aggregate notes payable of
approximately $17,953,000. The major components of this position
follow:
9
<PAGE>
The Company has outstanding secured formula based financing for the
operations of Windsor Art, Inc. with an asset based lender totalling
approximately $2,387,000 on December 31, 1998. Interest is determined
at an annual rate of prime plus 5.5% (13.25% as of the date of this
filing).
The Company has outstanding secured formula based financing for the
operations of Troy Lighting, Inc. with an asset based lender totalling
approximately $1,446,000 on December 31, 1998. Interest is determined
at an annual rate of prime plus 5.5% (13.25% as of the date of this
filing).
The Company has outstanding secured formula based financing for the
operations of its Vanguard Studios, Inc. subsidiary with an asset
based lender totalling approximately $2,814,000 on December 31, 1998.
Interest is determined at an annual rate of 10.25% plus related fees.
The Company has outstanding secured financing with a New York based
bank totalling approximately $214,000 on December 31, 1998. Interest
is determined at an annual rate of prime plus 1.0%. (8.75% as of the
date of this filing).
The Company has outstanding secured formula based financing for the
operations of APF Master Framemakers totalling $538,000 on December
31, 1998. Interest is determined at the annual rate of prime plus 8.0%
(15.75% as of the date of this filing).
During November 1997 the Company received a $250,000 loan from an
overseas lender. The loan is due December 31, 1999 and bears 12%
interest.
During April 1998, the Company received $250,000 from a loan from an
overseas lender. The loan is due April 16, 2001 and bears 15%
interest.
During March 1998, the Company issued convertible notes in the amount
of $1,700,000. These notes are due March 19, 2000 and bear interest at
6% per annum payable quarterly. On March 19, 2000, the holder must
convert into Class A Shares. Any default in payment of interest
triggers a default interest rate of 16% per annum. The Holders have
the right 180 days after the issuance of the notes to convert up to
one-half of the outstanding unpaid principle portion of the notes into
Class A Shares. At December 31, 1998, $1,000,000 of these notes had
converted , reducing the outstanding balance to $700,000. The full
balance had converted in January 1999. (See Changes to Stockholders
Equity, Discount Incurred with Convertible Notes and Class A Shares
Issued, Convertible Notes).
In conjunction with Interiors acquisition of Henlor, Inc. (the name
was subsequently changed to Vanguard Studios, Inc.), the Company
caused its subsidiary to issue $794,379 in 8% subordinated promissory
notes to the former shareholders. The Company renegotiated the terms
of the principal payment of $294,379 due December 1, 1998 to four
payments including $100,000 on December 16, 1998 and three equal
installments due January 15, 1999, February 15, 1999 and March 15,
1999. Additionally, Vanguard is scheduled to make principal payments
on March 1, 1999 and every three months thereafter in the amount of
$62,500. A balance of $694,379 plus accrued interest was due on
December 31, 1998.
In conjunction with Interior's acquisition of Merchandise Sales Inc.,
the Company issued a total of $810,000 in 10% subordinated promissory
notes to the former shareholders due March 15, 1999. On July 31, 1998,
a payment of $350,000 plus accrued interest was made. The balance of
$460,000 plus accrued interest due March 15, 1999 is outstanding at
December 31, 1998.
In July and August 1998, the company issued redeemable convertible
debentures (the "redeemable Convertible Debentures") in the aggregate
principal amount of $3,000,000, and warrants to purchase an aggregate
of
10
<PAGE>
1,451,786 Class A Shares in a private placement to three accredited
investors. The issuance was exempt from registration under
Section 4(2) of the Securities Act, as a transaction by the issuer not
involving any public offering. All proceeds received by the Company
pursuant to this private placement were applied toward the working
capital of the Company. On September 10, 1998, the Company filed a
registration statement on Form S-3 with the Securities and Exchange
Commission in order to, among other things, register the Class A
Shares underlying the redeemable Convertible Debentures and related
warrants.
