SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended: June 30, 2000 OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _________ to _________
Commission file number 0-24352
INTERIORS, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 13-3590047
---------------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
320 Washington Street
Mt. Vernon, New York 10553
---------------------------------------- ------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (914) 665-5400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, $.001 par value per share
-----------------------------------------------
(Title or Class)
Series A 10% Cumulative Convertible Preferred Stock, $.01 par value per share
-----------------------------------------------------------------------------
(Title or Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, computed by reference to the closing price
of such stock on October 11, 2000, was approximately $12,568,183.
As of October 11, 2000, the registrant had outstanding 45,142,524 shares
of Class A Common Stock, $.001 par value per share ("Class A Shares"), and
2,455,000 shares of Class B Common Stock, $.001 par value per share ("Class B
Shares").
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement of the registrant, which is to
be filed with the Securities and Exchange Commission (the "Commission") within
120 days of the end of the fiscal year, are incorporated by reference into Part
III of this Annual Report on Form 10-K.
<PAGE>
INTERIORS, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Description of Business............................................ 1
Item 2. Properties......................................................... 12
Item 3. Legal Proceedings.................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders................ 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 13
Item 6. Selected Financial Data........................................... 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 22
Item 8. Financial Statements and Supplementary Data....................... 22
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.............................. 22
PART III
Item 10. Directors and Executive Officers of the Registrant................ 23
Item 11. Executive Compensation............................................ 23
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 23
Item 13. Certain Relationships and Related Transactions.................... 23
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K............ 23
<PAGE>
PART I
Item 1. Business.
Overview
Interiors, Inc., a Delaware corporation ("Interiors" or the
"Company"), is a designer, manufacturer and marketer of a broad range of
decorative accessories for the residential, commercial, institutional and
contract markets, including museum-quality traditional and contemporary picture
frames, framed wall mirrors, oil paintings and prints under glass, portable and
installed lighting and lighting fixtures, sculptures and decorative tabletop
accessories and silk floral and tree arrangements. Interiors primarily markets
its products to retailers in the home furnishings industry, including furniture
stores, home furnishings centers, catalog retailers, home improvement centers,
department stores and lighting retailers. The Company's silk flower and tree
arrangements, as well as other accessories, are sold directly to consumers
through a direct mail catalogue and the internet. The Company also provides
design, merchandising and leasing services to the homebuilding and hospitality
industries. 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
categories.
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 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.
From 1994 through early 1998, Interiors' principal operating
division was A.P.F. Master Framemakers, a manufacturer of antique and
contemporary picture and mirror frames for museums, art galleries, interior
designers, collectors, frame retailers, and upscale furniture and department
stores. Since that time, the Company has been rapidly acquiring additional
businesses in the decorative accessories industry significantly expanding its
product lines. As a result of these transactions, the Company's business now
includes the design, manufacture and distribution of a broad range or decorative
accessories.
Interiors was originally incorporated in New York in October 1990
under the name A.P.F. Holdings, Inc., which subsequently merged with and into
Interiors, Inc., a Delaware corporation, in March 1994. A.P.F. Holdings, Inc.
was formed for the purpose of acquiring the assets of the picture framing
business previously operated by a subsidiary of Collectors' Guild International,
a New York corporation formed in 1976.
The Company's principal executive offices are located at 320
Washington Street, Mt. Vernon, New York 10553; its telephone number is (914)
665-5400.
Industry
According to the most recent bi-annual Universe Study conducted by
Home Accents Today, domestic retail sales of home furnishings accessories
totaled $54 billion in 1998. The two categories most relevant to the Company are
wall decor and portable lamps, which together accounted for 21.3% of total
industry sales, or $11.5 billion, in 1998. Wall decor consists of three
segments: framed art, framed mirrors and miscellaneous wall objects such as
metal sculpture. The Company has strong product lines in each of these
categories. The market for wall decor has been growing rapidly in recent years.
Retail sales of wall decor, which were $3.8 billion in 1997, increased by 13% in
1998 to $4.3 billion. The bi-annual Home Accents Today Universe Study estimated
growth for 1999 at 10%, resulting in anticipated total sales in excess of $4.8
billion in 1999. This represents a compound annual growth rate of 11.5% since
1997.
The growth in the decorative accessory industry is being driven in
part by demographic changes. The "baby boomer" generation, which represents the
largest population group in the country, is entering their 40s and 50s, their
peak earnings years. The baby boomers have traded up from starter homes into
their dream homes, and are spending more on home
<PAGE>
improvements, additions, and furnishings to make their homes more luxurious.
Management believes that Interiors' products appeal to the tastes and quality
expectations of the baby boomer generation.
The manufacturing sector of the decorative accessory industry is
highly fragmented and is composed predominately of small companies with limited
product lines. Over the last 20 years, the retail distribution channels for
their products has shifted from local independent retailers to large, national
and regional retailers in the mass and specialty markets that strive to attain
superior economics of scale and marketing leverage. The Company believes that
the manufacturing sector of the industry is under pressure to consolidate from
these large retailers. These retailers seek increased "single-sourcing" of
inventory purchases, particularly in product categories that do not account for
a significant percentage of their sales. Single-sourcing allows the retailers to
reduce distribution and related expenses, including styling costs associated
with coordinating related products from multiple vendors. Additionally, these
retailers are placing additional burdens on their suppliers by insisting that
suppliers communicate via electronic data interchange ("EDI"), hold inventory to
ensure quick delivery, and drop-ship inventory to each store in the retailer's
chain and, in many instances, directly to the retailer's customers.
The Company also believes that these retailers give preference to
vendors offering coordinated accessories. Coordinated accessories help satisfy
the consumer's preference for one-stop-shopping, whereby the consumer can
purchase furniture, floor coverings, window treatments and accessories from one
retailer in coordinated styles. Consumers find this approach preferable to
attempting to achieve consistent styling of accessories from several retailers.
Management believes that compliance with the demands of retailers and consumers
is very costly for many small manufacturers of decorative accessories. As a
result, the Company believes that many of these manufacturers are receptive to
being acquired by larger manufacturers such as the Company.
The Company, through the acquisition and consolidation of
manufacturers and distributors of decorative accessories, as well as internal
growth, intends to capitalize on both the fragmented nature of the manufacturing
sector of this industry and changing demands of retailers and consumers.
Management believes that increasing the breadth and depth of its product
offerings will enhance the Company's ability to expand its wholesale operations
as it develops the capability to market "whole room" packages of decorative
accessories to retailers in the mass and specialty markets. In addition,
management believes that the operations of acquired businesses can be
consolidated into regional operating units with centralized management,
eliminating operating and management redundancies, which should help Interiors,
improve its cash flow and operating margins. There can be no assurance, however,
that Interiors will be able to successfully integrate the operations, facilities
and management of acquired businesses or realize any benefits from any such
acquisitions.
Acquisition and Expansion Strategy
The Company's strategic objective since 1998 has been to become the
premier, national single-source provider of decorative accessories to the home
furnishings industry. Key elements of the Company's strategy to accomplish this
objective have been to (i) acquire independent manufacturers of decorative
accessories; (ii) integrate the operations of its operating divisions and
capture economies of scale; (iii) expand the Company's product lines through
acquisition and internal growth; and (iv) expand into new markets. Although the
Company successfully acquired nine business units since March 1998, it has
experienced difficulty in accomplishing the other key elements of its expansion
strategy. Accordingly, the Company has incurred significant net losses for the
fiscal years ended June 30, 2000 and 1999. Subject to improvement in the
Company's financial condition and results of operation in future periods, the
Company will seek to continue its acquisition and expansion strategy. See
"Certain Additional Factors to Consider."
Continue Growth Through Acquisitions. The Company has rapidly
established a national presence and critical customer mass by acquiring several
established, well-regarded companies which design, manufacture and distribute
decorative accessories in selected regions throughout the United States. Subject
to the Company's ability to raise additional capital, the Company intends to
continue its acquisition strategy by acquiring additional manufacturers of
decorative accessories in order to deepen and broaden its market presence and to
expand its product offerings. Given the increasing pressure from large retailers
to consolidate, the Company believes that smaller manufacturers of decorative
accessories will continue to be attracted to, and benefit from, the growth
opportunity provided by the Company. As part of its long-term growth strategy,
management intends to generally pursue companies with annual revenues ranging
from $5 million to $25 million, a moderate- to premium-priced product line, a
positive reputation in the marketplace and profitable operations. The Company
has only had preliminary discussions and currently has no agreement to acquire
any potential acquisitions candidates.
Integrate Operations and Capture Economies of Scale. To support the
growth of its business, the Company is attempting to implement a program
designed to maximize operating efficiencies by reducing manufacturing costs,
increasing
2
<PAGE>
inventory turnover and enhancing its management information systems. As a result
of this program, the Company hopes to integrate and optimize the operations of
the companies it acquires by (i) consolidating operations into operating units
with centralized management, (ii) providing the acquired companies with material
requirements planning software, which better determines inventory requirements,
(iii) linking ordering systems through EDI, which permits the computerized
receipt of customer orders, billing and exchange of information with customers,
and (iv) providing the acquired companies with the Company's integrated support
services. To date, the Company has had only limited success in being able to
integrate its management information systems. This situation has created
difficulty for the Company's management in its ability to manage a diverse group
of geographically dispersed business units. Management believes that the
eventual centralization of these functions will lead to increased sales, better
product design, and greater efficiency in manufacturing, shipping and inventory
management. The Company also has significant opportunities for cross-marketing
the products of its various operating units.
Expand Product Lines. Interiors continuously introduces new products
to complement new trends in interior design and decorating. As the Company
grows, management intends to centralize and coordinate product design throughout
the Company. Management believes that the Company's acquisitions and integration
activities will also enhance the Company's ability to design and manufacture new
products which are coordinated with products from the Company's other product
lines. Although the Company does not currently have any licensing arrangements
with nationally recognized designer labels, the Company intends to pursue
licensing arrangements by seeking and forming strategic alliances with designer
labels (i.e., product brands with national or international recognition) which
are expected to either (i) grant the Company the right to develop, market and
sell certain of the Company's products under the designer label's brand name or
(ii) grant a designer label the right to market and sell certain of the
Company's products under the designer label's brand name. These types of
licensing arrangements would be expected to bolster the Company's product
development efforts.
Expand Into New Markets. The Company intends to expand the
distribution of its products into new domestic markets and the international
market. Initially, the Company intends to focus on those markets in which it
already has achieved some market penetration or for which access is facilitated
through existing distribution channels and relationships. Currently, the Company
principally sells home furnishings and accessory items through the domestic
wholesale market and, to a more limited extent, the domestic retail market. The
Company intends to expand its business by increasing the Company's retail sales
through direct marketing and catalogue sales through its Petals subsidiary, and
to include design, merchandising and leasing services to the hospitality and
assisted living industries through its subsidiary, Habitat Solutions, Inc.
3
<PAGE>
Acquisition History
Set forth below is a list of the Company's acquisitions within the
past three fiscal years along with the date of acquisition, trade or brand names
and product categories related to each acquired company, and the approximate
amount of aggregate annual sales for the businesses acquired in the full year
prior to acquisition.
<TABLE>
<CAPTION>
Approximate
Date Company Trade or Brand Names Product Categories Annual Sales
---- ------- -------------------- ------------------ ------------
<S> <C> <C> <C> <C>
March 1998 Vanguard Studios, Inc. Serengeti Framed mirrors, $13.4 million
International; paintings and prints;
Vanguard Studios; Lee lighting products;
Reynolds sculptures and
tabletop accessories
March 1998 Artmaster Studios, Inc. Renaissance; Artmaster Framed mirrors, $6.8 million
Studios paintings and prints;
lighting products
July 1998 Windsor Art, Inc. Windsor; Dolbi Cashier Framed paintings and $12.7 million
prints; framed mirrors
August 1998 Troy Lighting, Inc. Troy-Lite Lighting products $12.5 million
February 1999 Model Home Interiors, Model Home Interiors Interior design and, $12.3 million
Inc. merchandising
February 1999 Stylecraft Lamps, Inc. Stylecraft Lamps Lighting products $25.4 million
March 1999 CSL Lighting Creative Systems Lighting products $12.3 million
Manufacturing, Inc.(1) Lighting, Ortek
March 1999 Petals, Inc. Petals Silk floral and tree $42.0 million
arrangements
December 1999 Concepts 4, Inc. Concepts 4 Architectural design $20.0 million
and merchandising
</TABLE>
------------
(1) The Company acquired a 51% interest in CSL.
Possible Sale of Businesses
Although the Company plans to continue its growth through strategic
acquisitions, the Company is also exploring the sale of certain business units,
including some of its west coast decorative accessories group and its design
merchandising and leasing business. That 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.
As of October 2000, the Company has only had preliminary discussions
with potential purchasers and currently has no agreement to sell any business
unit. There can be no assurance that any of these discussions will ultimately
lead to the consummation of the sale of any business or similar transaction.
Products
The Company manufactures and distributes an assortment of decorative
accessories for the home furnishing industry, including picture frames and
framed mirrors, paintings and prints, sculptures and tabletop accessories,
portable and fixed lighting products and artificial flower and tree
arrangements. The Company's products, brand names and price positioning are
described below.
Picture Frames and Framed Mirrors. Interiors is a leader in
producing high-end, custom frames for paintings, prints and mirrors. The Company
also restores frames. The Company's frames are primarily reproductions of
antique frames made to look as distressed as genuine frames from that period
would look today. Customers select any combination of elements
4
<PAGE>
from the Company's library of approximately 1,500 elements to generate the frame
style best suited for the picture or mirror and/or their decorating needs. These
elements have been collected over decades, mostly through the Company's
restoration activities, and primarily represent features from antique frames,
many of which cannot be replicated. The Company's skilled craftspeople hand
produce the frame based on the elements selected by the customer. Frame prices
range from $300 to $52,000, but more typically are between $800 and $4,000.
Picture frames and mirror frames are made with the same tools, dies
and molds. Mirror frames differ from picture frames in that mirror frames are
constructed in the traditional design, with a top that is different from the
sides and bottom. In comparison, picture frames have the same design throughout
the four sides of the frame. The Company's mirror prices range from $1,000 to
$8,000. The Company's picture frames and framed mirrors are sold primarily under
the trade name of A.P.F. Master Framemakers.
Framed Paintings and Prints. The Company produces framed
hand-painted oil paintings on artist canvas and framed paper prints. The
Company's line of framed hand-painted oil paintings is available in over 500
designs. These large canvases come in a variety of subjects including floral,
abstracts, landscapes, seascapes, and figurative subjects. The Company also
sells prints, both proprietary and non-proprietary, that are framed and placed
under glass. Frames and mats for both products are carefully selected to
complement current trends in interior design. Retail prices for the Company's
framed paintings and prints range from $70 to $600. The Company's framed art is
sold primarily under the trade names of Vanguard Studios, Artmaster Studios, Lee
Reynolds and Windsor.
Lighting Products. The Company manufactures lamps which are
available in over 350 styles. The Company's portable lamps are manufactured with
bases made of metal, crystal and hand-painted hydrocal, a plaster composition
that can be finished to resemble stone, ceramic or metal. Additionally, the
Company designs and manufactures formed and decorated metal lamps, both portable
and fixed. The Company's lighting products generally are contemporary and do not
compete with commodity or imported lighting. The Company's lighting products are
sold primarily under the trade names Stylecraft Lamps, Vanguard Studios,
Artmaster Studios and Troy Lighting.
Silk Flower and Tree Arrangements. The Company designs and
manufactures high-quality silk flower and tree arrangements utilizing unique
stems and other components. The Company's silk flower business, Petals, started
over 65 years ago, was a pioneer in the industry and has enjoyed a very
satisfied and loyal customer following ever since. The Company's products can be
used to decorate homes, apartments and offices. Petals is constantly introducing
many original creations to meet the changing demands of its customers. The main
avenue for distribution of its silk flower and tree arrangements is through
direct mail-order sales. The Company is the leading mail-order catalogue source
for decorative artificial flowers and accessories for the home. Catalogues are
approximately 56 pages and contain over 200 different floral designs and
accessories. The catalogue is published and updated four times a year to
coincide with the major seasons of Spring, Summer, Fall and Christmas. Petals
also has five retail locations throughout the New York metropolitan area and an
interactive website, Petals.com.
Sculptures and Tabletop Accessories. The Company manufactures and
distributes hand-crafted hydrocal sculptures and tabletop accessories. The
Company's products in this category sell for $75 to $200 at retail. The
Company's sculptures and tabletop accessories are sold primarily under the trade
names of Vanguard Studios and Serengeti International.
Design, Merchandising and Leasing Services. The Company provides
design, purchasing, installation and leasing services to the homebuilding and
hospitality industries. The Company's experienced team of designers create
specific interior designs to be used in model homes by homebuilders. The designs
are created to promote the sale of new homes by highlighting both the features
of the homes and targeting specific consumer markets. The Company purchases and
installs in the model homes all of the furniture and decorative accessories,
many of which are designed and manufactured by the Company, and either resells
or leases the furniture and accessories to homebuilders. The Company also
provides architectural design and merchandising services to the hospitality
industry. The Company's design, merchandising and leasing services are conducted
by its subsidiary, Habitat Solutions, Inc., which is composed of Model Home
Interiors, Inc. ("Model Home" or "MHI") on the east coast and Concepts 4, Inc.
("Concepts 4") on the west coast.
Raw Materials and Suppliers
The primary raw materials used by Interiors in manufacturing and
distributing its products are wood, hydrocal, composite resins, paint, glass,
plexiglass, corrugated packaging materials, matboards, gold leaf, metal and silk
flower components. The Company purchases its raw materials from a wide variety
of domestic and foreign suppliers. Interiors has at least two, and often more,
suppliers for each item used in its manufacturing process, and has chosen to
limit the majority of
5
<PAGE>
its purchases to those vendors with whom it has developed long-term
relationships. Interiors believes that there are a relatively large number of
other suppliers of raw materials available, which enable Interiors to obtain
competitive prices for its raw materials. Interiors does not anticipate, nor has
it experienced, any difficulty in obtaining any of its raw materials, and is not
dependent upon any one supplier. Interiors generally does not enter into
long-term contracts with its suppliers. Significant increases in the costs of
raw materials could have a negative effect on Interiors' gross margins for its
products if Interiors were unable to build these costs into the prices of its
products or to offset such raw material cost increases through cost reductions.
Manufacturing
All of the Company's products are either manufactured directly by
the Company or specifically on its behalf. The Company operates six
manufacturing and distribution facilities located in California (2), Florida,
Mississippi, and New York (2). Management estimates that approximately 85% of
the Company's finished products are manufactured at its production facilities, a
decrease of 5% from the prior year. This decrease is a result of the Company's
efforts to outsource the manufacturing of certain products to take advantage of
lower costs of overseas production. The balance of the Company's products and
certain components and raw materials utilized by the Company are manufactured
primarily in Mexico, China, Taiwan and Europe. The Company's manufacturing and
distribution systems are run by well-trained and experienced production
personnel.
The Company's manufacturing processes vary greatly among product
lines, and include metal fabrication and welding, wood cutting and joining,
finishing processes (including painting, polishing and etching), hydrocal
casting, electrification, silk screening and hand painting. Certain of the
Company's manufacturing processes utilize sophisticated computerized equipment,
including mat cutting, metal cutting and acetate generation, and advanced primer
and paint application systems. The Company emphasizes cost-efficiencies in the
manufacturing process and seeks to improve its manufacturing processes through
capital expenditures in facilities and equipment.
The Company's distribution facilities are located adjacent to its
manufacturing facilities. Interiors plans to invest in sophisticated computer
systems to code and track inventory and to coordinate and monitor loading and
shipment of products to retailers. The Company believes that coordination of the
manufacturing, packaging and distribution functions will allow for greater
quality control and production efficiencies.
Sales and Marketing
The Company's primary customers are domestic retailers in the home
furnishings industry, including furniture stores, home furnishings centers,
catalog retailers, home improvement centers, department stores and lighting
retailers. In addition, the Company's custom frame division markets its products
to museums, art galleries, designers, interior decorators and custom frame
retailers. The Company also sells artificial flower and tree arrangements direct
to consumers through catalogs, five retail stores and the Internet. The design,
merchandising and leasing services are marketed primarily to home builders and
the hospitality industry. In the fiscal year ended June 30, 2000, the Company
sold products to over 3,000 home furnishings and specialty accounts.
Each of the Company's product lines is marketed and sold through a
network of independent manufacturers' representatives, who are often agencies
employing a number of sales personnel. These representatives are paid on a
commission-only basis, which the Company believes makes them highly motivated.
None of the Company's present manufacturers' representatives are exclusive to
the Company, and any representative could terminate its relationship with the
Company at any time for any reason. In addition, manufacturers' representatives
typically represent and distribute other non-competing decorative accessories.
Given the large number of accounts, the Company believes that the use of
independent representatives is an effective and cost-efficient means to
distribute its products. The Company's manufacturer's representatives are
supported by an in-house team of sales and marketing personnel. In addition, the
Company maintains an in-house support staff consisting of order entry personnel
as well as pre-sale and post-sale customer service personnel. The Company
believes that its relationships with its sales representatives taken as a whole
are generally good.
To supplement its sales efforts to the home furnishings industry and
specialty account customers, the Company uses a variety of means to advertise
and promote its products, including product brochures, trade shows and
cooperative advertising with some of its accounts. Participation in trade shows,
particularly the semi-annual shows in High Point, North Carolina, is an
important element of Interiors' marketing efforts. In addition, the Company
operates twenty-four showrooms in seven cities around the country.
6
<PAGE>
The Company believes that one of the primary ways it will
distinguish itself from its competitors is through customer service. A critical
element of the Company's efforts to improve its customer service is on-time
delivery of products to its customers. Retailers are pursuing a number of
strategies to deliver the highest-quality, lowest-cost products to their
customers. A growing trend among retailers is to purchase on a "just-in-time"
basis in order to reduce inventory costs and increase returns on investment. As
retailers shorten their lead times for orders, manufacturers need to more
closely anticipate consumer buying patterns. The Company hopes to be able to
support its retail customers' "just-in-time" inventory strategies through
investments in supporting inventory, improved forecasting systems, more
responsive manufacturing and distribution capabilities and electronic
manufacturing, communications and distribution capabilities. Customer service
also involves customer contact with the Company's top-level decision makers,
which permits early recognition of market trends and timely response to customer
problems.
Competition
The decorative accessories industry is highly competitive, and
includes a large number of domestic and foreign manufacturers, none of which
dominate the market. A number of the companies which compete directly with the
Company are well established and may have financial and other resources equal
to, or greater than, those of the Company. Interiors believes that it is the
largest manufacturer of premium picture and mirror frames (as well as other wall
decor) in the United States. Interiors maintains a strong competitive advantage
in this market due to its extensive collection of tools, dies, and molds
developed over time from restoration of genuine antique frames. Interiors
believes that it would be extremely difficult for a competitor to build a
comparable collection of these elements. In addition, Interiors has a work force
of skilled crafts people that would be difficult to replicate. Interiors also
believes that it dominates a niche market for mass production of hand-painted
oil paintings on artist canvasses.
