As filed with the Securities and Exchange Commission on June 7, 1996
Registration No. 33-_________
----------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
----------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DECOR GROUP, INC.
(Name of small business issuer in its charter)
Delaware 2590 Applied For
- ------------------------- ---------------------------- -------------------
(State or other juris- (Primary Standard Industrial (I.R.S. Employer
diction of organization) Classification Code No.) Identification No.)
320 Washington Street
Mt. Vernon, New York 10553
(914) 665-5400
(Address and telephone number
of principal executive offices and principal place of business)
Donald Feldman
President
320 Washington Street
Mt. Vernon, New York 10553
(914) 665-5400
(Name, address and telephone number of agent for service)
Copies to:
Hartley T. Bernstein, Esq. Lester Morse, P.C.
Bernstein & Wasserman, LLP Steven A. Morse, Esq.
950 Third Avenue 111 Great Neck Road
New York, NY 10022 Great Neck, NY 11021
(212) 826-0730 (516) 487-1446
(212) 371-4730 (Fax) (516) 487-1452 (Fax)
Approximate date of proposed sale to the public: As soon as reasonably
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis, pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X] continued overleaf
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
====================================================================================================================================
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Title of Each Class of Securities to be Amount to be Proposed Maximum Proposed Maximum Amount of Registration
Registered Registered (1) Offering Price Per Aggregate Offering Price Fee
Security (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Units, consisting of two (2) shares of
Common Stock, par value $.0001 per
share and one (1) Class A Warrant (3) 287,500 $10.00 $2,875,000 $991.30
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, included in the Units 575,000 ----- ----- -----
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Warrants included in the Units (4) 287,500 ----- ----- ----
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, underlying the Class A Warrants (5) 287,500 $4.00 $1,150,000 $396.52
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriter's Unit Purchase Option 25,000 $.001 $25.00 $0.01
- ------------------------------------------------------------------------------------------------------------------------------------
Units, each Unit consisting of two (2)
shares of Common Stock, par value $.0001
per share, and one (1) Class A Warrant (6) 25,000 $12.00 $300,000 $103.44
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, underlying Underwriter's Unit
Purchase Option 50,000 ----- ----- -----
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Warrants, underlying
Underwriter's Unit Purchase Option 25,000 ----- ----- -----
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, underlying Class A Warrants in
Underwriter's Unit Purchase Option (7) 25,000 $4.00 $100,000 $34.48
- ------------------------------------------------------------------------------------------------------------------------------------
Selling Securityholders
- ------------------------------------------------------------------------------------------------------------------------------------
Unit, consisting of two (2) shares of
Common Stock, par value $.001 per share,
and one (1) Class A Warrant(8) 25,000 $10.00 $250,000 $86.20
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, included in the Units 50,000 ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Warrants, included in the Units (4) 25,000 ---- ---- ----
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share, underlying the Class A Warrants 25,000 $4.00 $100,000 $34.48
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Warrants (9) 3,000,000 ----- ----- -----
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per
share underlying Class A Warrants 3,000,000 $4.00 $12,000,000 $4,137.93
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.0001 per 2,002,000 $5.00 $10,010,000 $3,451.45
share (10)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ----- ------ $26,785,025 $9,235.80
====================================================================================================================================
(1) Pursuant to Rule 416 under the Securities Act of 1933 (the "Act"), this
Registration Statement covers such additional indeterminate number of
shares of Common Stock and Class A Redeemable Common Stock Purchase
Warrants (the "Class A Warrants") as may be issued by reason of adjustments
in the number of shares of Common Stock and Class A Warrants pursuant to
anti-dilution provisions contained in the Class A Warrants and
Underwriter's Warrant. Because such additional shares of Common Stock and
Class A Warrants will, if issued, be issued for no additional
consideration, no registration fee is required.
(2) Estimated solely for purposes of calculating registration fee.
(3) Includes 37,500 Units subject to the Underwriter's over-allotment option
(the "Over-Allotment Option"), consisting of 75,000 shares of Common Stock,
37,500 Class A Warrants and 37,500 shares of Common Stock underlying the
Class A Warrants.
(4) The Class A Warrants are exercisable over a four (4) year period commencing
one (1) year following the effective date of this Offering into one (1)
share of Common Stock per Class A Warrant at an exercise price of $4.00 per
share.
(5) The number of shares of Common Stock specified is the number which may be
acquired by the holders of the Units upon exercise of the Class A
Redeemable Common Stock Purchase Warrants ("Class A Warrants") at the
maximum exercise price thereof.
(6) The Underwriter's unit purchase option entitles the Underwriter to purchase
up to 25,000 Units at 120% of the offering price (the "Underwriter's Unit
Purchase Option").
(7) Issuable upon exercise of the Class A Warrants included in the
Underwriter's Unit Purchase Option.
(8) Represents the resale of 25,000 Units held by a Selling Securityholder.
(9) Represents the resale of 3,000,000 Class A Warrants issuable in connection
with certain Bridge Loans.
(10) Shares of Common Stock held by certain Selling Securityholders.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
DECOR GROUP, INC.
CROSS REFERENCE SHEET
(Showing Location in the Prospectus of Information
Required by Items 1 through 23, Part I, of Form SB-2)
Item in Form SB-2 Prospectus Caption
----------------- ------------------
1. Front of Registration
Statement and Outside Front
Cover of Prospectus................ Facing Page of Registration
Statement; Outside Front
Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus.......... Inside Front Cover Page of
Prospectus; Outside Back Cover
Page of Prospectus
3. Summary Information and Risk
Factors............................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Use of Proceeds
5. Determination of Offering Price.... Outside Front Cover Page of
Prospectus; Underwriting;
Risk Factors
6. Dilution........................... Dilution; Risk Factors
7. Selling Securityholders........... Description of Securities; Selling
Securityholders
8. Plan of Distribution............... Outside Front Cover Page of
Prospectus; Risk Factors;
Underwriting
9. Legal Proceedings.................. Business-Litigation
10. Directors, Executive Officers,
Promoters and Control Persons...... Management
11. Security Ownership of Certain
Beneficial Owners and Management... Principal Stockholders
i
Item in Form SB-2 Prospectus Caption
----------------- ------------------
12. Description of Securities.......... Description of Securities;
Underwriting
13. Interest of Named Experts and
Counsel............................ Experts; Legal Matters
14. Disclosure of Commission Position
on Indemnification for
Securities Act Liabilities......... Underwriting; Certain Transactions
15. Organization Within Last 5 Years... Prospectus Summary; The Company;
Business
16. Description of Business............ Business; Risk Factors
17. Management's Discussion and Analysis
or Plan of Operation............... Management's Discussion and
Analysis of Financial Condition
and Results of Operations
18. Description of Property............ Business - Facilities
19. Certain Relationships and
Related Transactions............... Certain Transactions
20. Market for Common Equity and
Related Stockholder Matters........ Outside Front Cover Page of
Prospectus; Prospectus Summary;
Description of Securities;
Underwriting
21. Executive Compensation............. Management - Executive
Compensation
22. Financial Statements............... Selected Financial Data;
Financial Statements
23. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosures.......... *
- ----------
* Omitted because Item is not applicable.
ii
Explanatory Note
This registration statement covers (i) the primary offering ("Offering") of
Units by Decor Group, Inc. (the "Company") and Units owned and offered by a
certain holder of Units (the "Unit Holder") and (ii) the concurrent offering of
securities by certain selling securityholders. The Company is registering, under
the primary prospectus ("Primary Prospectus"), (i) 287,500 Units, each Unit
consisting of two (2) shares of Common Stock and one (1) Class A Warrant
(including 37,500 Units subject to the over-allotment) and (ii) 25,000 Units on
behalf of the Unit Holder. The Company is also registering under an alternate
prospectus ("Alternate Prospectus") the resale of (i) 2,002,000 shares of Common
Stock on behalf of certain stockholders (the "Selling Stockholders"), and (ii)
3,000,000 Class A Warrants issuable to certain bridge lenders to the Company
(the "Bridge Lenders") and the shares of Common Stock issuable upon the exercise
thereof. See "Bridge Financing." The Alternate Prospectus pages, which follow
the Primary Prospectus, are to be combined with all of the sections contained in
the Primary Prospectus, with the following exceptions: the front and back cover
pages and the sections entitled "Concurrent Sales," "Selling Securityholders,"
and "Plan of Distribution." Such sections from the Alternate Prospectus pages
will be added to the Primary Prospectus. The "Underwriting" section contained in
the Primary Prospectus will not be included in the Alternate Prospectus.
