SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark one)
|X| Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934
For the quarterly period ended September 30, 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 November 13, 2000, the
registrant had 56,384,834 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 Statements
Consolidated Balance Sheets as of September 30, 2000 and June 20, 2000 . 1
Consolidated Statements of Operations for the Three Months Ended
September 30, 2000 and 1999 .......................................... 2
Consolidated Statement of Stockholders' Equity for the Three Months
Ended September 30, 2000 ............................................. 3
Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2000 and 1999 .......................................... 4
Notes to Consolidated Financial Statements ............................. 5-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................ 10-13
PART II OTHER INFORMATION
Item 2. Changes in Securities ......................................... 14
Item 5. Other Information ............................................. 14
Item 6. Exhibits and Reports on Form 8-K .............................. 14
<PAGE>
PART I
FINANCIAL INFORMATION
Interiors, Inc.
Consolidated Balance Sheets
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
(Unaudited)
September 30, June 30,
2000 2000
------------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ................................................................. $ 4,317 $ 6,229
Accounts receivable, net of reserves of $2,132 and $2,351
at September 30 and June 30, respectively ............................................... 21,008 18,069
Inventories ............................................................................... 26,948 23,324
Other current assets ...................................................................... 5,163 3,359
--------- ---------
Total current assets .................................................................. 57,436 50,981
--------- ---------
Property and Equipment, net ................................................................. 13,614 13,509
Goodwill, net ............................................................................... 37,490 37,748
Other Assets, net ........................................................................... 2,805 2,989
--------- ---------
Total assets .......................................................................... $ 111,345 $ 105,227
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current maturities of long-term debt .................................... $ 42,851 $ 38,518
Accounts payable .......................................................................... 17,841 16,939
Accrued liabilities ....................................................................... 19,180 17,104
--------- ---------
Total current liabilities ............................................................. 79,872 72,561
--------- ---------
Long-Term Debt .............................................................................. 4,720 4,961
Other Long-Term Liabilities ................................................................. 3,997 3,974
Stockholders' Equity:
Preferred stock, $.01 par value, 5,300,000 shares authorized:
Series A Redeemable Convertible Preferred Stock, $.01 par value, 2,870,000
shares authorized, 836,492 and 850,802 shares issued and outstanding at
September 30 and at
June 30, respectively ................................................................. 8 9
Series B Redeemable Convertible Preferred Stock, $.01 par value, 200,000 shares
authorized, 200,000 shares issued and outstanding at September 30 and June 30,
respectively .......................................................................... 2 2
Class A common stock, $.001 par value, 60,000,000 shares authorized, 43,362,390 and
37,271,457 shares issued and outstanding at September 30 and June 30, respectively ...... 43 37
Class B common stock, $.001 par value, 2,500,000 shares authorized, 2,455,000 shares issued
and outstanding at September 30 and at June 30, respectively ............................ 2 2
Treasury stock, at cost, 45,400 shares at September 30 and June 30, respectively .......... (41) (41)
Accreted Dividends on Series B Redeemable Convertible Preferred Stock ..................... 2,000 2,000
Additional paid-in-capital ................................................................ 63,338 63,343
Accumulated deficit ....................................................................... (39,634) (38,659)
Notes receivable .......................................................................... (2,962) (2,962)
--------- ---------
Total stockholders' equity ............................................................ 22,756 23,731
--------- ---------
Total liabilities and stockholders' equity .......................................... $ 111,345 $ 105,227
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE>
Interiors, Inc.
Consolidated Statements of Operations
(amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
2000 1999*
-------- --------
<S> <C> <C>
Net Sales .................................................................. $ 41,414 $ 35,640
Cost of Goods Sold ......................................................... 25,076 22,045
-------- --------
Gross profit ............................................................... 16,338 13,595
Selling, General, and Administrative Expenses .............................. 14,691 12,873
-------- --------
Income from operations ..................................................... 1,647 722
-------- --------
Other Expenses (Income):
Interest expense ......................................................... 2,384 836
Anticipated recovery on non-operating receivables and reduction of
reserve for loan guarantee ............................................. -- (250)
Minority interest ........................................................ -- (55)
-------- --------
Total other expenses ..................................................... 2,384 531
-------- --------
(Loss) income before provision for income taxes ............................ (737) 191
Provision for Income Taxes ................................................. 94 31
-------- --------
Net (Loss) Income .......................................................... $ (831) $ 160
======== ========
Earnings (Loss) Per Common Share:
Basic .................................................................... $ (.02) $ (.01)
Diluted .................................................................. $ (.02) $ (.01)
Weighted average number of shares used in computation of earnings per share:
Basic .................................................................... 41,857 32,858
Diluted .................................................................. 41,857 32,858
</TABLE>
* As restated, see Note 6
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
Interiors, Inc.