The rapid growth of high-volume retailers, together with changes in
consumer shopping patterns, have contributed to a significant consolidation of
the domestic home furnishings retail industry and the formation of dominant
multi-category retailers. Other trends among retailers are to require
manufacturers to maintain or reduce product prices or deliver products with
shorter lead times, or for the retailers to import generic products directly
from foreign sources. The combination of these market influences creates a
highly competitive environment in which the Company's largest customers
continuously evaluate which product suppliers to use, resulting in pricing
pressures and the need for ongoing improvements in customer service. Management
believes that the competition in the decorative accessories industry is
generally a function of timeliness of delivery, price, quality, reliability,
product design, product availability and customer service. Interiors believes
that it competes favorably with other companies due to its (i) dedicated
distribution channels, (ii) established vendor relationships, (iii) broad range
of product offerings, (iv) strong name recognition, (v) relative market share,
(vi) highly efficient, low cost manufacturing capabilities and (vii) experienced
management team.
Intellectual Property Rights
Many of the Company's products and their designs, as well as the
design of many of the tools, dies and molds used in manufacturing certain of the
Company's products, are proprietary to Interiors. In addition, the Company has
sought to establish certain proprietary rights with respect to the marks under
which its products and product categories are marketed. Consequently, the
business of the Company is dependent, to a certain extent, on the Company's
ability to establish and protect its intellectual property rights with respect
to its products, designs, trademarks and trade names under which it does
business.
The Company believes that it owns or has the right to use all
designs and proprietary technology necessary to manufacture and market its
existing and planned products. Designs with respect to its products are
generally created by employees and artists on a work-for-hire basis (i.e., the
design automatically becomes the property of the Company upon creation) or
purchased or licensed from independent designers on a consulting or royalty
basis. The Company has no knowledge that it is infringing on any existing
copyright, trademark or patent such that it would be liable for material damages
or be prevented from manufacturing or marketing its products that account for a
significant portion of its revenues. In the event the Company's right to market
any of its products were to be successfully challenged, the Company may be
required to discontinue certain products and the Company's business and
prospects may be adversely affected if acceptable alternative products were not
available.
7
<PAGE>
Regulatory Matters
Interiors is subject to a wide range of federal, state and local
laws and regulations relating to protection of the environment, worker health
and safety and the emission, discharge, storage, treatment and disposal of
hazardous materials. These laws include the Clean Air Act of 1970, as amended,
the Resource Conservation and Recovery Act, the Federal Water Pollution Control
Act and the Comprehensive Environmental, Response, Compensation and Liability
Act. Certain of the Company's operations use materials containing chemicals that
are considered hazardous under various environmental laws. Accordingly,
management closely monitors the Company's environmental performance at all of
its manufacturing facilities. Management believes that the Company is in
substantial compliance with all environmental laws. While the Company may be
required to make capital investments at some of its facilities to ensure
compliance, Interiors believes that it will continue to meet all applicable
requirements in a timely fashion and that any investment required to meet these
requirements will not materially affect its financial condition or results of
operations. However, legal and regulatory requirements in these areas have been
increasing, and there can be no assurance that significant costs and liabilities
will not be incurred in the future due to regulatory noncompliance.
Employees
As of June 30, 2000, the Company employed 1,064 full-time persons
and 209 part-time persons, 132 of whom were subject to collective bargaining
agreements. The Company and its subsidiaries are party to two collective
bargaining agreements which expire in the years 2002 and 2003. None of the
Company's employees have been on strike, or threatened to strike, since the
Company's inception and the Company believes that its relations with its
employees are generally good.
Directors, Executive Officers and Significant Employees
The following table sets forth the directors, executive officers and
significant employees of the Company and their respective ages and positions:
Name Age Position(s) Held with the Company
---- --- ---------------------------------
Max Munn 56 President, Chief Executive Officer, Chairman
of the Board, and Director
Robert J. Conologue 52 Chief Financial Officer and Executive Vice
President
Richard P. Belenski 45 Executive Vice President, and President of
Petals, a subsidiary of the Company
James P. McCorry 55 President of Habitat Solutions, Inc., a
subsidiary of the Company
David A. Schwartz 33 General Counsel, Executive Vice President and
Secretary
Jimmy D. Webster 52 Chief Executive Officer of Stylecraft, a
subsidiary of the Company
Roger Lourie 55 Director
Richard Josephberg 53 Director
James G. Bloise 56 Director
Management Biographies
Brief biographies of the directors, executive officers, and key
personnel of the Company are set forth below. All Directors hold office until
their resignation, retirement, removal, disqualification, death or until their
successors have been
8
<PAGE>
elected and qualified. Vacancies in the existing Board of Directors are filled
by majority vote of the remaining directors. Officers of the Company serve at
the will of the Board of Directors.
Max Munn has been a director of Interiors since March 1994 and
Chairman of the Board, Chief Executive Officer and President since September
1995. At various times since September 1995, Mr. Munn was Chief Financial
Officer of Interiors. Mr. Munn previously held the positions of Executive Vice
President, Operations and Secretary of Interiors from February 1994 through
September 1995. Mr. Munn served as Vice President of A.P.F. Holdings, Inc. from
May 1993 until A.P.F. Holdings, Inc. merged with Interiors in March 1994. Since
June 1996, Mr. Munn has served as a director and officer of Decor Group, Inc.,
which has been consolidated with Interiors since October 1999. Since March 1999,
Mr. Munn has served as a director and an officer of CSL Lighting Manufacturing,
Inc., which was acquired by Interiors in March 1999.
Robert J. Conologue has served as Chief Financial Officer and
Executive Vice President of Interiors since May 2000. From May 1999 to April
2000, Mr. Conologue served as Senior Vice President, Chief Financial Officer and
Chief Operating Officer of the Sportswear Division of Warnaco Group, Inc.
("Warnaco"). Prior to that Mr. Conologue held the positions of Senior Vice
President, Finance and Controller of Warnaco. From May 1995 through early 1997,
Mr. Conologue served as Vice President Finance and Control of Southern New
England Telecommunications Corp. From 1989 to 1995, Mr. Conologue held various
financial positions, most recently Group Vice President, Finance, with Avon
Products, Inc.
Richard P. Belenski has served as President of Petals since May 1999
and Executive Vice President of Interiors since October 1998. Mr. Belenski
served as Vice President and Chief Financial Officer of Petals from December
1996 through October 1998. From October 1998 until May 2000, Mr. Belenski served
as Chief Financial Officer of Interiors. Mr. Belenski has over 20 years
experience in the management of retail, direct marketing and manufacturing
companies. From October 1986 through May 1996, Mr. Belenski served as Vice
President of Finance and Chief Financial Officer for operating divisions of the
J. Crew Group, Inc., an international catalog and retail company with total
revenues of $900 million. Mr. Belenski was also Director of Budgeting and
Financial Analysis at Lincoln Center for the Performing Arts, Inc. from March
1985 through October 1996 and held management positions with J.C. Penney
Company, Inc. from February 1978 through August 1980. From March 1999 until
January 2000, Mr. Belenski served as a director and officer of CSL Lighting
Manufacturing, Inc. Mr. Belenski received a BA degree from Lycoming College in
1977 and holds an MBA from Fairleigh Dickinson University.
James J. McCorry was appointed President of Habitat Solutions, Inc.,
a subsidiary of Interiors, in July 1998. Since 1996, Mr. McCorry has served as
the Executive Vice President, Chief Operating Officer and Chief Financial
Officer of Plaid Clothing Group, Inc. From 1994 through 1995, Mr. McCorry served
as the Senior Vice President, Chief Financial and Chief Operating Officer of
Warnaco Group, Inc., Warners/Intimates Group. In addition, Mr. McCorry served as
the Chief Financial Officer and Vice President of Operations and Administration
of Sara Lee Corp., Aris Isotoner Division. Mr. McCorry is not an officer of
Interiors, but may be deemed an executive officer pursuant to Rule 3b-7 of the
Exchange Act.
David A. Schwartz has served General Counsel, Executive Vice
President and Secretary of Interiors since February 1999. From April 1996 until
January 1999, Mr. Schwartz served as Corporate Counsel and Assistant Secretary
for Complete Management, Inc. From late 1993 until March 1996, Mr. Schwartz was
an associate at Skadden Arps Slate Meagher & Flom, LLP. From March 1999 until
January 2000, Mr. Schwartz served as a director and officer of CSL Lighting
Manufacturing, Inc., an affiliate of Interiors. Mr. Schwartz holds a JD degree
from the Boston University School of Law and received a BA degree from the State
University of New York at Binghamton.
Jimmy D. Webster has served as Chief Executive Officer of Stylecraft
since the Company's acquisition of Stylecraft in March 1998. Mr. Webster and his
family are former owners of Stylecraft. Mr. Webster is not an officer of
Interiors, but may be deemed an executive officer pursuant to Rule 3b-7 of the
Exchange Act.
Roger Lourie has served as a director of Interiors since May 1995.
Since 1980, Mr. Lourie has been a General Partner of Tremont Associates, a
private equity investment fund, and since 1980 has served as President of Misty
Ridge Associates, another private equity investment fund. Mr. Lourie is also
Chairman of the Board of Directors of Pneumatic Tool, Inc., a tool manufacturer
and Devon-Adair Publishing, Inc., a book publisher. Mr. Lourie received a B.S.
degree in engineering from Rensselaer Polytechnic Institute of Technology and
MBA and MIA degrees from Columbia University in New York.
Richard Josephberg has served as a director of Interiors since
October 1995. Since 1986, Mr. Josephberg has served as the Chairman of
Josephberg Grosz & Co., Inc., a New York-based investment banking firm
specializing in providing private institutional capital to emerging growth
companies. From 1969 through 1975, Mr. Josephberg served as a security analyst
with Goldman Sachs & Co. Additionally, from 1985 through 1990, Mr. Josephberg
served as a member of the New York Stock
9
<PAGE>
Exchange. Mr. Josephberg received a BBA degree from the University of
Cincinnati, and attended the MBA program at Bernard Baruch Graduate School of
Business in New York.
James G. Bloise has served as a director of Interiors since
September 2000. From 1996 until April 2000, Mr. Bloise was Chief Operating
Officer of the Calvin Klein Jeanswear division of Warnaco Group, Inc. Prior to
that Mr. Bloise served as Senior Vice President of Operations of The Leslie Fay
Companies, Inc., Vice President-International for Federated Department Stores,
Executive Vice President of Allied Stores Corp, Vice President and Corporate
Controller of Mast Industries, a subsidiary of The Limited, Inc. Mr. Bloise has
a Bachelor of Science in Accounting from St. Bonaventure University and was
Honorably Discharged from the U.S. Marine Corp. in 1968.
There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than five
percent of any class of voting securities of the Company, or any associate of
any such director, officer, affiliate of the Company or security holder is a
party adverse to the Company or any of its subsidiaries or has a material
interest adverse the Company or any of its subsidiaries.
10
<PAGE>
ADDITIONAL FACTORS TO CONSIDER
Ability to Continue as a Going Concern
The report of the Company's independent public accountants in
connection with the Company's financial statements as of and for the year ended
June 30, 2000 contains an explanatory paragraph as to Company's ability to
continue as a going concern. Among the factors contributing to the substantial
doubt about the Company's ability to continue as a going concern are recurring
net losses and the Company's default with respect to significant debt
obligations. For the years ended June 30, 2000 and 1999, the Company had net
losses of $18,581,000 and $8,024,000, respectively. In addition, the Company had
negative operating cash flows of $4,294,000, $637,000 and $338,000 for the
three years ended June 30, 2000, 1999 and 1998, respectively. As of June 30,
2000, the Company had classified $30,772,000 of its long term debt as current
liabilities because of its failure to meet requirements contained in the
instruments governing these debt obligations. Such amount can currently be
accelerated by the holders of these instruments as a result of the defaults. The
Company is exploring opportunities to refinance these obligations with debt
instruments that may have longer terms and contain lower interest rates,
however, if the Company is unable to refinance these obligations, they will have
a material adverse effect on the Company's financial condition and results of
operations. No assurance can be given, however, that the Company will be able to
refinance these obligations or that the Company will be able to continue
operations as a going concern.
Limited Liquidity
At June 30, 2000, the Company had negative working capital of
approximately $21,578,000. The Company continues to experience working capital
limitations which materially impair its ability to generate positive cash flow.
The Company's credit facility provides for availability based upon inventory and
account receivable levels and, accordingly, the Company has experienced
limitations on the availability under this facility. If the Company continues to
experience working capital limitations it will materially impact the Company's
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Significant Financing Costs
The Company has incurred significant costs in the financing of its
business operations and acquisition strategy. As of June 30, 2000, the Company
had total debt in the aggregate principal amount of approximately $43,479,000.
As a consequence of the Company's significant financing costs, a substantial
portion of the Company's cash flow from operations is committed to the payment
of debt service and is not available to the Company for other purposes. The
Company is currently in default with respect to $32,960,000 of debt obligations.
A substantial decrease in operating cash flow or an increase in expenses would
make it even more difficult for the Company to meet its other debt service
requirements and force it to modify its operations. If this event were to occur,
it would have a material adverse effect on the Company's financial position and
results of operations.
Delisting of Securities; Limited Trading Market
In August 2000, the Company received a notice from the Nasdaq Stock
Market of its intention to delist the Company's securities from the Nasdaq Small
Cap Market because of the Company's failure to maintain at least $2.0 million in
net tangible assets and a bid price of $1.00 per share. Marketplace Rule
4310(c)(2)(B) requires that an issuer have net tangible assets of at least
$2,000,000 or a market capitalization of $35,000,000 or net income of $500,000.
Marketplace Rule 4310(c)(4) requires that the Company's securities maintain a
minimum bid price of $1.00 per share. The Company does not currently satisfy
these criteria. The Company requested an oral hearing, which occurred on October
5, 2000, appealing Nasdaq's intention to delist the Company's securities. The
request for a hearing resulted in an automatic stay of the delisting process. On
October 11, 2000, the Company received notice from Nasdaq that it had determined
to delist the Company's securities. The Company anticipates its securities will
be traded on the OTC Bulletin Board, however, there can be no assurance that
there will be a market maker for the Company's securities or that an active
market will develop on the OTC Bulletin Board.
"Penny Stock" Regulations May Impose Certain Restrictions on Marketability of
the Company's Securities
The Securities and Exchange Commission (the "Commission") has
adopted regulations which generally define a "penny stock" to be any equity
security that has a market price of less than $5.00 per share, subject to
certain exemptions such as being listed on the Nasdaq SmallCap Market. As a
result of being delisted, the Company's securities are subject to rules, which
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established
11
<PAGE>
customers and accredited investors (generally, those persons with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of the securities
and have received the purchaser's written consent to the transaction prior to
the purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the transaction, of a risk
disclosure document mandated by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the penny stock rules may restrict
the ability of broker-dealers to sell the securities and adversely affect the
marketability of the Company's securities.
12
<PAGE>
Item 2. Properties.
Interiors' headquarters are located in Mount Vernon, New York under
a five-year lease expiring at the end of 2001 with a five-year renewal option.
The Company owns approximately fifteen acres located in Hernando, Mississippi,
where it has a 200,000 sq. ft manufacturing and distribution facility.
As of June 30, 2000, the Company leased the manufacturing facilities
listed in the table below.
<TABLE>
<CAPTION>
Location Primary Use Approximate Size (sq. ft)
-------- ----------- -------------------------
<S> <C> <C>
City of Industry, California Manufacturing; Distribution 98,000
Vernon, California Manufacturing; Distribution 235,000
Longwood, Florida Manufacturing; Distribution 70,000
Mount Vernon, New York Manufacturing; Executive Offices 70,000
Millwood, New York Warehouse 65,000
White Plains, New York Manufacturing; Distribution 85,000
</TABLE>
------------
The Company also has offices in Long Beach, California and
Beltsville, Maryland. In addition, the Company leases showroom facilities in
High Point, North Carolina (six showrooms), San Francisco, California (four
showrooms), New York, New York (three showrooms) and Dallas, Texas (three
showrooms). The showroom sizes range from 855 square feet to approximately
27,505 square feet. In addition, the Company leases five retail outlets located
in the New York metropolitan area.
The Company's White Plains lease currently expires on June 30, 2001.
The Company is currently looking for alternative space. If the Company is unable
to find, or delayed in finding, suitable space, this could have a material
adverse effect on the Company. Interiors believes that its other facilities are
well-maintained and adequate for its current requirements, and that suitable
additional space will be available as needed to accommodate anticipated growth
of its operations in the foreseeable future.
Item 3. Legal Proceedings.
Interiors is subject to claims and litigation arising in the
ordinary course of its business. In management's opinion, Interiors is not
presently a party to any such litigation or claims the outcome of which would
have a material adverse effect on its financial position or its results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year ended June 30, 2000.
13
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's Class A Shares have been traded on the Nasdaq Small
Cap Market ("NASDAQ") under the symbol INTXA since June 23, 1994. Prior to that
date, there was no public market for the Company's Class A Shares. The Class B
Shares are not traded on any public market. The high and low closing prices of
the Class A Shares on NASDAQ set forth below represent interdealer prices
without retail markups, markdowns or commissions, and may not necessarily
represent actual transactions:
Fiscal Year Ending June 30, 2000 High Low
---- ---
First Quarter.................................. $1.75 $1.00
Second Quarter................................. $1.38 $0.72
Third Quarter ................................. $1.31 $0.75
Fourth Quarter................................. $1.06 $0.63
Fiscal Year Ending June 30, 1999 High Low
---- ---
First Quarter ................................. $2.00 $0.94
Second Quarter ................................ $1.78 $0.91
Third Quarter ................................. $3.22 $1.38
Fourth Quarter ................................ $1.94 $1.06
As of September 21, 2000, there were 218 holders of record of the
Company's Class A Shares and one holder of record of the Company's Class B
Shares. On October 11, 2000, the last reported sale price on the NASDAQ for the
Company's Class A Shares was $0.28. On October 11, 2000, the Company received
notice from Nasdaq that it had determined to delist the Company's securities.
See "Additional Factors to Consider - Delisting of Securites; Limited Trading
Market."
The Company has never declared or paid cash dividends on its Class A
Shares or Class B Shares. The Company intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate
declaring or paying any cash dividends in the foreseeable future. The Company's
ability to pay dividends is limited by factors the Board of Directors deems
relevant, including results of operations, financial condition and capital and
surplus requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, pursuant to the Company's
Certificate of Designations Rights and Preferences, (a) the Company's Series A
Preferred Shares are entitled to a dividend, prior to any payment of dividends
on the Class A Shares, of $0.50 per share per annum payable in cash or Class A
Shares in semi-annual installments of $0.25 per share and (b) the Company's
Series B Preferred Shares are entitled to a dividend, prior to any payment of
dividends on the Class A Shares, at a rate of 8% per year.
As of June 30, 2000, the Company had accrued but unpaid dividends of
$319,000, or $0.375 per share, on its Series A Preferred Shares and $240,000, or
$1.20 per share, on its Series B Preferred Shares. The dividends on the Series A
Preferred Shares are payable in cash or Class A Shares at the Company's option.
In September 1999, the Company had declared a $0.25 dividend on its Series A
Preferred Shares for holders of record at December 10, 1999. This dividend was
paid by the issuance of 225,353 Class A Shares.
Unregistered Offerings
In August 1999, the Company issued 53,343 Class A Shares to James
McCorry as compensation of $75,000.
In August and October 1999, the Company issued 968,271 and 665,000
Class A Shares, respectively, into the escrow established in connection with the
acquisition of Model Home.
In February 2000, the Company issued 200,000 Class A Shares to
Morgan Steel upon conversion of a $250,000 convertible promissory note.
In March 2000 and April 2000, the Company issued 2,434,197 and
1,947,358 Class A Shares, respectively, into the escrow established in
connection with the acquisition of Concepts 4.
14
<PAGE>
These issuances of these Class A Shares were exempt from
registration under Section 4(2) of the Securities Act as transactions by the
issuer not involving any public offering because of one or more of the following
factors: (i) the offering was limited to a small number of persons, (ii) such
persons had a pre-existing relationship with the Company and access to
information that would be required in a registration statement, (iii) the
offering was made through direct negotiations and did not include general
advertising or solicitation, or (iv) such persons had sophisticated
representatives.
No underwriters were engaged by the Company in connection with any
of the issuances described above and, accordingly, no underwriting discounts or
commissions were paid.
15
<PAGE>
Item 6. Selected Financial Data.
The following table presents selected combined or consolidated
financial data, derived from the Company's audited financial statements, for the
five-year period ended June 30, 2000. The selected financial data of the Company
for fiscal years 1998, 1999 and 2000 is not directly comparable to prior periods
due to the Company's acquisitions of several business since March 1998.
Selected Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales $ 170,275 $ 80,433 $ 13,447 $ 4,652 $ 5,379
Income (loss) from Continuing
Operations (18,273) (8,694) 525 291 (1,792)
Per Share - Basic (0.59) (0.42) .04 (.09) .63
Per Share - Diluted (0.59) (0.42) .04 (.09) .63
Weighted Average Shares 35,124 22,036 7,251 4,527 2,837
Balance Sheet Data:
Total Assets $ 105,227 $ 93,768 $ 12,373 $ 3,637 $ 2,823
Total Debt 43,479 24,747 5,622 1,618 2,517
Mandatory Redeemable
Preferred Stock -- 1,000 -- -- --
Stockholder's Equity (deficit) 23,731 43,997 12,257 4,118 (645)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
financial statements of the Company and the related notes thereto, and the other
financial information included elsewhere in this Form 10-K.
Overview
Interiors, Inc., a Delaware corporation (the "Company"), is a
designer, manufacturer and marketer of a broad range of decorative accessories
for the residential, commercial, institutional and contract markets, including
museum-quality traditional and contemporary picture frames, framed wall mirrors,
hand-painted oil paintings and prints under glass, portable and installed
lighting and lighting fixtures, sculptures and decorative tabletop accessories,
and silk floral and tree arrangements. The Company's goal is to become the
premier, national single-source provider of decorative accessories to the home
furnishings industry. To achieve this goal, the Company has begun consolidating
the highly fragmented decorative accessories industry, rapidly establishing its
national presence through the acquisition, integration and growth of
established, well-regarded manufacturers of decorative accessories.
16
<PAGE>
Results of Operations
Comparison of Fiscal Years Ended June 30, 2000 and 1999
During the fiscal year ended June 30, 2000, the Company continued to
aggressively grow its revenues through acquisitions and brand expansion;
however, net income was adversely impacted by poor operating performance and
write-offs for the Company's West Coast decorative accessories businesses,
startup costs of new product brands and significantly higher interest expense
than had been incurred during the prior fiscal year.