Furthermore, all references contained in the Alternate Prospectus to "the
Offering" or "this Offering" shall refer to the Company's Offering under the
Primary Prospectus.
iii
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH AN OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED JUNE 7, 1996
DECOR GROUP, INC.
275,000 Units, Each Unit Consists of Two (2) Shares of Common Stock
par value $.0001 per share, and
One (1) Class A Redeemable Common Stock Purchase Warrant
Offering Price Per Unit - $10.00
----------
Decor Group, Inc. ("Decor" or the "Company") is offering 250,000 units (the
"Units") at an offering price of $10.00 per Unit. Each Unit consists of two (2)
shares of common stock, par value $.0001 per share (the "Common Stock") and one
(1) Class A Redeemable Common Stock Purchase Warrant (the "Class A Warrants").
The securities comprising the Units will be separately transferable immediately
upon the date of this offering (the "Offering"). This offering also includes
25,000 Units owned and offered by the holder thereof (the "Unit Holder"). The
Company will not receive any of the proceeds from the sale of the Units by the
Unit Holder. See "Risk Factors" and "Description of Securities." The Risk Factor
section begins on page 14 of this Prospectus.
The Class A Warrants shall be exercisable commencing one (1) year after the
date hereof (the "Effective Date"). Each Class A Warrant entitles the holder to
purchase one (1) share of Common Stock at a price of $4.00 per share during the
four (4) year period commencing one (1) year from the Effective Date. The Class
A Warrants are redeemable by the Company for $.05 per Warrant, at any time after
________ __, 1997, upon thirty (30) days' prior written notice, if the average
closing price or bid price of the Common Stock, as reported by the principal
exchange on which the Common Stock is traded, Nasdaq or the National Quotation
Bureau Incorporated, as the case may be, equals or exceeds $12.00 per share, for
any twenty (20) trading days within a period of thirty (30) consecutive trading
days ending five (5) days prior to the date of the notice of redemption. Upon
thirty (30) days' written notice to all holders of the Class A Warrants, the
Company shall have the right to reduce the exercise price and/or extend the term
of the Class A Warrants. See "Description of Securities." Although the Company
has no current plans to reduce the exercise price and/or extend the term of the
Class A Warrants, it may consider taking such action depending upon the
Company's financial condition, its financial needs and based upon general market
conditions.
The Company has applied for inclusion of the Units, the Common Stock and
the Class A Warrants on The Nasdaq SmallCap Market, although there can be no
assurance that an active trading market will develop even if the securities are
accepted for quotation. Additionally, even if an active trading market develops,
the Company is still required to maintain certain minimum
criteria established by Nasdaq, of which there can be no assurance. See "Risk
Factors - Lack of Prior Market for Units, Common Stock and Class A Warrants; No
Assurance of Public Trading Market" and "Penny Stock Regulations May Impose
Certain Restrictions on Marketability of Securities."
Prior to this Offering, there has been no public market for the Units, the
Common Stock or the Class A Warrants. It is currently anticipated that the
initial public offering price will be $10.00 per Unit. The price of the Units,
as well as the exercise price of the Class A Warrants, have been determined by
negotiations between the Company and VTR Capital, Inc., the underwriter of this
Offering (the "Underwriter"), and do not necessarily bear any relationship to
the Company's assets, book value, net worth or results of operations or any
other established criteria of value. The Underwriter may enter into arrangements
with one or more broker-dealers to act as co-underwriters of this Offering. For
additional information regarding the factors considered in determining the
initial public offering price of the Units and the exercise price of the Class A
Warrants, see "Risk Factors - No Prior Public Market; Possible Volatility of
Stock Price," "Description of Securities" and "Underwriting."
The registration statement of which this Prospectus forms a part also
covers the resale of (i) 3,000,000 Class A Warrants issuable to certain bridge
lenders (the "Bridge Lenders") in connection with the Company's recent bridge
financings (the "Bridge Loans") and 3,000,000 shares of Common Stock issuable
upon exercise of the Class A Warrants and (ii) 2,002,000 shares of Common Stock,
held by certain stockholders (the "Selling Stockholders"). The Bridge Lenders
and the Selling Stockholders are hereinafter collectively referred to as the
"Selling Securityholders." The officers and directors of the Company as well as
certain members of their immediate families (including certain Selling
Securityholders holding an aggregate of 250,000 shares of Common Stock) have
agreed not to sell or transfer the securities of the Company held thereby for a
period of twenty-four (24) months following the Effective Date, subject to
earlier release by the Underwriter. The Company will not receive any of the
proceeds on the sale of the securities by the Selling Securityholders. The
resale of the securities of the Selling Securityholders are subject to
Prospectus delivery and other requirements of the Securities Act of 1933, as
amended (the "Act"). Sales of such securities or the potential of such sales at
any time may have an adverse effect on the market prices of the securities
offered hereby. See "Selling Securityholders" and "Risk Factors - Shares
Eligible for Future Sale May Adversely Affect the Market."
----------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK
INCLUDED IN THE UNITS OFFERED HEREBY AND SHOULD BE CONSIDERED ONLY BY PERSONS
WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "DILUTION" and "RISK
FACTORS."
2
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
==============================================================================================
==============================================================================================
Underwriting
Discount and Proceeds to Proceeds to Selling
Price to Public Commissions(1) Company(2) Securityholders(3)
- ----------------------------------------------------------------------------------------------
Per Unit Offered by
the Company........
$10.00 $1.00 $9.00 $----
- ----------------------------------------------------------------------------------------------
Per Unit Offered by
Selling
Securityholders
$10.00 $1.00 $---- $9.00
- ----------------------------------------------------------------------------------------------
Total(4).......... $2,750,000 $275,000 $2,250,000 $225,000
==============================================================================================
The date of this Prospectus is , 1996
-----------
VTR CAPITAL, INC.
Investment Bankers
(Notes to Cover)
- ----------
(1) Does not reflect additional compensation to be received by the Underwriter
in the form of: (i) a non-accountable expense allowance of $75,000 ($86,250
if the Over-Allotment Option (as hereinafter defined) is exercised in
full), (ii) a two (2) year financial advisory and investment banking
agreement providing for an aggregate fee of $100,000 payable in advance at
the closing of this Offering, and (iii) an option to purchase 25,000 Units
at $12.00 per Unit (the "Underwriter's Unit Purchase Option"), exercisable
for a period of four (4) years, commencing one (1) year from the effective
date of this Offering. The Company and the Underwriter have agreed to
indemnify each other against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Act"). The Company has
been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy and is therefore
unenforceable. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $675,000
3
including the Underwriter's non-accountable expense allowance ($75,000) and
the financial advisory fee referred to in Footnote (1) (not assuming
exercise of the Over-Allotment Option (as hereinafter defined),
registration fees, transfer agent fees, NASD fees, Blue Sky filing fees and
expenses, legal fees and expenses, and accounting fees and expenses. See
"Use of Proceeds" and "Underwriting."
(3) The Company will not receive any of the proceeds from the sale of the Units
by the Unit Holder. See "Selling Securityholders" and "Underwriting."
(4) Does not include 37,500 additional Units from the Company to cover
over-allotments which the Underwriter has an option to purchase for thirty
(30) days from the date of this Prospectus at the initial public offering
price, less the Underwriter's discount (the "Over- Allotment Option"). If
the Over-Allotment Option is exercised in full, the total price to the
public, underwriting discounts and commissions and the estimated expenses
including the Underwriter's non-accountable expense allowance will be
$2,875,000, $287,500, and $686,250 (including the financial advisory fee
paid to the Underwriter), respectively, and the total proceeds to the
Company will be $1,901,250. See "Underwriting."
