SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(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, 2000
--------------
|_| Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ___________________to_____________________
Commission file number 0-24352
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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
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(Address of Principal Executive Offices)
(914) 665-5400
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(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 11, 2000, the
registrant had 37,269,564 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>
INTERIORS, INC.
Table Of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statement
Consolidated Balance Sheet as of March 31, 2000 ....................... 3
Consolidated Statements of Operations for the Three Months Ended
March 31, 2000 and 1999 ............................................. 4
Consolidated Statements of Operations for the Nine Months Ended
March 31, 2000 and 1999 ............................................. 5
Consolidated Statement of Changes in Stockholders' Equity for
the Nine Months Ended March 31, 2000 ................................ 6
Consolidated Statements of Cash Flows for the Nine Months Ended
March 31, 2000 and 1999 ............................................. 7-8
Notes to Consolidated Financial Statements ............................ 9-10
Item 2. Management's Discussion and Analysis or Plan of Operation ..... 11-14
PART II OTHER INFORMATION
Item 2. Changes in Securities ......................................... 15
Item 5. Other Information ............................................. 15
Item 6. Exhibits and Reports on Form 8-K .............................. 16
2
<PAGE>
PART I
FINANCIAL INFORMATION
Interiors, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
March 31, 2000
--------------
<S> <C>
Assets
Current Assets:
Cash and cash equivalents .................................................................. $ 7,166,463
Accounts receivable, net of allowance for doubtful accounts of $1,209,315 .................. 19,089,423
Inventories ................................................................................ 24,135,886
Other current assets ....................................................................... 6,567,016
-------------
Total current assets ................................................................... 56,958,788
Property and Equipment, net ..................................................................... 12,624,120
Goodwill, net ................................................................................... 43,481,508
Other Assets .................................................................................... 2,572,586
-------------
Total assets ........................................................................... $ 115,637,002
=============
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current maturities of long-term debt ..................................... $ 12,956,744
Accounts payable and accrued liabilities ................................................... 29,367,393
-------------
Total current liabilities .............................................................. 42,324,137
Long Term Debt .................................................................................. 31,497,494
Other Long Term Liabilities ..................................................................... 1,343,242
Stockholders' Equity:
Preferred stock, $.01 par value, 5,300,000 shares authorized, 1,055,668 shares issued and
outstanding
Series A Convertible Redeemable Preferred Stock, $.01 par value, 2,870,000 shares
authorized, 855,668 shares issued and outstanding .................................... 8,557
Series B Convertible Redeemable Preferred Stock, $.01 par value, 200,000 shares
authorized, issued and outstanding ................................................... 2,000
Class A common stock, $.001 par value, 60,000,000 shares
Authorized, 35,309,501 shares issued, 35,182,594 shares outstanding ...................... 35,310
Class B common stock, $.001 par value, 2,500,000 shares
Authorized, 2,455,000 shares issued and outstanding ...................................... 2,455
Treasury stock ............................................................................. (1,359,690)
Additional paid-in-capital ................................................................. 63,916,401
Accumulated deficit ........................................................................ (19,171,024)
Notes receivable ........................................................................... (2,961,880)
-------------
Total stockholders' equity ............................................................. 40,472,129
-------------
Total Liabilities and Stockholders' Equity ...................................................... $ 115,637,002
=============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
Interiors, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended
March 31,
---------------------------
2000 1999(1)
----------- -----------
<S> <C> <C>
Net Sales ............................................................... $48,569,920 $19,475,116
Cost of Goods Sold ...................................................... 30,361,007 12,957,708
----------- -----------
Gross profit ...................................................... 18,208,913 6,517,408
----------- -----------
Selling, General, and Administrative Expenses ........................... 17,210,210 7,029,724
Income (loss) from operations ..................................... 998,703 (512,316)
----------- -----------
Other Expenses (Income)
Interest expense .................................................. 1,763,430 648,553
Financing charges - non-cash ...................................... 152,789 574,308
Consulting and management fees .................................... (22,135) (507,500)
Minority interest ................................................. -- (58,838)
Impairment loss on investments and non-operating receivables ...... 29,266 4,822,489
----------- -----------
Total other expense ........................................... 1,923,350 5,479,012
----------- -----------
Loss before provision for income taxes and extraordinary item ..... (924,647) (5,991,328)
Provision for Income Taxes .............................................. 62,564 50,000
----------- -----------
Loss from operations before extraordinary item .................... (987,211) (6,041,328)
Extraordinary Loss from Early Extinguishment of Debt .................... -- (113,013)
----------- -----------
Net Loss ................................................................ ($987,211) ($6,154,341)
=========== ===========
Loss Per Common Share Basic and Diluted:
Loss from continuing operations ................................... (987,211) ($6,041,328)
Preferred dividends ............................................... (106,959) (607,688)
Accreted preferred dividends ...................................... (168,000) (332,000)
----------- -----------
Net loss from continuing operations attributable to common shares
before extraordinary item ......................................... (1,262,170) (6,981,016)
Extraordinary gain from early extinguishment of debt .............. -- (113,013)
----------- -----------
Net loss .......................................................... ($1,262,170) ($7,094,029)
=========== ===========
Loss from continuing operations ................................... ($0.04) ($0.31)
Extraordinary loss from early extinguishment of debt .............. -- (0.00)
----------- -----------
Net loss per common share ......................................... ($0.04) ($0.31)
=========== ===========
Weighted Average Number of Shares -Basic and Diluted .................... 35,186,013 22,699,648
=========== ===========
</TABLE>
(1) Fiscal 1999 financial information has been restated as described in Note 1
to these financial statements.