Net sales for the fiscal year ended June 30, 2000 were $170,275,000
as compared to $80,433,000 for the 1999 fiscal year, an increase of $89,842,000.
The increase in net sales was primarily due to the Company's acquisitions in
calendar 1999 and 2000. Fiscal 2000 net sales included a full year of net sales
for Stylecraft Lamps, Inc. ("Stylecraft"), which was acquired in February 1999,
Model Home Interiors, Inc. ("Model Home"), and Petals, Inc. ("Petals"), which
were acquired in March 1999, these acquisitions increased fiscal 2000 net sales
by $73,673,000. In addition, the January 2000 acquisition of Concepts 4, Inc.
("Concepts 4") added $10,330,000 in net sales.
Cost of goods sold for the twelve months ended June 30, 2000
increased to $108,058,000 from $50,449,000 for the same period in 1999, an
increase of $57,609,000. Cost of goods sold includes the costs directly related
to net sales. As a percentage of net sales, cost of goods sold for the fiscal
year ended June 30, 2000 increased slightly to 63.5% from the 62.7% for the
prior year due to weaker margins and inventory reserves established in the West
Coast decorative accessories businesses. The dollar increase in cost of goods
sold was primarily due to the Company's acquisitions in calendar 1999 and 2000
discussed in the preceding paragraph.
Selling, general and administrative expenses increased to
$72,261,000 for the fiscal year ended June 30, 2000 as compared to $28,964,000
for the 1999 fiscal year, an increase of $43,297,000. General and administrative
expenses represent overhead and administrative expenses excluding costs directly
related to the cost of products sold. The dollar increase in general and
administrative expenses was primarily due to the Company's March 1999
acquisition of Petals, which resulted in $18,440,000 of additional expenses in
the current fiscal year. Selling, general and administrative expenses for the
West Coast decorative accessories businesses increased by $10,046,000 or 76%
from the prior fiscal year while revenue only increased by slightly more than
10%. This significant increase was primarily the result of a $3,000,000 write
down of goodwill related to the West Coast lighting businesses and higher costs
incurred in connection with operating the consolidated businesses. Model Homes
Interiors, Inc., acquired in March 1999, and Concepts 4, Inc., acquired in
January 2000, accounted for $5,365,000 of the year over year increase. In
addition $2,500,000 of start up expenses for two new brands were incurred in the
current fiscal year. As a percentage of net sales, selling, general and
administrative expenses for the twelve-month period ended June 30, 2000
increased to 42.4% from 36.0% for the prior year. This percentage increase
primarily resulted from the full year impact of acquisitions with alternative
cost structures and the items discussed above.
Interest expense, including finance charges, increased to $8,284,000
for the fiscal year ended June 30, 2000 from $4,185,000 for the same period in
fiscal 1999 principally due to financing activities associated with the
Company's acquisitions. Interest expense also increased due to the September
1999 exchange of Series C Preferred Shares, plus accrued and unpaid dividends,
into the Limeridge Note and the Endeavour Note (both as defined below) which
have an effective interest rate of 29%. Interest expense also included $475,000
of prepayment expenses incurred in connection with the refinancing of the
Company's various line of credit facilities as well as the accretion of interest
on the Concepts 4 deferred purchase price and the Troy merger shares.
The Company reflected income tax expense of approximately $308,000
and $200,000, respectively, for the years ended June 30, 2000 and 1999. The
expense recorded in each year represents the various state income tax
requirements. No Federal income tax benefit has been recognized in either year
because there is no assurance as to the future realizability of deferred tax
assets.
Comparison of Fiscal Years Ended June 30, 1999 and 1998
Net sales for the fiscal year ended June 30, 1999 were $80,433,000
compared to $13,447,000 for the fiscal year June 30, 1998, an increase of
$66,986,000. The increase in net sales was primarily due to the Company's
acquisitions in March 1998 of Vanguard and Artmaster, which added approximately
$9,498,000 in additional net sales, the acquisition in August 1998 of
17
<PAGE>
Windsor, which added approximately $12,533,000 in additional net sales, the
acquisition in August 1998 of Troy, which added approximately $12,073,000 in
additional net sales, the acquisition in February 1999 of MHI, which added
approximately $5,368,000 in additional net sales, the acquisition in February
1999 of Stylecraft, which added approximately $13,946,000 in additional net
sales, the acquisition in March 1999 of Petals, which added approximately
$11,371,000 in additional net sales and the acquisition of an interest in March
1999 in CSL which added approximately $3,113,000 in additional net sales.
Cost of goods sold for the twelve months ended June 30, 1999
increased to $50,449,000 from $8,269,000 for the same period in 1998, an
increase of $42,181,000. Cost of goods sold includes the costs directly related
to net sales. The increase in cost of goods sold was primarily due to the
Company's acquisitions of Vanguard and Artmaster, which added approximately
$7,000,000 in additional cost, the acquisition of Windsor, which added
approximately $8,700,000 in additional cost, the acquisition of Troy, which
added approximately $8,600,000 in additional cost, the acquisition of MHI, which
added approximately $2,700,000 in additional cost, the acquisition of
Stylecraft, which added approximately $9,200,000 in additional cost, the
acquisition of Petals, which added approximately $4,600,000 in additional cost,
and the acquisition of an interest in CSL, which added $1,900,000 in additional
cost.
As a percentage of net sales, cost of goods sold for the fiscal year
ended June 30, 1999 increased to 62.7% from 61.4% for the same period of the
prior year. The concomitant decrease in profit margin resulted primarily from
the acquisition of additional businesses with alternative margin structures.
Selling, general and administrative expenses increased to
$28,964,000 for the fiscal year ended June 30, 1999 compared to $4,025,000 for
the fiscal year 1998, an increase of $24,939,000. General and administrative
expenses represent overhead and administrative expenses excluding costs directly
related to the costs of products sold net sales. The increase in general and
administrative expenses was primarily due to the Company's acquisitions of
Vanguard and Artmaster, which added approximately $4,100,000 in additional
expenses, the acquisition of Windsor, which added approximately $2,700,000 in
additional expenses, the acquisition of Troy, which added approximately
$3,400,000 in additional expenses, the acquisition of MHI, which added
approximately $2,300,000 in additional expenses, the acquisition of Stylecraft,
which added approximately $2,000,000 in additional expenses, the acquisition of
Petals, which added approximately $5,200,000 in additional expenses, and the
acquisition of an interest in CSL, which added $1,200,000 in additional
expenses.
As a percentage of net sales, selling, general and administrative
expenses for the twelve-month period ended June 30, 1999 increased to 36.0% from
29.9% for the same period of the prior year. This increase primarily resulted
from acquisitions of new businesses with alternative cost structures.
Interest expense and non-cash financing charges increased to
$4,185,000 for the fiscal year ended June 30, 1999 from $963,000 for the same
period in 1998 principally due to financing activities associated with the
Company's acquisitions.
Other income reported for the twelve month period ended June 30,
1999 increased to $559,000 from $335,000 of other income for the same period of
1998. During the third quarter of fiscal 1999, the Company recorded an
impairment loss of its entire investment, approximately $3.3 million, in Decor
Group, Inc. ("Decor"), a publicly-traded corporation that designs and
manufactures metal sculptures, because the Company believes that, based on
Decor's current financial condition its investment has been permanently
impaired. The Company has established reserves for the uncollectibility of its
entire receivable of approximately $1.0 million, owed to the Company from Decor
and the possibility that the Company would be required to pay up to $300,000
pursuant to its guaranty of approximately $580,000 of indebtedness of Decor owed
to Austin Financial. During the fourth quarter of fiscal 1999, the Company
recorded an impairment loss of its entire investment, approximately $1.1
million, in Photo-To-Art, Ltd. ("Photo-to-Art"), a company that converts
photographs into paintings, because the Company believes that, based on
Photo-to-Art's current financial condition its investment has been permanently
impaired. The Company has established reserves for the uncollectibility of
$250,000 of its receivable, approximately $325,000, owed to the Company from
Photo-to-Art. During the twelve month period ended June 30, 1999, the Company
also had an extraordinary gain from early extinguishment of debt in the amount
of $870,264.
The Company reflected income tax expense of $200,000 for fiscal 1999
and an income tax benefit of $109,000 for the year ended June 30, 1998. The
benefit recorded is net of the various state income tax requirements and is
primarily as a result of net operating losses accumulated since the Company's
inception and available to offset future taxable income. The decrease in the
benefit rate primarily results from an increase in the Company's state income
tax rate for the year ended June 30, 1999 as compared to June 30, 1998.
18
<PAGE>
Liquidity and Capital Resources
During the fiscal year ended June 30, 2000, the Company had
primarily used its cash to support operating activities and capital
expenditures. The Company's primary sources of cash during this period have been
the proceeds raised by the issuance of the Limeridge Note and Endeavour Note
(both as defined below) and borrowing under revolving credit facilities. At June
30, 2000, the Company had current assets of $50,981,000 and current liabilities
of $71,559,000. This working capital deficit of $20,578,000 was the result of
having to classify a majority of the Company's debt to current liabilities,
which is discussed in the "Going Concern Matters" section of Note 1 to the
accompanying consolidated financial statements.
Net cash used by operating activities during fiscal year 2000 was
$4,294,000 principally due to operating losses and increases working capital
assets.
Net cash used in investing activities during fiscal year 2000 was
$4,334,000, primarily for capital expenditures.
Net cash provided by financing activities during fiscal year 2000
was $7,947,000, primarily due to proceeds raised from the issuance of 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 June 30, 2000, total borrowings were $16,859,000, of which
$13,200,000 represented borrowings under the revolving loans and $3,659,000
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 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.
In June 2000, the Company issued a $2,300,000 promissory note at
8.97% to Bank of America. The note is due July 1, 2005 and secured by the
Company's real estate located in Mississippi. Foothill has a second mortgage on
the property. The note is payable in 59 equal monthly payments of $23,399 and
one last payment of $1,872,221.
In May 2000, the Company issued to Seaside Partners, L.P.
("Seaside") a $1,000,000 promissory note due May 2002, (the "Seaside Note")
which accrues interest at 8% and is payable upon maturity, default or
conversion. The note is convertible into common stock of a Interiors.com, Inc.,
a newly formed subsidiary of the Company ("Interiors.com"), subject to the
occurrence of one of the following transactions: (i) an underwritten initial
public offering of Interiors.com, (ii) a merger or consolidation of
Interiors.com with a publicly-held corporation in which Interiors.com is not the
surviving entity or (iii) a rights offering of Interiors.com securities to the
shareholders of the Company. The conversion rights terminate if Interiors.com is
unable to secure financing of at least $5,000,000 on or before December 31, 2000
or (ii) Interiors.com fails to consummate a transaction described in the
previous sentence by October 2001. Notwithstanding the terms of the Seaside
Note, the Company has currently suspended its efforts to establish Interiors.com
as an independent public company.
On October 12, 2000, Seaside 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 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
19
<PAGE>
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.
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"). The
purchase price consisted of (a) cash payments of $4,600,000, (b) a payment of
$2,823,000 which was payable on March 10, 2000 (the "March 2000 Payment") in
cash or stock, (c) a cash payment of $770,000 payable on December 15, 2000, (d)
a cash payment of $1,218,000 payable on December 15, 2001, (e) a cash payment of
$1,218,000 payable on December 15, 2002, and (f) a cash payment of $1,007,000
payable on March 10, 2003. 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 the Company for the calendar years 2000, 2001 and 2002. The present
value of the future purchase price obligations was approximately $5,732,000. As
of June 30, 2000 the accretion of interest on these obligations was
approximately $357,000, which was recognized as interest expense. As of June 30,
2000, the purchase price obligations due were contained on the Company's balance
sheet as current accrued liabilities in the amount of $718,000 and other long
term liabilities in the amount of $2,546,000.
In satisfaction of the March 2000 Payment of $2,823,000, the Company
delivered to an escrow account (the "Escrow Account") 2,434,197 Class A Shares
having a fair market value of $2,823,000 (the "Escrow Shares"). If at any time
the fair market value of the Escrow Shares falls below 80% of this amount, the
Company is required to deliver additional Class A Shares to the Escrow Account
so that the fair market value of the Escrow Account equals $2,823,000. The
Company has the right (the "Call Option"), but not the obligation, to redeem the
Escrow Shares until September 10, 2000 for $3,105,000 in cash or thereafter
until March 10, 2001 for $3,388,000. The Escrow Account will terminate upon the
earlier of March 10, 2001, or the date the Company exercises the Call Option. If
as of March 10, 2001 the Company has not exercised the Call Option, the Escrow
Shares plus additional Class A Shares, if necessary, having a value of
$3,388,000 will be delivered to the former shareholders.
As of June 30, 2000, the Company had delivered an aggregate of
4,381,565 Class A Shares into escrow for payment to the former shareholders of
Concepts 4. In the first quarter fiscal year 2001, the Company has added another
3,164,321 Class A Shares to the Escrow Account. Such securities are being held
in escrow until March 10, 2001. If such securities are worth less than
$3,388,000 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 $3,388,000, the
shareholders will return to the Company a number of shares equal to the amount
of the excess. The Company could have repurchased these securities for
$3,105,000 from March 10, 2000 until September 10, 2000. Thereafter, it may
repurchase these securities until March 10, 2001 for $3,388,000. This
acquisition has been accounted for under the purchase method of accounting and
the results of the operations have been included in the consolidated financial
statements since the date of acquisition. The excess purchase price over the
fair values of net assets acquired was approximately $8,646,000 and has been
recorded as goodwill in the consolidated balance sheets, and is being amortized
over forty years. As of June, 30, 2000, the purchase price obligations were
contained on the Company's balance sheet as current accrued liabilities in the
amount of $718,000 and other long term liabilities in the amount of $2,546,000.
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 addition, all future 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 obligations as they become due under the terms of the original
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.
In October 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 in the amount of
$215,000, 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 $7,500,000 and after certain fees and expenses, net
proceeds of approximately $7,200,000 in the transaction. The Limeridge Note has
a principal amount of $13,541,000, 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
20
<PAGE>
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 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 in the
amount of $64,000, 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 $1,744,000, 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.
Pursuant to the registration rights agreements with Limeridge and
Endeavour, (a) the Limeridge Note, the Endeavour Note, the Limeridge Warrant and
the Endeavour Warrant were required to be covered by an effective registration
statement by September 30, 2000 and (b) the Company is required to keep its
Class A Shares listed on the Nasdaq SmallCap Market or its equivalent. As of
September 30, 2000, the securities were not covered by an effective registration
statement and the Company had received a notice from NASDAQ of its intention to
delist the Class A Shares. Accordingly, the Company is subject to liquidated
damages in the amount of 2% per month after such date on the principal amount of
the Limeridge Note and the Endeavour Note and such parties are entitled to
accelerate the entire principal amount of the notes. As of June 30, 2000, the
Company was also in arrears on interest payments in the aggregate amount of
$542,000, which also entitles Limeridge to accelerate its note, subject to the
Company's right to cure. As a result these rights to accelerate, the Limeridge
Note and the Endeavour Note are reflected as current liabilities in the
Company's financial statement as of June 30, 2000. See "Additional Factors to
Consider - Ability to Continue as a Going Concern."
In July 1999, the former shareholders of Troy agreed to sell 650,000
Class A Shares (the "Troy Merger Shares") obtained from the Company to Dominion
Capital Fund, Ltd., Dominion Investment Fund, LLC and Sovereign Partners, L.P.
(collectively, the "Troy Purchasers") for $1,000,000. Contemporaneously
therewith, the Company and the Troy Purchasers entered into a letter agreement
pursuant to which the Troy Purchasers agreed not to sell or otherwise transfer
the Troy Merger Shares for a period of six months. On December 10, 1999, the
Company agreed to release the restrictions on the Troy Merger Shares. If the
Troy Merger Shares were worth less $1,150,000 based on the sixty-day average of
the Class A Shares following January 25, 2000, the Company must either pay cash
or issue additional Class A Shares to the Troy Purchasers in the amount of the
shortfall. The determination to pay shares or issue stock is based upon, among
other things, the price of the Class A Shares and the liquidity needs of the
Company at the time of payment. The amount of the shortfall was approximately
$470,000, which pursuant to the agreement is accruing liquidated damages at a
rate of 2% per month. The Company has not paid such shortfall or issued shares
and is currently negotiating with the Troy Purchasers to settle this outstanding
obligation. The Company has accrued the additional cost, including interest as
of June 30, 2000. Of the $470,000 additional cost, $319,000 was recognized as
additional goodwill; $151,000 as accretion of interest plus accrued interest at
the rate of 2% per month, resulting in additional accrued interest of $47,000 as
of June 30, 2000. The accretion of interest was recorded as interest expense
with a corresponding increase to additional paid in capital.
Pursuant to the Company's acquisition of Model Home in February
1999, the Company was required to deliver Class A Shares having a fair market
value of $2,300,000 (the "MHI Merger Shares") on August 28, 2000. Additionally,
the Company agreed to issue Class A Shares with a maximum fair market value of
$2,000,000 (the "Earnout Shares") upon the attainment of certain earnings goals
by Model Home. At the time of closing, the Company deposited into escrow
1,056,342 Class A Shares to secure the Company's obligation to deliver the MHI
Merger Shares and to satisfy the promissory notes. If the value of the Class A
Shares held in escrow fell below $1,840,000 based on the ten day-average of the
closing price, the Company was required to deposit additional shares into the
escrow. Accordingly, on August 5, 2000 and October 26, 1999, the Company
deposited 968,271 and 665,000 additional Class A Shares, respectively, into
escrow. Until the dissolution of the escrow, the MHI Merger Shares may not be
transferred, however, the former shareholders of MHI have shared voting power
over them.
21
<PAGE>
During the first year following the acquisition of Model Home, Model
Home achieved certain earnings threshold criteria established at the time of the
transaction. Accordingly, in April 2000, the Company released 763,561 Earnout
Shares valued at $644,000 to the former shareholders of MHI. Based on the ten
day-average of the closing price of Class A Shares on August 28, 2000, the
former shareholders of MHI are entitled to 4,842,003 MHI Merger Shares. There
are currently only 4,088,889 MHI Merger Shares being held in escrow to satisfy
the Company's obligation. The former shareholders of MHI have sent the Company a
letter demanding the release of these shares as well as the issuance of an
additional 753,114 Class A Shares. The Company is currently negotiating with the
former shareholders to settle this obligation.
In January 1999, the Company issued in a private placement 12%
convertible demand notes aggregating $686,000 (the "12% Notes"), which are
convertible into Class A Shares at $1.125 per share. As of June 30, 2000, the
Company was in arrears on interest payments in the aggregate amount of $46,000
on the 12% Notes. The Company, however, believes it has offsets in the amount of
approximately $32,500 against one of the holders of the 12% Notes. The Company
and the noteholders are currently discussing the reduction of the conversion
price from $1.125 to $0.50 per share if the noteholders convert the 12% Notes
into Class A Shares.
In March 1998, the Company issued in a private placement 15%
convertible demand notes aggregating $1,270,000 (the "15% Notes"), which are
convertible into Class A Shares at $1.50 per share. As of June 30, 2000, the
outstanding principal amount that had not converted was $140,000 and the Company
was in arrears on interest payments in the aggregate amount of $10,500 on the
15% Notes. The Company and the noteholders are currently discussing the
reduction of the conversion price from $1.50 to $0.50 per share if the
noteholders convert the 15% Notes into Class A Shares.
As of June 30, 2000, the Company had accrued but unpaid dividends of
$0.33 per share, or an aggregate of $133,000, on its Series A Preferred Shares
and $1.20 per share, or an aggregate of $240,000, on its Series B Preferred
Shares. The dividends on the Series A Preferred Shares are payable in cash or
Class A Shares at the Company's option. In September 1999, the Company had
declared a $0.25 dividend on its Series A Preferred Shares for holders of record
at December 10, 1999. The dividend was paid by the issuance of 225,344 Class A
Shares.
During fiscal year 2000, the Company used cash, stock and debt as
consideration in its acquisition of Concepts 4. In order to accomplish
additional acquisitions, the Company anticipates that it will be required to pay
additional cash, issue additional securities and/or incur additional debt.
With the exception of the Limeridge Note and the Endeavour Note and
purchase price obligations relating to the acquisition of Concepts 4, 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 for the next twelve months. See "Additional Factors to
Consider - Ability to Continue as a Going Concern."
Impact of Inflation
The Company does not believe that inflation has had a material
adverse effect on sales or income during the past several years. Increases in
supplied and other operating costs could adversely effect the Company's
operations. The Company, however, believes that it should be able to increase
prices to offset increases in cost of goods sold or other operating costs.
Sales Variations
The Company's net sales are not generally subject to seasonal
fluctuations experienced by certain retailers, however, the Company does
experience some minor variations in the level of sales during the year. The
first quarter of the Company's fiscal year (July through September) is generally
the Company's slowest sales period due to the fact that the summer is typically
when retailers are in their slowest purchasing period. During this time, certain
of the Company's warehouses and factories 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.
22
<PAGE>
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
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 Annual Report on Form 10-K, the words "may,"
"will," "should," "expect," "believe," "anticipate," "continue," "estimate,"
"project," "intend" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act regarding events, conditions and
financial trends that may affect the Company's future plans of operations,
business strategy, results of operations and financial condition. The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements pursuant to the safe harbor established in the Private Securities
Litigation Reform Act of 1995. Prospective investors are cautioned that any
forward-looking statements are not guarantees of future performance and are
subject to risks and uncertainties and that actual results may differ materially
from those included within the forward-looking statements as a result of various
factors. Such forward-looking statements should, therefore, be considered in
light of various important factors, including those set forth herein and others
set forth from time to time in the Company's reports and registration statements
filed with the Securities and Exchange Commission. The Company disclaims any
intent or obligation to update such forward-looking statements.
In particular, in connection with certain past acquisitions, the
Company has disclosed expected additions to its revenues from such transactions.
Such revenue forecasts are forward-looking information and as such are
inherently subject to risk and uncertainty. Important factors, including those
set forth below, could cause the Company's actual results from these
transactions to differ materially and adversely from the projections, or the
additional revenues from these transactions could be offset by a diminution of
other revenues. Accordingly, there can be no assurance that the Company will
achieve the projected revenues, or, if attained, what effect such revenues will
have on the Company's net earnings or earnings per share. In addition, the
Company is particularly susceptible to various factors that may affect future
results, such as: risks relating to the integration in connection with
acquisitions; hiring and retaining upper management personnel; capital
requirements; identification of growth opportunities; implementation of cost and
accounting controls; the issuance of securities that may be dilutive to current
equity holders, maintaining high levels of debt and the possible volatility of
stock prices.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to market risk related to changes in interest
rates based primarily on its financing activities. As of June 30, 2000,
approximately $16,859,000 of the Company's total liabilities were subject to
floating rates. The Company does not enter into financial instruments for
hedging, speculation or for trading purposes.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the Index to Consolidated Financial Statements
on page F-1 for the Company's consolidated financial statements and notes
thereto. Supplementary schedules for the Company have been omitted as not
required or not applicable because the information required to be presented is
included in the consolidated financial statements and related notes.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
23
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item. 10 is incorporated by reference
from the Company's definitive Proxy Statement to be filed by the Company with
the Commission within 120 days of the end of the fiscal year.