The Units are offered by the Underwriter on a "firm commitment" basis,
when, as and if delivered to and accepted by the Underwriter, and subject to
prior sale, allotment and withdrawal, modification of the offer with notice,
receipt and acceptance by the Underwriter named herein and subject to its right
to reject orders in whole or in part and to certain other conditions. It is
expected that the delivery of the certificates representing the securities and
payment therefor will be made at the offices of the Underwriter on or about
_______ __, 1996.
4
AVAILABLE INFORMATION
The Company does not presently file reports and other information with the
Securities and Exchange Commission (the "Commission"). However, following
completion of this Offering, the Company intends to furnish its stockholders
with annual reports containing audited financial statements examined and
reported upon by its independent public accounting firm and such interim
reports, in each case as it may determine to furnish or as may be required by
law. After the effective date of this Offering, the Company will be subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and in accordance therewith will file reports, proxy
statements and other information with the Commission.
Reports and other information filed by the Company can be inspected and
copied at the public reference facilities maintained at the Commission at Room
1024, 450 Fifth Street, N.W., Washington, DC 20549. Copies of such material can
be obtained upon written request addressed to the Commission, Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company has filed with the Commission a registration statement on Form SB-2
(herein together with all amendments and exhibits referred to as the
"Registration Statement") under the Act of which this Prospectus forms a part.
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information
reference is made to the Registration Statement.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE UNITS, THE
COMMON STOCK AND/OR THE CLASS A WARRANTS CONTAINED THEREIN AT A LEVEL ABOVE THAT
WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED IN THE NASDAQ SMALLCAP MARKET OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
A SIGNIFICANT AMOUNT OF THE UNITS TO BE SOLD IN THIS OFFERING MAY BE SOLD
TO CUSTOMERS OF THE UNDERWRITER WHICH MAY AFFECT THE MARKET FOR AND LIQUIDITY OF
THE COMPANY'S SECURITIES IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT MAKE
A MARKET IN THE COMPANY'S SECURITIES, OF WHICH THERE CAN NO ASSURANCE. SUCH
CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN TRANSACTIONS FOR THE SALE OR PURCHASE OF
THE UNITS OR THE COMMON STOCK AND/OR THE CLASS A WARRANTS CONTAINED THEREIN
THROUGH AND/OR WITH THE UNDERWRITER.
ALTHOUGH IT HAS NO OBLIGATION TO DO SO, THE UNDERWRITER MAY FROM TIME TO
TIME ACT AS A MARKET MAKER AND OTHERWISE EFFECT TRANSACTIONS IN THE COMPANY'S
SECURITIES. THE UNDERWRITER, IF IT PARTICIPATES IN THE MARKET, MAY BECOME A
DOMINATING INFLUENCE IN THE
5
MARKET FOR THE UNITS OR THE COMMON STOCK AND CLASS A WARRANTS CONTAINED THEREIN.
HOWEVER, THERE IS NO ASSURANCE THAT THE UNDERWRITER WILL OR WILL NOT CONTINUE TO
BE A DOMINATING INFLUENCE. THE PRICES AND LIQUIDITY OF THE SECURITIES OFFERED
HEREUNDER MAY BE SIGNIFICANTLY AFFECTED BY THE DEGREE, IF ANY, OF THE
UNDERWRITER'S PARTICIPATION IN SUCH MARKET. SEE "RISK FACTORS - LACK OF PRIOR
MARKET FOR UNITS, COMMON STOCK AND CLASS A WARRANTS; NO ASSURANCE OF PUBLIC
TRADING MARKET." THE UNDERWRITER MAY DISCONTINUE SUCH ACTIVITIES AT ANY TIME OR
FROM TIME TO TIME.
6
PROSPECTUS SUMMARY
The following is a summary of certain information (including financial
statements and notes thereto) contained in this Prospectus and is qualified in
its entirety by the more detailed information appearing elsewhere herein. In
addition, unless otherwise indicated to the contrary, all information appearing
herein does not give effect to (i) 275,000 shares of Common Stock issuable upon
exercise of the Class A Warrants; (b) 75,000 shares of Common Stock issuable
upon exercise of the Over-Allotment Option; (c) 37,500 shares of Common Stock
issuable upon exercise of the Class A Warrants included in the Over-Allotment
Option; (d) 50,000 shares of Common Stock issuable upon exercise of the
Underwriter's Unit Purchase Option; (e) 25,000 shares of Common Stock issuable
upon exercise of the Class A Warrants included in the Underwriter's Unit
Purchase Option; (f) 3,000,000 shares of Common Stock issuable upon exercise of
Class A Warrants issuable to certain Selling Securityholders, and (g) 500,000
shares of Common Stock issuable upon the conversion of 500,000 shares of Series
A Convertible Preferred Stock. See "Description of Securities," "Certain
Transactions" "Underwriting," and "Management - Stock Option Plans and
Agreements." Each prospective investor is urged to read this Prospectus in its
entirety.
The Company
Decor Group, Inc., a Delaware corporation (the "Company" or "Decor"), was
incorporated in March 1996. Artisan Acquisition Corporation, a Delaware
corporation wholly owned by the Company ("AAC"), was incorporated in March 1996
for the purpose of entering into an Asset Purchase Agreement with Artisan House,
Inc. ("Artisan House") pursuant to which AAC has agreed to purchase
substantially all of the operating assets, and assume certain liabilities, of
Artisan House (the "Artisan House Transaction") for an aggregate purchase price
of $3,526,400, subject to certain adjustments. The Company anticipates closing
the Artisan House Transaction prior to, or contemporaneously with, the closing
of this Offering. Unless otherwise indicated, references made hereinafter to the
Company include AAC and Artisan House. See "Business -Acquisition of Artisan
House."
Artisan House, located in Los Angeles, California and founded in 1964, is
engaged in the design, manufacturing and marketing of metal wall, table and
freestanding sculptures. Management believes that Artisan House's products
bridge the gap between high priced gallery art and mass produced decorative
pieces. Artisan House products retail from approximately $100 to over $400. The
primary goal of the Company is to supply a broad spectrum of design driven
sculpture and decorative accessories at moderate prices.
Artisan House markets its products through a network of independent
commissioned sales representatives, both domestically and internationally, as
well as through strategically located showrooms servicing the home furnishing
and decorative accessory industries. Artisan House has permanent showrooms
located in High Point, NC and San Francisco, CA that are leased and
7
controlled by the Artisan House, as well as sales representative showrooms in
Atlanta and Dallas.
Artisan House's typical customers include fine furniture stores, interior
decorators and major department stores such as Sears and JC Penny, large
furniture chains such as Levitz and Wickes, and catalogue houses. See "Business"
and "Recent Developments."
The Company believes that the home furnishing and decorative accessory
supply industry will consolidate as major retailers attempt to increase their
"single-sourcing" in order to reduce distribution and related expenses. The
Company intends to capitalize on the fragmented nature of the supply side of the
home decorative accessory industry and the consolidation of such industry
through the acquisition of manufacturers and distributors of art-related
decorative accessories. Through such acquisitions, the Company intends to
increase the number and nature of products manufactured by the Company. Other
than the acquisition of Artisan House, the Company is not currently in
discussions regarding the acquisition of any other business.
The Company's executive offices are located at 320 Washington Street, Mt.
Vernon, New York 10553. Its telephone number is (914) 665-5400. See "Risk
Factors" for a discussion of certain factors that should be considered in
evaluation the Company and its business.