Consolidated Statement of Stockholders' Equity
For the three months ended September 30, 2000
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Series A Series B Class A Class B
Preferred Stock Preferred Stock Common Stock Common Stock
--------------- --------------- --------------- --------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 2000 851 $ 9 200 $ 2 37,271 $ 37 2,455 $ 2
Conversion of preferred stock
to common stock (15) (1) 43 1
Additional shares issued
regarding Model Home
acquisition 2,916 2
Additional shares issued
regarding Concepts 4
acquisition 3,132 3
Dividends declared on Series A
and B Preferred Stock
Net loss through
September 30, 2000
-------------------------------------------------------------------------------------------------------------
Balance September 30, 2000 836 $ 8 200 $ 2 43,362 $ 43 2,455 $ 2
=============================================================================================================
<CAPTION>
Additional*
Paid in Accumulated Treasury Note
Capital (Deficit) Stock Receivable Total
----------- ----------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance June 30, 2000 $ 65,343 $(38,659) $ (41) $ (2,962) $ 23,731
Conversion of preferred stock
to common stock
Additional shares issued
regarding Model Home
acquisition (2)
Additional shares issued
regarding Concepts 4
acquisition (3)
Dividends declared on Series A
and B Preferred Stock (144) (144)
Net loss through
September 30, 2000 (831) (831)
--------------------------------------------------------------------------------------------------
Balance September 30, 2000 $ 65,338 $(39,634) $ (41) $ (2,962) $ 22,756
==================================================================================================
</TABLE>
* Amounts reported in Additional Paid in Capital column includes the amounts
reported in accreted dividends on Series B Redeemable Convertible
Preferred Stock and Additional Paid in Capital on the accompanying
Consolidated Balance Sheets.
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
Interiors, Inc.
Consolidated Statements of Cash Flows
(amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
2000 1999
------- -------
<S> <C> <C>
Cash Flow From Operating Activities:
Net (loss) income ............................................................ $ (831) $ 160
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization ................................................ 1,306 1,409
Net book value of rental property disposed ................................... 348 598
Provision for losses on accounts receivable .................................. 86 (85)
Provision for inventory ...................................................... 68 --
Anticipated recovery on non-operating receivables and reduction of reserve for
loan guarantee ............................................................. -- (250)
Non-cash financing charge, including accretion of interest on acquisition
indebtedness ............................................................... 334 83
Provision for issuance of stock .............................................. -- 75
Minority interest in subsidiary .............................................. -- (54)
Changes In Assets and Liabilities:
Increase in accounts receivable, trade ..................................... (3,025) (1,865)
Increase in inventories .................................................... (3,692) (2,379)
Increase in prepaid expenses and other current assets ...................... (1,804) (689)
Increase in other assets ................................................... (248) (524)
Increase in accounts payable and accrued expenses .......................... 2,728 3,092
------- -------
Net cash used in operating activities ........................................ (4,730) (429)
------- -------
Cash Flow From Investing Activities:
Capital expenditures ......................................................... (1,274) (1,543)
------- -------
Net cash used in investing activities ........................................ (1,274) (1,543)
------- -------
Cash Flow From Financing Activities:
Borrowing from Foothill under revolving loans ................................ 4,691 --
Net proceeds from issuance of debt ........................................... -- 1,231
Repayments of debt and capitalized lease obligations ......................... (599) (2,542)
------- -------
Net cash provided by (used in) by financing activities ....................... 4,092 (1,311)
------- -------
Net decrease in cash ......................................................... (1,912) (3,283)
Cash, beginning of period .................................................... 6,229 6,910
------- -------
Cash, end of period .......................................................... $ 4,317 $ 3,627
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
Interiors, Inc.
Notes to Consolidated Financial Statements
September 30, 2000
1. Basis of Presentation
General
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
September 30, 2000 and the results of operations of the Company and its
subsidiaries for the three-month periods ended September 30, 2000 and 1999.
The Company's results of operations during the three months ended
September 30, 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-K for the fiscal year ended June 30, 2000.