Item 11. Executive Compensation.
The information required by Item. 11 is incorporated by reference
from the Company's definitive Proxy Statement to be filed by the Company with
the Commission within 120 days of the end of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item. 12 is incorporated by reference
from the Company's definitive Proxy Statement to be filed by the Company with
the Commission within 120 days of the end of the fiscal year.
Item 13. Certain Relationships and Related Transactions.
The information required by Item. 13 is incorporated by reference
from the Company's definitive Proxy Statement to be filed by the Company with
the Commission within 120 days of the end of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statements, Supplementary Schedules and Reports on
Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements:
The Financial Statements are incorporated herein as part of Item 8
of this Report.
2. Exhibits:
See Index on Page 25 of this Report.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the last quarter of
fiscal year ended June 30, 1999:
(1) Current Report on Form 8-K reporting "Item 2 Acquisition or
Disposition of Assets" as filed with the Commission on December 29,
1999;
(2) Current Report on Form 8-K/A reporting "Item 2 Acquisition or
Disposition of Assets" and including the required financial
statements as filed with the Commission on February 28 2000; and
(3) Current Report on Form 8-K reporting "Item 5 Other Events" as filed
with the Commission on June 23, 2000.
24
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
------- ----------------------
2.1 Stock Purchase Agreement, dated as of March 1, 1999, by and between
Interiors, Inc. ("Interiors") and CSL Lighting Manufacturing, Inc.
("CSL"). 1/
2.2 Agreement and Plan of Merger dated December 31, 1998 by and between
MHI Acquisition Corp., Interiors and Model Home Interiors, Inc. 2/
2.3 Stock Purchase Agreement dated August 27, 1998 by and among
Interiors, Jimmy D. Webster, Jr., Bettye Jo Webster and Henry L.
Gray. 3/
2.4 Agreement and Plan of Merger, dated July 2, 1998, by and among Troy
Acquisition Corp., Interiors, Troy, Barry R. Jackson, and Todd R.
Langner ("Langner"). 4/
2.5 Stock Purchase Agreement dated July 7, 1998, by and between
Interiors and Bentley. 5/
2.6 Purchase Agreement dated December 11, 1999 by and among Interiors,
and Mark N. Sklar, Drew M. Brown, the Bennett Dorrance Trust, the
Bennett Dorrance, Jr. Trust, the Ashley Dorrance Trust, the Dorrance
1995 Issue Trust and DMB Property Ventures Limited Partnership. 6/
2.7 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*
2.8 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*
3.1 Certificate of Incorporation of Interiors. 7/
3.2 Certificate of Ownership and Merger between Interiors, Inc. and
A.P.F. Holdings, Inc. 7/
3.3 Certificate of Amendment of Certificate of Incorporation of
Interiors. 8/
3.4 Certificate of Designations, Rights and Preferences of Series A
Preferred Stock. 8/
3.5 Certificate for Restoration, Renewal and Revival of the Certificate
of Incorporation. 9/
3.6 Certificate of Merger of Interiors, Inc. into Interiors Holdings,
Inc.9/
3.7 By-Laws of Interiors. 7/
3.8 Certificate of Designations, Rights and Preferences of Series B
Preferred Stock. 10/
3.9 Certificate of Designations, Rights and Preferences of Series C
Preferred Stock. 10/
25
<PAGE>
4.1 Specimen Class A Preferred Stock Certificate. 8/
4.2 Specimen Class A Common Stock Certificate. 8/
4.3 Specimen Class B Common Stock Certificate. 8/
4.4 7% Convertible Debenture due July 26, 2001, dated July 27, 1998, in
the amount of $500,000, issued by Interiors to Dominion Capital
Fund, Ltd. ("Dominion"). 9/
4.5 7% Convertible Debenture due July 26, 2001, dated July 27, 1998, in
the amount of $500,000, issued by Interiors to Sovereign Partners,
L.P. ("Sovereign"). 9/
4.6 7% Convertible Debenture due July 29, 2001, dated July 30, 1998, in
the amount of $1,250,000, issued by Interiors to RBB Bank AG
("RBB"). 9/
4.7 Common Stock Purchase Warrant A to Purchase 214,286 Shares of Common
Stock of Interiors, dated July 27, 1998, issued by Interiors to
Dominion. 9/
4.8 Common Stock Purchase Warrant A to Purchase 214,286 Shares of Common
Stock of Interiors, dated July 27, 1998, issued by Interiors to
Sovereign. 9/
4.9 Common Stock Purchase Warrant A to Purchase 535,714 Shares of Common
Stock of Interiors, dated July 30, 1998, issued by Interiors to RBB.
9/
4.10 Common Stock Purchase Warrant B to Purchase 50,000 Shares of Common
Stock of Interiors, dated July 27, 1998, issued by Interiors to
Cardinal Capital Management Inc. ("Cardinal").9/
4.11 Common Stock Purchase Warrant B to Purchase 62,500 Shares of Common
Stock of Interiors, dated July 30, 1998, issued by Interiors to
Cardinal. 9/
4.12 Registration Rights Agreement, dated July 27, 1998, by the Holders
listed therein and Interiors. 9/
4.13 Common Stock Purchase Warrant A to Purchase 187,500 Shares of Common
Stock of Interiors, dated August 25, 1998, issued by Interiors to
Sovereign. 9/
4.14 Common Stock Purchase Warrant A to Purchase 187,500 Shares of Common
Stock of Interiors, dated August 25, 1998, issued by Interiors to
Dominion. 9/
4.15 7% Convertible Debenture due August 24, 2001, in the amount of
$375,000, issued by Interiors to Sovereign. 9/
4.16 7% Convertible Debenture due August 24, 2001, in the amount of
$375,000, issued by Interiors to Dominion. 9/
4.17 Registration Rights Agreement, dated August 25, 1998, by the Holders
listed therein and Interiors. 9/
4.18 Escrow Agreement dated July 2, 1998 by and among Buyer, U.S. First
Trust, a national association, and Barry R. Jackson. 10/
4.19 The Windsor Art, Inc. Voting Trust Agreement No. 1 dated July 30,
1998 by and
26
<PAGE>
among Lloyd R. Abrams and Max Munn, Buyer and Bentley. 10/
4.20 Series B Warrant to purchase up to 2,000,000 Class A Shares issued
to Seaside Partners, L.P. 10/
4.21 Form of 12% Convertible Promissory Notes. 10/
4.22 Form of Registration Rights Agreement by and among Interiors and
minority shareholders of Petals. 10/
4.23 Form of Warrant to Purchase Class A Shares issued to minority
shareholders of Petals. 10/
4.24 10% Convertible Promissory Note dated March 23, 1999 in the amount
of $2,000,000 issued to majority shareholder of Petals. 10/
4.25 Secured Convertible Note Purchase Agreement dated as of September
30, 1999 between Limeridge LLC and Interiors, Inc.*
4.26 Secured Convertible Note dated as of September 30, 1999 in favor of
Limeridge LLC*
4.27 Common Stock Purchase Warrant dated as of September 30, 1999 in
favor of Limeridge LLC.*
4.28 Convertible Note Exchange Agreement December 31, 1999, by and
between Interiors, Inc. and Endeavour Capital Fund SA*
4.29 Secured Convertible Note due September 29, 2004 in favor of
Endeavour Capital Fund, SA*
4.30 Common Stock Purchase Warrant dated as of December 31, 1999 and
Endeavour Capital Fund, SA*
10.1 Security Agreement, dated November 13, 1990, between Interiors and
United Credit Corporation and amendments thereto dated November 13,
1990, January 7, 1992, October 11, 1991, December 15, 1992 and June
23, 1993. 7/
10.2 Standstill Agreement, dated as of March 1, 1999, by and between
Interiors, Inc. ("Interiors") and CSL Lighting Manufacturing, Inc.
("CSL"). 1/
10.3 1994 Stock Option and Appreciation Rights Plan. 11/
10.4 1994 Director Stock Option and Appreciation Rights Plan. 12/
10.5 Revised form of Warrant Exercise Fee Agreement. 11/
10.6 Consulting Agreement, dated October 1, 1993, between Morris Munn and
Interiors. 11/
10.7 Employment Agreement, dated November 1, 1998, between Interiors and
Max Munn.
10.8 Promissory Note, dated March 10, 1998, made by Interiors in favor of
Michael H. Greeley ("Greeley"), in the principal sum of $794,379. 9/
10.9 Non-Negotiable Promissory Note, dated July 30, 1998, made by
Interiors in favor of
27
<PAGE>
Bentley, in the principal sum of $3,300,300. 5/
10.10 Non-Negotiable Promissory Note, dated July 30, 1998, made by
Interiors in favor of Bentley, in the principal sum of $2,000,000.
5/
10.18 Consulting Agreement, dated July 30, 1998, by and among Windsor,
Lloyd R. Abrams, and Interiors. 5/
10.19 Securities Purchase and Registration Rights Agreement, dated July
30, 1998, by and among Max Munn, Bentley, and Interiors. 5/
10.20 Employment Agreement, dated March 10, 1998, by and between Greeley
and Henlor. 13/
10.21 Employment Agreement, dated August 14, 1998, by and between
Interiors and Langner. 4/
10.22 Stock Purchase Agreement dated as of July 30, 1999 by and among
Interiors, Barry R. Jackson, U.S. Bank Trust and the entities listed
on Schedule A annexed thereto.*
10.23 Letter Agreement dated August 2, 1999 by and among Interiors,
Sovereign, Dominion and Dominion Investment Fund, LLC.*
10.24 Registration Rights Agreement dated as of September 30, 1999 between
Limeridge LLC and Interiors, Inc.
10.25 Security Agreement dated as of September 30, 1999 between Limeridge
LLC, Interiors, Inc. and Petals, Inc.
10.26 Registration Rights Agreement dated as of December 31, 1999 between
Endeavour Capital Fund, SA and Interiors, Inc.
10.27 Security Agreement dated as of December 31, 1999 between Endeavour
Capital Fund, SA, Interiors, Inc. and Petals, Inc.
10.28 Letter Agreement dated August 2, 1999 by and among Interiors,
Sovereign, Dominion and Dominion Investment Fund, LLC.*
11.1 Statement re: computation of per share earnings.
21.1 Subsidiaries of the Registrant.*
27 Financial Data Schedule
99.1 U.S. Patent and Trademark Office Trademark Reg. No. 1,736,623.7/
99.2 U.S. Patent and Trademark Office Service Mark Reg. No. 1,783,694.7/
* Previously filed.
1/ Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed March 4, 1999 (File No. 00-24352), as amended, which
exhibit is incorporated herein by reference.
2/ Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed March 9, 1999 (File No. 00-24352) which exhibit is
incorporated herein by reference.
28
<PAGE>
3/ Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed March 9, 1999 (File No. 00-24352), as amended, which
exhibit is incorporated herein by reference.
4/ Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed August 14, 1998 (File No. 00-24352), as amended, which
exhibit is incorporated herein by this reference.
5/ Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed August 10, 1998 (File No. 00-24352), as amended, which
exhibit is incorporated herein by this reference.
6/ Previously filed as an exhibit to Interiors' Current Report on Form
8-K filed April 9, 1999 (File No. 00-24352), as amended, which
exhibit is incorporated herein by reference.
7/ Previously filed as an exhibit to the Registration Statement on Form
SB-2 (the "Registration Statement") (Registration No. 33-77288-NY),
which exhibit is incorporated herein by reference.
8/ Previously filed as an exhibit to Amendment No. 1 to the
Registration Statement (Registration No. 33-77288-NY), which exhibit
is incorporated herein by reference.
9/ Previously filed as an exhibit to Annual Report on Form 10-KSB for
fiscal year ended June 30, 1998 (File No. 0-24352), which exhibit is
incorporated herein by this reference.
10/ Previously filed as an exhibit to Amendment No. 1 to the
Registration Statement on Form S-3 (Registration No. 333-63207),
which exhibit is incorporated herein by reference.
11/ Previously filed as an exhibit to Annual Report on Form 10-KSB for
fiscal year ended June 30, 1994 (File No. 0-24352), which exhibit is
incorporated herein by this reference.
12/ Previously filed as an exhibit to Amendment No. 3 to the
Registration Statement (Registration No. 33-7728-NY), which exhibit
is incorporated by reference.
13/ Previously filed as an exhibit to Current Report on Form 8-K filed
March 10, 1998 (File No. 00-24352), which exhibit is incorporated
herein by reference.
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
INTERIORS, INC.
By: /s/ MAX MUNN
----------------------------------------------
Name: Max Munn
Title: Chairman, President and Chief Executive
Officer
In accordance with the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ MAX MUNN Chairman, President, Chief October 13, 2000
------------------------ Executive Officer, and Director
Max Munn
/s/ ROBERT J. CONOLOGUE Chief Financial Officer, October 13, 2000
------------------------ Executive Vice President and
Robert J. Conologue Principal Accounting Officer
/s/ ROGER LOURIE Director October 13, 2000
------------------------
Roger Lourie
/s/ RICHARD JOSEPHBERG Director October 13, 2000
------------------------
Richard Josephberg
/s/ JAMES G. BLOISE Director October 13, 2000
------------------------
James G. Bloise
30
<PAGE>
PART IV
Item 14. Index to Consolidated Financial Statements of Interiors, Inc. and
Subsidiaries
Page
----
Report of Independent Public Accountants................................ F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2000 and 1999................ F-3
Consolidated Statements of Operations for the
years ended June 30, 2000, 1999 and 1998................................ F-4
Consolidated Statements of Stockholders'
Equity for the years ended June 30, 2000, 1999 and 1998................. F-6
Consolidated Statements of Cash Flows for
the years ended June 30, 2000, 1999 and 1998............................ F-9
Notes to Consolidated Financial Statements.............................. F-11
Financial Statement Schedule:
Schedule II. Valuation and Qualifying Accounts and Reserves............. S-1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission which are not included
with this additional financial data have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Interiors, Inc.:
We have audited the accompanying consolidated balance sheets of Interiors, Inc.
(a Delaware corporation) and subsidiaries as of June 30, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interiors, Inc. and
subsidiaries as of June 30, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
2000, in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced recurring net
losses and negative operating cash flows and at June 30, 2000, the Company had a
net working capital deficit resulting from the reclassification of a majority of
its debt to current liabilities. This reclassification was the result of the
Company's failure to meet certain requirements contained in their debt
agreements. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to consolidated
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen, LLP
New York, New York
October 13, 2000
F-2
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2000 and 1999
(amounts in thousands, except share data)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents .......................................................................... $ 6,229 $ 6,910
Accounts receivable, net of reserves of $2,351 and $793 in 2000 and 1999, respectively ............. 18,069 14,465
Inventories ........................................................................................ 23,324 22,972
Other current assets ............................................................................... 3,359 3,474
--------- ---------
Total current assets ........................................................................ 50,981 47,821
--------- ---------
Property and Equipment, net .......................................................................... 13,509 11,902
Goodwill, net ........................................................................................ 37,748 32,262
Other Assets, net .................................................................................... 2,989 1,781
--------- ---------
Total assets ................................................................................ $ 105,227 $ 93,766
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current maturities of long-term debt ............................................. $ 38,518 $ 7,654
Accounts payable ................................................................................... 16,939 12,645
Accrued liabilities ................................................................................ 17,104 10,383
--------- ---------
Total current liabilities ................................................................... 72,561 30,682
--------- ---------
Long-Term Debt ....................................................................................... 4,961 17,093
Other Long-Term Liabilities .......................................................................... 3,974 994
Commitments and Contingencies (Note 12)
Series B Redeemable Convertible Preferred Stock, par value $.01 per share, 100,000 shares
issued and outstanding ............................................................................. -- 1,000
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, 850,802 and 1,066,050 shares issued and outstanding in 2000 and 1999,
respectively .................................................................................. 9 11
Series B Redeemable Convertible Preferred Stock, $.01 par value, 200,000 shares
authorized, 200,000 and 100,000 shares issued and outstanding in 2000 and 1999,
respectively (1999-100,000 shares reported outside of stockholders' equity) ................... 2 1
Series C Redeemable Convertible Preferred Stock, $.01 par value, 6,527 shares
authorized, 0 and 6,527 shares issued and outstanding in 2000 and 1999, respectively .......... -- --
Class A common stock, $.001 par value, 60,000,000 shares authorized, 37,271,457 and
30,173,459 shares issued and outstanding in 2000 and 1999, respectively ......................... 37 30
Class B common stock, $.001 par value, 2,500,000 shares authorized, 2,455,000 shares issued
and outstanding in 2000 and 1999, respectively .................................................. 2 2
Treasury stock, at cost, 45,400 and 0 shares in 2000 and 1999, respectively ........................ (41) --
Accreted Dividends on Series B Redeemable Convertible Preferred Stock .............................. 2,000 832
Additional paid-in-capital ......................................................................... 63,343 64,214
Accumulated deficit ................................................................................ (38,659) (17,881)
Notes receivable ................................................................................... (2,962) (3,212)
--------- ---------
Total stockholders' equity .................................................................. 23,731 43,997
--------- ---------
Total liabilities and stockholders' equity ............................................. $ 105,227 $ 93,766
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements Of Operations
For the Years Ended June 30, 2000, 1999 and 1998
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Net Sales ............................................................................. $ 170,275 $ 80,433 $ 13,447
Cost of Goods Sold .................................................................... 108,058 50,449 8,269
--------- --------- ---------
Gross profit .......................................................................... 62,217 29,984 5,178
Selling, General, and Administrative Expenses:
Selling, general and administrative ................................................... 69,261 28,964 4,025
Write down of goodwill ................................................................ 3,000 -- --
--------- --------- ---------
Total expenses ........................................................................ 72,261 28,964 4,025
--------- --------- ---------
(Loss) income from operations ......................................................... (10,044) 1,020 1,153
--------- --------- ---------
Other Expenses (Income):
Interest expense ...................................................................... 8,284 4,185 963
Impairment loss on investments and non-operating receivables .......................... -- 6,088 --
Consulting and management fees ........................................................ -- (442) (335)
Minority interest ..................................................................... (55) (117) --
--------- --------- ---------
Total other expenses .................................................................. 8,229 9,714 628
--------- --------- ---------
(Loss) income before provision (benefit) for income taxes and extraordinary item ...... (18,273) (8,694) 525
Provision (Benefit) for Income Taxes .................................................. 308 200 (109)
--------- --------- ---------
(Loss) income before extraordinary item ............................................... (18,581) (8,894) 634
Extraordinary Gain from Early Extinguishment of Debt, net ............................. -- 870 --
--------- --------- ---------
Net (Loss) Income ..................................................................... $ (18,581) $ (8,024) $ 634
========= ========= =========
Earnings Per Common Share:
Basic
(Loss) income before extraordinary item ............................................... $ (18,581) $ (8,894) $ 634
Preferred dividends ................................................................... (1,029) (518) (340)
Accreted preferred dividends .......................................................... (1,168) (832) --
--------- --------- ---------
Net (loss) income attributable to common shares before extraordinary item ............. (20,778) (10,244) 294
Extraordinary gain from early extinguishment of debt, net ............................. -- 870 --
--------- --------- ---------
Net (loss) income ..................................................................... $ (20,778) $ (9,374) $ 294
========= ========= =========
Net earnings per common share - basic:
Net earnings from continuing operations per common share .............................. $ (0.59) $ (0.46) $ 0.04
Extraordinary gain from early extinguishment of debt .................................. -- $ 0.04 --
--------- --------- ---------
Net earnings per common share - basic ................................................. $ (0.59) $ (0.42) $ 0.04
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements Of Operations (continued)
For the Years Ended June 30, 2000, 1999 and 1998
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Diluted
(Loss) income before extraordinary item ............................................... $(18,581) $ (8,894) $ 634
Preferred dividends ................................................................... (1,029) (518) (340)
Accreted preferred dividends .......................................................... (1,168) (832) --
-------- -------- --------
Net (loss) income attributable to common shares before extraordinary item ............. (20,778) (10,244) 294
Extraordinary gain from early extinguishment of debt, net ............................. -- 870 --
-------- -------- --------
Net (loss) income ..................................................................... $(20,778) $ (9,374) $ 294
======== ======== ========
Net earnings per common share - diluted:
Net earnings from continuing operations per common share .............................. $ (0.59) $ (0.46) $ 0.04
Extraordinary gain from early extinguishment of debt .................................. -- $ 0.04 --
-------- -------- --------
Net earnings per common share - diluted ............................................... $ (0.59) $ (0.42) $ 0.04
======== ======== ========
Weighted average number of shares used in computation of earnings per share
Basic ................................................................................. 35,124 22,036 7,251
Diluted ............................................................................... 35,124 22,036 8,154
======== ======== ========
Weighted average number of shares used in computation of earnings per
share from extraordinary gain
Basic ................................................................................. 35,124 22,036 7,251
Diluted ............................................................................... 35,124 22,036 8,154
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Years Ended June 30, 2000, 1999 and 1998
(amounts in thousands)
<TABLE>
<CAPTION>
Class A Class B
Series A Series B Series C ------- -------
Preferred Stock Preferred Stock Preferred Stock Common Stock Common Stock
--------------- --------------- --------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 1,147 $ 12 5,261 $ 5 1,770 $ 2
Sale of Treasury Stock
Conversion of preferred stock to
common stock (518) (5) 1,553 1
Class B Common Shares issued 730 1
Escrow shares 7,500 8
Class A Common Shares issued for
services rendered 227 --
Common stock issued in connection
with acquisitions 1,079 1
Exercise of Class WA Warrants, net
of expenses 2,607 3
Warrants issued in connection
with convertible debt
Stock dividends declared December, 1997 530 1
Conversion of Class B Common shares
into Class A Common shares 395 1 (395) (1)
Issuance of Preferred Stock 50
Conversion of promissory notes to Class
A common 463 --
Net income through June 30, 1998
------------------------------------------------------------------------------------
Balance, June 30, 1998 679 7 19,615 20 2,105 2
Class B Common shares issued 1,725 1
Series B Preferred shares issued, net of
expenses 100 1
Series C Preferred Shares issued, net of
expenses 5
Conversion of Class B to Class A Common 125 (125)
Conversion of Preferred to Class A Common (1,946) (19) 5,838 6
Escrow shares 5,000 5
CSL acquisition 2
Troy Lighting acquisition 650 1
Windsor Art acquisition 1,500 2
MHI acquisition 1,056 1
<CAPTION>
Additional * Accumulated Treasury Note
Paid in Capital (Deficit) Stock Receivable Total
--------------- ----------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1997 $ 13,217 $ (8,680) $ (1) $ (437) $ 4,118
Sale of Treasury Stock 479 1 480
Conversion of preferred stock to
common stock 4
Class B Common Shares issued 510 (510) 1
Escrow shares (8)
Class A Common Shares issued for
services rendered 351 351
Common stock issued in connection
with acquisitions 1,749 1,750
Exercise of Class WA Warrants, net
of expenses 3,775 3,778
Warrants issued in connection
with convertible debt 200 200
Stock dividends declared December, 1997 530 (531)
Conversion of Class B Common shares
into Class A Common shares
Issuance of Preferred Stock 250 250
Conversion of promissory notes to Class
A common 695 695
Net income through June 30, 1998 634 634
-----------------------------------------------------------
Balance, June 30, 1998 21,752 (8,577) (947) 12,257
Class B Common shares issued 2,004 (1,607) 398
Series B Preferred shares issued, net of
expenses 1,004 1,005
Series C Preferred Shares issued, net of
expenses 4,480 4,480
Conversion of Class B to Class A Common
Conversion of Preferred to Class A Common 13
Escrow shares (5)
CSL acquisition 1,927 1,927
Troy Lighting acquisition 974 975
Windsor Art acquisition 2,530 2,531
MHI acquisition 2,299 2,300
</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.