8
The Offering
Securities Offered by
the Company (1)....................250,000 Units(2)
Securities Offered by the
Unit Holder........................25,000 Units
Redemption of Class A
Warrants ..........................The Class A Warrants are each redeemable
by the Company for $.05 per Warrant, at
any time after ___________, upon thirty
(30) days' prior written notice, if the
average closing price of bid price of
the Common Stock, as reported by the
principal exchange on which the Common
Stock is quoted, The Nasdaq SmallCap
Market or the National Quotation Bureau
Incorporated, as the case may be, equals
or exceeds $12.00 per share for any
twenty (20) trading days within a period
of thirty (30) consecutive trading days
ending five (5) days prior to the date
of the notice of redemption. Upon thirty
(30) days' written notice to all holders
of the Class A Warrants, the Company
shall have the right to reduce the
exercise price and/or extend the term of
the Class A Warrants. See "Description
of Securities."
- ----------
(1) Concurrently with this Offering, the Company is registering (i) 2,002,000
shares of Common Stock on behalf of certain Selling Stockholders, and (ii)
3,000,000 Class A Warrants on behalf of certain Selling Warrantholders. See
"Selling Securityholders" and "Certain Transactions".
(2) Each Unit consists of two (2) shares of Common Stock and one (1) Class A
Warrant. The securities comprising the Units are separately transferable
immediately upon the Effective Date of this Offering. The Class A Warrants
shall be exercisable commencing one (1) year from the Effective Date. Each
Class A Warrant entitles the holder to purchase one (1) share of Common
Stock at a price of $4.00 per share during the four (4) year period
commencing one (1) year from the Effective Date of this Offering. The
exercise price of the Warrants was determined by negotiations between the
Company and the Representative. Among the factors used in fixing the
exercise price were the market price of the Company's Common Stock, the
general condition of the securities market at the time of this Offering,
demand for similar securities of comparable companies and the benefit to
the Company and purchasers of the Company's securities of an exercise price
which is below the initial offering price of the Common Stock. See
"Description of Securities."
9
Securities Outstanding Prior to
the Offering:
Series A Convertible
Preferred Stock..............500,000 Shares
Series B Non-Convertible
Preferred Stock...............20,000,000 Shares(1)
Common Stock.......................2,625,000 Shares(2)
Class A Warrants...................25,000 Warrants(3)
Securities Outstanding Subsequent
to the Offering:
Series A Convertible
Preferred Stock..............500,000 Shares
Series B Non-Convertible
Preferred Stock...............20,000,000 Shares(1)
Common Stock.......................3,125,000 Shares(4)
Class A Warrants...................3,275,000 Warrants(5)
Use of Proceeds ...................The net proceeds to the Company from the
sale of the 250,000 Units offered
hereby, after deducting offering
expenses and the $100,000 financial
advisory fee, are estimated to be
$1,575,000. The net
- ----------
(1) Assumes the exercise of an option to purchase 20,000,000 shares of Series B
Non-Convertible Preferred Stock held by Interiors, Inc. See "Certain
Transactions".
(2) Includes 50,000 shares included in the Units held by the Unit Holder.
(3) Includes 25,000 Class A Warrants included in the Units held by the Unit
Holder but does not include 3,000,000 Class A Warrants issuable to the
Bridge Lenders.
(4) Excludes 100,000 shares issuable to Artisan House, Inc. upon the closing of
the Artisan House Transaction.
(5) Assumes the issuance of 3,000,000 Class A Warrants to the Bridge Lenders as
of the Effective Date.
10
proceeds are expected to be applied for
the following purposes: purchase of all
of the operating assets and assumptions
of certain liabilities of Artisan House,
repayment of certain indebtedness, and
working capital. "See Use of Proceeds".
Risk Factors ...........................Qualified Auditor's Report of
Accountants, Limited Operating History,
No Assurance that the Company will
Successfully Commence Business,
Dependence on Offering Proceeds;
Possible Need for Additional Financing,
Significant Industry Competition,
Dilution; Equity Securities and Sold
Previously at Below Offering Price,
Conflicts of Interest, Governmental
Regulation, Dependence on Interiors,
Dependence on Key Personnel, Control by
Interiors, Acquisition of Artisan House,
Trademark Protection, Broad Discretion
in Application of Proceeds, Charges for
Interest Expense Relating to Bridge
Notes, Dependence on Skilled Craftsmen
and Salespersons, Significant Customer,
Absence of Dividends, No Prior Public
Market; Possible Volatility of Stock
Price, Lack of Prior Market for Units,
Common Stock and Class A Warrants; No
Assurance of Public Trading Market,
Current Prospectus and State Blue Sky
Registration in Connection with the
Exercise of the Warrants, Impact on
Market of Warrant Exercise,
Underwriter's Unit Purchase Option,
"Penny Stock" Regulations May Impose
Certain Restrictions on Marketability of
Securities, Redemption of Redeemable
Warrants, Limitation on Director
Liability, Limited Number of Management
Personnel, Shares Eligible of Future
Sale May Adversely Affect the Market and
Anti-Takeover Effect of General
Corporation Law of Delaware. An
investment in the securities offered
hereby involves a high degree of risk
and immediate substantial dilution of
the book value of the Common Stock
included in the Units and should be
considered only by persons who can
afford the loss of their entire
investment. See "Dilution" and "Risk
Factors."
Proposed Nasdaq Small-Cap Market
Symbol(1) .........................Units -_____
11
Common Stock-_____
Class A Warrants-_____
- ----------
(1) Although the Company intends to apply for inclusion of the Units, the
Common Stock and Class A Warrants on The Nasdaq SmallCap Market, there can
be no assurance that the Company's securities will be included for
quotation, or if so included that the Company will be able to continue to
meet the requirements for continued quotation, or that a public trading
market will develop or that if such market develops, it will be sustained.
See "Risk Factors- Lack of Prior Market for Units, Common Stock and Class A
Warrants; No Assurance of Public Trading Market."
12
Summary Financial Information
The selected historical financial data as of March 31, 1996 presented below are
derived from financial statements of the Company, which have been audited by
Mortenson and Associates, P.C., independent accountants, whose reports are
included elsewhere herein. The data set forth below should be read in
conjunction with and is qualified in its entirety by the Company's financial
statements, related notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations. See "Financial Statements," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The following summary financial information has been summarized
from the Company's financial statements included elsewhere in this Prospectus.
The information should be read in conjunction with the financial statements and
the related notes thereto See "Financial Statements."
Summary Statement of Operations
- ----------------------------------------------------------------------------------------------------
As of March 31, 1996 As of March 31, 1996, As of March 31, 1996,
($) As Adjusted(1)($) As Adjusted(1)(2)($)
- ----------------------------------------------------------------------------------------------------
Revenues ---- 4,809,422 4,809,422
Gross Profit ---- 2,213,039 2,213,039
Operating Profit (Loss) (100,000) 99,448 99,448
Net Income (Loss) (99,750) (20,054) (20,054)
Net Income (Loss) per share (.04) (.01) (.01)
Weighted Average number of 2,625,000 2,725,000 3,225,000
Common Shares outstanding
- ----------------------------------------------------------------------------------------------------
Summary Balance Sheet Data
- ----------------------------------------------------------------------------------------------------
As of March 31, 1996 As of March 31, 1996, As of March 31, 1996,
($) As Adjusted(1)($) As Adjusted(1)(2)($)
- ----------------------------------------------------------------------------------------------------
Working Capital (deficit) (144,750) (1,242,708) 332,292
Total Assets 3,355,250 7,334,080 7,499,080
Total Liabilities 250,000 3,928,830 2,518,830
Stockholder's Equity 3,105,250 3,405,250 4,980,250
- ----------------------------------------------------------------------------------------------------
- ----------
(1) Adjusted to reflect the closing of the Artisan House Transaction.
(2) Adjusted to reflect the sale of 250,000 Units offered hereby and the net
proceeds therefrom of $1,575,000.
13
RISK FACTORS
An investment in the securities offered hereby is speculative and involves
a high degree of risk and substantial dilution and should only be purchased by
investors who can afford to lose their entire investment. Prospective
purchasers, prior to making an investment, should carefully consider the
following risks and speculative factors, as well as other information set forth
elsewhere in this Prospectus, associated with this Offering, including the
information contained in the Financial Statements herein.