Going Concern Matters
The accompanying consolidated financial statements have been
prepared on a going concern basis that contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As
reported in the Company's Annual Report on Form 10-K for the year ended June 30,
2000, the Company had net losses of $18,581,000 and $8,024,000 for the fiscal
years ended June 30, 2000 and 1999, respectively. The Company also had negative
operating cash flows of $4,294,000, $367,000 and $338,000 for the years ended
June 30, 2000, 1999 and 1998, respectively. In addition, as of September 30 and
June 30, 2000, the Company classified $35,072,000 and $30,772,000, respectively,
of its long term debt as current liabilities because of its failure to meet
certain requirements contained in the agreements governing these instruments.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
The primary factors contributing to the Company's $18,581,000 net
loss for the year ended June 30, 2000 were poor operating results at the
Company's West Coast decorative accessories businesses, which resulted in
$14,015,000 of the Company's net loss. Included in such loss is a $3,000,000
impairment of goodwill related to the anticipated sale of the lighting
businesses and $700,000 of other assets written down to net realizable value.
Also contributing to the net loss were significant reserves established against
inventory and receivables as well as costs associated with terminating the
employment of certain executives of the Company. For the three months ended
September 30, 2000, the West Coast operations reported a net loss of $238,000
compared to a net loss of $517,000, for the comparable period of 1999. Included
in the net loss for the quarter ended September 30, 1999 was the benefit of
$55,000 assigned to the minority interest.
Since June 30, 2000, the Company has made several significant
management changes both at the corporate level and the West Coast decorative
accessories businesses to provide more experienced leadership in a turnaround
environment. The Company also has a detailed operating recovery plan for each of
the West Coast decorative accessories businesses. In its operating plans for
fiscal year ending June 30, 2001, management plans to consolidate product lines
and aggressively reduce the number of SKU's and fixed costs associated with the
West Coast decorative accessories businesses. The transition of these businesses
from manufacturing to a more efficient sourcing operation is already underway.
Since June 2000, the headcount in these businesses has been reduced from 457 to
309 employees. In addition to the anticipated sale of the lighting businesses
previously mentioned, the sale of some or all of the other West Coast decorative
accessories businesses are being seriously considered.
The other significant factor contributing to the Company's net
losses for fiscal 2000 were the introduction of two new product brands
commencing in the third quarter fiscal 2000. Operating difficulties in
connection with this start up enterprise resulted in a net loss of $3,089,000.
In an effort to reduce its ongoing exposure to such expenses, the Company has
significantly reduced its plans and resources dedicated to these two new brands.
For the three months ended September 30, 2000, these brands had a net loss of
$361,000.
5
<PAGE>
At September 30, 2000 and June 30, 2000, the Company had $35,072,000
and $30,772,000, respectively, of long term debt, including its secured
convertible notes of $15,285,000 for both periods, bank lines of credit and
revolving loans $17,843,000 and $13,200,000, respectively, and bank term loans
of $1,944,000 and $2,287,000, respectively, classified as current liabilities
because the Company was not in compliance with certain requirements governing
these instruments. The Company has obtained a bank default waiver on its bank
lines of credit and revolving loans and bank term loans. However, while only the
secured convertible notes remain in default, the acceleration of such notes may
trigger the acceleration of the bank lines of credit and revolving loans and
bank term loans. The nature of the defaults on the notes relate to the failure
of certain securities to be covered by an effective registration statement by
September 30, 2000, the de-listing of the Company's securities from the Nasdaq
SmallCap Market and the failure to pay approximately $1,035,000 in accrued
interest as of September 30, 2000. In part, these defaults were caused by the
timing and effort necessary to have the Company's Registration Statement
declared effective by September 30, 2000 and the decrease in the Company's stock
price.
The Company is currently attempting to negotiate waivers from its
lenders relating to the requirements of these debt instruments. If unable to
obtain these waivers, the Company will attempt to cure its defaults as soon as
practicable. The Company is also aggressively pursuing more favorable mezzanine
financing by finding alternative financing arrangements or by renegotiating the
existing high interest rate secured convertible notes. In October 2000, the
Company converted an aggregate of $3,000,000 of its outstanding debt and Series
B Preferred Shares to common stock and is continuing to pursue the conversion of
other debt instruments to common stock in an effort to reduce its interest
expense. See Note 8 "Subsequent Events."
2. Debt.
In July 2000, the Company issued to Donald M. Landis a $2,000,000
promissory note due July 27, 2001 (the "Landis Note"). The note requires the
payment of monthly interest at 14%, accrues interest at 4% and is secured by the
assets of the Company. The note replaces two separate $1,000,000 promissory
notes with 24% and 16% interest rates previously issued to Mr. Landis and the
Landis Brothers Corporation, respectively. The note is personally guaranteed by
Mr. Munn, Chairman, President and Chief Executive Officer of the Company, and
his spouse.