F-6
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (continued)
For the Years Ended June 30, 2000, 1999 and 1998
(amounts in thousands)
<TABLE>
<CAPTION>
Class A Class B
Series A Series B Series C ------- -------
Preferred Stock Preferred Stock Preferred Stock Common Stock Common Stock
--------------- --------------- --------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of Class WA Warrants 240 --
Exercise of Class WB Warrants 2,796 3
Exercise of Class WC Warrants 2,321 23
Exercise of other warrants 827 1
Warrants issued with convertible debentures
Warrants issued in Petals acquisition
Shares issued for services rendered 181 --
Shares issued in connection with settlement 10 -- 10 --
Escrow shares transferred to outside investor 1,250 1 (1,250) (1)
Shares issued in connection with
employment agreement 100 --
Discount incurred with convertible notes
Class A shares issued, convertible notes 2,131 2
Stock Dividend 345 --
Windsor Art extinguishment of debt
Retirement of treasury stock
Escrow shares transferred to outside investor
Shares issued for Stylecraft finance charges 10 --
Retirement of escrow and Windsor shares (11,500) (12)
Accretion of Dividend - Warrants Series C
Preferred Stock
<CAPTION>
Additional * Accumulated Treasury Note
Paid in Capital (Deficit) Stock Receivable Total
--------------- ----------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Exercise of Class WA Warrants 361 361
Exercise of Class WB Warrants 5,589 5,592
Exercise of Class WC Warrants 12,572 (382) 12,214
Exercise of other warrants 1,150 1,151
Warrants issued with convertible debentures 1,000 1,000
Warrants issued in Petals acquisition 50 50
Shares issued for services rendered 343 343
Shares issued in connection with settlement 42 42
Escrow shares transferred to outside investor 1,200 1,200
Shares issued in connection with
employment agreement 125 125
Discount incurred with convertible notes 728 728
Class A shares issued, convertible notes 1,933 1,935
Stock Dividend 448 (448)
Windsor Art extinguishment of debt (1,317) (1,317)
Retirement of treasury stock (1,317) 1,317 -0-
Escrow shares transferred to outside investor 2,775 (275) 2,500
Shares issued for Stylecraft finance charges 16 16
Retirement of escrow and Windsor shares 12
Accretion of Dividend - Warrants Series C
Preferred Stock 832 (832)
</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.
F-7
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (continued)
For the Years Ended June 30, 2000, 1999 and 1998
(amounts in thousands)
<TABLE>
<CAPTION>
Class A Class B
Series A Series B Series C ------- -------
Preferred Stock Preferred Stock Preferred Stock Common Stock Common Stock
--------------- --------------- --------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Finance charges connected with
12% promissory notes
Stock options issued to officer
Deferred financing expense
Net income (loss) through June 30, 1999
------------------------------------------------------------------------------------
Balance June 30, 1999 1,066 11 100 1 7 -- 30,173 30 2,455 2
Conversion of Series A preferred stock to
common stock (205) (2) 615 1
Shares issued in connection with
employment agreement 53
Additional shares issued regarding MHI
acquisition 1,633 2
Shares issued regarding Concepts 4, Inc.
acquisition 4,382 4
Retirement of stock (10) (10)
Reclassification of Mandatory Redeemable
Preferred Series B to Equity 100 1
Conversion of Preferred Series C shares to
debt (7)
Conversion of debt to equity 200
Repurchase of common shares
Payments received on notes receivables
Warrants issued in connection with debt
Accretion of Dividend - Warrants Preferred
Series C
Preferred Series C dividend
Dividends Preferred Series A and B, net of
reversals 225
Net loss through June 30, 2000
------------------------------------------------------------------------------------
Balance June 30, 2000 851 $ 9 200 $ 2 -- $ -- 37,271 $ 37 2,455 $ 2
====================================================================================
<CAPTION>
Additional * Accumulated Treasury Note
Paid in Capital (Deficit) Stock Receivable Total
--------------- ----------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Finance charges connected with
12% promissory notes 49 49
Stock options issued to officer 75 75
Deferred financing expense 82 82
Net income (loss) through June 30, 1999 (8,024) (8,024)
------------------------------------------------------------
Balance June 30, 1999 65,046 (17,881) (3,212) 43,997
Conversion of Series A preferred stock to
common stock 1 --
Shares issued in connection with
employment agreement 75 75
Additional shares issued regarding MHI
acquisition 642 644
Shares issued regarding Concepts 4, Inc.
acquisition 2,819 2,823
Retirement of stock (25) (25)
Reclassification of Mandatory Redeemable
Preferred Series B to Equity 999 1,000
Conversion of Preferred Series C shares to
debt (6,527) (6,527)
Conversion of debt to equity 291 291
Repurchase of common shares (41) (41)
Payments received on notes receivables 250 250
Warrants issued in connection with debt 662 662
Accretion of Dividend - Warrants Preferred
Series C 1,168 (1,168)
Preferred Series C dividend (279) (279)
Dividends Preferred Series A and B, net of
reversals 192 (750) (558)
Net loss through June 30, 2000 (18,581) (18,581)
------------------------------------------------------------
Balance June 30, 2000 $65,343 $(38,659) $(41) $(2,962) $ 23,731
============================================================
</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 financial statements.
F-8
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended June 30, 2000, 1999 and 1998
(amounts in thousands)
<TABLE>
<CAPTION>
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net (loss) income ............................................................... $(18,581) $ (8,024) $ 634
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation and amortization ................................................... 5,894 2,223 742
Net book value of rental property disposed ...................................... 1,390 599 --
Provision for losses on accounts receivable ..................................... 1,438 31 228
Provision for inventory ......................................................... 2,848 971 346
Impairment of goodwill .......................................................... 3,000 -- --
Impairment loss on investments and other non-operating receivables .............. -- 6,088 --
Non-cash financing charge, including accretion of interest on acquisition
indebtedness ................................................................... 1,295 1,192 406
Provision for issuance of stock ................................................. 75 510 --
Minority interest in subsidiary ................................................. (55) 55 --
Changes in Assets and Liabilities: .............................................
Increase in accounts receivable ............................................ (2,121) (163) (417)
Increase in inventories .................................................... (2,289) (1,615) (486)
Increase in prepaid expenses and other current assets ...................... (2,058) (886) (539)
Decrease (increase) in other assets ........................................ 224 834 (1,354)
Increase (decrease) in accounts payable and accrued expenses ............... 4,646 (2,182) 102
-------- -------- --------
Net cash used in operating activities ........................................... (4,294) (367) (338)
-------- -------- --------
Cash Flow From Investing Activities:
Capital expenditures ............................................................ (5,788) (4,226) (237)
Acquisition of Concepts 4, net of cash acquired ................................. 1,454 -- --
Acquisition of Windsor, net of cash acquired .................................... -- (2,277) --
Acquisition of Troy Lighting, net of cash acquired .............................. -- (2,344) --
Acquisition of MHI, net of cash acquired ........................................ -- (2,188) --
Acquisition of CSL, net of cash acquired ........................................ -- (678) --
Acquisition of Stylecraft Lamps, net of cash .................................... -- (10,624) --
Acquisition of Petals, net of cash acquired ..................................... -- (6,921) --
Acquisitions of Vanguard and Artmaster, net of cash acquired .................... -- -- (1,828)
-------- -------- --------
Net cash used in investing activities ........................................... (4,334) (29,258) (2,065)
-------- -------- --------
Cash Flow From Financing Activities:
Borrowing from Foothill under revolving loans ................................... 13,200 -- --
Net (repayments) proceeds from issuance of debt ................................. (18,400) 19,363 3,143
Repayments of debt and capitalized lease obligations ............................ (1,949) (16,369) (847)
Borrowings under debt instruments ............................................... 15,459 -- --
Net proceeds from exercise of common and preferred stock warrants ............... -- 19,320 3,873
Net proceeds from sale of common and preferred stock options .................... -- 10,185 --
Other, net ...................................................................... (363) -- --
-------- -------- --------
Net cash provided by financing activities ....................................... 7,947 32,499 6,169
-------- -------- --------
Net (decrease) increase in cash ................................................. (681) 2,874 3,766
Cash, beginning of year ......................................................... 6,910 4,036 269
-------- -------- --------
Cash, end of year ............................................................... $ 6,229 $ 6,910 $ 4,036
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for -
Interest ........................................................................ $ 4,693 $ 3,015 $ 500
Taxes ........................................................................... 150 13 19
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-9
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Years Ended June 30, 2000, 1999 and 1998
(amounts in thousands)
<TABLE>
<CAPTION>
June 30,
-----------------------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Supplemental disclosure of non-cash items from financing activities::
Conversion of Series A Redeemable Convertible Preferred Stock to Class A
Common Stock ...................................................................... -- 14 --
Conversion of Series C Redeemable Convertible Preferred Stock to Debt ............. 7,785 -- --
Stock issuance for financing charges .............................................. -- 65 --
Stock issuance for services ...................................................... -- 343 --
Stock issuance in connection with legal settlement ................................ -- 42 --
Stock issuance per employment agreement ........................................... 75 125 --
Debt Financing Costs .............................................................. -- -- 351
Debt issued for services rendered ................................................. -- -- 45
Common Stock repurchased in conjunction with early extinguishment of debt ......... -- (1,317)
Debt and Guarantee Reduction Through Treasury Stock Issuance ...................... -- -- 480
Stock Issuance Financed by note or Short-Term Receivable .......................... -- -- 761
Debt Discount-Warrants Issued ..................................................... -- -- 200
Promissory Note Conversion ........................................................ -- 1,935 695
Common Stock issued for preferred dividends ....................................... 291 449 531
Supplemental disclosure of non-cash items related to acquisitions:
Fair value of assets acquired, excluding cash ..................................... -- 41,263 4,671
Issuance of common stock .......................................................... (2,823) (5,806) (1,750)
Issuance of preferred stock ....................................................... -- (2,027)
Issuance of notes payable ......................................................... (4,213) (2,231) (1,604)
Issuance of warrants .............................................................. -- 50
Payments in connection with acquisitions, net of cash acquired .................... -- (23,467) (1,710)
Liabilities assumed ............................................................... -- 27,442 6,052
Supplemental disclosure of non-cash items from investing activities:
Issuance of common stock in connection with acquisitions .......................... 2,823 5,806 1,750
Issuance of preferred stock in connection with acquisitions ....................... -- 2,027
Issuance of debt in connection with acquisitions .................................. 4,213 2,231 1,604
Issuance of warrants in connection with convertible debentures .................... -- 1,000 --
Issuance of Class B Common Shares in connection with Laurie Munn debt guaranties .. -- 2,455 --
Issuance of common stock as dividend on Series A Redeemable Convertible
Preferred Stock ................................................................. 191 -- --
Capital lease equipment acquisition ............................................... (1,863) -- --
Increase in capital lease obligation ............................................. 1,863 -- --
</TABLE>
The accompanying notes are in integral part
of these consolidated financial statements.
F-10
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business and Going Concern Matters
Business
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 and hospitality
industries. The Company's operations are primarily conducted in the United
States.
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 shown in the accompanying consolidated financial statements,
for the years ended June 30, 2000 and 1999, the Company had net losses of
$18,581,000 and $8,024,000, 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 June
30, 2000, the Company classified $30,772,000 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.
The Company has recently 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 in
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.
At June 30, 2000, the Company had $30,772,000 of long term debt,
including its secured convertible notes ($15,285,000), bank lines of
credit and revolving loans ($13,200,000) and bank term loans ($2,287,000),
classified as current liabilities because the Company was not in
compliance with certain requirements governing these instruments (as
described in Note 9 "Debt"). 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
F-11
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $542,000 in accrued interest
as of June 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. Further, the Company has converted an aggregate of
$3,000,000 of its outstanding debt and Series B Preferred Shares to common
stock (see Note 19) and is continuing to pursue the conversion of other
debt instruments to common stock in an effort to reduce its interest
expense.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of
Interiors, Inc. and its wholly-owned and majority owned subsidiaries,
which are included from their respective dates of acquisition.
Accordingly, significant inter-company accounts and transactions have been
eliminated in the consolidated financial statements.
Revenue Recognition
The Company's revenue is generally recognized at the time finished
goods, whether standard product or custom work, is shipped. A small
portion of the Company's 1998 revenue was recognized upon the acceptance
of goods. Payments received for merchandise not yet shipped or accepted
are reflected within current liabilities. Sales returns have not
historically been significant.
The Company's design, merchandising and leasing business, Habitat
Solutions, Inc. ("Habitat Solutions"), is comprised of Model Home
Interiors, Inc. ("MHI"), and Concepts 4, Inc. ("Concepts 4"). As part of
its business, MHI leases furniture and fixtures under operating leases to
its customers with terms generally of one to three years and recognizes
revenue over the term of the leases. Concepts 4 uses the percentage of
completion method of accounting for revenue recognition.
Cash and Cash Equivalents
Cash equivalents are comprised of deposits in banks and cash
invested temporarily in various instruments with maturities of three
months or less at time of purchase.
Inventories
Inventories are valued at the lower of cost or market, with cost
determined using the first-in, first-out method. Finished goods consist of
those items available for shipping.
Investment In Affiliates
The Company accounts for its investment in affiliates under the cost
method. The Company evaluates its cost basis investments for
recoverability on a quarterly and annual basis. It is the Company's policy
to review all available financial data as well as discuss each
investment's operations with respective company management. Should
available information at any reporting date indicate impairment in the
carrying value of either of the Company's cost investments, an adjustment
would be recorded. As of June 30, 2000, the Company did not have any
investments in affiliates. See Note 3 "Investment in Affiliates".
F-12
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment is stated at cost. The cost of additions and
improvements and the costs incurred in the construction of castings and
the related master molds are capitalized. Expenditures for repairs and
maintenance are expensed in the period incurred. Depreciation and
amortization of property and equipment is provided utilizing straight-line
and accelerated methods over the estimated useful lives of the respective
assets as follows:
YEARS
---------
Machinery and equipment.................. 3 - 10
Computer equipment and software.......... 5
Furniture and fixtures................... 7 - 10
Building and improvements................ 7 - 40
Leasehold improvements are amortized over the shorter of the
remaining term of the lease or the useful life of the improvement
utilizing the straight-line method. Furniture and fixtures under operating
leases of MHI are amortized on a straight-line basis. When the Company
sells these furniture and fixtures, the proceeds are reported as revenue
and the net book value of the equipment is reported as cost of sales in
the accompanying financial statements.
Income Taxes
The Company uses the liability method of accounting for income
taxes. Under this method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates to differences between the financial statement carrying amounts and
the tax basis of existing assets and liabilities. Deferred income taxes
have been provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
Goodwill and Other Long-Lived Assets
In connection with acquisitions, amounts were paid in excess of the
fair market value of the net identifiable assets acquired. These amounts
have been recorded as goodwill and are being amortized over 40 years. The
Company continually reviews its long-lived assets for events or changes in
circumstances that might indicate the carrying amount of the assets may
not be recoverable. The Company assesses the recoverability of assets by
determining whether the amortization of such assets over their remaining
lives can be recovered through projected undiscounted cash flows. The
amount of impairment, if any, is measured based on projected discounted
future cash flows using a discount rate reflecting the Company's average
cost of funds. At June 30, 2000, the Company recognized a $3.0 million
asset impairment related to certain subsidiaries, which was reported as a
reduction to goodwill in the accompanying financial statements.
Amortization of goodwill was $1,059,000, $529,000 and $42,000 in fiscal
year 2000, 1999 and 1998, respectively. Accumulated amortization was
$1,630,000 and $571,000 at June 30, 2000 and 1999, respectively.
Deferred Financing Costs
Debt financing costs are deferred and amortized over the term of the
related debt. As of June 30, 2000 and 1999, unamoritized deferred
financing costs, which are included in Other Assets, were $1,790,000 and
$580,000, respectively. The amortization expense for the years ended June
30, 2000, 1999 and 1998 was $647,000, $766,000 and $186,000, respectively.
During the fiscal year ended June 30, 2000, the Company entered into a new
revolving credit agreement with Foothill Capital Corporation resulting in
the write-off of unamortized deferred financing cost of approximately
$550,000. During the fiscal year ended June 30, 1999, deferred financing
costs of approximately $1,000,000 related to convertible debt was written
off when the debt was converted into Class A Shares.
Use of Estimates
F-13
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
The Company has determined the estimated fair value of its financial
instruments using appropriate market information and valuation
methodologies. Considerable judgement is required to develop the estimates
of fair value; thus, the estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange. The Company's
financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable and debt. The carrying value of these assets
and liabilities and estimates of their fair market value at June 30, 2000
and 1999 are included in Note 18.
Earnings (Loss) Per Common Share
Net earnings (loss) per share amounts ("basic EPS") were computed by
dividing net earnings (loss) by the weighted average number of common
shares outstanding, and excluding any potential dilution.
For purposes of this calculation, common shares of the Company
include both Class A Common Stock, par value $.001 per share ("Class A
Shares") and Class B Common Stock, par value $.001 per share ("Class B
Shares"). Net earnings per diluted share amounts ("diluted EPS") were
computed assuming potential dilution from the exercise of outstanding
stock options, warrants and other securities. Where appropriate, the
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 exchanged for the Limeridge Note and
the Endeavour Note (both as defined below) during fiscal year 2000 and,
accordingly, there are no Series C Preferred Shares outstanding as of June
30, 2000. As of June 30, 2000, the Company had 4,525,000 shares covered by
an option which were not included in the diluted earnings per share
calculation since the option exercise prices were below the average stock
price during the year.
Recent Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board issued, SFAS
No. 138, "Accounting for Derivative Instruments and Hedging Activities",
which amends SFAS No. 133 as amended in SFAS No. 137 which is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
SFAS No. 133 requires that an entity recognize all derivatives as either
assets or liabilities on the statement of financial position and measure
those instruments at fair value. The Company is reviewing what impact, if
any, the adoption of SFAS No. 133 would have on the Company's financial
statements.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin 101 "Revenue Recognition in Financial
Statements". The effective date has been deferred until fiscal year 2001.
Based on current interpretations, no material impact on the Company's
financial statements is anticipated.
Reclassifications
Certain prior year amounts have been reclassified to conform to
current year presentation.
3. Investment In Affiliates
In the formation of Decor Group, Inc. ("Decor"), a separate
publicly-held corporation, the Company's intention was to create a company
with a corporate identity separate and distinct from that of Interiors.
Accordingly, in March 1996, the Company issued 200,000 Class A Shares,
200,000 Series A Preferred Shares and agreed to guarantee indebtedness of
Decor in exchange for 83,333 shares of Series A Non-Voting Convertible
F-14
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preferred Stock and an option to purchase 6,666,667 shares of Series B
Non-Convertible Voting Preferred Stock (the "Option Shares") of Decor. The
83,333 shares of Series A Non-Voting Convertible Preferred Stock were sold
by Interiors in February 1997 and later reacquired in January 1999 for
$190,000. The 200,000 Class A Shares and 200,000 Series A Preferred Shares
were sold by Decor.
During the months of August and September 1996, the Company
purchased 18,311 shares of Series C Non-Voting Convertible Preferred
Stock, which are convertible into three shares of Decor's common stock, at
a cost of $824,000. Effective with the Company's acquisition of the Option
Shares in September 1996 for $2,000, the Company executed a Voting
Agreement (the "Voting Agreement") to vest the power to vote the Option
Shares in a Voting Trust until the repayment of $600,000 of indebtedness.
Pursuant to the Voting Trust, the Company did not have the power to
exercise control over Decor. The Voting Agreement terminated in October
2000 upon the repayment of such indebtedness and the Company commenced the
consolidation of Decor in its financial statements.
The Company's holding in Decor had been recorded on the Company's
financial statements under the cost method of accounting. The cost method
was used because Interiors control of Decor was subject to the Voting
Agreement. Interiors had no residual common equity interest and the
minority owners of Decor were entitled to 100% of Decor's profits and
losses. In fiscal 1999, the Company entered into an agreement, which was
subsequently terminated, to acquire Decor. In connection with such
potential acquisition, the Company allocated and capitalized costs of
investment banking services in the amount of $350,000 during fiscal 1998
based on the fair value of the trading securities received, 100,000 Class
A Shares and 100,000 Series A Preferred Shares, as direct consulting fees.
During the third quarter of fiscal 1999, the Company recorded an
impairment loss of its entire investment, approximately $3,300,000, in
Decor because the Company believed that based on Decor's financial
condition its investment had been permanently impaired. The Company had
established reserves for the uncollectibility of its entire receivable,
approximately $1,000,000, owed to the Company by Decor and the possibility
that the Company would be required to pay up to $300,000 pursuant to its
guaranty of approximately $580,000 of indebtedness of Decor owed to Austin
Financial. For the fiscal years 2000, 1999 and 1998, the Company
recognized consulting and management fee income of $0, $115,000 and
$70,000, respectively. The 1999 and 1998 management fee income and
resulting receivable was written off during 1999 as discussed above.
The Company consummated certain transactions during the fiscal year
ended June 30, 1997 with Photo-To-Art, Ltd. ("Photo-to-Art"), a company
that converts photographs into paintings, whereby the Company agreed to
sell $1,140,000 worth of certain canvas related assets and other goods and
consulting services to Photo-to-Art in exchange for 270,000 shares of
common stock of Photo-to-Art and 120,000 warrants to purchase additional
shares at $4.50 per share. The valuation ascribed to this transaction by
the Company was comparable to the values received by unrelated investors
in private placement transactions between those investors and
Photo-to-Art. Such amounts were reflected as a cost basis investment on
the Company's balance sheet. Interiors also received $50,000 in cash for
use of its mailing lists. During the fourth quarter of fiscal 1999, the
Company recorded an impairment loss of its entire investment,
approximately $1,100,000, in Photo-to-Art because the Company believed
that, based on Photo-to-Art's financial condition its investment had been
permanently impaired. In addition, a $250,000 reserve had been recorded
against non-operating receivables from Photo-to-Art of the approximately
$325,000, owed to the Company from Photo-to-Art. During fiscal 2000, the
Company wrote-off its remaining receivable from Photo-to-Art recognizing
an additional loss of $75,000. Photo-to-Art is currently being liquidated
under Chapter 7 of the Bankruptcy Code. See Note 13 - "Related Party
Transactions."