1. Qualified Auditor's Report of Accountants. As a result of the Company's
current financial condition, the Company's independent auditors have qualified
their report on the Company's financial statement for the period from March 1,
1996 (inception) to March 31, 1996. The Company's ability to continue in the
normal course of business is dependent upon successful completion of its planned
public offering of securities to raise capital and the success of future
operations. These uncertainties raise substantial doubt about its ability to
continue as a going concern. There can be no assurance that the Company will not
incur net losses in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business, " "Use of Proceeds, "
and "Financial Statements and Notes."
2. Limited Operating History, No Assurance that the Company will
Successfully Commence Business. The Company was organized on March 1, 1996 and
is in its early stage of development. The Company's business consist solely of
the assets acquired from Artisan House (the "Artisan House Transaction"). For
the year quarter ended January 31, 1996, Artisan House generated revenues of
$4,809,422, had stockholder's equity of $469,525 and working capital of
$400,879. Like any relatively new business enterprise operating in a specialized
and intensely competitive market, the Company is subject to many business risks
which include, but are not limited to, unforeseen marketing and promotional
expenses, unforeseen negative publicity, competition, product liability and lack
of operating experience. Many of the risks may be unforeseeable or beyond the
control of the Company. There can be no assurance that the Company will
successfully implement its business plan in a timely or effective manner, or
that management of the Company will be able to market and sell enough products
to generate sufficient revenues and continue as a going concern. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Use of Proceeds," "Certain Transactions" and
"Financial Statements."
3. Dependence on Offering Proceeds; Possible Need for Additional Financing.
The Company's cash requirements will be significant. The Company is dependent on
the proceeds from this Offering and the proceeds from a certain secured loan
from United Credit Corporation (the "Secured Loan") to close the Artisan House
Transaction. See "Business - Secured Loan Agreement." The Company anticipates,
based on its currently proposed plans, that the proceeds of this Offering
14
and from the Secured Loan, together with funds generated from operations, will
be sufficient to satisfy its anticipated cash requirements for approximately
twelve (12) months following the consummation of this Offering. In the event
that these plans change, or the costs of development of operations prove greater
than anticipated, the Company could be required to modify its operations,
curtail its expansion or seek additional financing sooner than currently
anticipated. The Company believes that its operations would be restricted absent
expansion. Other than with respect to obtaining the Secured Loan, the Company
has no current arrangements with respect to such additional financing and there
can be no assurance that such additional financing, if available, will be on
terms acceptable to the Company. See "Use Of Proceeds and "Business - Secured
Loan Agreement"."
4. Significant Industry Competition. The market for sculptures and
decorative art products is highly competitive. Numerous manufacturers compete
for customers throughout the United States and internationally. There can be no
assurance that the Company will be able to compete successfully with its
competitors.
5. Dilution; Equity Securities Sold Previously at Below Offering Price.
Upon completion of this Offering assuming no exercise of the Over-Allotment
Option, and without giving effect to the exercise of the Underwriter's Unit
Purchase Option, the net tangible book value per share of the Company's Common
Stock will be $.99. At the initial public offering price of $10.00 per Unit,
assuming that no portion of the Unit purchase price is allocated to the Class A
Warrant, investors in this Offering will experience an immediate dilution of
approximately $4.01 or 80% in net tangible book value per share and existing
investors will experience an increase of approximately $.38 per share. The
exercise of the Class A Warrants sold to the public will result in future
dilution to the public investors. See "Dilution." The present stockholders of
the Company have acquired their respective equity interest at costs
substantially below the public offering price. Accordingly, to the extent that
the Company incurs losses, the public investors will bear a disproportionate
risk of such losses.
6. Conflicts of Interest. After this Offering, Interiors, Inc.
("Interiors") will continue to own 500,000 shares of Series A Convertible
Preferred Stock (the "Series A Preferred Stock") or 13% of the Company's shares
of Common Stock on an as converted basis and an option to purchase 20,000,000
shares of the Company's of Series B Non-Convertible Preferred Stock (the "Series
B Preferred Stock"). Since the Common Stock and the Series B Preferred Stock
vote together as a class, Interiors will own following the completion of this
Offering (assuming the Over-Allotment Option is not exercised), 86.5% of the
total number of voting shares outstanding. In addition, Interiors has agreed
pursuant to the terms of that certain Management Service Agreement between the
Company and Interiors to provide, management, administrative and marketing
services to the Company. In addition, Max Munn, the Chairman of the Board of the
Company, is also the President and a director of Interiors, and Donald Feldman,
the Company's President and Chief Financial Officer, is a director of Interiors.
Because of Interior's ownership interest in the Company, the identity of certain
management and Interior's role under the Management Services Agreement, certain
conflicts of interest may occur between the Company and Interiors. In such
instances, members of
15
the Board of Directors who are also members of the Interiors Board of Directors
may be precluded from participating in corporate decisions. Accordingly, no
assurance can be given that such conflicts will be resolved in a manner
favorable to the Company. Although the Board of Directors of the Company has not
adopted any written policy on this matter, the General Corporation Law of the
State of Delaware contains specific provisions governing such conflicts.
7. Governmental Regulation. The Company's operations are subject to
numerous Federal, state and local laws and regulations relating to the
environment and health safety and other regulatory matters. Certain materials
used in the manufacturing of the Company's products such as paints, solvents and
other water-based related finishes may be classified by Federal and certain
state and local governments as "hazardous materials." Control of those
substances is regulated by the Environmental Protection Agency ("EPA") and
certain state and local environmental protection agencies which require reports
and inspect facilities to monitor compliance. In addition, under the
Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"),
any generator of hazardous waste sent to a hazardous waste disposal site is
potentially responsible for the clean up and remediation costs required for such
site in the event that the site is not properly closed by the owner or operator,
irrespective of the amount of waste sent to the site. The Company's
manufacturing facilities have been and will continue to be inspected by the
Occupational Safety and Health Administration and by certain state and local
inspection agencies and departments. The Company has obtained all permits and
anticipates that its facilities and operations will be in substantial compliance
with all material applicable laws and regulations. Nevertheless, no assurance
can be given that the Company will be able to obtain such permits in the future
or that future events, such as changes in or modified interpretations of
existing laws or regulations or enforcement policies, may give rise to
additional compliance costs that could have a material adverse effect on the
Company.
8. Dependence on Interiors. In May 1996, the Company entered into a
Management Services Agreement with Interiors, Inc. ("Interiors"). Interiors has,
pursuant to such agreement, agreed to advise the Company on the manufacturing,
sale, marketing and distribution of the Company's products. In exchange for such
services, the Company has agreed to pay to Interiors an annual amount equal to
the greater of (i) $75,000 or (ii) 1 1/2% of gross sales, subject to certain
cashflow restrictions. In the event that the Management Services Agreement is
terminated for any reason, the Company's business may be negatively effected.
See "Certain Transactions."
9. Dependence on Key Personnel. The Company is substantially dependent on
the continued services of Donald Feldman, the Company's Chief Executive Officer
and Chief Financial Officer. The Company has entered into three (3) year
employment agreement with Mr. Feldman. Should Mr. Feldman not be able to
continue as officers of the Company, its prospects could be adversely affected
and as a result the loss of either of these officers could materially adversely
affect the Company's operations. The Company currently does not maintain key
personnel life insurance for any of its employees. See "Management."
10. Control by Interiors. Following this Offering, Interiors will own
500,000 shares of
16
the Company's Series A Preferred Stock (non-voting shares) and hold an option to
purchase 20,000,000 shares of the Company's Series B Preferred Stock (voting
shares), representing 86.5% of the total voting stock outstanding (based upon
3,125,000 shares of Common Stock outstanding and assuming the exercise of the
option to purchase the shares of Series B Preferred Stock). Since holders of
Class B Preferred Stock and Common Stock do not have any cumulative voting
rights and directors are elected by a majority vote of the voting shares
outstanding, Interiors is in a position to control the election of directors as
well as the affairs of the Company. In addition, Max Munn, a member of the
Company's Board of Directors is also the President and director of Interior's
Board of Directors. Such control could also preclude an unsolicited acquisition
of the Company and consequently, adversely affect the market price of the Common
Stock. See "Description of Securities."