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
Interiors, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended
March 31,
-----------------------------
2000 1999(1)
------------ -----------
<S> <C> <C>
Net Sales ................................................................ $127,890,757 $42,737,862
Cost of Goods Sold ....................................................... 77,365,250 27,918,196
------------ -----------
Gross profit ....................................................... 50,525,507 14,819,666
------------ -----------
Selling, General, and Administrative Expenses ............................ 47,196,836 14,353,479
Income from operations ............................................. 3,328,671 466,187
------------ -----------
Other Expenses (Income)
Interest expense ................................................... 4,339,309 1,978,452
Financing charges - non-cash ....................................... 347,267 929,199
Consulting and management fees ..................................... -- (627,500)
Minority interest .................................................. (54,703) (58,838)
Impairment loss on investments and non-operating receivables ....... 204,827 4,822,489
------------ -----------
Total other expense (income) ................................... 4,836,700 7,043,802
------------ -----------
Loss before provision for income taxes and extraordinary item ...... (1,508,029) (6,577,615)
Provision for Income Taxes ............................................... 143,114 50,000
------------ -----------
Loss from operations before extraordinary item ..................... (1,651,143) (6,627,615)
Extraordinary Gain From Early Extinguishment of Debt ..................... -- 1,257,529
------------ -----------
Net Loss ................................................................. ($1,651,143) ($5,370,086)
============ ===========
Loss Per Common Share - Basic and Diluted:
Loss from continuing operations .................................... ($1,651,143) ($6,627,615)
Preferred dividends ................................................ (398,749) (744,366)
Accreted preferred dividends ....................................... (1,168,000) (332,000)
------------ -----------
Net loss from continuing operations attributable to common shares
before extraordinary item .......................................... (3,217,892) (7,703,981)
Extraordinary gain from early extinguishment of debt ............... -- 1,257,529
------------ -----------
Net Loss ........................................................... ($3,217,892) ($6,446,452)
============ ===========
Loss from continuing operations .................................... ($0.09) ($0.40)
Extraordinary gain from early of debt .............................. -- 0.07
------------ -----------
Net loss per common share .......................................... ($0.09) ($0.33)
============ ===========
Weighted Average Number of Shares - Basic and Diluted .................... 34,261,388 19,271,239
============ ===========
</TABLE>
(1) Fiscal 1999 financial information has been restated as described in Note 1
to these financial statements.
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, 2000
(Unaudited)
<TABLE>
<CAPTION>
Series A Series B Series C Class A
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1999 1,066,050 $10,660 100,000 $1,000 6,527 $65 30,173,459 $30,173
Conversion of preferred stock to
common stock (200,382) (2,003) 601,146 601
Shares issued in connection with
employment agreement 53,343 53
Additional shares issued regarding
MHI acquisition 1,633,271 1,633
Shares issued regarding
Concepts 4, Inc. Acquisition 2,434,197 2,435
Retirement of stock (10,000) (100) (4,833) (4)
Reclassification of Preferred
Series B to Equity 100,000 1,000
Conversion of Preferred Series C
shares to debt (6,527) (65)
Conversion of debt to equity 200,000 200
Repurchase of common shares
Payments received on notes
receivables
Warrants issued in connection
with debt
Preferred Series C dividend
Stock Dividend, net of reversal 218,918 219
Net loss through March 31, 2000
Balance March 31, 2000 855,668 $8,557 200,000 $2,000 -- $-- 35,309,501 $35,310
Class B Additional Paid Retained Earnings Treasury Note
Common Stock in Capital (Deficit) Stock Receivable Total
------------ ---------- --------- ----- ---------- -----
Shares Amount
------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1999 2,455,000 $2,455 $65,531,022 $(17,048,703) $(1,317,023) $(3,211,880) $43,997,769
Conversion of preferred stock to
common stock 1,402
Shares issued in connection with
employment agreement 74,947 $75,000
Additional shares issued regarding
MHI acquisition (1,633)
Shares issued regarding
Concepts 4, Inc. Acquisition 3,102,797 $3,105,232
Retirement of stock (24,896) $(25,000)
Reclassification of Preferred
Series B to Equity 999,000 $1,000,000
Conversion of Preferred Series C
shares to debt (6,526,935) $(6,527,000)
Conversion of debt to equity 291,467 $291,667
Repurchase of common shares (42,667) $(42,667)
Payments received on notes
receivables 250,000 $250,000
Warrants issued in connection
with debt 277,500 $277,500
Preferred Series C dividend (279,229) $(279,229)
Stock Dividend, net of reversal 191,730 (191,949)
Net loss through March 31, 2000 (1,651,143) $(1,651,143)
Balance March 31, 2000 2,455,000 $2,455 $63,916,401 $(19,171,024) $(1,359,690) $2,961,880 $40,472,129
</TABLE>
The accompanying notes are an integral part of these consolidated statements
6
<PAGE>
Interiors, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended
March 31,
---------------------------
2000 1999 (1)
----------- -----------
<S> <C> <C>
Cash Flow From Operating Activities:
Net Loss ........................................................................ $(1,651,143) $(5,370,086)
Adjustments To Reconcile Net Loss To Net Cash (Used In) Provided By Operating Activities:
Depreciation and amortization ................................................... 4,348,902 1,340,612
NBV of rental property disposed ................................................. 1,113,212 177,300
Reserve for restructuring ....................................................... (480,528) --