The redeemable Convertible Debentures bear interest at the rate of 7%
per annum, payable quarterly beginning October 1, 1998, and mature in
July and August, 2001, three years after their respective issuance
dates. Any or all portion of the Convertible Debentures may be
converted to Class A Shares any time after 240 days from their
respective dates of issuance based upon market prices. The redeemable
Convertible Debentures may be redeemed at face value (plus any accrued
interest) by The Company at any time (in part or in whole) until they
are converted.
In conjunction with the issuance of the redeemable Convertible
Debentures, the Company issued Common Stock Purchase Warrants
("B Warrants") to a finder. The B Warrants expire five years from
their respective dates of issue and allow the holder to purchase
112,500 Class A Shares in the aggregate at an exercise price of $2.10
per Class A Share. If 50% or more of the voting power of the Company
is disposed of in an exchange other than an exchange solely for cash
the B Warrants may be used to purchase whatever assets or securities
that the holder of the B Warrants would have been able to acquire had
the B Warrants been previously used to purchase Class A Shares.
Warrants, at fair market value, have been recorded as a debt discount
to be amortized over the term of the obligation.
In connection with Interiors recent acquisition of Troy Lighting Inc.,
the Company issued $1,500,000 24.5% demand notes on July 2, 1998 to an
asset based lender. The entire principal balance together with accrued
interest remained unpaid on December 31, 1998. Accrued interest is
payable on the last day of every month.
In connection with Interiors acquisition of Windsor Art Inc. the
Company has outstanding approximately $532,000 in secured formula
based financing plus accrued interest with an asset based lender.
Interest is determined at the annual rate of prime plus 8.0% (15.75%
as of the date of this filing)
During March 1998, the Company issued convertible subordinated notes
in the aggregate principal amount of $1,270,000. These notes are due
March 17, 2001, and bear interest at 15% per annum payable quarterly.
As of June 30, 1998, $695,000 of these notes were converted into Class
A Shares and warrants to purchase 286,000 shares of Series A Preferred
Stock and 27,000 shares of Class A common stock were issued in
connection with these notes. On December 31, 1998, $575,000 of these
notes remain unconverted with $375,000 of this amount classified as
debt. In February, 1999 the noteholders requested the conversion of
the balance of this debt.
In conjunction with the Company's repurchase of its obligations from
the Seller arising from its purchase of Windsor Art, Inc., the Company
issued on December 1, 1998 a promissory note for the principal amount
of $2,500,000. On December 31, 1998, $2,500,000 of the principal
balance remained outstanding. Interest is determined at the annual
rate of prime plus 4% (11.75%) as of the date of this filing.
4. SHAREHOLDERS' EQUITY
On July 7, 1998 the Company entered into a Stock Purchase Agreement
with Bentley International, Inc., and on July 30, 1998 the Company
consummated the transaction contemplated by this Agreement. The
Purchase price paid to Bentley for the Bentley shares included
1,500,000 shares of the Company's Class A Common Stock. In conjunction
with the Company's repurchase of all its remaining obligations to the
Seller, the Company on
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December 1, 1998, repurchased the 1,500,000 shares. These shares, 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 with the Seller for approximately $848,000
represented the value of outstanding obligations of the Company to the
Seller for the purchase of the Bentley shares. On December 1, 1998,
for approximately $2,580,000 in cash and other consideration totalling
approximately $2,634,000 the Company extinguished its entire debt to
the Seller of the Bentley shares. After accounting adjustments, the
early extinguishment of this debt resulted in an extraordinary gain to
the Company of approximately $1,371,000.
In a transaction related to the purchase of the Company's obligations
from the Seller of the Bentley shares, the Company assumed an
obligation of Bentley, under a Bentley Bonus Agreement, to convey to a
former Bentley employee, now employed by the Company, 100,000 shares
of Interiors Class A common stock.