11. Acquisition of Artisan House. On March 25, 1996, the Company and AAC, a
wholly owned subsidiary of the Company entered into an Asset Purchase Agreement
with the Artisan House, Inc. and Henry Goldman, pursuant to which the Company
intends to close the Artisan House Transaction. In order to consummate the
proposed acquisition, the Company intends to use a significant portion of the
proceeds of this Offering and the proceeds of $1,100,000 from the Secured Loan
to fund the purchase price for the Artisan House Transaction. See "Business -
Acquisition of Artisan House". The Company anticipates that its wholly-owned
subsidiary, ACC, will close the Artisan House Transaction prior to, or
contemporaneously with, the closing of this Offering.
12. Trademark Protection. The trademarks "Artisan House", "C. Jere",
"Sautere", and "Glendale Ironworks" have been registered with the United States
Patent and Trademark Office ("PTO"). The Company presently intends to make all
appropriate filings and registrations and take all other actions necessary to
protect all of its intellectual property rights. There can be no assurance,
however, that the Company will be able to effectively protect such property
rights. The failure by the Company to protect such rights from unlawful and
improper appropriation may have a material adverse effect on the Company.
Although to date no claims have been brought against the Company alleging that
it infringes on the intellectual property rights of others, there can be no
assurance that such claims will not be brought against the Company in the
future, or that if made, such claims will not be successful. In addition to any
potential monetary liability for damage, the Company could be required to obtain
a license in order to continue to use the trademarks in question or could be
enjoined from using such trademarks if such license were not made available on
acceptable terms. If the Company becomes involved in such litigation, it may
divert significant Company resources, which could have a material adverse effect
on the Company and its results or operations, and, if such a claim were
successful, the Company's business could be materially adversely affected. See
"Business- Products; Trademarks."
13. Broad Discretion in Application of Proceeds. While the Company
presently intends to use the net proceeds of this Offering, as described in the
"Use of Proceeds" section of this Prospectus, management of the Company has
broad discretion to adjust the application and allocation of the net proceeds of
this Offering as well as any proceeds received upon any exercise of the Class A
Warrants in order to address changed circumstances and opportunities. As a
result of the
17
foregoing, the success of the Company will be substantially dependent upon the
discretion and judgment of the management of the Company with respect to the
application and allocation of the net proceeds hereof. Pending use of such
proceeds, the net proceeds of this Offering will be invested by the Company in
short-term, low risk marketable securities. See "Use of Proceeds."
14. Charges for Interest Expense Relating to Bridge Notes. In March 1996
the Company issued $250,000 in principal amount of 8% Notes in connection with a
bridge financing. Management believes that based on the nature of such
borrowings, the Company's position and the current economic environment, such
interest rates may not be reflective of the effective position and the market
rate of interest. Accordingly, a deferred financing cost is reflected in the
Balance Sheet dated March 31, 1996 in the amount of $1,500,000 and will be
charged to operations over the life of the loans. See "Bridge Financing" and
"Management's Discussion and Analysis."
15. Dependence on Skilled Craftsmen and Salespersons. The Company relies on
its skilled craftsmen with specialized skills in the design, crafting and
manufacture of its products. Although the Company attempts to hire and train
skilled craftsmen, the inability of the Company to retain craftsmen and creative
designers may adversely affect operations. The loss of such persons could have a
material adverse impact on the Company.
16. Significant Customers. During fiscal 1995, two customers purchased
approximately 6% and 5%, respectively, of the net sales of Artisan House. There
can be no assurance that these significant customers will continue to make
purchases at the same level or at all. Failure by these customers to continue to
purchase products from the Company could have an adverse effect on the Company's
business.
17. Absence of Dividends. The Company has not paid and does not anticipate
paying any cash dividends on its Common and Preferred Stock in the foreseeable
future but instead intends to retain all working capital and earnings, if any,
for use in the Company's business operations and in the expansion of its
business. See "Dividend Policy" and "Description of Securities".
18. No Prior Public Market; Possible Volatility of Stock Price. Prior to
this Offering, there has been no public market for the Units, Common Stock or
Class A Warrants. The initial public offering price of the Units, as well as the
exercise price for the Class A Warrants was determined by negotiation between
the Company and the representatives of the Underwriter, and may not be
indicative of the market price for such securities in the future, and does not
necessarily bear any relationship to the Company's assets, book value, net worth
or results of operations of the Company or any other established criteria of
value. Among the factors considered in determining the price of the Units were
the history of and prospects for the industry in which the Company competes,
estimates of the business potential of the Company, the present state of the
development of the Company's business, the Company's financial condition, an
assessment of the Company's management, the general condition of the securities
markets at the time of this Offering, and the demand for similar securities of
comparable companies. There is, however, no relationship whatsoever between the
offering price of the Units, the exercise price of the Class A Warrants and the
Company's net worth,
18
projected earnings, book value, or any other objective criteria of value on the
other. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. See "Underwriting - Determination
of Public Offering Price," "Description of Securities" and "Financial
Statements."
19. Lack of Prior Market for Units, Common Stock and Class A Warrants; No
Assurance of Public Trading Market. Prior to this Offering, no public trading
market existed for the Units, Common Stock and Warrants. There can be no
assurances that a public trading market for the Units, Common Stock and Warrants
will develop or that a public trading market, if developed, will be sustained.
Although the Company anticipates that upon completion of this Offering, the
Units, Common Stock and Warrants will be eligible for inclusion on The Nasdaq
SmallCap Market, no assurance can be given that the Units, Common Stock and
Warrants will be listed on The Nasdaq SmallCap Market as of the Effective Date.
Consequently, there can be no assurance that a regular trading market for the
Units, Common Stock and Warrants, other than the pink sheets, will develop after
the completion of this Offering. If a trading market does in fact develop for
the Units, Common Stock and Class A Warrants offered hereby, there can be no
assurance that it will be maintained. If for any reason the Units, Common Stock
and Warrants are not listed on The Nasdaq SmallCap Market or a public trading
market does not develop, purchasers of the Units, Common Stock and Warrants may
have difficulty in selling their securities should they desire to do so. In any
event, because certain restrictions may be placed upon the sale of securities at
prices under $5.00, unless such securities qualify for an exemption from the
"penny stock" rules, such as a listing on The Nasdaq SmallCap Market, some
brokerage firms will not effect transactions in the Company's securities and it
is unlikely that any bank or financial institution will accept such securities
as collateral, which could have an adverse effect in developing or sustaining
any market for the Units, Common Stock and Warrants. See "Risk Factors - Penny
Stock Regulations May Impose Certain Restrictions on Marketability of
Securities."
Although it has no legal obligation to do so, the Underwriter from time to
time may act as a market maker and may otherwise effect and influence
transactions in the Company's securities. However, there is no assurance that
the Underwriter will continue to effect and influence transactions in the
Company's securities. The prices and liquidity of the Company's securities may
be significantly affected by the degree, if any, of the Underwriter's
participation in the market. The Underwriter may voluntarily discontinue such
participation at any time. Further, the market for, and liquidity of, the
Company's securities may be adversely affected by the fact that a significant
amount of the Units may be sold to customers of the Underwriter.
Under prevailing rules of the National Association of Securities Dealers,
Inc ("NASD"), in order to qualify for initial quotation of securities on The
Nasdaq SmallCap Market, a company, among other things, must have at least
$4,000,000 in total assets, $2,000,000 in total capital and surplus, $1,000,000
in market value of public float and a minimum bid price of $3.00 per share.
Although the Company may upon the completion of this Offering qualify for
initial quotation of its securities on The Nasdaq SmallCap Market, for continued
listing on The Nasdaq SmallCap Market, a company, among other things, must have
$2,000,000 in total assets, $1,000,000 in total capital and surplus,
19
$1,000,000 in market value of public float and a minimum bid price of $1.00 per
share. If the Company is unable to satisfy the requirements for quotation on The
Nasdaq SmallCap Market, trading, if any, in the Units, Common Stock and Class A
Warrants offered hereby would be conducted in the over-the-counter market in
what are commonly referred to as the "pink sheets" or on the NASD OTC Electronic
Bulletin Board. As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the securities offered
hereby. The above-described rules may materially adversely affect the liquidity
of the market for the Company's securities. See "Underwriting."