Provision for losses on accounts receivable ..................................... 118,443 94,369
Gain on sale of fixed assets (3,588) --
Non-cash Write-off of non-productive assets 200,515 --
Reserve for inventory ........................................................... 151,259 --
Impairment loss on investments and non-operating receivables .................... -- 4,822,489
Non-cash financing charge ....................................................... 347,267 929,199
Provision for issuance of stock ................................................. 75,000 341,700
Minority interest in subsidiary ................................................. (54,703) 746,154
Changes In Assets and Liabilities:
Decrease (increase) in accounts receivable, trade ............................... (2,794,611) (193,408)
Decrease (increase) in inventories .............................................. (2,636,019) (267,333)
Decrease (increase) in prepaid expenses and other current assets ................ (1,238,057) (2,129,751)
Decrease (increase) in other assets ............................................. (928,134) 159,232
Increase (decrease) in other long term liabilities .............................. (64,570) --
Increase (decrease) in accounts payable and accrued expenses .................... (202,690) (464,613)
----------- -----------
Net cash used in operating activities ........................................... (3,699,445) 185,864
----------- -----------
Cash Flow From Investing Activities:
Capital expenditures ............................................................ (4,291,265) (750,824)
Increase in deferred charges .................................................... (427,706) --
Acquisition of Concepts 4 ....................................................... (4,819,881) --
Acquisition of Bentley International ............................................ -- (2,106,767)
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 ........................................... (9,538,852) (25,464,529)
----------- -----------
Cash Flow From Financing Activities:
Net proceeds from issuance of debt .............................................. 10,635,629 16,342,147
Repurchase of common shares ..................................................... (42,667) --
Retirement of stock ............................................................. (25,000) --
Repayments of note receivable 250,000 --
Repayments of debt and capitalized lease obligations ............................ (3,073,215) (13,768,624)
Net proceeds from exercise of common stock warrants ............................. -- 19,320,302
Net proceeds from exercise of common and preferred stock ........................ -- 10,185,020
----------- -----------
Net cash provided by financing activities ....................................... 7,744,747 32,078,845
----------- -----------
Net increase (decrease) in cash ................................................. (5,493,550) 6,800,180
Cash, beginning of period ....................................................... 12,660,013 5,202,473
----------- -----------
Cash, end of period ............................................................. $7,166,463 $12,002,653
=========== ===========
</TABLE>
(1) Fiscal 1999 financial information has been restated as described in Note 1
to these financial statements.
7
<PAGE>
The accompanying notes are an integral part of these consolidated statements.
8
<PAGE>
Interiors, Inc.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended
March 31,
------------------------
2000 1999(1)
---------- ----------
<S> <C> <C>
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest .......................................................................... $3,025,566 $1,361,408
Taxes ............................................................................. 14,960 17,304
Non-Cash Financial Activities:
Conversion of Series A Preferred Stock to Class A Common Stock .................... 1,402 5,790
Stock issuance for finance charges ................................................ -- 65,073
Conversion of Series C Preferred Stock to debt .................................... 6,527,000 --
Stock issuance for services ....................................................... -- 342,910
Promissory note conversion ........................................................ 250,000 1,735,000
Stock issuance in connection with legal settlement ................................ -- 42,410
Stock issuance per employment agreement ........................................... 75,000 125,000
Common Stock issued for preferred dividends ....................................... 191,949 258,703
Class A Common Stock repurchased in conjunction with early extinguishment of debt . -- (1,317,023)
Supplemental disclosure of cash flows related to acquisitions:
Fair value of assets acquired, excluding cash ..................................... 2,839,415 41,263,434
Issuance of common stock .......................................................... -- (5,806,250)
Issuance of preferred stock ....................................................... -- (2,027,000)
Issuance of notes payable ......................................................... (7,036,227) (2,230,766)
Issuance of warrants .............................................................. -- 50,000
Payments in connection with acquisitions, net of cash acquired .................... 1,174,813 (22,886,899)
Liabilities assumed ............................................................... 6,668,324 27,442,410
Supplemental disclosure of non cash items from investing and financing activities:
Issuance of common stock in connection with acquisitions .......................... -- 5,806,250
Issuance of preferred stock in connection with acquisitions ....................... -- 2,027,000
Issuance of warrants in connection with convertible debentures .................... 277,500 1,000,000
Issuance of Class B Common Shares in connection with Laurie Munn debt guarantees .. -- 2,455,000
Issuance of debt in connection with acquisitions .................................. 7,036,227 2,230,766
</TABLE>
(1) Fiscal 1999 financial information has been restated as described in Note 1
to these financial statements.