In June 2000, the Company and Foothill Capital Corporation
("Foothill") entered into a Loan and Security Agreement (the "Foothill
Agreement") pursuant to which Foothill agreed to make revolving credit loans and
advances based on agreed upon percentages of eligible accounts receivable and
inventory of Artisan House, Inc., CSL, Model Home, Petals, Stylecraft, Troy,
Vanguard and Windsor (collectively with Interiors, the "Borrowers"). The credit
facility is a combination of revolving loans and two thirty-two (32) month term
loans. As of September 30, 2000 and June 30, 2000, total borrowings were
$21,159,000 and $16,859,000, respectively, of which $17,843,000 and $13,200,000,
respectively, represented borrowings under the revolving loans and $3,316,000
and $3,659,000, respectively, represented the borrowing under the term loans.
The interest rates on the revolving loans is prime plus 1.25% and on the term
loans is prime plus 1.50%. At September 30, 2000 and June 30, 2000, the prime
rate was 9.50% announced by Wells Fargo Bank. The credit facility contains
financial and other covenants, including minimum net worth, and earnings before
interest, income taxes and depreciation and amortization. The Company has
received a waiver from Foothill for defaults relating to its fiscal 2000
financial results. Borrowings under the credit facility are secured by
substantially all the assets of the Company, including accounts receivable and
inventory. This debt is in current liabilities because Foothill has the right to
accelerate this obligation in the event other debt obligations which are
currently in default were accelerated by other lenders.
3. Stockholders' Equity.
Due to a decrease in the price of the Class A Shares, during the
first quarter of fiscal 2001, the Company placed 2,915,951 and 3,164,321 Class A
Shares into escrow accounts established in connection with the Company's prior
years' acquisitions of Model Homes Interiors, Inc. ("Model Home") and Concepts
4, Inc. ("Concepts 4"), respectively.
6
<PAGE>
4. Earnings (Loss) Per Share.
Reconciliation between the numerators and denominators of the basic
and diluted EPS computations for net earnings for the quarters ended September
30, 2000, and 1999, respectively is as follows:
<TABLE>
<CAPTION>
(amounts in thousands,
except per share data)
-----------------------
Quarters ended September 30, 2000 1999
-------- --------
<S> <C> <C>
Numerator for basic earnings per share:
Net (loss) income ..................................... $ (831) $ 160
less:
Dividends on non-convertible preferred stock .......... (144) (125)
Accreted preferred dividends .......................... -- (500)
-------- --------
Net (loss) applicable to common stock ................. $ (975) $ (465)
======== ========
Denominator for basic earnings per share:
Weighted average shares common shares outstanding used
in the computation of per share earnings .............. 41,857 32,858
-------- --------
Weighted Average shares outstanding - basic ........... 41,857 32,858
-------- --------
Numerator for diluted earnings per share:
Net (loss) income ..................................... $ (831) $ 160
Less:
Dividends on non-convertible preferred stock .......... (144) (125)
Accreted preferred dividends .......................... -- (500)
-------- --------
Net income (loss) applicable to common stock .......... $ (975) $ (465)
======== ========
Denominator for diluted earnings per share:
Weighted Average shares outstanding - diluted ......... 41,857 32,858
-------- --------
Weighted Average shares outstanding - diluted ......... 41,857 32,858
-------- --------
Earnings (loss) per share:
Basic ................................................. $ (.02) $ (.01)
Diluted ............................................... (.02) (.01)
</TABLE>
Conversion of 836,492 Series A Preferred Shares and 200,000 Series B
Preferred Shares were not included for computation purposes since their effect
would be antidilutive. Also not included in the computation were options on
approximately 4.5 million shares since the exercise price was higher than the
market price of the Company's stock price.
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") were computed assuming there was no
potential dilution from the exercise of outstanding stock options, warrants and
other securities since the exercise price was higher than the market price. 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 Series C Preferred
Shares were redeemed by June 30, 2000.