20. Current Prospectus and State Blue Sky Registration in Connection with
the Exercise of the Warrants. The Company will be able to issue the securities
offered hereby, shares of its Common Stock upon the exercise of the Class A
Warrants and Underwriter's Unit Purchase Option only if (i) there is a current
prospectus relating to the Common Stock issuable upon the exercise of the
Warrants under an effective registration statement filed with the Securities and
Exchange Commission, and (ii) such Common Stock is then qualified for sale or
exempt therefrom under applicable state securities laws of the jurisdictions in
which the various holders of Warrants reside. There can be no assurance,
however, that the Company will be successful in maintaining a current
registration statement. After a registration statement becomes effective, it may
require updating by the filing of a post-effective amendment. A post-effective
amendment is required (i) anytime after nine (9) months subsequent to the
Effective Date when any information contained in the prospectus is over sixteen
(16) months old, (ii) when facts or events have occurred which represent a
fundamental change in the information contained in the registration statement,
or (iii) when any material change occurs in the information relating to the plan
or distribution of the securities registered by such registration statement. The
Company anticipates that this Registration Statement will remain effective for
at least nine (9) months following the date of this Prospectus or until _______
__, 1997, assuming a post-effective amendment is not filed by the Company. The
Company intends to qualify the sale of Units in a limited number of states,
although certain exemptions under certain state securities ("blue sky") laws may
permit the Warrants to be transferred to purchasers in states other than those
in which the Warrants were initially qualified. The Company will be prevented,
however, from issuing Common Stock upon exercise of the Warrants in those states
where exemptions are unavailable and the Company has failed to qualify the
Common Stock issuable upon exercise of the Warrants. The Company may decide not
to seek, or may not be able to obtain qualification of the issuance of such
Common Stock in all of the states in which the ultimate purchasers of the
Warrants reside. In such a case, the Warrants of those purchasers will expire
and have no value if such Warrants cannot be exercised or sold. Accordingly, the
market for the Warrants may be limited because of the Company's obligation to
fulfill both of the foregoing requirements. See "Description of Securities."
21. Impact on Market of Warrant Exercise. In the event of the exercise of a
substantial number of Class A Warrants offered as part of the Units within a
reasonably short period of time after their right to exercise commences, the
resulting increase in the amount of Common Stock of the Company in the trading
market could substantially affect the market price of the Common Stock. See
"Description of Securities - Class A Warrants."
20
22. Underwriter's Unit Purchase Option. In connection with this Offering,
the Company will sell to the Underwriter, for nominal consideration, an option
to purchase an aggregate of 25,000 Units (the "Underwriter's Unit Purchase
Option"). The Underwriter's Unit Purchase Option will be exercisable commencing
one year from the Effective Date of this Offering and ending four (4) years from
such date, at an exercise price of $12.00 per Underwriter's unit (the
"Underwriter's Units") subject to certain adjustment with the underlying
warrants (the "Underwriter's Warrants") exercisable at $4.00 per share. The
holders of the Underwriter's Unit Purchase Option will have the opportunity to
profit from a rise in the market price of the Units, Warrants and/or the Common
Stock, if any, without assuming the risk of ownership. The Company may find it
more difficult to raise additional equity capital if it should be needed for the
business of the Company while the Underwriter's Unit Purchase Option is
outstanding. At any time when the holders thereof might be expected to exercise
them, the Company would probably be able to obtain additional capital on terms
more favorable than those provided by the Underwriter's Unit Purchase Option.
See "Dilution" and "Underwriting."
23. "Penny Stock" Regulations May Impose Certain Restrictions on
Marketability of Securities. The Securities and Exchange Commission (the
"Commission") has adopted regulations which generally define"penny stock" to be
any equity security that has a market price (as defined) less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exceptions. Since it is intended that the securities offered hereby will be
authorized for quotation on The Nasdaq Small Cap Market, such securities will
initially be exempt from the definition of "penny stock." If the securities
offered hereby are removed from listing by The Nasdaq SmallCap Market at any
time following the Effective Date, the Company's securities may become subject
to rules that impose additional sales practice requirements on broker-dealers
who sell such securities to persons other than established customers and
accredited investors (generally those 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 such 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 must also disclose the commission 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 Company's securities and may
affect the ability of purchasers in this Offering to sell the Company's
securities in the secondary market and the price at which such purchasers can
sell any such securities.
24. Redemption of Redeemable Warrants. The Class A Warrants are subject to
redemption by the Company, at any time, commencing one (1) year following the
date of this Prospectus, at a price of $.05 per Warrant if the closing bid price
for the Common Stock equals or
21
exceeds $12.00 per share for any twenty (20) trading days within a period of
thirty (30) consecutive trading days ending on the fifth trading day prior to
the date of the notice of redemption. In the event that the Warrants are called
for redemption by the Company, Warrantholders will have thirty (30) days during
which they may exercise their rights to purchase shares of Common Stock. If
holders of the Warrants elect not to exercise them upon notice of redemption
thereof, and the Warrants are subsequently redeemed prior to exercise, the
holders thereof would lose the benefit of the difference between the market
price of the underlying Common Stock as of such date and the exercise price of
such Warrants, as well as any possible future price appreciation in the Common
Stock. As a result of an exercise of the Warrants, existing stockholders would
be diluted and the market price of the Common Stock may be adversely affected.
If a Warrantholder fails to exercise his rights under the Warrants prior to the
date set for redemption, the Warrantholder will be entitled to receive only the
redemption price, or $.05 per Warrant. In addition, the Warrants may only be
exercised when a Prospectus is current and meets the requirements of Section 10
of the Securities Act of 1933. See "Description of Securities - Class A
Warrants."
25. Limitation on Director Liability. As permitted by Delaware corporation
law, the Company's Certificate of Incorporation limits the liability of
Directors to the Company or its stockholders to monetary damages for breach of a
Director's fiduciary duty except for liability in certain instances. As a result
of the Company's charter provision and Delaware law, stockholders may have a
more limited right to recover against Directors for breach of their fiduciary
duty other than as existed prior to the enactment of the law. See "Description
of Securities - Limitation on Liability of Directors."
26. Limited Number of Management Personnel. There is currently only one (1)
executive officer of the Company. Following this Offering, there can be no
assurance that, if the Company grows, the current management team will be able
to continue to properly manage the Company's affairs. Further, there can be no
assurance that the Company will be able to identify additional qualified
managers on terms economically feasible to the Company.
27. Shares Eligible for Future Sale May Adversely Affect the Market. All of
the Company's currently outstanding shares of Common Stock are "restricted
securities" and, in the future, may be sold upon compliance with Rule 144,
adopted under the Securities Act of 1933, as amended. Rule 144 provides, in
essence, that a person holding "restricted securities" for a period of two (2)
years may sell only an amount every three (3) months equal to the greater of (a)
one percent (1%) of the Company's issued and outstanding shares, or (b) the
average weekly volume of sales during the four (4) calendar weeks preceding the
sale. The amount of "restricted securities" which a person who is not an
affiliate of the Company may sell is not so limited, since non-affiliates may
sell without volume limitation their shares held for three (3) years if there is
adequate current public information available concerning the Company. It should
be noted, however, that the Commission is currently considering changing the two
(2) year holding period to one (1) year and the three (3) year holding period to
two (2) years. In such an event, "restricted securities" would be eligible for
sale to the public at an earlier date. Immediately prior to the Effective Date,
the Company will have 2,625,000 shares of its Common Stock issued and
outstanding, which are "restricted securities", and
22
2,002,000 shares of which are being registered under the Registration Statement
of which this Prospectus forms a part. The officers and directors of the Company
as well as certain members of their immediate families (including certain
Selling Securityholders holding an aggregate of 250,000 shares of Common Stock)
have agreed not to sell or transfer the securities of the Company held thereby
for a period of twenty-four (24) months following the Effective Date, subject to
earlier release by the Underwriter.