The accompanying notes are an integral part of these consolidated statements.
9
<PAGE>
Interiors, Inc.
Notes to Consolidated Financial Statements
March 31, 2000
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, 2000 and the results of operations of the Company and its subsidiaries for
the three and nine-month periods ended March 31, 2000 and 1999. Certain
financial information for the prior year has been reclassified in the current
financial statements to conform to the current presentation.
The Company's results of operations during the three and nine months ended
March 31, 2000 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, 1999, as amended.
The March 31, 1999 financial statements included herein have been restated
from those previously filed in Form 10-Q for the quarter ended March 31, 1999.
The Company disclosed in its Form 10-K for the fiscal year ended June 30, 1999
in Note 3. "Investment in Affiliates" that it recorded in the third quarter of
fiscal 1999 an impairment loss of its investment in Decor, approximately $3.3
million. The Company also established reserves for the uncollectiblility of its
receivable, approximately $1.0 million owed to the Company from Decor, and the
possibility that the Company would be required to pay $522,000 pursuant to its
guaranty of indebtedness. All of the above items resulted in the net loss
being increased by $4,822,489 in the three and nine month periods ended March
31, 1999.
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." In accordance with SFAS No. 128, net
earnings per share amounts ("basic EPS") were computed by dividing net earnings
by the weighted average number of common shares outstanding, excluding any
potential dilution. For purposes of this calculation, common shares include both
Class A Common Stock, par value $.001 per share ("Class A Shares"), and Class B
Common Stock, par value $.001 per share, of the Company. Net earnings per
diluted share amounts ("diluted EPS") are generally computed assuming potential
dilution from the exercise of outstanding stock options, warrants and other
securities. Because the Company reported a loss for its basic EPS, however, its
diluted EPS is computed using the same weighted average number of common shares
outstanding as its basic EPS. All periods presented include a deduction for the
dividend requirement of the Company's 10% Series A Cumulative Convertible
Preferred Stock, par value $.01 per share ("Series A Preferred Shares"), Series
B Preferred Stock, par value $.01 per share ("Series B Preferred Shares"), and
Series C Preferred Stock, par value $.01 per share ("Series C Preferred
Shares").
The Company has consummated several acquisitions during fiscal years 2000,
1999 and 1998. While management believes that the company operates in one
overall business segment, as its businesses are integrated management will be
better able to assess the company's segment reporting requirements. During the
period of integration and growth, including the installation of an enterprise
wide software system, the company is managing the business on a geographic
basis.
In October 1999, the Company terminated a voting trust agreement relating
to its ownership of preferred shares in Decor Group, Inc. ("Decor"). As a
result, the Company began consolidating the results of operations of Decor
commencing with the period ended December 31, 1999. The results of Decor are
expected to be included in the financial statements of the Company for the
foreseeable future. For the year ended March 31, 1999, Decor had annual sales of
approximately $4.9 million and net loss of $2.7 million. This consolidation has
been accounted for under the purchase method of accounting and the results of
operations have been included in the consolidated financial statements since the
termination of the voting trust agreement. The allocation of purchase price is
subject to revision when additional information concerning the asset and
liability valuations become available. Accordingly, the final purchase price
allocation could differ. The excess of purchase price over the fair values of
net assets acquired was approximately $1,372,406 and has been recorded as
goodwill in the consolidated balance sheet, and is being amortized on a
straight-line basis over forty years.
2. Notes Payable.
On January 24, 2000, the Company executed a $1,000,000 promissory note in
favor of Don M. Landis (the "Second Landis Note"). The Second Landis Note
accrues interest at a rate of 24%, matures on May 22, 2000 and is
10
<PAGE>
secured by the assets of Petals. The proceeds of the Second Landis Note were
used for working capital and general corporate purposes. The Company is
currently seeking an extension of the maturity date.
For a discussion of the Limeridge Note (as defined below) and the
Endeavour Note (as defined below) see Management's Discussion and Analysis or
Plan of Operations.
3. Shareholders' Equity.
In December 1999, the Company acquired all of the outstanding capital
stock of Concepts 4, Inc., a company that employs interior designers, architects
and merchandisers to the hospitality industry ("Concepts 4"). On March 21, 2000,
the Company delivered 2,434,197 Class A Shares to the former shareholders of
Concepts 4. Such securities are being held in escrow until March 10, 2001. If
such securities are worth less than $3,387,252.60 on March 10, 2001, the Company
will issue to the shareholders additional shares equal to the amount of
shortfall and the shares will be released from escrow. If such securities are
worth more than $3,387,252.60, the shareholders will return to the Company a
number of shares equal to the amount of the excess. The Company may repurchase
these securities for $3,105,231.80 from March 10, 2000 until September 10, 2000
and thereafter until March 10, 2001 for $3,387,252.60. See Item 2. "Changes in
Securities."
As of January 31, 2000, the right to seek mandatory redemption with
respect to $1.0 million of the Series B Preferred Shares expired without
exercise. Accordingly, such amount has been reclassified and is presented in the
Company's consolidated balance sheet at March 31, 2000 as stockholders' equity.