7
<PAGE>
5. Supplemental Cash Flow Information.
<TABLE>
<CAPTION>
Three Months Ended
September 30,
(amounts in thousands)
----------------------
2000 1999
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest ....................................................................... $987 $713
Taxes .......................................................................... -- 9
Supplemental disclosure of non-cash items from financing activities:
Conversion of Series A Redeemable Convertible Preferred Stock to Class A Common
Stock ........................................................................ 1 --
Stock issuance for financing charges ........................................... -- 75
Supplemental disclosure of non-cash items related to acquisitions:
Issuance of common stock ................................................... 5 --
Supplemental disclosure of non-cash items from investing activities:
Issuance of common stock in connection with acquisitions ................... 5 --
</TABLE>
6. Operating Business Segment Information
During the second quarter of fiscal year 2000, the Company acquired
Concepts 4, Inc. ("Concepts 4") and began consolidating the financial results of
Decor Group, Inc.("Decor"). The Company generally manages its operation by
business unit, however, certain West Coast operations are managed
geographically. Set forth below is certain financial information for these
business segments:
<TABLE>
<CAPTION>
Habitat
Quarter Ended 9/30/2000 Stylecraft Petals APF West Coast Solutions Interiors Total
---------- ------ --- ---------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ................. $12,060 $ 8,883 $ 1,564 $ 9,957 $ 8,537 $ 413 $41,414
Gross profit .............. 3,137 4,848 715 3,556 3,889 193 16,338
Interest expense .......... 207 35 3 259 42 1,838 2,384
Depreciation / amortization 22 143 62 212 479 316 1,234
Amortization of goodwill .. 34 35 -- 139 73 -- 281
<CAPTION>
Habitat
Quarter Ended 9/30/1999 Stylecraft Petals APF West Coast Solutions Interiors Total
---------- ------ --- ---------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ................. $ 9,730 $ 7,967 $ 1,694 $12,824 $ 3,425 $ -- $35,640
Gross profit .............. 2,589 4,518 711 4,008 1,770 -- 13,596
Interest expense .......... 128 20 31 387 56 130 752
Depreciation/amortization . 24 138 62 241 466 261 1,192
Amortization of goodwill .. 33 33 -- 130 8 -- 204
</TABLE>
West Coast is comprised of the operations of Troy Lighting, Inc.
("Troy"), CSL Lighting Manufacturing, Inc. ("CSL"), Windsor Art, Inc.
("Windsor"), Vanguard Studios, Inc. ("Vanguard"), which was merged into Windsor
during the quarter ended September 30, 2000, and Decor. Habitat Solutions is
comprised of Concepts 4 and Model Homes Interiors, Inc. ("MHI").
Revenues for the business segments are from external sales.
Inter-segment sales totaled $90,000 and $0 in the quarters ended September 30,
2000 and 1999, respectively, and is reported under Interiors, which also
includes operating results of the rug and table top accessory businesses.
Inter-segment sales were not significant for any business segment.
Depreciation and amortization assigned to the business units
represents amounts applicable to fixed assets and other intangible assets
excluding goodwill which is presented separately.
8
<PAGE>
7. Restatement.
As reported in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000, the operating results for the quarter ended
September 30, 1999 have been restated from the amounts previously reported. The
restatement increased costs and expenses approximately $665,000 related to
higher expense accruals, accounts receivable reserves and acquisition related
adjustments.
8. Subsequent Events.
In October 2000, the Company released an aggregate of 4,842,003
Class A Shares from the escrow. On November 3, 2000, the Company deposited an
additional 2,419,100 shares into the escrow to secure future earnout obligations
owed to the former shareholders of Model Home.
On October 12, 2000, Seaside Partners, L.P. exercised the Series B
Warrant resulting in the issuance of 2,000,000 Class A Shares at $0.75 per
share. The exercise price of $1,500,000 was paid by the return to the Company of
150,000 Series B Preferred Shares held by Seaside. Seaside also converted its
remaining 50,000 Series B Preferred Shares having a liquidation value of
$500,000 and $213,485 in accrued dividends through October 11, 2000 into 303,610
Class A Shares at $2.35 per share. In addition, the Seaside note in the amount
of $1,000,000 principal amount and $9,863 in accrued interest through June 30,
2000 were converted into 4,039,452 Class A Shares at $0.25 per share. Until
March 31, 2001, Seaside has agreed not to sell, transfer, pledge, hypothecate or
otherwise convey these Class A Shares. In addition, Seaside has agreed to vote
such shares in support of the election of the nominees of Board of Directors as
long as Seaside Partners holds these Class A Shares.
On October 12, 2000, the Company and the former shareholders of
Concepts 4 amended the terms of the purchase agreement pursuant to which the
Company acquired all of the common stock of Concepts 4. Pursuant to the amended
terms, the Company is required to pay to the former shareholders $3,388,000 in
cash before December 10, 2000. In October 2000, the Company paid $1,387,526 of
this obligation. The Company also has future purchase price obligations
consisting of (a) a cash payment of $770,000 payable on December 15, 2000, (b) a
cash payment of $1,218,000 payable on December 15, 2001, (c) a cash payment of
$1,218,000 payable on December 15, 2002, and (e) a cash payment of $1,007,289
payable on March 10, 2003. Pursuant to the transaction, the Company also agreed
to pay the former shareholders up to $4,500,000 upon the attainment of certain
earnings goals by the Company. The amount, if any, will be determined by the
earnings of the Concepts 4 for the fiscal years 2000, 2001 and 2002. All
purchase price obligations of the Company can be satisfied by the delivery of
twelve month promissory notes bearing interest at 8% per annum and all earnout
obligations can be satisfied by the delivery of eighteen month promissory notes
bearing interest at 8% per annum.