4. Acquisitions
Vanguard. On March 10, 1998, the Company consummated the
transactions contemplated by a merger agreement among the Company, an
acquisition subsidiary of the Company, Henlor, Inc. ("Henlor"), and the
shareholders of Henlor. Pursuant to the agreement, the Company's
acquisition subsidiary merged with and into Henlor with Henlor continuing
as the surviving corporation. Henlor also merged with its subsidiary
Vanguard Studios, Inc. ("Vanguard"). The merger consideration paid by the
Company consisted of (i) a cash payment of $705,000, (ii) an 8% sinking
fund promissory note in the aggregate principal amount of $794,000 due
December 1, 2000, of which $125,000 is outstanding as of June 30, 2000 and
(iii) the issuance of 299,581 Class A Shares valued at $500,000 to the
former shareholders of Henlor. This acquisition has been accounted for
under the purchase
F-15
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
method of accounting and the results of the operations have been included
in the consolidated financial statements since the date of acquisition.
The excess of purchase price over the fair values of net assets acquired
was approximately $3.0 million and has been recorded as goodwill in the
consolidated balance sheets, and is being amortized on a straight-line
basis over forty years.
Artmaster. On March 23, 1998, the Company consummated the
transactions contemplated by a merger agreement among the Company,
Merchandise Sales, Inc. ("MSI"), Artmaster Studios, Inc. ("Artmaster"),
and certain shareholders of MSI. Pursuant to the agreement, MSI merged
with and into Artmaster, with Artmaster continuing as the surviving
corporation. The merger consideration paid by the Company consisted of a
10% subordinated note of the Company in the amount of $537,000 and 779,302
Class A Shares valued at $1,250,000 (the "MSI Merger Shares"). In
addition, the Company agreed to repay indebtedness of MSI owed to certain
creditors of MSI in the aggregate amount of $1,023,000 (which payment
consisted of a cash payment of $750,000 and a 10% subordinated promissory
note in the amount of $273,000). The Company repaid the $273,000 and
$537,000 promissory notes on July 31, 1998 and March 31, 1999,
respectively. In May 1999, the former shareholders of MSI transferred the
MSI Merger Shares to Aberdeen Avenue, LLC in consideration for $1,250,000,
and the Company was released from all continuing obligations under the
merger agreement. This acquisition has been accounted for under the
purchase method of accounting and the results of the operations have been
included in the consolidated financial statements since the date of
acquisition. The excess of purchase price over the fair values of net
assets acquired was approximately $3,800,000 and has been recorded as
goodwill in the consolidated balance sheets, and is being amortized on a
straight-line basis over forty years.
Windsor. On July 30, 1998, the Company consummated the transactions
contemplated by a stock purchase agreement between the Company and Bentley
International, Inc. ("Bentley"), a publicly-traded Missouri corporation.
Pursuant to the agreement, the Company purchased all of the issued and
outstanding shares of Windsor Art, Inc. ("Windsor"). The purchase price
consisted of $1,707,000 in cash and two secured subordinated 8% promissory
notes, one in the amount of $3,300,000 and the other in the amount of
$2,000,000 (collectively, the "Windsor Notes"). Concurrently with the
purchase of the shares of Windsor, the Company purchased 150,000 shares of
common stock of Bentley (the "Bentley Shares") valued at $2,531,000 and a
warrant to purchase 300,000 shares of common stock of Bentley (the
"Bentley Warrant") in exchange for the issuance of 1,500,000 Class A
Shares (the "Windsor Shares"). In addition, an officer of Bentley entered
into a consulting agreement with Windsor pursuant to which he received
warrants to purchase 100,000 Class A Shares. One of the Windsor Notes, in
the amount of $3,300,000, was repaid on September 30, 1998. On December 1,
1998, the other Windsor Note, in the amount of $2,000,000, and the Windsor
Shares were repurchased by the Company in exchange for $2,442,000, the
transfer, on behalf of Bentley, of 110,000 Bentley Shares and 100,000
Class A Shares to a former officer of Bentley, and some furniture. In
addition, an officer of Bentley agreed to terminate his consulting
agreement with Windsor, as well as warrants to purchase 50,000 Class A
Shares, in exchange for $125,000, 40,000 Bentley Shares and the Bentley
Warrant. This repurchase transaction resulted in an extraordinary gain of
approximately $1,371,000, which was offset by $500,000 of net losses on
other debt extinguishments including the write-off of unamortized deferred
financing charges associated with the debt extinguished. The Windsor
Shares were retired by the Company on February 22, 1999. This acquisition
has been accounted for under the purchase method of accounting and the
results of the operations have been included in the consolidated financial
statements since the date of acquisition. The excess of purchase price
over the fair values of net assets acquired was approximately $8,200,000
and has been recorded as goodwill in the consolidated balance sheet, and
is being amortized over forty years.
Troy. On August 14, 1998, the Company consummated the transactions
contemplated by a July 2, 1998 merger agreement among the Company, Troy
Lighting, Inc. ("Troy"), and the former shareholders of Troy. Pursuant to
the agreement, a wholly-owned subsidiary of the Company merged with and
into Troy, with Troy continuing as the surviving corporation. The merger
consideration paid by the Company consisted of a cash payment of $250,000
and the issuance of 650,000 Class A Shares valued at $975,000 (the "Troy
Merger Shares"). In addition, the Company agreed to cause Troy to repay
$1,700,000 in indebtedness to certain former shareholders of Troy. The
indebtedness was repaid. This acquisition has been accounted for under the
purchase method of accounting and the results of the operations have been
included in the consolidated financial statements since the date of
acquisition. The excess of purchase price over the fair values of net
assets acquired was approximately
F-16
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$3,300,000 and has been recorded as goodwill in the consolidated balance
sheets, and is being amortized over forty years.
On or about July 31, 1999, the former shareholders of Troy agreed to
sell the Troy Merger Shares to Dominion Capital Fund, Ltd., Dominion
Investment Fund, LLC and Sovereign Partners, L.P. (collectively, the "Troy
Purchasers") for $1,000,000. Contemporaneously therewith, the Company and
the Troy Purchasers entered into a letter agreement pursuant to which the
Troy Purchasers agreed not to sell or otherwise transfer the Troy Merger
Shares for a period of six months. If the Troy Merger Shares were worth
less $1,150,500 based on the sixty-day average of the Class A Shares
following January 25, 2000, the Company would be required to either pay
cash or issue additional Class A Shares to the Troy Purchasers in the
amount of the shortfall. The determination to pay shares or issue stock is
based upon, among other things, the price of the Class A Shares and the
liquidity needs of the Company at the time of payment. The amount of the
shortfall was approximately $470,000, which pursuant to the agreement is
accruing liquidated damages at a rate of 2% per month. The Company has not
paid such shortfall or issued shares and is currently negotiating with the
Troy Purchasers to settle this outstanding obligation. The Company has
accrued the additional cost, including interest as of June 30, 2000. Of
the $470,000 additional cost, $319,000 was recognized as additional
goodwill; $151,000 as accretion of interest plus accrued interest at the
rate of 2% per month, resulting in additional accrued interest of $47,000
as of June 30, 2000. The accretion of interest was recorded as interest
expense with a corresponding increase to additional paid in capital.
Model Home. On February 26, 1999, the Company consummated the
transactions contemplated by a merger agreement among the Company, MHI and
a wholly owned subsidiary of the Company. Pursuant to the Agreement, the
Company's wholly owned subsidiary merged with and into MHI, with MHI
continuing as the surviving corporation merger. The purchase price paid by
the Company consisted of a cash payment of $2,000,000, promissory notes
aggregating $231,000, which were repaid during the fiscal year ended June
30, 2000, and Class A Shares having a fair market value of $2,300,000 (the
"MHI Merger Shares"). Additionally, the Company agreed to issue Class A
Shares with a maximum fair market value of $2,000,000 (the "Earnout
Shares") upon the attainment of certain earnings goals by MHI during the
calendar years 2000, 2001 and 2002. This acquisition has been accounted
for under the purchase method of accounting and the results of the
operations have been included in the consolidated financial statements
since the date of acquisition. The excess of purchase price over the fair
values of net assets acquired was approximately $1,450,000 and has been
recorded as goodwill in the consolidated balance sheets, and is being
amortized over forty years.
At the time of closing, the Company deposited into escrow 1,056,342
Class A Shares to secure the Company's obligation to deliver the MHI
Merger Shares and to satisfy the promissory notes. If the value of the
Class A Shares held in escrow fell below $1,840,000 based on the ten
day-average of the closing price, the Company was required to deposit
additional shares into the escrow. As of June 30, 2000 the Company has
deposited an additional 665,000 shares. In August 2000, the Company
deposited an additional 968,271 Class A shares. During the first year
following the acquisition, MHI achieved certain earnings threshold
criteria established at the time of the transaction. Accordingly, in April
2000, the Company released 763,561 Earnout Shares valued at $644,000 to
the former shareholders of MHI, as the earnout shares during the first
calendar year after the acquisition. Based on the ten day-average of the
closing price of Class A Shares on August 28, 2000, the former
shareholders of MHI are entitled to 4,842,003 MHI Merger Shares. There are
currently only 4,088,889 MHI Merger Shares being held in escrow to satisfy
the Company's obligation. The former shareholders of MHI have sent the
Company a letter demanding the release of these shares as well as the
issuance of an additional 753,114 Class A Shares. The Company is currently
attempting to negotiate with the former shareholders to reach an
alternative payment method.
Stylecraft. On February 22, 1999, the Company consummated the
transactions contemplated by a stock purchase agreement among the Company
and the former shareholders of Stylecraft Lamps, Inc. ("Stylecraft")
pursuant to which the Company acquired all of the outstanding capital
stock of Stylecraft for $10,319,000 in cash. This acquisition has been
accounted for under the purchase method of accounting and the results of
the operations have been included in the consolidated financial statements
since the date of acquisition. The excess of purchase price over the fair
values of net assets acquired was approximately $5,400,000 and has been
recorded as goodwill in the consolidated balance sheets, and is being
amortized over forty years.
F-17
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CSL. On March 2, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement between the Company and CSL
Lighting Manufacturing, Inc. ("CSL"). Pursuant to the agreement, the
Company acquired 1,191,752 newly-issued shares of common stock, par value
$.001 per share, of CSL (the "CSL Shares"), representing approximately 51%
of the issued and outstanding shares of common stock of CSL. The purchase
price for the CSL Shares consisted of $600,000 in cash paid to CSL and the
issuance of 1,927 Series C Preferred Shares valued at $1,927,000 to
certain creditors of CSL in exchange for the cancellation of debt of CSL
having a principal amount of $1,028,000. This acquisition has been
accounted for under the purchase method of accounting and the results of
the operations have been included in the consolidated financial statements
since the date of acquisition. The excess of purchase price over the fair
values of net assets acquired was approximately $2,500,000 and has been
recorded as goodwill in the consolidated balance sheets, and is being
amortized on a straight-line basis over forty years. As a result of
applying the purchase method of accounting, the Company recognized a
minority interest of $172,000 at the date of acquisition. During fiscal
years 1999 and 2000, the Company has recognized a benefit for the
allocation of losses of CSL to the minority interest of $117,000 and
$55,000, respectively. During fiscal year 2000, CSL's net losses allocated
to the minority interest was limited to the balance remaining in minority
interest at June 30, 1999 resulting in the Company's 51% interest
absorbing a significantly higher portion of the total loss.
During fiscal year 1999, the Company loaned CSL an aggregate of
$355,000 in exchange for two 6.75% promissory notes due April 30, 2001 and
convertible into common stock of CSL at $0.345 per share. In addition, the
Company generated management fees in the amount of approximately $200,000
in connection with the provision of certain management services to CSL. As
of June 30, 2000, the Company owned 51% of the outstanding common stock of
CSL, and Mr. Munn, Chairman, President and Chief Executive Officer of the
Company, is the sole director of CSL.
Petals. On March 23, 1999, the Company consummated the transactions
contemplated by a stock purchase agreement among the majority stockholders
of Petals, Inc. ("Petals") and the Company pursuant to which the Company
acquired Petals in exchange for the cancellation of $2,440,000 of debt
owed by Petals to one of the stockholders, an aggregate of $4,000,000 in
cash and a 8% convertible note in the original principal amount of
$2,000,000 due March 23, 2001. The note is convertible at any time into
Class A Shares at $2.00 per share. The Company also issued an aggregate of
100,000 three-year warrants to purchase Class A Shares at an exercise
price of $3.50 per share to the minority stockholders (the "Petals
Warrants"). In connection with the transaction, Petals redeemed the
interests of the minority stockholders for aggregate consideration of
approximately $3.9 million in cash and $263,000 paid over nine months as
severance payments. This acquisition has been accounted for under the
purchase method of accounting and the results of the operations have been
included in the consolidated financial statements since the date of
acquisition. The excess of purchase price over the fair values of net
assets acquired was approximately $5,200,000 and has been recorded as
goodwill in the consolidated balance sheets, and is being amortized on a
straight-line basis over forty years.
Concepts 4, Inc. 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"). The purchase price consisted of (a) a cash
payments of $4,600,000, (b) a payment of $2,823,000 which was payable on
March 10, 2000 in cash or stock (the "March 2000 Payment"), (c) a cash
payment of $770,000 payable on December 15, 2000, (d) a cash payment of
$1,218,000 payable on December 15, 2001, (e) a cash payment of $1,218,000
payable on December 15, 2002, and (f) a cash payment of $1,007,000 payable
on March 10, 2003. 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 the operations for the calendar years 2000,
2001 and 2002. The present value of the future purchase price obligations
was approximately $5,732,000. As of June 30, 2000 the accretion of
interest on these obligations was approximately $357,000, which was
recognized as interest expense. As of June 30, 2000, the purchase price
obligations due were contained on the Company's balance sheet as current
accrued liabilities in the amount of $718,000 and other long term
liabilities in the amount of $2,546,000.
In satisfaction of the March 2000 Payment, the Company delivered to
an escrow account (the "Escrow Account") Class A Shares having a fair
market value of $2,823,000 (the "Escrow Shares"). If at any time the fair
F-18
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
market value of the Escrow Shares falls below 80% of this amount, the
Company is required to deliver additional Class A Shares to the Escrow
Account so that the fair market value of the Escrow Account equals
$2,823,000. The Company has the right (the "Call Option"), but not the
obligation, to redeem the Escrow Shares until September 10, 2000 for
$3,105,000 in cash or thereafter until March 10, 2001 at which time it is
obligated to pay cash or shares valued at $3,388,000. The Escrow Account
will terminate upon the earlier of March 10, 2001 or the date the Company
exercises the Call Option. If as of June 30, 2001 the Company has not
exercised the Call Option, the Escrow Shares will be delivered to the
former shareholders. The accretion of interest on the obligation as of
June 30, 2000 recognized as interest expense was approximately $141,000.
As of June 30, 2000, the Company had delivered an aggregate of
4,381,565 Class A Shares into escrow for payment to the former
shareholders of Concepts 4. In fiscal year 2001, the Company has added
another 3,164,000 Class A Shares to the escrow account. Such securities
are being held in Escrow account until March 10, 2001. If such securities
are worth less than $3,388,000 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 $3,387,000, 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 $3,105,000 from March 10, 2000 until September 10, 2000 and
thereafter until March 10, 2001 for $3,388,000. As of June 30, 2000, the
Company has recognized interest expense of approximately $141,000 due to
the required increase in the value of the shares at the dates indicated.
This acquisition has been accounted for under the purchase method of
accounting and the results of the operations have been included in the
consolidated financial statements since the date of acquisition. The
excess purchase price over the fair values of net assets acquired was
approximately $8,646,000 and has been recorded as goodwill in the
consolidated balance sheets, and is being amortized over forty years
Following are selected pro forma statements of operations
information which reflect the various acquisitions and transactions during
the two year period ended June 30, 2000 and as if they occurred at the
beginning of the prior fiscal year.
Years ended June 30,
(amounts in thousands
except per share data)
------------------------
2000 1999
----------- -----------
Net revenues................ $ 181,976 $ 168,183
Net (loss).................. (19,358) (11,489)
EPS basic and diluted....... (0.55) (.52)
The unaudited pro forma information is not necessarily indicative of
the results of operations of the combined companies had the acquisitions
occurred on the dates previously specified, nor is it indicative of future
results of operations for the combined companies at any future date or for
any future periods.
5. Inventories
The components of inventory are as follows:
June 30,
(amounts in thousands)
------------------------
2000 1999
----------- -----------
Raw Materials............... $ 10,072 $ 9,657
Work in Process............. 723 738
Finished Goods.............. 12,529 12,577
----------- -----------
Total:................. $ 23,324 $ 22,972
=========== ===========
6. Other Current Assets
The components of other current assets are as follows:
F-19
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,
(amounts in thousands)
------------------------
2000 1999
----------- -----------
Prepaid Expenses............ $ 2,512 $ 2,101
Due From Affiliates (1)..... -- 79
Other (2)................... 847 1,294
----------- -----------
Total:................. $ 3,359 $ 3,474
=========== ===========
(1) Due from affiliates primarily represents amounts owed from
Photo-to-Art. See Note 13 - "Related Party Transactions."
(2) Included in other current assets are amounts due from the Company's
employees, salespeople and officer. During fiscal year 1999, the
Company made advances aggregating $458,000 to the Company's Chief
Executive Officer. In September 1999, this entire amount was repaid
to the Company. During fiscal year 2000, new advances were made and,
as of June 30, 2000, the balance was $283,000. While these advances
bear interest at 6.5% per annum, the Company does not accrue
interest on these advances in the accompanying consolidated
financial statements.
7. Property and Equipment, net
The components of property and equipment are as follows:
June 30,
(amounts in thousands)
------------------------
2000 1999
----------- -----------
Machinery and Equipment.................... $ 5,651 $ 4,722
Computer Equipment and Software............ 3,024 1,151
Furniture and Fixtures..................... 9,051 6,637
Leasehold Improvements..................... 2,734 2,614
Buildings and Improvements................. 1,299 1,054
----------- -----------
21,759 16,178
Accumulated Depreciation and Amortization.. (8,250) (4,276)
----------- -----------
Total:............................... $ 13,509 $ 11,902
=========== ===========
Depreciation expense was $4,198,000, $590,000 and $485,000 for the
years ended June 30, 2000, 1999 and 1998, respectively.
8. Accrued Liabilities
The components of accrued liabilities are as follows:
June 30,
(amounts in thousands)
----------------------
2000 1999
---- ----
Billings in Excess of Costs and Customer Deposits........ $ 4,371 $ --
Salaries and Employee Benefits........................... 2,433 1,707
Deferred Purchase Price on Acquisition of Concepts 4..... 718 --
Interest................................................. 3,075 869
Accrual for Troy Merger Shares........................... 517 --
Dividends Payable........................................ 559 --
Accrued Severance Reserve................................ 538 --
Commissions and Royalties................................ 705 362
Income, Sales and Payroll Taxes.......................... 838 1,275
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent..................................................... 553 181
Settlement Costs, Legal Fees and Other Professional Fees
and Expenses....................................... 1,367 738
Other.................................................... 1,430 5,251
-------- --------
Total:............................................. $ 17,104 $ 10,383
======== ========
F-20
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Debt
Debt outstanding as of June 30, 2000 and June 30, 1999 is as follows:
June 30,
(amounts in thousands)
----------------------
2000 1999
-------- --------
Bank lines of credit and revolving loans (a) ....... $ 13,200 $ 18,400
Bank term loans (a) ................................ 3,659 --
29% Notes - Limeridge and Endeavour (b) ............ 15,285 --
15% Convertible Demand Notes (c) ................... 140 140
15% Convertible Note - Morgan Steel (d) ............ -- 250
12% Convertible Demand Notes (e) ................... 686 686
12% Promissory Note - Ekistics (f) ................. -- 250
10% Convertible Debenture - Petals (g) ............. 2,000 2,000
8.97% Promissory Note - Bank of America (h) ........ 2,300 --
8% Promissory Note - Vanguard (i) .................. 125 375
8% Promissory Note - Seaside Partners (j) .......... 1,000 --
8% Promissory Notes -MHI (k) ....................... -- 231
Promissory Note - Landis (l) ....................... 2,000 1,000
Other notes payable (m) ............................ 3,084 1,415
-------- --------
Total .................................. 43,479 24,747
Less current portion comprised of:
Limeridge and Endeavor Notes .................... (15,285) --
Foothill revolving loans and term loans ......... (16,859) --
Other ........................................... (6,374) (7,654)
-------- --------
Total current portion .................. (38,518) (7,654)
-------- --------
Long term portion .................................. $ 4,961 $ 17,093
======== ========
(a) As of June 30, 1999, the Company had secured formula based financing
arrangements with several lenders relating to the operations of its
subsidiaries. As of June 30, 1999, the Company owed Austin Financial
Services, Inc. approximately $11,060,000 at an annual rate equal to
prime plus 2.0%, and could borrow approximately an additional
$840,000, relating to the operations of Windsor, Troy and
Stylecraft. The Company owed NationsBank, N.A. approximately
$3,908,000 at an annual rate equal to prime, and could borrow an
additional approximately $92,000, relating to the operations of MHI.
The Company owed Finova Capital Corp. approximately $641,000 at an
annual rate equal to prime plus 8.0%, and could borrow approximately
an additional $359,000, relating to the operations of the Company's
A.P.F. Master Framemakers division. The Company's obligations owed
to Finova Capital Corp. were personally guaranteed by Mr. Munn,
Chairman, President and Chief Executive Officer of the Company, and
his spouse. The Company owed Capital Business Credit approximately
$1,210,000 at an annual rate of prime plus 2.50% and could borrow
approximately an additional $8,000 relating to the operations of
Vanguard.
In June 2000, the Company entered into a four year $25,000,000
senior credit facility with Foothill Capital Corporation, a
subsidiary of Wells Fargo Company. The credit facility is a
combination of revolving loans and two thirty-two (32) month term
loans. As of June 30, 2000, total borrowings were $16,859,000, of
which $13,200,000 represented borrowings under the revolving loans
and $3,659,000 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 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 year 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 classified as 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.