In April 2000, the Company released 763,561 Class A Shares from the escrow
previously established in connection with the Company's acquisition of Model
Home Interiors, Inc. ("MHI"). During the first year following the acquisition,
MHI achieved certain threshold criteria established at the time of the
transaction resulting in the delivery of these contingent earn-out shares to the
former shareholders of MHI. For the nine month period ended March 31, 2000, the
Company has added $1,633,271 Class A Shares to the escrow. See Item 2. "Changes
in Securities."
4. Related Party Transactions.
During fiscal 1999, the Company made advances aggregating $50,000 to the
Company's Chief Executive Officers for an aggregate outstanding balance of
$297,357 as of March 31, 2000. These advances are expected to be repaid by June
30, 2000 and have been incldued in the current assets in the accompanying
consolidated balance sheet.
The Company will not permit loans or other transactions among the Company
and the officers, directors, principal shareholders, or affiliates of any of
them for other than bona fide business purposes or on terms no less favorable
than could be obtained from third parties, unless approved by a majority of the
disinterested directors and the independent directors, if any, of the Company.
11
<PAGE>
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 ("Interiors" or the "Company"), is
a designer, manufacturer and marketer of a broad range of decorative accessories
for the residential, commercial, institutional and contract markets, including
museum-quality traditional and contemporary picture frames, framed wall mirrors,
oil paintings and prints under glass, portable and installed lighting and
lighting fixtures, sculptures and decorative tabletop accessories and silk
floral and tree arrangements. Interiors primarily markets its products to
retailers in the home furnishings industry, including furniture stores, home
furnishings centers, catalog retailers, home improvement centers, department
stores and lighting retailers. The Company's silk flower and tree arrangements,
as well as other accessories, are also sold directly to consumers through a
direct mail catalogue, and the Company has recently begun marketing several
products through the internet. The Company also provides design, merchandising
and leasing services to the homebuilding industry. The Company believes that it
has a unique competitive advantage in serving a broad range of customers because
of the breadth and depth of its product lines as well as its ability to
coordinate design among several product lines.
Interiors' goal is to become the premier, national single-source provider
of decorative accessories to the home furnishings industry. To achieve this
goal, Interiors has begun consolidating the highly fragmented decorative
accessories industry, rapidly establishing its national presence through the
acquisition, integration, and growth of established, well-regarded manufacturers
of decorative accessories. The Company's business strategy was developed in
response to changing demands of large retailers, who seek to increase
"single-sourcing" of inventory purchases in order to reduce distribution and
related expenses, including styling costs associated with coordinating related
products from multiple vendors. Interiors intends to integrate and optimize the
operations of acquired companies by consolidating into regional operating units
with centralized management, which the Company believes will lead to better
product design and greater efficiency in manufacturing, shipping and inventory
management, resulting in increased sales.
Results of Operations
Comparison of Nine Months Ended March 31, 2000 and 1999
Net Sales for the nine months ended March 31, 2000 were $127,890,757 as
compared to $42,737,862 for the same period in 1999, an increase of $85,162,895
or 199%. The increase in net sales was primarily due to the Company's
acquisitions of Model Home Interiors, Inc. ("MHI") and Stylecraft Lamps, Inc.
("Stylecraft") in February 1999, the acquisitions of Petals, Inc. ("Petals") and
CSL Lighting Manufacturing, Inc. ("CSL") in March 1999, the consolidation of
Decor in October 1999 and the acquisition of Concepts 4, Inc. ("Concepts 4") in
December 1999.
Cost of goods sold for the nine months ended March 31, 2000 increased to
$77,365,250 from $27,918,196 for the same period in 1999, an increase of
$49,477,054. 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 MHI, Stylecraft, Petals, CSL and
Concepts 4.
As a percentage of net sales, gross profit for the nine-month period ended
March 31, 2000 increased to 39.5% from 34.6% for the same period of the prior
year. The increase in profit margin resulted primarily from the acquisition of
additional businesses with higher margin structures particularly Stylecraft and
Petals.
Selling, general and administrative expenses increased to $47,196,836 for
the nine months ended March 31, 2000 as compared to $14,353,479 for the same
period in 1999, an increase of $32,843,357. 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 MHI, Stylecraft, Petals, CSL and Concepts 4.
As a percentage of net sales, selling, general and administrative expenses
for the nine month period ended March 31, 2000 increased to 36.9% from 33.5% for
the same period of the prior year. This increase primarily resulted from
acquisitions of new businesses with alternative cost structures, particularly
Petals, a catalogue company, with a higher selling expense ratio than the
Company's manufacturing businesses.
12
<PAGE>
Interest expense and non-cash financing charges increased to $4,686,576
for the nine months ended March 31, 2000 from $2,907,651 for the same period in
1999.
Other expense for both the three and nine-month periods ended March 31,
2000 is signifantly lower than the comparable periods in fiscal 1999 due to the
Company reporting an impairment loss, which is more fully described in Note 1 of
the accompanying consolidated financial statements, in the third quarter of
fiscal 1999.
The Company is further evaluating the carrying values of its recoverables
and inventory in CSL. CSL's current annualized net sales are approximately $6.0
million.