The Company has also agreed to maintain an escrow account containing
Class A Shares in an amount sufficient to satisfy all purchase price and earnout
obligations relating to Concepts 4 as they become due under the terms of the
transaction. The former shareholders have agreed to vote such shares in support
of the election of the nominees of Board of Directors as long as the Company is
not in default under the amended purchase agreements. As of September 30, 2000,
the Company had delivered an aggregate of 7,545,886 Class A Shares into the
escrow account. The former shareholders have the option of removing Class A
Shares from the escrow account in an amount necessary to satisfy any outstanding
purchase price obligations or promissory notes delivered in connection
therewith.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
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.
During the second quarter of fiscal year 2000, the Company acquired
Concepts 4, Inc. ("Concepts 4") and began consolidating the financial results of
Decor Group, Inc.("Decor"). The Company generally manages its operation by
business unit, however, certain West Coast operations are managed
geographically. Set forth below is certain financial information for these
business segments:
<TABLE>
<CAPTION>
Habitat
Quarter Ended 9/30/2000 Stylecraft Petals APF West Coast Solutions Interiors Total
---------- ------ --- ---------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ................. $12,060 $ 8,883 $ 1,564 $ 9,957 $ 8,537 $ 413 $41,414
Gross profit .............. 3,137 4,848 715 3,556 3,889 193 16,338
Interest expense .......... 207 35 3 259 42 1,838 2,384
Depreciation / amortization 22 143 62 212 479 316 1,234
Amortization of goodwill .. 34 35 -- 139 73 -- 281
<CAPTION>
Habitat
Quarter Ended 9/30/1999 Stylecraft Petals APF West Coast Solutions Interiors Total
---------- ------ --- ---------- --------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ................. $ 9,730 $ 7,967 $ 1,694 $12,824 $ 3,425 $ -- $35,640
Gross profit .............. 2,589 4,518 711 4,008 1,770 -- 13,596
Interest expense .......... 128 20 31 387 56 130 752
Depreciation/amortization . 24 138 62 241 466 261 1,192
Amortization of goodwill .. 33 33 -- 130 8 -- 204
</TABLE>
West Coast is comprised of the operations of Troy Lighting, Inc.
("Troy"), CSL Lighting Manufacturing, Inc. ("CSL"), Windsor Art, Inc.
("Windsor"), Vanguard Studios, Inc. ("Vanguard"), which was merged into Windsor
during the quarter ended September 30, 2000, and Decor. Habitat Solutions is
comprised of Concepts 4 and Model Homes Interiors, Inc. ("MHI").
Revenues for the business segments are from external sales.
Inter-segment sales totaled $90,000 and $0 in the quarters ended September 30,
2000 and 1999, respectively, and is reported under Interiors, which also
includes operating results of the rug and table top accessory businesses.
Inter-segment sales were not significant for any business segment.
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Depreciation and amortization assigned to the business units
represents amounts applicable to fixed assets and other intangible assets
excluding goodwill which is presented separately.
Results of Operations
Comparison of Three Months Ended September 30, 2000 and 1999
Net sales for the three months ended September 30, 2000 were
$41,414,000 as compared to $35,640,000 for the same period in 1999, an increase
of $5,774,000 or 16.2%. The increase in net sales was primarily due to the
Company's acquisitions of Concepts 4 in December 1999, which added $5,155,000 in
net sales and the consolidation of Decor beginning in October 1999, which added
$1,138,000 in net sales.
Also, contributing to the increase in sales were increases in net
sales of Stylecraft, which increased $2,330,000 or 23.5% and Petals, which
increased $916,000 or 11.5%. Offsetting these higher sales was a decline in the
net sales of the West Coast decorator accessory operations, which decreased
$4,005,000 or 31.2%. The Company is the process of selling certain of its
lighting businesses and exploring the sale of other business units, including
some of its West Coast decorative accessories businesses. The Company believes
these businesses are not core to its strategic plan to become the premier,
national single-source provider of decorative accessories to the home
furnishings industry.
Cost of goods sold for the three months ended September 30, 2000
increased to $25,076,000 from $22,045,000 for the same period in 1999, an
increase of $3,031,000. 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 acquisition of Concepts 4 and the
consolidation of Decor. As a percentage of net sales, cost of goods sold for the
three month period ended September 30, 2000 improved to 60.5% from 61.9% for the
same period of the prior year. The increase in profit margin resulted primarily
from the acquisition of additional businesses with alternative cost structures.