On October 30, 1998 the Company eliminated all obligations incurred
under the Stevens Settlement for a cash payment to the Stevens
principals of $500,000. This payment was financed by a $330,000 10%
Demand Loan from an outside investor which was paid in full by the
Company on November 18, 1998 and a $170,000 payment to the Stevens
principals by the same outside investor. As collateral for this
transaction, the outside investor received 3,750,000 shares of
Interiors Class A Common Stock and agreed to pay Interiors the
transaction date fair market value for this collateral in future
installments. These installments included proceeds used by the Company
to pay in full the 10% demand loan. Among other things, this
transaction caused 3,750,000 Stevens Settlement escrow shares
(1,250,000 Class B Common converted to Class A Common and 2,500,000
Class A Common) to be issued to the outside investor and another
10,000,000 Class A Common shares that were escrowed in the Stevens
Settlement to be retired. At the date of this transaction, the Company
had reserves for all remaining obligations under the Stevens
Settlement of approximately $248,000. The Company's $330,000 portion
of the settlement payment created a charge to earnings of $82,000.
On December 30, 1998 the Company received $250,000 from a private
investor in exchange for a subscription to the Company's Series A
Preferred Stock.
On December 31, 1998, the Company declared a 0.75 cent dividend on its
Series A Preferred Stock for holders of record at September 30, 1998.
This dividend was paid in approximately 166,000 shares of the
Company's Class A Common.
During the three month period ending December 31, 1998, Holders of the
$1,700,000 in convertible notes issued by the Company in March 1998,
converted $1,000,000 of the unpaid principal portion of these notes
into approximately 646,000 shares of the Company's Class A Common.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be made in conjunction with the
information contained in the financial statement of the company and
the Notes thereto appearing elsewhere herein and in conjunction with
Management's Discussion and analysis set forth in the Company's Form
10-KSB for the fiscal year ended June 30, 1998, which discussion is
incorporated herein by reference.
RESULTS OF OPERATIONS
Six months ending December 31, 1998 as compared to six months ending
December 31, 1997.
The Company's net sales from operations for the six months ending
December 31, 1998 totaled $23,262,746; an increase of $19,426,881 or
506% from $3,835,865 for the six month period ending December 31,
1997. The
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revenue growth has resulted from executing the Company's business plan
and acquiring and consolidating independent companies that design,
manufacture and distribute decorative accessories
The Company's cost of goods sold as a percentage of net sales
increased 1.8 percentage points from 62.5% for the six months ending
December 31, 1997 to 64.3% for the six months ending December 31,
1998. Cost of goods for the current period was approximately
$14,960,000 compared to approximately $2,397,000 for the same period
last year. The increase in the cost of goods percentage year-to-year
is primarily the result of acquiring new product lines with
alternative margin structures.
The Company's selling, general and administrative expenses as a
percentage of net sales totaled 29.9% for the six months ending
December 31, 1998 compared to 23.2% for the same period last year. SG
& A for the period ending December 31, 1998 was approximately
$6,962,000 compared to $889,000 for the same period last year. The
Company has begun to execute its strategy of consolidation to overcome
redundancies in the expense structure by combining Henlor, Inc. and
Merchandise Sales, Inc. in one facility in June of 1998 under the name
Vanguard Studios, Inc.
On November 23, 1998 the Company signed a lease on a 216,000 square
foot manufacturing and distribution facility. This facility will be
used to consolidate the operations of Windsor Art, Inc. and Vanguard,
Inc. In January of 1999 the Company moved the operations of Windsor
Art, Inc. to the new facility. Additionally, expense redundancies at
Troy Lighting, Inc. will be overcome with management from the new
facility. Further reductions in overhead are planned from a systems
integration program that is already underway.
Interest expense, primarily from financing activities associated with
the acquisitions, has increased approximately $759,000 to
approximately $984,000 during the six months ending December 31, 1998
from approximately $226,000 for the same interval last year.
Additionally, for the six months ending December 31, 1998, the Company
incurred non cash financing charges of approximately $437,000.