Liquidity and Capital Resources
Since the beginning of the fiscal year, the Company has primarily used its
cash to support operating activities and for capital expenditures. The Company's
primary sources of cash during this period have been the proceeds raised by the
issuance of the Limeridge Note (as defined below), the Endeavour Note (as
defined below), the Second Landis Note and cash flow from operations. In
addition, as discussed below, the Company currently has formula based secured
financing arrangements with Austin Financial Services, Inc. ("Austin"),
NationsBank, N.A. ("NationsBank") and Finova Growth Finance ("Finova"). At March
31, 2000, the Company had working capital of $13,134,651
Net cash used in operating activities during the first nine months of
fiscal 2000 was $3,699,445, principally due to increases in receivables and
inventory caused by normal seasonal activity.
Net cash used in investing activities during the first nine months of
fiscal 2000 was $9,538,852, due to increases in capital expenditures and the
Concepts 4 acquisition. Capital expenditures increased mainly due to MHI's
operating inventories of $2,439,477, which are classified by the Company as
capital expenditures. MHI's inventories include interior decorating items that
are not immediately offered for resale. Certain of such items are leased to
customers. Additionally, the cash portion of the Concepts 4, Inc. acquisition
was $4,819,881.
Net cash provided by financing activities during the first nine months of
fiscal 2000 was $7,744,747.
The Company has secured formula based financing arrangements with several
lenders relating to the operations of its subsidiaries. As of May 9, 2000, the
Company owed Austin Financial approximately $7.9 million at an annual rate equal
to prime plus 2.0% (11.0% as of the date of this filing), and could borrow
approximately an additional $2.1 million relating to the operations of Windsor,
Troy, Vanguard, Stylecraft and Decor. As of May 9, 2000, the Company owed
NationsBank approximately $2.6 million at an annual rate equal to prime (9.0% as
of the date of this filing), and could borrow approximately an additional
$300,000 relating to the operations of MHI. As of May 9, 2000, the Company owed
Finova approximately $804,000 at an annual rate equal to prime plus 8.0% (17.0%
as of the date of this filing), and could borrow approximately an additional
$21,000, 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.
On May 3, 2000, the Company announced that Foothill Capital Corporation, a
subsidiary of Wells Fargo Company, approved a $25.0 million senior credit
facility. The credit facility, a combination of term loans and revolving loans,
is anticipated to close by the end of May or early June. The proceeds will be
used to refinance existing senior credit facilities currently bearing
significantly higher interest rates, to repay debt obligations, and for working
capital and other general corporate purposes. The Company expects that this
refinancing will reduce its annual interest expense by approximately $500,000.
The credit facility is subject to the execution of definitive agreements and
other conditions customary to transactions of this nature.
On October 4, 1999, the Company consummated a transaction with Limeridge
LLC ("Limeridge") pursuant to which $5,027,000 principal amount of Series C
Preferred Shares, plus accrued and unpaid dividends, were exchanged for a
Secured Convertible Note due September 30, 2004 bearing interest at 17% per
annum (the "Limeridge Note"). The Company received aggregate proceeds of $7.5
million and after certain fees and expenses, net proceeds of approximately $7.2
million in the transaction. The Limeridge Note has a principal amount of
$13,540,626, is secured by the common stock of Petals, Inc., a wholly owned
subsidiary of the Company ("Petals"), and convertible after September 30, 2000
into Class A Shares at the fair market value of such securities at the time of
conversion. Interest on the Limeridge Note is not payable until the earlier of a
redemption, conversion or default of such security, however, the Company is
required to pay an administrative fee in connection with the Limeridge Note
equal to 1% of the outstanding principal amount of the security per month until
the earlier of a redemption, conversion or default of such security. In
connection therewith, the Company issued a warrant to purchase 1,000,000 Class A
Shares at an exercise price of $2.00 per share (the "Limeridge Warrant"). At any
time, the Company may redeem the Limeridge Note at its face value, plus all
accrued and unpaid interest, and redeem the Limeridge Warrant at $0.25 per
warrant share.
On December 15, 1999, the Company consummated the transactions
contemplated by the Stock Purchase Agreement dated October 27, 1999 by and among
Jerry Howard, Dennis Darlington, the Mamer Family Trust and the Company (the
13
<PAGE>
"Stock Purchase Agreement"). Pursuant to the Stock Purchase Agreement, the
Company purchased all of the issued and outstanding shares of Concepts 4, Inc.,
a California corporation ("Concepts 4"), and Concepts 4 became a wholly-owned
subsidiary of the Company. Concepts 4 provides interior design and architectural
design services and distributes products to the hospitality industry. The
purchase price consists of (a) $2,000,000 which was paid at closing, (b) a cash
payment of $2,600,000 which was paid on December 20, 1999, (c) a cash payment of
$2,822,938 payable on March 10, 2000 (the "March 2000 Payment"), (d) a cash
payment of $770,000 payable on December 15, 2000, (e) a cash payment of
$1,218,000 payable on December 15, 2001, (f) a cash payment of $1,218,000
payable on December 15, 2002, and (g) a cash payment of $1,007,289 payable on
March 10, 2003. The aggregate purchase price was determined in arms-length
negotiations between the Company and the former shareholders of Concepts 4.