Selling, general and administrative expenses increased to
$14,691,000 for the three months ended September 30, 2000 as compared to
$12,873,000 for the same period in 1999, an increase of $1,818,000. 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 acquisition of Concepts 4, effective in December 1999, and the
consolidation of Decor effective in October 1999. Partially offsetting these
higher expenses was a decrease in the expenses of the West Coast operations. The
lower West Coast selling, general and administrative expenses are primarily due
to the lower net sales discussed above and aggressive cost reductions, including
headcount reductions. As a percentage of net sales, selling, general and
administrative expenses for the three-month period ended September 30, 2000
decreased to 35.5% from 36.1% for the same period of the prior year. This
decrease primarily resulted from the higher net sales and aggressive cost
reductions.
Interest expense increased to $2,384,000 for the three months ended
September 30, 2000 from $836,000 for the same period in 1999 principally due to
financing activities associated with the Company's acquisitions, the higher
interest rates primarily due to the borrowings under the Limeridge and Endeavor
agreements and the accretion of interest on the Concepts 4 deferred purchase
obligations.
Other income reported for the three-month period ended September 30,
1999 of $305,000 included $100,000, which resulted from the Company's reduction
of a guaranty reserve previously established for its guaranty of indebtedness of
Decor. In addition, $150,000 of other income resulted the Company's reduction of
a reserve established for its receivable owed from Photo-To-Art, Ltd. In
addition the Company recognized a benefit of $55,000 for the allocation of
losses of CSL to the minority interest. As of June 30, 2000, there was no
availability to allocate additional losses to the minority owners of CSL,
resulting in the Company's having to absorb a significantly higher portion of
the total loss for the quarter ended September 30, 2000.
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 borrowings under
the Foothill revolving loan agreement and from operations. At September 30,
2000, the Company had a working capital deficit
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of $22,436,000, of which $35,072,000 represents debt classified as current
because the Company was not in compliance with certain requirements governing
these instruments. .
Net cash used in operating activities during the quarters ended
September 30, 2000 and 1999 was $4,730,000 and $429,000, respectively. The
higher net cash usage during the quarter ended September 30, 2000 compared to
the quarter ended September 30, 1999, is principally due to increases in
receivables and inventory caused by normal seasonal activity. In addition, the
quarter ended September 30, 2000 had a net loss of $831,000 compared to net
income of $160,000 for the quarter ended September 30, 1999.
Net cash used in investing activities during the quarters ended
September 30, 2000 and 1999 was $1,274,000 and $1,543,000, respectively, for
capital expenditures.
Net cash provided by (used in) financing activities during the
quarters ended September 30, 2000 and 1999 was $4,092,000 and ($1,311,000),
respectively, representing the net borrowing (repayment) during the respective
periods.
On October 12, 2000, the Company and the former shareholders of
Concepts 4 amended the terms of the purchase agreement pursuant to which the
Company acquired all of the common stock of Concepts 4. Pursuant to the amended
terms, the Company is required to pay to the former shareholders $3,388,000 in
cash before December 10, 2000. In October 2000, the Company paid $1,387,526 of
this obligation. The Company also has future purchase price obligations
consisting of (a) a cash payment of $770,000 payable on December 15, 2000, (b) a
cash payment of $1,218,000 payable on December 15, 2001, (c) a cash payment of
$1,218,000 payable on December 15, 2002, and (e) a cash payment of $1,007,289
payable on March 10, 2003. Pursuant to the transaction, the Company also agreed
to pay the former shareholders up to $4,500,000 upon the attainment of certain
earnings goals by the Company. The amount, if any, will be determined by the
earnings of the Concepts 4 for the fiscal years 2000, 2001 and 2002. All
purchase price obligations of the Company can be satisfied by the delivery of
twelve month promissory notes bearing interest at 8% per annum and all earnout
obligations can be satisfied by the delivery of eighteen month promissory notes
bearing interest at 8% per annum.
The Company has also agreed to maintain an escrow account containing
Class A Shares in an amount sufficient to satisfy all purchase price and earnout
obligations relating to Concepts 4 as they become due under the terms of the
transaction. The former shareholders have agreed to vote such shares in support
of the election of the nominees of Board of Directors as long as the Company is
not in default under the amended purchase agreements. As of September 30, 2000,
the Company had delivered an aggregate of 7,545,886 Class A Shares into the
escrow account. The former shareholders have the option of removing Class A
Shares from the escrow account in an amount necessary to satisfy any outstanding
purchase price obligations or promissory notes delivered in connection
therewith.
During the past year, the Company has conducted an active
acquisition program using both cash, stock and debt as consideration in its
transactions. In order to accomplish additional acquisitions, the Company
anticipates that it will required to pay additional cash, issue additional
shares of stock and/or incur additional debt.