For the six months ending December 31, 1998, the Company's net income
was $1,289,192 or 0.08 per share compared to $310,543 or 0.00 per
share for the same period last year. EPS data for continuing
operations attributable to common shares before extraordinary items
for the six months ending December 31, 1998 reflect a deduction of
preferred stock dividends and last year's EPS data is restated to
reflect the deduction of preferred stock dividends. Basic net earnings
per common share from continuing operations for the six months ending
December 31, 1998 was (0.02) compared to 0.00 per share for the same
period last year. Basic net earnings per common share from gain on the
early extinguishment of debt for the six months ending December 31,
1998 was 0.10 compared to 0.00 per share for the same period last
year. Diluted net earnings per common share from continuing operations
for the six months ending December 31, 1998 was (0.01) compared to
0.00 per share for the same period last year. Diluted net earnings per
common share from gain on the early extinguishment of debt for the six
months ending December 31, 1998 was 0.09 per share compared to 0.00
per share for the same period last year. Six month income from
operations before interest and provisions for income taxes was
$1,340,504 this year versus $549,357 last year.
For the three months ending December 31, 1998, the Company's net
income was $1,006,217 or 0.05 per share compared to $202,635 or 0.01
per share for the same period last year. EPS data for continuing
operations attributable to common shares before extraordinary items
for the three months ending December 31, 1998 reflect a deduction of
preferred stock dividends and last year's EPS data is restated to
reflect the deduction of preferred stock dividends. Basic and Diluted
net earnings per common share from continuing operations for the three
months ending December 31, 1998 was (0.02) compared to 0.01 per share
for the same period last year. Basic and Diluted net earnings per
common share from gain on the early extinguishment of debt for the
three months ending December 31, 1998 was 0.07 compared to 0.00 per
share for the same period last year. Three month income from
operations before interest and provisions for income taxes was
$568,712 this year versus $328,947 last year.
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LIQUIDITY AND CAPITAL RESOURCES
Management believes that future cash flows from operations will be
sufficient to support the Company's operation. Company management
continues to implement what it believes is necessary to insure
positive cash flow and profitability. Specific actions taken as of the
date of this filing include seeking acquisition or strategic alliances
with unrelated companies in the decorative accessory industries. The
Company continues to seek new sources of financing to fund it's
acquisitions. No assurances can be given that these measures will
generate the fiscal improvement sought by the Company.
As of December 31, 1998, the Company had cash balances of
approximately $673,000 compared to cash balances of approximately
$4,036,000 at June 30, 1998, a decrease of approximately $3,363,000.
Net cash used in operating activities was approximately $2,996,000 for
the six months ended December 31, 1998 compared to a net use of cash
of approximately $375,000 for the same period last year. The increase
in use of cash for the six months ended December 31, 1998 included
acquisition related inventory growth of approximately $1,337,000, an
increase in Prepaid Expenses and Other Current Assets of approximately
$3,067,000 primarily from receivables incurred in the resolution of
the Stevens Settlement and an increase in Other Assets of
approximately $1,325,000 from acquisition related growth.
Net cash used in investing activities during the six months ending
December 31, 1998 totaled $4,435,000 There were no material investing
activities during the same period last year. The Company completed the
acquisition of Windsor Art, Inc. and Troy Lighting, Inc. during the
period ending December 31, 1998, accounting for almost all of the
Company's investing activities for the period.
As of December 31, 1998 financing activities provided approximately
$4,215,000 in cash compared to approximately $433,000 for the same
period last year. Net cash provided by financing activities includes
among other things, the total cash payments receivable from an
investor's sale of collateral as part of resolving the Stevens
Settlement.
As of December 31, 1998, the Company's financial position reflected a
working capital surplus of approximately $1,377,000 compared to a
working capital surplus of approximately $1,114,000 at June 30, 1998
and a working capital surplus of approximately $195,000 for the same
period end last year. Change in the Company's working capital position
resulted in large part from acquisition activity.
Except as otherwise set forth here in, the Company has no commitments
for capital expenditures.