Pursuant to the Stock Purchase Agreement, the Company also agreed to issue Class
A Shares with a maximum fair market value of $4,500,000 (the "Earnout Shares")
upon the attainment of certain earnings goals by Concepts 4. The amount of the
Earnout Shares, if any, issued to the former shareholders will be determined by
the earnings of Concepts 4 for the fiscal years 2000, 2001 and 2002.
In lieu of the March 2000 Payment, the Company delivered 2,434,197 Class A
Shares to the former shareholders of Concepts 4. Such securities are being held
in escrow until March 10, 2001. If the fair market value of these shares falls
below 80% of the fair market value of the shares on March 10, 2000, the Company
will deliver additional Class A Shares into the escrow so that the aggregate
fair market value of the shares equals $2,822,938. As of April 7, 2000, such
shares were below this value and the Company added 1,947,358 additional shares
to the escrow. If such securities are worth less than $3,387,252.60 on March 10,
2001, the Company will issue to the shareholders additional shares equal to the
amount of shortfall and the shares will be released from escrow. If such
securities are worth more than $3,387,252.60 on March 10, 2001, the shareholders
will return to the Company a number of shares equal to the amount of the excess.
The Company may repurchase these securities for $3,105,231.80 from March 10,
2000 until September 10, 2000 and thereafter until March 10, 2001 for
$3,387,252.60. This acquisition has been accounted for under the purchase method
of accounting and the results of operations have been included in the
consolidated financial statements since the date of acquisition. The allocation
of purchase price is subject to revision when additional information concerning
the asset and liability valuations become available. Accordingly, the final
purchase price allocation could differ. See Item 2. "Changes in Securities." For
additional information, see the Company's Form 8-K, as amended, filed with the
Securities and Exchange Commission.
On December 31, 1999, the Company consummated a transaction with Endeavour
Capital Fund, SA ("Endeavour") pursuant to which $1,500,000 principal amount of
Series C Preferred Shares, plus accrued and unpaid dividends, were exchanged for
a Secured Convertible Note due September 30, 2004 bearing interest at 17% per
annum (the "Endeavour Note"). The Endeavour Note has a principal amount of
$1,744,518, is secured by the common stock of Petals, and convertible after
September 30, 2000 into Class A Shares at the fair market value of such
securities at the time of conversion. Interest on the Endeavour Note is not
payable until the earlier of a redemption, conversion or default of such
security, however, the Company is required to pay an administrative fee in
connection with the Endeavour Note equal to 1% of the outstanding principal
amount of the security per month until the earlier of a redemption, conversion
or default of such security. In connection therewith, the Company issued a
warrant to purchase 110,000 Class A Shares at an exercise price of $2.00 per
share (the "Endeavour Warrant"). At any time, the Company may redeem the
Endeavour Note at its face value, plus all accrued and unpaid interest, and
redeem the Endeavour Warrant at $0.25 per warrant share.
On January 24, 2000, the Company executed a $1,000,000 promissory note in
favor of Don M. Landis (the "Second Landis Note"). The Second Landis Note
accrues interest at a rate of 24%, matures on May 22, 2000 and is secured by the
assets of Petals. The proceeds of the Second Landis Note were used for working
capital and general corporate purposes.
As of January 31, 2000, the right to seek mandatory redemption with
respect to $1.0 million of the Series B Preferred Shares expired without
exercise. Accordingly, such amount has been reclassified and is presented in the
Company's balance sheet at March 31, 2000 as stockholders' equity.
During the past year, the Company has conducted an active acquisition
program using 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 2001.
Impact of Inflation
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in supplied
and other operating costs could adversely effect the Company's operations,
however,
14
<PAGE>
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 close for three to five days to take annual
physical inventories and to consolidate vacation periods for certain of the
Company's employees. In addition, the second quarter of the Company's fiscal
year (October through December) is generally the highest sales period for the
Company's subsidiary, Petals.
Year 2000 Compliance
Prior to the end of 1999, the Company completed a full evaluation of its
Year 2000 compliance needs with respect to its financial computer systems and
spent approximately $200,000 on consulting service to meet those needs. The
Company did not experience any material disruptions in operations involving the
transition of dates from 1999 to 2000 and was fully Year 2000 compliant by such
time. To date, the Company has not experienced related problems among third
parties upon which it relies, including its suppliers and customers. If
unforeseen circumstances do arise, however, the foregoing factors, individually
or in the aggregate, could materially adversely affect the Company's operating
results and could make comparison of historic operating results and balances
difficult or not meaningful.
Forward Looking Statements
When used in this Quarterly Report on Form 10-QSB, 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.
15
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities
In December 1999, the Company acquired all of the outstanding capital
stock of Concepts 4, Inc., a company that employees interior designers,
architects and merchandisers to the hospitality industry ("Concepts 4"). On
March 21, 2000, the Company delivered 2,434,197 Class A Shares to the former
shareholders of Concepts 4. Such securities are being held in escrow until March
10, 2001. If such securities are worth less than $3,387,252.60 on March 10,
2001, the Company will issue to the shareholders additional shares equal to the
amount of shortfall and the shares will be released from escrow. If such
securities are worth more than $3,387,252.60, the shareholders will return to
the Company a number of shares equal to the amount of the excess. The Company
may repurchase these securities for $3,105,231.80 from March 10, 2000 until
September 10, 2000 and thereafter until March 10, 2001 for $3,387,252.60.