Subject to the negotiation of waivers of the current defaults under
debt instruments, the Company believes that its current cash, cash flow from
operations, and available lines of credit will enable it to meet its working
capital and capital expenditure requirements through the first quarter of fiscal
2002.
Impact of Inflation
The Company does not believe that inflation has had a material
adverse effect on sales or income during the past several years. Increases in
supplied and other operating costs could adversely effect the Company's
operations, however, the Company believes that it should be able to increase
prices to offset increases in cost of goods sold or other operating costs.
Sales Variations
The Company's net sales are not generally subject to seasonal
fluctuations experienced by certain retailers, however, the Company does
experience some minor variations in the level of sales during the year. The
first quarter of the Company's fiscal year (July through September) is generally
the Company's slowest sales period due to the fact that the summer is typically
when retailers are in their slowest purchasing period. During this time, certain
of the Company's
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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. As a result, the Company's liquidity is dramatically
improved during this period.
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 services 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
January 1, 2000. 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-Q, the words "may,"
"will," "should," "expect," "believe," "anticipate," "continue," "estimate,"
"project," "intend" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act regarding events, conditions and
financial trends that may affect the Company's future plans of operations,
business strategy, results of operations and financial condition. The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements pursuant to the safe harbor established in the Private Securities
Litigation Reform Act of 1995. Prospective investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such forward-looking statements should, therefore, be considered in
light of various important factors, including those set forth herein and others
set forth from time to time in the Company's reports and registration statements
filed with the Securities and Exchange Commission. The Company disclaims any
intent or obligation to update such forward-looking statements.
In particular, in connection with certain past acquisitions the
Company has disclosed expected additions to its revenues from such transactions.
Such revenue forecasts are forward-looking information and as such are
inherently subject to risk and uncertainty. The Company has also discussed
management and other changes expected to improve operating performance on the
West Coast, discussions with lenders that are anticipated to result in executed
default waivers, and potential sales of businesses, all of which are
forward-looking in nature. Important factors, including those set forth below,
could cause the Company's actual results to differ materially and adversely from
its projections or expectations. In addition, additional revenues from
transactions could be offset by a diminution of other revenues. Accordingly,
there can be no assurance that the Company will have the other expected results
or achieve the projected revenues or, if attained, what effect such revenues or
results 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.
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PART II
OTHER INFORMATION
Item 2. Changes in Securities
Due to a decrease in the price of the Class A Shares, on August 10, 2000
and September 7, 2000, the Company deposited 1,264,321 and 1,900,000,
respectively, Class A Shares into an escrow account established in connection
with the Company's acquisition of Concepts 4.
Due to a decrease in the price of the Class A Shares, on August 25,
2000 and September 15, 2000, the Company deposited 2,162,837 and 753,114,
respectively, Class A Shares into an escrow account established in connection
with the Company's acquisition of Model Home. In October 2000, the Company
released an aggregate of 4,842,003 Class A Shares from the escrow. On November
3, 2000, the Company deposited an additional 2,419,100 shares into the escrow to
secure future earnout obligations owed to the former shareholders of Model Home.
Item 5. Other Information.
On October 12, 2000, Seaside Partners, L.P. exercised the Series B Warrant
resulting in the issuance of 2,000,000 Class A Shares at $0.75 per share. The
exercise price of $1,500,000 was paid by the return to the Company of 150,000
Series B Preferred Shares held by Seaside. Seaside also converted its remaining
50,000 Series B Preferred Shares having a liquidation value of $500,000 and
$213,485 in accrued dividends through October 11, 2000 into 303,610 Class A
Shares at $2.35 per share. In addition, the Seaside note in the amount of
$1,000,000 principal amount and $9,863 in accrued interest through June 30, 2000
were converted into 4,039,452 Class A Shares at $0.25 per share. Until March 31,
2001, Seaside has agreed not to sell, transfer, pledge, hypothecate or otherwise
convey these Class A Shares. In addition, Seaside has agreed to vote such shares
in support of the election of the nominees of Board of Directors as long as
Seaside Partners holds these Class A Shares.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
----------- -----------
2.1 Second Amendment to Stock Purchase Agreement among Interiors,
Inc. and Concepts 4, Inc., et al.
10.1 Conversion Agreement between Seaside Partners L.P. and
Interiors, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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.
November 14,2000 By: /s/ Max Munn
----------------------------------------
Max Munn
President and Chief Executive Officer
November 14, 2000 By: /s/ Robert J. Conologue
----------------------------------------
Robert J Conologue
Executive Vice President and
Chief Financial Officer
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