F-21
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b) In October 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 in the amount of $215,000, were exchanged for a Secure
Convertible Note due September 30, 2004 bearing interest at 17% per
annum (the "Limeridge Note"). The Company also received aggregate
proceeds of $7,500,000 and after certain fees and expenses, net
proceeds of approximately $7,500,000 in the transaction. In
addition, the Company owed Limeridge an additional $799,000 which
consisted primarily of penalties. The Limeridge Note has a principal
amount of $13,541,000, 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. The 1% administrative fee is
recorded as interest expense in the accompanying consolidated
financial statements. 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. The fair market value of the Limeridge Warrant of
approximately $629,000 is being amortized over the term of the
Limeridge Note as a deferred financing charge.
In December 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 in the amount of $65,000, and accrued
and unpaid interest in the amount of $180,000 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 $1,745,000, is secured by the common stock of
Petals, and convertible after September 20, 2000 into Class A Shares
at 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. The 1% administrative fee is
recorded as interest expense. 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. The fair market value of the Endeavour
Warrant of approximately $33,000 is being amortized over the term of
the Endeavour Note as a deferred financing cost.
Pursuant to the registration rights agreements with Limeridge and
Endeavour, (a) the Limeridge Note, the Endeavour Note, the Limeridge
Warrant and the Endeavour Warrant were required to be covered by an
effective registration statement by September 30, 2000 and (b) the
Company is required to keep its Class A Shares listed on the Nasdaq
SmallCap Market or its equivalent. As of September 30, 2000, the
securities were not covered by an effective registration statement
and the Company had received a notice from NASDAQ of its intention
to delist the Class A Shares. Accordingly, the Company is subject to
liquidated damages in the amount of 2% per month after such date on
the principal amount of the Limeridge Note and the Endeavour Note
and such parties are entitled to accelerate the entire principal
amount of the notes. As of June 30, 2000 and the Company was also in
arrears on interest payments in the aggregate amount of $542,000,
which also entitles Limeridge and Endeavor to accelerate its note,
subject to the Company's right to cure. As a result these rights to
accelerate, the Limeridge Note and the Endeavour Note are classified
as current liabilities in the Company's Consolidated balance sheet
as of June 30, 2000.
(c) Issued to four accredited investors and convertible into Class A
Shares at $1.50 per share. The Company and the noteholders are
currently discussing the reduction of the conversion price from
$1.50 to $0.50 per share if the noteholders convert the 15% Notes
into Class A Shares.
F-22
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(d) Issued to Morgan Steel Ltd., due April 16, 2001 and convertible into
Class A Shares at $1.50 per share. Warrants to purchase 15,000 Class
A Shares and 15,000 Series A Preferred Shares were issued in
connection with this note. During the third quarter of fiscal year
2000, the conversion price was changed to $1.25 per share and the
Company issued 200,000 Class A Shares upon conversion. As a result
of lowering the conversion price from $1.50 to $1.25, the Company
recognized financing expense of approximately $42,000.
(e) Issued to five accredited investors and convertible into Class A
Shares at $1.125 per share and accrued interest. The Company and the
noteholders are currently discussing the reduction of the conversion
price from $1.125 to $0.50 per share if the noteholders convert the
12% Notes into Class A Shares.
(f) Issued to Ekistics Corp. and due December 31, 1998. On October 8,
1999, the Company repaid Ekistics Corp. the outstanding principal,
plus all accrued interest.
(g) Issued to DMB Property Ventures LP in connection with the
acquisition of Petals, Inc. The note is due March 23, 2001 and
convertible into Class A Shares at $2.00 per share.
(h) In June 2000, the Company issued a $2,300,000 promissory note at
8.97% to Bank of America. The note is due July 1, 2005 and secured
by the Company's real estate located in Mississippi. Foothill has a
second mortgage on the property. The note is payable in 59 equal
monthly payments of $23,000 and one last payment of $1,872,000.
(i) Issued in connection with the acquisition of Vanguard. The note is
due December 1, 2000 and requires quarterly principal payments of
$63,000, plus interest.
(j) In May 2000, the Company issued to Seaside Partners, L.P. a
$1,000,000 promissory note due May 2002, (the "Seaside Note") which
accrues interest at 8% and is payable upon maturity, default or
conversion. The note is convertible into common stock of
Interiors.com, Inc., a newly formed subsidiary of the Company
("Interiors.com"), subject to the occurrence of one of the following
transactions: (i) an underwritten initial public offering of
Interiors.com, (ii) a merger or consolidation of Interiors.com with
a publicly-held corporation in which Interiors.com is not the
surviving entity or (iii) a rights offering of Interiors.com
securities to the shareholders of the Company. The conversion rights
terminate if Interiors.com is unable to secure financing of at least
$5,000,000 on or before December 31, 2000 or (ii) Interiors.com
fails to consummate a transaction described in the previous sentence
by October 2001.
(k) Issued in connection with the acquisition of MHI. The notes were
repaid, when due, in February 2000.
(l) 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 an annual rate of 14%,
accrues interest at 4%, which is payable at maturity, 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.
(m) Includes $2,161,000 and $598,000 of capital lease obligations as of
June 30, 2000 and 1999, respectively.
During the fiscal year ended June 30, 1999, the Company had an
extraordinary gain from early extinguishment of debt in the amount of
$870,000, which includes the gain of $1,371,000 resulting from repurchase
of the Windsor Note and Windsor Shares, as discussed in Note 4. Offsetting
the gain was $500,000, of net losses on other debt extinguishments
including the write-off of unamortized deferred financing charges
associated with the debt extinguishment.
F-23
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate maturities of debt payable over the next five fiscal years and
thereafter are as follows:
2001............................ $ 38,518
2002............................ 2,391
2003............................ 477
2004............................ 126
2005............................ 95
Thereafter...................... 1,872
----------
Total..................... $ 43,479
==========
10. Stockholders Equity
Description of Securities
Common Stock
Class A Shares. The Certificate of Incorporation of the Company
authorizes the issuance of up to 60,000,000 Class A Shares. Each Class A
Share is entitled to one non-cumulative vote per share on all matters on
which stockholders' may vote at meetings of stockholders. The Class A
Shares are not convertible into any other securities of the Company.
Class B Shares. The Certificate of Incorporation of the Company
authorizes the issuance of up to 2,500,000 Class B Shares. Each Class B
Share is entitled to five non-cumulative votes per share on all matters on
which stockholders may vote at meetings of stockholders. The Class B
Shares are convertible on a one-for-one basis at any time after issuance
at the option of the holder into Class A Shares.
The holders of Class A Shares and Class B Shares (collectively,
"Common Stock"): (i) have equal ratable rights to dividends from funds
legally available therefor, when, as and if declared by the Board of
Directors of the Company; (ii) are entitled to share ratably in all of the
assets of the Company available for distribution to holders of Common
Stock, upon liquidation, dissolution or winding up of the affairs of the
Company; and (iii) do not have preemptive or subscription rights and there
are no redemption or sinking fund provisions applicable thereto. All
shares of Common Stock issued and outstanding are duly authorized, fully
paid and non-assessable. Except as otherwise required by law, the holders
of Common Stock shall vote together as a single class on all matters.
Preferred Stock
The Certificate of Incorporation of the Company authorizes the
issuance of up to 5,300,000 shares of Preferred Stock, $.01 par value per
share. Of this amount 2,870,000 shares have been designated as Series A
10% Cumulative Convertible Preferred Stock (the "Series A Preferred
Shares"), 200,000 shares have been designated Series B Preferred Stock
("Series B Preferred Shares") and 6,527 shares have been designated Series
C Preferred Stock ("Series C Preferred Shares"). The Board of Directors is
authorized to issue shares of Preferred Stock from time to time in one or
more series and, subject to the limitations contained in the Certificate
of Incorporation and any limitations prescribed by law, to establish and
designate any such series and to fix the number of shares and the relative
conversion rights, voting rights and terms of redemption (including
sinking fund provisions) and liquidation preferences. If shares of
Preferred stock are issued with voting rights, such issuance could affect
the voting rights of the holders of the Company's Class A Shares by
increasing the number of outstanding shares having voting rights, and by
the creation of class or series voting rights. Shares of Preferred Stock
with conversion rights could potentially increase the number of Class A
Shares outstanding. Issuance of Preferred Stock could, under certain
circumstances, have the effect of delaying or preventing a change in
control of the Company and may adversely affect the rights of holders of
Class A Shares. Also, Preferred Stock could have preferences over the
Class A Shares (and other series of stock) with respect to dividends and
liquidation rights.
In January 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
F-24
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ten percent or more of the Company voting
stock, or if a party announces an offer to acquire thirty 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 Series D
Preferred Shares, par value $.001 per share, 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 ten percent position in the voting stock.
Series A Preferred Shares
The Series A Preferred Stock consists of 2,870,000 shares. After
September 17, 2000, each Series A Preferred Share is redeemable by the
Company in whole or in part at $5.50 per share upon 30 days prior written
notice. Each Series A Preferred Share is convertible, subject to
adjustment, into three Class A Shares of the Company. The Series A
Preferred Stock is entitled to a dividend, prior to any payment of
dividends on the Class A Shares or Class B Shares, of $0.50 per share per
annum payable in semi-annual installments of $0.25 per share. If the
dividend on the Series A Preferred Shares is not paid, it accumulates
until paid in full to date. The Company may elect to pay the dividend
either in cash or in Class A Shares, which Class A Shares shall be issued
for such purposes on the basis of the average closing prices of the Class
A Shares for the ten business days prior to the date of declaration of the
dividend. The Series A Preferred Shares shall not have any right to vote
except to the extent, if any, required by Delaware law. Upon liquidation
of the Company, each Series A Preferred Share is entitled to receive $5.00
plus accrued and unpaid dividends before any payment is made to the
holders of Common Stock.
During fiscal years 2000 and 1999, 1,945,743 and 1,945 Series A
Preferred Shares were converted into 5,837,229 and 5,838 Class A Shares,
respectively.
In September 1999, the Company declared a $0.25 dividend on its
Series A Preferred Shares for holders of record at December 10, 1999. The
dividend of $192,000 was paid by the issuance of 225,344 Class A Shares.
On September 30, 1998 and May 24, 1999, the Company's Board of Directors
declared stock dividends equivalent to $0.25 per share on its Series A
Preferred Shares to stockholders of record as of the close business on
December 10, 1998 and June 10, 1999, respectively. Accordingly, a total of
344,510 Class A Shares were issued for this purpose and accumulated
deficit was charged $449,000 in conjunction with the issuance of these
securities.
As of June 30, 2000, the Company had not declared or established a
record date for accrued dividends on its Series A Preferred Shares in the
amount of $0.375. Cumulative but unpaid dividends on Series A Preferred
Shares are approximately $319,000, which is recorded in accrued
liabilities in the accompanying financial statements.
Series B Preferred Shares
On January 22, 1999, in order to provide it with additional working
capital, the Company completed a private placement with one accredited
investor of newly designated Series B Preferred Shares and redeemable
three year warrants to purchase up to 2,000,000 Class A Shares at an
exercise price of $0.75 per share (the "Series B Warrants"). The Company
received $2,020,000 of gross proceeds from the sale of the Series B
Preferred Shares and Series B Warrants. The Company incurred expenses of
$15,000 in connection with the issuance of these securities. The Series B
Preferred Shares consist of 200,000 shares, each of which is convertible
into approximately 4.26 Class A Shares for an aggregate of 851,064 Class A
Shares. The holders of the Series B Preferred Shares were granted certain
registration rights with respect to the underlying Class A Shares issuable
upon conversion of the Series B Preferred Shares or exercise of the Series
B Warrants. The Series B Warrants were valued at the estimated fair market
value on the date of issuance, approximately $2,000,000, which was
amortized as accreted dividends over the term of the security.
F-25
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Series B Preferred Shares rank in parity with the Company's
Series A Preferred Shares with respect to dividends and liquidation, pays
an 8% annual dividend, payable quarterly in cash or by the issuance of
additional shares of Series B Preferred Shares, and is convertible by the
holder at any time on or after January 31, 2000 into Class A Shares at a
conversion price of $2.35 per share. Under certain limited conditions
relating to a sale of the Company, through merger, sale of substantially
all of its assets or tender offer, the Series B Preferred Shares may be
converted into Class A Shares by the holder. At June 30, 1999, $1,000,000
of Series B Preferred Shares was classified outside the stockholders'
equity section of the Company's consolidated balance sheet. As of January
31, 2000, the right to seek mandatory redemption with respect to
$1,000,000 of the Series B Preferred Shares expired without exercise.
Accordingly, such amount has been reclassified as stockholders' equity in
the Company's consolidated balance sheets since March 31, 2000. The
conversion price and the number of Class A Shares issuable upon conversion
of the Series B Preferred Shares is subject to adjustment to protect the
holder against dilution.
As of June 30, 2000, the Company had not declared or established a
record date for accrued dividends on its Series B Preferred Shares in the
amount of $1.20. Cumulative but unpaid dividends on Series B Preferred
Shares are approximately $240,000, which is recorded as accrued
liabilities in the accompanying financial statements.
Series C Preferred Shares
On February 18, 1999, in order to provide it with the capital
resources to complete pending acquisitions, the Company completed a
private placement with four accredited investors of 6,427 newly designated
Series C Preferred Shares. The Series C Preferred Shares have a
liquidation value of $1,000 per share. In consideration for the issuance
of 4,500 Series C Preferred Shares, the Company received $4,500,000 in
gross proceeds. The Company incurred expenses of $20,000 in connection
with the issuance of these securities. In addition, two of the purchasers
of the Series C Preferred Shares, who were also holders of $1,028,000 of
7% notes previously issued to them by CSL Lighting Manufacturing, Inc., an
affiliate of the Company, canceled such notes in exchange for the issuance
of 1,927 Series C Preferred Shares. The Company also issued 100 Series C
Preferred Shares as a fee in connection with the acquisition of CSL.
The Series C Preferred Shares were exchanged for the Limeridge Note
and the Endeavour Note during fiscal year 2000 and, accordingly, there are
no longer any Series C Preferred Shares outstanding.
Other Equity Transactions
On May 6, 1998, the Company issued 100,000 Class A Shares to the
principals of United Credit Corporation in satisfaction of a prior
obligation to issue such shares to United Credit Corporation.
On September 21, 1998, the Company issued 5,000,000 Class A Shares
into escrow to secure the Company's obligation to Ann Stevens, sister of
the Company's Chairman, President and Chief Executive Officer.
On or about October 7, 1998, the Company issued 125,000 Class A
Shares to Laurie Munn upon conversion of 125,000 Class B Shares. On or
about October 22, 1998, the Company issued 10,000 Series A Preferred
Shares to SJP Contractors of New York, Inc. in settlement of litigation
against the Company. On or about October 22, 1998, the Company issued
10,000 Class A Shares to Jules L. Marx in settlement of litigation against
the Company's Chief Executive Officer.
On November 11, 1998, the Company issued 44,431 Class A Shares to
James McCorry as a $75,000 bonus. On November 16, 1998, the Company issued
38,820 Class A Shares to Todd Langner as a $50,000 bonus. On or about
November 23, 1998, the Company issued 10,000 Class A Shares to Roger
Lourie, a director of the Company, and 10,000 Class A Shares to various
designees named by Richard Josephberg, a director of the Company. On
November 23, 1998, the Company issued 15,000 Class A Shares to JG Partners
LP in connection with certain investment banking services provided by
Josephberg Grosz & Co., Inc. ("Josephberg Grosz"), an affiliate of Mr.
Josephberg.
F-26
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 9, 1999, the Company issued to Pauline Raschella, an
employee of Windsor, an incentive bonus of 100,000 Class A Shares.
On March 1, 1999, the Company issued to Earley Kielty and
Associates, Inc., an executive search firm, 26,666 Class A Shares in
connection with a search related to MHI. On March 11, 1999, the Company
issued to Maria Matos, a former employee of the Company, 10,000 Class A
Shares as a severance payment. On such date, the Company also issued to
Judith E. Schneider, 6,250 Class A Shares in consideration for certain
consulting services.
During fiscal year 1999, the Company issued an aggregate of
3,206,342 Class A Shares relating to various acquisitions. In addition,
the Company retired 1.5 million Class A Shares that were being held in
escrow related to the acquisition of Windsor. See Note 4 - "Acquisitions
and Dispositions."
During fiscal year 1999, holders of 6% Convertible Notes issued in
March and April 1998 with a principal amount of $1,700,000 and holders of
12% Convertible Demand Notes with a principal amount of $235,000 issued in
March 1998, converted these notes into an aggregate of 2,130,900 Class A
Shares.
In August 1999, the Company issued to James McCorry, President of
Habitat Solutions, Inc., a wholly owned subsidiary of the Company, an
incentive bonus of 53,343 Class A Shares valued at $75,000.
During fiscal year 2000, the Company added 1,633,271 Class A Shares
to the escrow established in connection with the Company's acquisition of
MHI.
In December 1999, the Company acquired and subsequently retired
10,000 Series A Preferred Shares in exchange for $25,000. Such shares were
originally issued in connection with the settlement of litigation SJP
Contractors of New York, Inc. In addition, the Company retired 4,833 Class
A Shares issued as dividends related thereto.
In January 2000, the right to seek mandatory redemption with respect
to 100,000 Series B Preferred Shares expired without exercise.
Accordingly, these 100,000 shares valued at $1,000,000 has been
reclassified from Redeemable Series B Preferred Stock to Stockholders'
Equity in the accompanying financial statements.
No underwriters were engaged by the Company in connection with any
of the issuance's described above and, accordingly, no underwriting
discounts or commissions were paid.
Warrants and Other
In July 1998, warrants were exercised at $1.50 resulting in the
issuance of 240,517 Class A Shares and total proceeds of $360,000.
In March 1999, the Company redeemed 916,591 warrants for Class A
Shares and 103,610 warrants for Series A Preferred Shares for aggregate
consideration of $10,000 or $0.01 per warrant. As a result of the
redemption, there are no longer any outstanding publicly traded warrants.
Prior to redemption, an amount of warrants for Class A Shares and Series A
Preferred Shares were exercised at $2.00 and $5.50, respectively,
resulting in the issuance of 2,796,032 Class A Shares and 2,322,355 Series
A Preferred Shares, and the Company received gross proceeds of
approximately $18,200,000. In connection with the redemption, the Company
paid a fee of $175,000.
During fiscal year 1999, other warrants were exercised at prices
ranging from $1.38 to $1.75 resulting in the issuance of 826,905 Class A
Shares and total proceeds of $1,151,309. During fiscal year 2000, there
were no warrants exercised.
F-27
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Option Plans
The 1994 Plan. On June 20, 1994, the Company adopted the Interiors,
Inc. 1994 Stock Option and Appreciation Rights Plan (the "1994 Plan"),
which, as amended, currently provides for the granting of options to
officers, employees and consultants to purchase not more than an aggregate
of 250,000,000 Class A Shares. Directors of the Company are not eligible
to participate in the 1994 Plan. The 1994 Plan provides for the grant of
options intended to qualify as "incentive stock options" under the
Internal Revenue Code of 1986, as amended (the "Code") as well as options
which do not so qualify.
The Director Plan. On June 20, 1994 the Board of Directors approved
the 1994 Director Stock Option and Appreciation Rights Plan (the "Director
Plan"), which, as amended, currently provides for the granting of options
to directors to purchase not more than an aggregate of 750,000 Class A
Shares. The Director Plan was adopted to provide an incentive to Directors
through automatic and discretionary grants of stock options. The Director
Plan provides for the grant of options intended to qualify as "incentive
stock options" under the Code as well as options which do not so qualify.
The Director Plan provides that on the second Monday of May of each
year each person who is then a director of the Company shall be
automatically granted an option to purchase 10,000 of the Company's Class
A Shares, subject to adjustment as provided for by the Director Plan. The
aggregate number of shares for which options may be issued pursuant to the
Director Plan is 250,000 shares. The exercise price for options granted
under the Director Plan must be equal to the fair market value per Class A
Share on the date of grant. Each option granted under the Director Plan
expires ten years after the date of grant, unless a shorter period is
specified by the option committee administering the plan.
The status of the Company's stock option plans as of June 30, 2000,
1999 and 1998, respectively is summarized below:
<TABLE>
<CAPTION>
Years Ended June 30,
(amounts in thousands, except per share data)
-----------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options Outstanding at beginning of year ........ 4,058 $1.27 878 $1.76 350 $2.25
Granted ......................................... 470 .91 4,070 1.27 528 1.44
Terminated ...................................... (3) 1.00 (890) 1.77 -- --
------ ----- ------ ----- ------ -----
Options outstanding at end of year .............. 4,525 1.23 4,058 1.27 878 1.76
====== ===== ====== ===== ====== =====
Exercisable at end of year ...................... 752 $1.30 438 $1.27 191 $2.03
Weighted average fair value of options granted .. $1.22 $1.20 $1.09
</TABLE>
Of the 4,525,000 options outstanding as of June 30, 2000:
(a) 63,025 options have an exercise price of $0.001, weighted
average fair market values on the date of grant of $1.16 and
remaining contractual lives of 8.5 years.
(b) 1,862,500 options have exercise prices ranging from $.88 to
$2.13, weighted average exercise price of $1.31, weighted
average fair market values on the dates of grant of $1.29 and
weighted average remaining contractual lives of 9.5 years.
(c) 2,600,000 options (excluding options to purchase 250,000
Series A Preferred Shares with an exercise price of $3.63,
fair market value on the date of grant of $2.88 and remaining
contractual lives of 10.5 years, each of which is convertible
into three Class A Shares) were granted outside of the
Company's stock option plans. These options are not
exercisable until November 2008, however, 275,000 of
F-28
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the options may become exercisable each year that the Company
reaches certain specified earnings targets. Exercise prices
for these options range from $1.16 to $3.63 and increase at a
rate of 10% per annum. As of June 30, 2000: 2,500,000 of these
options have exercise prices of $1.16, fair market values on
the dates of grant of $.98 and remaining contractual lives of
10.5 years; and 100,000 of these options have an exercise
price of $1.00, which was the fair market value on date of
grant and these options vested immediately.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumption used for those options granted in 2000, 1999
and 1998, respectively: Dividend yield of 0% in all fiscal years, expected
volatility of 73%, 91% and 83%, risk-free interest rates ranging from 0%
to 6.5%, and expected lives of 3 years, 10 years and 5 years,
respectively.