In April 2000, the Company released 763,561 Class A Shares from the escrow
previously established in connection with the Company's acquisition of Model
Home Interiors, Inc. ("MHI"). During the first year following the acquisition,
MHI achieved certain threshold criteria established at the time of the
transaction resulting in the delivery of these contingent earn-out shares to the
former shareholders of MHI.
Item 5. Other Information.
On January 27, 2000, the Company announced that its Board of Directors
adopted a Rights Plan designed to protect the Company's stockholders in the
event of takeover action that would deny them the full value of their
investment. The terms of the Rights Plan provide for a dividend distribution of
one right for each share of common stock to holders of record at the close of
business on February 11, 2000. The rights will become exercisable only in the
event, with certain exemptions, an acquiring party accumulates 10 percent or
more of the Company voting stock, or if a party announces an offer to acquire 30
percent or more of such stock. The rights will expire on November 30, 2009. Each
right will entitle the holder to buy one one-hundredth of a share of a new
series of preferred stock at a price of $25.00. In addition, upon the occurrence
of certain events, holders of the rights will be entitled to purchase Interiors
stock or shares in an "acquiring entity" at half of the market value. The
Company is entitled to redeem the rights at $0.01 per right at any time until
the tenth day following the acquisition of a 10 percent position in the voting
stock.
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
- ---------- -----------
2.1 Stock Purchase Agreement dated October 27, 1999 by and among
Interiors, Inc., Jerry Howard, Dennis Darlington, and the Mamer
Family Trust dated October 1, 1997*
2.2 First Amendment to Stock Purchase Agreement dated December 15, 1999
by and among Interiors, Inc., Jerry Howard, Dennis Darlington and
the Mamer Family Trust dated October 1, 1997*
4.1 Secured Convertible Note Purchase Agreement dated as of September
30, 1999 between Limeridge LLC and Interiors, Inc.**
4.2 Secured Convertible Note dated as of September 30, 1999 in favor of
Limeridge LLC**
4.3 Common Stock Purchase Warrant dated as of September 30, 1999 in
favor of Limeridge LLC.**
10.1 Registration Rights Agreement dated as of September 30, 1999 between
Limeridge LLC and Interiors, Inc.**
10.2 Security Agreement dated as of September 30, 1999 between Limeridge
LLC, Interiors, Inc. and Petals, Inc.**
11 Computation of Earnings per Share
27 Financial Data Schedule
* Incorporated by reference to Current Report on Form 8-K filed with the
Commission on December 29, 1999;
** Incorporated by reference to Annual Report on Form 10-KSB for the year
ended June 30, 1999 filed on October 13, 1999;
(b) Reports on Form 8-K
Form 8-K/A filed February 28, 2000 relating to the acquisition of Concepts 4,
Inc. by the Company.
17
<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 15, 2000 By: /s/ Max Munn
--------------------------------------
Max Munn
Chairman, President and Chief
Executive Officer
May 15, 2000 By: /s/ Robert J. Conologue
--------------------------------------
Robert J. Conologue
Chief Financial and Principal
Accounting Officer
18
Exhibit 11
Interiors, Inc.
Computation of Weighted Average Number of Shares
Outstanding for the nine months ended March 31, 2000
<TABLE>
<CAPTION>
Class A &
Class B Weighted Weighted
Common Basic Diluted
(000) (000) (000)
---------- --------- ---------
<S> <C> <C> <C>
Total Common Shares Outstanding at June 30, 1999 32,629
Escrow Shares at June 30, 1999 (82)
Class A Common and Class B Common for EPS at June 30, 1999 32,547 32,547 32,547
Additional Common Shares 5,091 1,714 1,714
Total Common Shares Outstanding at March 31, 2000 37,720
Escrow Shares at March 31, 2000 (82)
Class A Common and Class B Common for EPS at March 31, 2000 37,638 34,261 34,261
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Income in the company's Form
10-Q for the nine months ending March 31, 2000 and is qualified in its
entirety by reference to such consolidated financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUN-30-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,166,463
<SECURITIES> 0
<RECEIVABLES> 20,298,738
<ALLOWANCES> (1,459,315)
<INVENTORY> 22,885,886
<CURRENT-ASSETS> 6,567,016
<PP&E> 12,624,120
<DEPRECIATION> 1,890,605
<TOTAL-ASSETS> 115,597,002
<CURRENT-LIABILITIES> 42,324,137
<BONDS> 0
0
8,557
<COMMON> 37,765
<OTHER-SE> 40,383,807
<TOTAL-LIABILITY-AND-EQUITY> 115,595,002
<SALES> 127,890,757
<TOTAL-REVENUES> 127,890,757
<CGS> 77,365,250
<TOTAL-COSTS> 47,236,836
<OTHER-EXPENSES> 150,124
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,686,576
<INCOME-PRETAX> (1,548,029)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,691,143)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,691,143)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