In order to fund growth over the long term the Company anticipates
possible future issuance of its securities resulting in further
dilution to the security holders
The Company operates pursuant to a policy that generally precludes
acceptance of goods or non-cash basis (Sometimes known as barter
transaction)
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 affect the
Company's operations. However, the Company believes it could increase
prices to offset increases in cost of goods sold or other operating
costs.
SALES VARIATIONS
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Although the Company's net sales are not subject to seasonal
fluctuations experienced by certain retailers, the Company experiences
some minor variations in the level of sales during the year. The first
quarter of the fiscal year (i.e., July 1 through December 31) is
generally the Company's slowest sales period due to the fact that the
summer period is typically the period when art galleries are at their
slowest purchasing period. During this period, the Company's warehouse
and factory closes for three to five days to take the annual physical
inventory and to consolidate vacation periods for the Company's
employees.
YEAR 2000 COMPLIANCE
The Company is currently in the process of evaluating and implementing
changes to computer programs necessary to address the year 2000 issue.
The Company has hired a consultant and initiated the process of
conversion.
The costs to address the Company's Year 2000 issues are currently
estimated at $1,800,000 for the businesses the Company currently owns.
Stylecraft and Petals have initiated Year 2000 compliancy measures and
are not expected to materially add to the Company's cost of
conversion.
The Year 2000 issue is expected to affect the systems of various
entities with which the Company interacts. However, there can be no
assurance that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure by another
company's systems to be Year 2000 compliant would not have a material
adverse effect on the Company.
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PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is subject to other claims and litigation in the ordinary course of
business in Management's opinion, such claims are not material to the Company's
financial position or its results of operations.
ITEM 2. CHANGES IN SECURITIES
None in addition to those disclosed herein.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On November 1, 1998, the Company's Board of Directors entered into a ten-year
extendable employment agreement between the Company and its President and Chief
Executive Officer. The agreement provides for an annual salary of $375,000,
with annual increases of 8%. Such increases will be subject to the attainment
of profitable results of operations by the Company. In addition, the agreement
grants the President and Chief Executive Officer an option to purchase at any
time during the term of the agreement 250,000 shares of the Company's Series A,
10% Cumulative Convertible Preferred Stock at the market price as of November
2, 1998. In addition, the Agreement grants the President and Chief Executive
Officer options to purchase 2,500,000 shares of the Company's common stock at
the end of the above ten-year term; such options are priced at the fair market
value on November 2, 1998. The exercise rights may be accelerated if certain
performance measures, as defined, are met.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Windsor Acquisitions on July 30,1998 filed August 10, 1998, Troy Acquisitions
on August 14, 1998 filed October 9, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
INTERIORS, INC.
FEBRUARY 22, 1999
BY: RICHARD P. BELENSKI
EXECUTIVE VICE PRESIDENT
FINANCE AND ADMINISTRATION,
CHIEF FINANCIAL OFFICER
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EXHIBIT 11
INTERIORS, INC.
COMPUTATION OF WEIGHTED AVERAGE SHARES
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
(000) (000) (000) (000)
COMMON SHARES VS. WEIGHTED WEIGHTED
A & B NOTE REC. BASIC DILUTED
<S> <C> <C> <C> <C>
Total shares outstanding at June 30, 1998 21,257
Escrow shares at June 30, 1998 (6,250)
Shares vs. Note Receivable at June 30, 1998 (980)
------
Basic Common A & B shares for EPS at June 30, 1998 14,027 980 12,072 12,072
Additional Basic Shares 4,354 1,966 1,966
Additional Shares vs. Note Receivable
Stock options and warrants 890
-------------------------------------------
Basic Common A & B shares for EPS at December 31, 1998 18,381 980 14,038 14,928
====================
Shares vs. Note Receivable at December 31, 1998 980
Escrow shares at December 31, 1998 0
------
Total shares outstanding December 31, 1998 19,361
======
</TABLE>