The Company accounts for its plans under APB Opinion No. 25,
"Accounting for Stock Issued to Employees", under which no compensation
cost is recognized for options granted at or above fair market value on
the date of grant. Compensation expense of $75,000, in connection with the
issuance of incentive stock options to an officer of the Company, has been
charged to expense for the year-ended June 30, 2000 and 1999. Had
compensation expense been determined based upon fair values at the grant
dates for options granted under those plans in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net loss
would have been increased follows:
June 30,
(amounts in thousands, except per share data)
2000 1999 1998
---------- ---------- ----------
Net Loss Attributable to Common
Stock before Extraordinary Gain:
As Reported ..................... $ (20,778) $ (10,244) $ 294
Pro Forma ....................... (21,430) (10,785) (178)
Basic EPS
As Reported ..................... (.59) (0.46) .04
Pro Forma ....................... (.61) (0.49) (.02)
Diluted EPS
Reported ........................ (.59) (0.46) .04
Pro Forma ....................... (.61) (0.49) (.02)
F-29
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Earnings (Loss) Per Share
Reconciliation between the numerators and denominators of the basic
and diluted EPS computations for net earnings for the fiscal years ended
June 30, 2000, 1999 and 1998, respectively is as follows:
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
------------------------------------------------------------------------------------ --------------------------------------------
Years Ended June 30, 2000 1999 1998
------------------------------------------------------------------------------------ ------------- ------------- --------------
<S> <C> <C> <C>
Numerator for basic earnings per share:
Net (loss) income .................................................................. $(18,581) $ (8,024) $ 634
less
Dividends on non-convertible preferred stock ................................. (1,029) (518) (340)
Accreted preferred dividends ................................................. (1,168) (832) --
-------- -------- --------
Net income applicable to common stock .............................................. $(20,778) $ (9,374) $ 294
======== ======== ========
Denominator for basic earnings per share:
Weighted average shares outstanding used in the
computation of per share earnings
Common stock issued .......................................................... 35,124 22,036 7,251(1)
-------- -------- --------
Weighted average shares outstanding - basic ........................................ 35,124 22,036 7,251
-------- -------- --------
Numerator for diluted earnings per share:
Net (loss) income .................................................................. $(18,581) $ (8,024) $ 634
Less:
Dividends on non-convertible preferred stock ................................. (1,029) (518) (340)
Accreted preferred dividends ................................................. (1,168) (832) --
-------- -------- --------
Net income (loss) applicable to common stock ....................................... $(20,778) $ (9,374) $ 294
======== ======== ========
Denominator for diluted earnings per share:
Weighted average shares outstanding - diluted ...................................... 35,124 22,036 7,251
Effect of diluted securities stock options and warrants ............................ -- -- 903
-------- -------- --------
Weighted average shares outstanding diluted ........................................ 35,124 22,036 8,154
-------- -------- --------
Earnings (loss) per share:
Basic .............................................................................. $ (0.59) $ (0.42) $ .04
Diluted ............................................................................ (0.59) (0.42) .04
</TABLE>
(1) 7,500,000 Class A Shares that were held in escrow and issued during
the year were not included in Basic EPS computation as their
ultimate status was uncertain. These shares were retired by the
Company during fiscal year 1999.
Conversion of 850,802 Series A Preferred Shares and 200,000 Series B
Preferred Shares were not included for computation purposes since 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.
12. Commitments and Contingencies
Operating Leases
The operating leases of the Company primarily are for facilities.
The Company's headquarters are located in Mount Vernon, New York, in
leased facilities consisting of 70,000 square feet of manufacturing and
warehouse space together with executive offices and a showroom. The
facility is occupied under a five-year lease expiring at the end of 2001
with a five-year renewal option. The Company also has various other
manufacturing and distribution facilities located in City of Industry and
Vernon, California, Longwood, Florida, and Millwood and White Plains, New
York.
F-30
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company leases showroom facilities in High Point,
North Carolina (six showrooms), San Francisco, California (four
showrooms), New York, New York (three showrooms) and Dallas, Texas (three
showrooms). The showroom sizes range from 855 square feet to approximately
27,505 square feet. In addition, the Company leases five retail outlets
located in the New York metropolitan area.
The approximate future minimum lease payments per fiscal year under
operating leases, exclusive of sublease income, and equipment operating
business of MHI, and minimum lease revenue as of June 30, 2000 are as
follows:
(amounts in thousands)
Minimum Lease Minimum Lease
Payments Revenue
------------- -------------
2001 .......................... $ 5,821 $ 3,012
2002 .......................... 5,061 820
2003 .......................... 4,497 23
2004 .......................... 2,773 --
2005 .......................... 1,828 --
Thereafter .................... 1,027 --
------- -------
Total ................... $21,007 $ 3,855
======= =======
In addition to the minimum base payments for various facilities,
certain facilities have a contingent rental which is based on a percentage
of sales, or a per charge for per piece of merchandise handled. The above
table includes anticipated further rent for facility when lease terminates
in the fiscal year 2001.
Rent expense charged to operations for the fiscal years 2000, 1999
and 1998 was approximately $6,000,000, $3,400,000 and $560,000,
respectively.
Rental revenue on Model Home's operating leases was approximately
$4,500,000 and $1,400,000 for the fiscal years 2000 and 1999,
respectively.
Union Agreement
The Company and its subsidiaries are party to two collective
bargaining agreements. None of the Company's employees have been on
strike, or threatened to since the Company's inception and the Company
believes its relationship with all of its personnel is satisfactory. As of
June 30, 1999, the Company owed a union approximately $114,000 and has
agreed to retire this amount through monthly payments of approximately
$11,000, including interest. The last payment was made on March 31, 2000.
As of June 30, 2000, the accrual liability balance was $39,000.
Consulting Arrangements
Refer to Note 13 for discussion of these arrangements.
Legal Proceedings
The Company is subject to claims and litigation and other claims
arising in the ordinary course of its business. In management's opinion,
Interiors is not presently a party to any such litigation or claims the
outcome of which would have a material adverse effect on its financial
position or its results of operations.
13. Related Party Transactions
From time to time, the Company has entered into transactions with
parties related to the Company. As of June 30, 2000 and 1999, the Company
had no investments in affiliates.
During fiscal year 1999, the Company generated management fees in
the amount of $115,000 in connection with the provision of management
services to Decor Group, Inc., a publicly-held affiliate ("Decor") which
the Company began consolidating in its financial statements in October
1999 (Note 3). The Company owns
F-31
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
83,333 shares of Series A Non-Voting Convertible Preferred Stock,
6,666,667 shares of Series B Non-Convertible Voting Preferred Stock and
18,311 shares of Series C Non-Voting Convertible Preferred Stock of Decor.
Such ownership amounts to approximately 78% of the voting securities of
Decor. Mr. Munn is a director of Decor. In fiscal 1999, the Company
entered into an agreement, which was subsequently terminated, to acquire
Decor. In connection with such potential acquisition, the Company
capitalized costs of investment banking services in the amount of $725,000
during fiscal 1998 based on the fair value of the trading securities
received, 100,000 Class A Shares and 100,000 Series A Preferred Shares, as
direct consulting fees. During the third quarter of fiscal 1999, the
Company recorded an impairment loss of its entire investment,
approximately $3,300,000, in Decor because the Company believed that based
on Decor's financial condition its investment had been permanently
impaired. The Company had established reserves for the uncollectibility of
its entire receivable, approximately $1,000,000, owed to the Company by
Decor and the possibility that the Company would be required to pay up to
$300,000 pursuant to its guaranty of approximately $580,000 of
indebtedness of Decor owed to Austin Financial. For the fiscal years 2000,
1999 and 1998, the Company recognized consulting and management fee income
of $0, $115,000 and $70,000, respectively. The 1999 and 1998 management
fee income and resulting receivable were written off during 1999 as
discussed above.
During fiscal year 1999, the Company loaned $275,000 to
Photo-to-Art, Ltd. ("Photo-to-Art"). In addition, the Company was paid
$76,000 from Photo-to-Art in connection with the sublease of certain space
in the Company's facility located in Mount Vernon and $216,000 for the
purchase of merchandise. The Company owns 270,000 shares, or approximately
0.5%, of the common stock of Photo-to-Art and warrants to purchase 120,000
common shares of Photo-to-Art at $4.50 per share. As of June 30, 1999,
Photo-to-Art owed the Company $325,000 for which a $250,000 reserve had
been established. Mr. Munn, the Company's Chairman, President and Chief
Executive Officer, had personally guaranteed debt of Photo-to-Art owed to
a third party in the amount of approximately $180,000. The Company
acquired $28,000 of such debt. Photo-to-Art is currently being liquidated
under Chapter 7 of the Bankruptcy Code. During fiscal 2000, the Company
wrote off its remaining receivable from Photo-to-Art recognizing an
additional loss of $75,000.
During fiscal years 1999 and 1998, the Company earned $442,000 and
$335,000 of management fees from entities that were subsequently acquired.
During fiscal year 1999, the Company issued 375,000 Class B Shares
to Laurie Munn, wife of the Company's Chief Executive Officer, in
consideration for her personal guarantee of $5,300,000 of the Company's
obligations in connection with its acquisitions of Windsor and Troy. In
addition, the Company issued 1,350,000 Class B Shares to Ms. Munn upon the
exercise of an option. The exercise price for the option was $1,350 in
cash and a promissory note in the amount of $1,606,000. The note bears
interest at a rate of 6.5% per annum and matures on December 8, 2005. As
of June 30, 1999, Ms. Munn owes the Company $2,555,000 principal amount
all of which is secured by a lien on 2,455,000 Class B Shares, and Ms Munn
guarantees debt of the Company in the amount of $2,400,000. The Company is
not accruing any interest on this obligation.
During fiscal years 2000 and 1999, the Company paid Morris Munn,
father of the Company's Chairman, President and Chief Executive Officer,
$71,000 and $64,000, respectively, for consulting services pursuant to a
five-year agreement commencing June 30, 1996. The agreement has been
extended for a period of five years until June 30, 2006. In June 1999,
Decor paid Morris Munn $152,000 in settlement of a consolidated
arbitration proceedings and other litigation involving Decor, Interiors,
Max Munn, Laurie Munn, Morris Munn and Ann Stevens, sister of Max Munn.
During fiscal year 1999, 3,750,000 Class A Shares were transferred
out of escrow to an accredited investor as collateral for the $500,000
paid to Ann Stevens, sister of Max Munn, the Company's Chairman, President
and Chief Executive Officer, as part of the Company's settlement agreement
related to an employment agreement with Stevens. Of these shares,
1,250,000 Class A Shares were converted from Class B Shares previously
held in escrow and 2,500,000 Class A Shares were issued out of such
escrow. Total proceeds resulting from the transfer was $3,975,000, of
which $3,700,000 was paid in cash and $275,000 was paid by satisfying a
promissory note. In addition, the Company retired 10,000,000 Class A
Shares previously held in such escrow.
F-32
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with certain investment banking services provided
during fiscal year 1999 by Josephberg Grosz, an affiliate of Richard
Josephberg, a director of the Company, the Company issued (a) a four-year
warrant to purchase 135,000 Class A Shares at $1.75 per share, 4,650 Class
A Shares and $30,000 cash to JG Capital, Inc., (b) 15,000 Class A Shares
to JG Partners, LP (c) 5,350 Class A Shares to various designees named by
Richard Josephberg. The shares were valued at the fair market value on the
date of issuance.
During fiscal year 1999, the Company made advances aggregating
$458,000 at 6.5% interest to Mr. Munn, the Company's Chairman, President
and Chief Executive Officer. In September 1999, this entire amount was
repaid to the Company and the Company forgave all related interest.
Subsequently, the Company made advances aggregating $283,000 at 6.5%
interest during fiscal year 2000, which were outstanding as of June 30,
2000. The Company is not accruing any interest on this obligation.
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.
14. Benefit Plans
In fiscal year 1992, the Company started a Qualified Profit Sharing
Plan for all nonunion employees. In fiscal year 1996, the Company started
a 401(k) Savings Plan which provides for employees contributing up to 15%
for non-highly compensated employees and up to 5% for highly compensated
employees ($80,000) of their salaries. There are no employer matching
contributions. The Qualified Profit Sharing Plan was effectually closed in
March of 2000 and employee accounts were either transferred to the 401(k)
Savings Plan or distributed, as the employee elected.
15. Provision For Income Taxes
The income tax provision (benefit) consists of:
Years Ended June 30,
(amounts in thousands)
---------------------------------
2000 1999 1998
----- ----- -----
Current Income Taxes:
Federal ........................ $ -- $ -- $ --
State and Local ................ 308 200 53
Deferred Income Tax ............ -- -- (162)
----- ----- -----
Total .................... $ 308 $ 200 $(109)
===== ===== =====
There was no Federal income tax expense or benefit in fiscal year
2000, 1999 or 1998. The state tax expense relates to certain state filings
where the company does not file combined returns and the Company was
profitable in those states.
The income tax expense (benefit) differs from the amount computed by
applying the statutory Federal income tax rates to the earnings (loss)
before income taxes as follows:
Years ended June 30,
------------------------------
2000 1999 1998
-------- -------- --------
U.S. Federal statutory rate .......... (34.0)% (34.0) (34.0)%
State income taxes ................... 1.7 2.3 6.8
Non-deductible goodwill .............. 7.1 2.0 2.8
Valuation allowance .................. 26.9 32.0 3.6
---- ---- ----
Effective tax rate ................... 1.7% 2.3% (20.8)%
==== ==== ====
F-33
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred taxes represent the differences between financial statement
amounts and the tax bases of assets and liabilities. Deferred tax
liabilities (assets) are as follows:
Years ended June 30,
(amounts in thousands, except percentages)
------------------------------------------
2000 1999
-------- --------
Financing costs ..................... $ 3,545 $ 1,513
Bad debt expense .................... 2,351 599
Accrued union dues .................. 226 226
Inventory ........................... 300 250
Inventory obsolescence .............. 4,130 1,653
Amortization of customer list........ (139) (139)
Depreciation ........................ 139 139
Severance reserve ................... 538 --
Other ............................... 223 1,088
Net operating loss .................. 11,942 3,839
-------- --------
Total ............................... $ 23,255 $ 9,168
Tax rate ............................ 40% 40%
-------- --------
Total deferred tax asset ............ $ 9,302 $ 3,667
Valuation allowance ................. (8,959) (3,467)
-------- --------
$ 343 $ 200
======== ========
The benefit from the Company's net operating loss ("NOL") carry
forward for Federal income tax purposes is approximately $11,942,000
(which expires through 2020). The deferred tax asset of approximately
$9,302,000 is comprised primarily of net operating losses and reserves.
The utilization of such NOLs may be limited in the future due to changes
in ownership under Internal Revenue Section 382.
The majority of the Company's deferred tax assets are reserved
resulting in a net deferred tax asset of approximately $343,000 and
$200,000 as of June 30, 2000 and 1999, respectively.
The reduction of the valuation allowance in both 1999 and 1998 was
calculated at the statutory federal income tax rate. State income taxes
have been recorded based upon the applicable state requirements.
Currently, the Company is under sales and use tax audits and payroll
tax audits. The Company is not sure what the outcome of these audits will
be. In addition, the Company has not filed their fiscal 1999 tax returns
which, with extension, were due March 15, 2000.
16. Operating Business Segment Information
The Company has consummated several acquisitions since March 1998.
The Company generally manages its operations by business unit, however,
certain west coast operations are managed geographically. Set forth below
is certain financial information for these businesses segments:
<TABLE>
<CAPTION>
(amounts in thousands)
West Habitat
Year Ended June 30, 2000 Coast Stylecraft Petals APF Solutions Interiors Total
-------- ---------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ............................. $ 47,986 $ 42,562 $ 48,479 $ 7,283 $ 23,648 $ 317 $170,275
Gross profit .......................... 10,086 11,389 28,824 2,519 9,963 (565) 62,216
Interest expense ...................... 1,098 1,013 55 80 190 5,848 8,284
Depreciation / amortization ........... 965 148 550 248 1,882 1,042 4,835
Amortization of goodwill .............. 624 135 136 -- 164 -- 1,059
Identifiable assets ................... 16,107 15,018 12,832 3,819 13,315 6,388 67,479
</TABLE>
F-34
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Goodwill, net ......................... 18,434 4,709 5,217 -- 9,388 -- 37,748
Capital expenditures .................. 880 295 327 51 3,128 1,107 5,788
</TABLE>
<TABLE>
<CAPTION>
(amounts in thousands)
West Habitat
Year Ended June 30, 1999 Coast Stylecraft Petals APF Solutions Interiors Total
-------- ---------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ............................. $ 43,347 $ 13,946 $ 11,371 $ 6,401 $ 5,368 $ -- $ 80,433
Gross profit .......................... 13,210 4,709 6,734 2,685 2,646 -- 29,984
Interest expense ...................... 1,093 180 (3) 162 79 2,674 4,185
Depreciation/amortization ............. 300 30 50 100 10 1,204 1,694
Amortization of goodwill .............. 440 45 33 -- 11 -- 529
Identifiable assets ................... 22,842 18,503 10,299 4,913 11,147 (6,200) 61,504
Goodwill, net ......................... 20,722 4,971 5,246 -- 1,323 -- 32,262
Capital expenditures .................. 1,200 200 300 100 850 1,576 4,226
</TABLE>
<TABLE>
<CAPTION>
(amounts in thousands)
West Habitat
Year Ended June 30, 1998 Coast Stylecraft Petals APF Solutions Interiors Total
-------- ---------- -------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ............................. $ 6,130 $ -- $ -- $ 7,317 $ -- $ -- $ 13,447
Gross profit .......................... 2,204 -- -- 2,974 -- -- 5,178
Interest expense ...................... 116 -- -- 100 -- 747 963
Depreciation/amortization ............. 300 -- -- 100 -- 300 700
Amortization of goodwill .............. 42 -- -- -- -- -- 42
Identifiable assets ................... 5,762 -- -- 4,600 -- 9,302 19,664
Goodwill, net ......................... 6,677 -- -- -- -- -- 6,677
Capital expenditures .................. 182 -- -- 5 -- 50 237
</TABLE>
West Coast is comprised of the operations of Troy, CSL, Vanguard, Windsor
Art and Decor.
Revenues for the business segments are from external sales. Inter-segment
sales totaled $722,000 in the fiscal year 2000 and is reported under
Interiors, which also includes operating results of the rug and table top
accessory businesses. Inter-segment sales was not significant for any
business segment. There was no Inter-segment sales for fiscal years 1999
or 1998.
Depreciation and amortization assigned to the business units represents
amounts applicable to fixed assets and other intangible assets excluding
goodwill which is presented separately. Identifiable assets primarily
represent amounts reported by the business units, including cash.
Identifiable asset is exclusive of goodwill which is presented separately.
17. Quarterly Financial Data (unaudited)
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
--------------------------------------------------------------------------
First Second Third Fourth Total Year
Fiscal Year Ended June 30, 2000 Quarter Quarter Quarter Quarter (a)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Revenues ....................................... $ 35,640 $ 43,681 $ 48,570 $ 42,384 $ 170,275
Gross Profit ....................................... 13,595 18,722 18,209 11,691 62,217
Net (loss) income .................................. 160 (1,815) (1,699) (15,227) (18,581)
Basic net (loss) income per common share ........... (.01) (.07) (.06) (.43) (.59)
Diluted net (loss) income per common share ......... (.01) (.07) (.06) (.43) (.59)
Fiscal Year Ended June 30, 1999
Net revenues ....................................... $ 10,406 $ 12,856 $ 19,475 $ 37,696 $ 80,433
Gross profit ....................................... 3,564 4,739 6,517 15,164 29,984
Net (loss) income .................................. 283 1,006 (6,154) (3,159) (8,024)
</TABLE>
F-35
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C> <C>
Basic net (loss) income per common share ........... -- .05 (.31) (.16) (.42)
Diluted net (loss) income per common share ......... -- .05 (.31) (.16) (.42)
</TABLE>
(a) The sum of net income per share for the four quarters may not equal
earnings per share for the total year due to changes in the average
number of common shares outstanding.
The operating results for the first three quarters of fiscal 2000
have been restated from the amounts previously reported. Costs and
expenses related to higher expense accruals, accounts receivable reserves
as well as acquisition related adjustments resulted in the restatement of
the first, second and third quarters of fiscal 2000 by $665,000, $315,433
and $712,000, respectively.
Fourth Quarter Adjustments
In the fourth quarter of fiscal year 2000, the Company recorded
approximately $8,700,000 of adjustments. The adjustments related primarily
to write-offs of certain other assets, including an impairment loss of
$3,000,000 related to the Troy and CSL operations resulting in a
impairment of the goodwill previously established at the purchase dates;
the recording of reserves for accounts receivable and inventory; the write
off of old, obsolete and slow moving inventory; which incurred significant
costs of gross margin losses; and the recording of severance costs. In
addition, the quarter includes the start up of the rug and tabletop
accessory business operation.
In fourth quarter of fiscal year 1999 the Company recorded
approximately $1,800,000 of adjustments primarily related to the write-off
of the Company's investment in Photo to Art of approximately $1,100,000
and professional service fees of approximately $500,000.
18. Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Accounts Receivable. The carrying amount of the Company's accounts
receivables approximate fair value.
Revolving, term loans and other borrowings. The carrying amounts of
the Company's outstanding balances under its various credit agreements and
other outstanding debt approximate the fair value because the interest
rate on the outstanding borrowings is variable and there are no prepayment
penalties.
Series B redeemable convertible preferred stock. The carrying
amounts and fair value of the Company's financial instruments as of June
30, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
----------------------
June 30, 2000 June 30, 1999
----------------------------- ------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Accounts receivable ........................................ $18,069 $18,069 $14,465 $14,465
Bank lines of credit and revolving loans ................... 13,200 13,200 18,400 18,400
Limeridge and Endeavor Notes ............................... 15,285 15,285 -- --
Term loans ................................................. 3,659 3,659 -- --
Other debt ................................................. 11,335 11,335 6,347 6,347
Series B redeemable preferred securities ................... -- -- 1,000 1,000
</TABLE>
19. Subsequent Events
F-36
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 addition, all
future 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 obligations as they become
due under the terms of the original 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.
F-37
<PAGE>
INTERIORS, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION & QUALIFYING ACCOUNTS & RESERVES
(amounts in thousands)
<TABLE>
<CAPTION>
Balance at Additions
Beginning of Charged to Costs Balance at
Description Year and Expenses(1) Deductions (2) Other(3) End of Year
---------------------------------------------------- ------------ ---------------- -------------- ------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended June 30, 2000
Receivable allowances .......................... $ 793 $ 1,438 $ (65) $ 185 2,351
Inventory reserve .............................. 1,908 2,848 (286) (340) 4,130
Year Ended June 30, 1999
Receivable allowances .......................... 528 31 xx 234 793
Inventory reserve .............................. 690 xx xx 1,218 1,908
Year Ended June 30, 1998
Receivable allowances .......................... 268 228 xx 32 528
Inventory reserve .............................. -- xx xx 690 690
</TABLE>
-------------------------------
(1) Allowances are primarily charged to income as incurred. The
allowance is adjusted at the end of each period, by a charge or
credit to income, for the estimated discounts and allowances
applicable to the account receivable then outstanding.
(2) Amounts written-off, net of recoveries.
(3) Reserves related to assets acquired in fiscal 2000, 1999 and 1998,
respectively. During fiscal 2000, an inventory reserve of $400,000
established during fiscal 1999 associated with the Petals
acquisition was subsequently determined as not necessary and was
reversed against the goodwill previously established.
The above reserves are deducted from the related assets in the
consolidated balance sheets.
S-1