Prospective investors should be aware that the possibility of sales may, in
the future, have a depressive effect on the price of the Company's Common Stock
in any market which may develop, and therefore, the ability of any investor to
market his shares may be dependent directly upon the number of shares that are
offered and sold. Affiliates of the Company may sell their shares during a
favorable movement in the market price of the Company's Common Stock which may
have a depressive effect on its price per share. See "Description of
Securities."
28. Anti-Takeover Effect of General Corporation Law of Delaware. The
Company is governed by the provisions of Section 203 of the General Corporation
Law of Delaware, an anti-takeover law enacted in 1988. As a result of Section
203, potential acquirors of the Company may be discouraged from attempting to
effect acquisition transactions with the Company, thereby possibly depriving
holders of the Company's securities of certain opportunities to sell or
otherwise dispose of such securities at above-market prices pursuant to such
transactions. See "Description of Securities."
23
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 250,000 Units offered
hereby are estimated to be $1,575,000 (after deducting approximately $250,000 in
underwriting discounts, and other expenses of this Offering estimated to be
$675,000, which includes the Underwriters' non-accountable expense allowance of
$75,000, and a $100,000 financial consulting fee payable to the Underwriter at
the closing) (but not considering any exercise of the Over-Allotment Option, or
the Underwriters' Unit Purchase Option). The Company, based upon all currently
available information, intends to utilize such proceeds approximately as
follows:
Approximate Approximate
Amount of Net Percentage(%)of
Proceeds Net Proceeds
------------- ---------------
Acquisition of Assets of Artisan House, Inc. (1) $1,150,000 73.0%
Repayment of Certain Indebtedness (2) 260,000 16.5%
Working Capital (3) 165,000 10.5%
------------ ---------------
Total $1,575,000 100.0%
(1) Represents the payment of $1,150,00 as partial payment of the purchase
price to be paid to close the Artisan House Transaction. In addition, to
the foregoing, the Company intends to use approximately $1,100,000 from the
proceeds of the Secured Loan to fund the remainder of the purchase price to
close the Artisan House Transaction. See "Business- Artisan House
Transaction."
(2) Represents the repayment of Bridge Loans in the aggregate principal amount
of $250,000 plus accrued and unpaid interest. The Bridge Loans were made by
nine (9) unaffiliated parties. The Bridge Loans are due and payable upon
the earlier of March 1997 or the closing of the Company's initial public
offering and bear interest at the rate of 8% per annum. The proceeds of the
Bridge Loans were used for working capital and as a source of funds to pay
expenses associated with this Offering. See "Bridge Financing" and See
"Certain Transactions."
(3) To be used for general operating and overhead expenses and the funding of
inventory.
The amounts set forth above are estimates. Should a reapportionment or
redirection of funds be determined to be in the best interests of the Company,
the actual amount expended to finance any category of expenses may be increased
or decreased by the Company's Board of Directors, at its discretion.
The Company believes that the proceeds of this Offering will enable the
Company to increase its annual revenues through the expansion of its business
and development of product lines. As a result, the Company believes that the net
proceeds of this Offering, together with increased revenues generated from
operations, will be sufficient to conduct the Company's operations for at least
twelve (12) months. The terms of the underwriting agreement between the Company
and the Underwriter restrict the Company from entering into any acquisition or
merger of the Company or obtaining additional capital financing, without the
prior approval of the Underwriter, for the issuance of additional equity
securities for a period of one (1) year, in either public or private offerings,
which approval may not be unreasonably withheld. The underwriting agreement does
not prevent the Company from seeking bank financing although there can be no
assurance that such financing will
24
be available on commercially reasonable terms. See "Risk Factors - Dependence on
Offering Proceeds; Possible Need for Additional Financing."
To the extent that the Company's expenditures are less than projected
and/or the proceeds of this Offering increase as a result of the exercise by the
Underwriter of its Over-Allotment Option, the resulting balances will be
retained and used for general working capital purposes. Conversely, to the
extent that such expenditures require the utilization of funds in excess of the
amounts anticipated, additional financing may be sought from other sources, such
as debt financing from financial institutions, although there can be no
assurance that such additional financing, if available, will be on terms
acceptable to the Company. See "Risk Factors Dependence on Offering Proceeds;
Possible Need For Additional Financing." The net proceeds of this Offering that
are not expended immediately may be deposited in interest bearing accounts, or
invested in government obligations or certificates of deposit.
25
DILUTION
At March 31, 1996, the Company had outstanding an aggregate of 2,625,000
shares of Common Stock having an aggregate net tangible book value of $1,605,250
or $.61 per common share, based upon operating activity through March 31, 1996.
Net tangible book value per share consists of total assets less intangible
assets and liabilities, divided by the total number of shares of Common Stock
outstanding. The shares of capital stock described above do not include any
securities subject to outstanding warrants or options.
After giving effect to the sale of 250,000 Units consisting of 500,000
shares of Common Stock and 250,000 Class A Warrants by the Company (assuming no
value is attributable to the Class A Warrants and the 100,000 shares to be
issued in connection with the closing of Artisan House Transaction) with net
proceeds of $1,575,000, the pro forma net tangible book value of the Common
Stock would have been $3,180,250 or approximately $.99 per share. This
represents an immediate increase in pro forma net tangible book value of $.38
per share to the present stockholders and an immediate dilution of $4.01 per
share (80.2%) to the public purchasers. The following table illustrates the
dilution which investors participating in this Offering will incur and the
benefit to current stockholders as a result of this Offering:
Public offering price of per share offered hereby(l)(4) $5.00
Net tangible book value per share $ .61
Increase per share attributable to units offered hereby $ .38
Pro Forma net tangible book value per share after offering(3) $ .99
Dilution of net tangible book value per share to purchasers in
this offering(2)(3) $4.01
- ----------
(1) Before deduction of underwriting discounts, commissions, fees and offering
expenses.
(2) Assuming no exercise of the Over-Allotment Option, the Underwriters' Unit
Purchase Option or Class A Warrants. See "Underwriting" and "Description of
Securities."
(3) Assuming no exercise of the 3,000,000 Class A Warrants issuable in
connection with Bridge Loans. See "Selling Security Holders" and "Certain
Transactions."
(4) The Units offered hereby are comprised of two (2) shares of Common Stock
and one (1) Class A Warrant. No portion of the offering price per Unit
price has been assigned to the Class A Warrants.
26
The following table shows the number and percentage of shares of Common
Stock purchased and acquired and the amount and percentage of consideration and
average price per share paid by existing stockholders as of March 31, 1996 and
to be paid by purchasers pursuant to this Offering (based upon the anticipated
public offering price of $10.00 per Unit before deducting underwriting discounts
and commission and estimated Offering expenses).
Aggregate
Shares of Cash Percent of
Common Percent of Consideration Total cash Average Price
Stock Equity Owned Paid Consideration Per Share
Purchased
New Stockholders 500,000 16% $2,500,000 96% $5.00
Existing Stockholders 2,625,000 84% $ 103,000 4% $0.04
--------- ----- ---------- ---- -----
Total 3,175,000 100% $2,603,000 100%
The foregoing table gives effect to the sale of the Common Stock and Class
A Warrants underlying the Units offered hereby but without giving effect to the
exercise of the Underwriters' Unit Purchase Option, or any securities issuable
upon the exercise of the Over-Allotment Option or any outstanding options or
warrants, including those held by the Bridge Lenders.
27
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1996 and as adjusted gives effect to the sale of 250,000 Units
consisting of Common Stock and Class A Warrants offered hereby and the
application of net proceeds therefrom. The table is not adjusted to give effect
to the exercise of the Over-Allotment Option, the Class A Warrants, the
Underwriters' Unit Purchase Option or any other outstanding warrants or options.
This table should be read in conjunction with the Financial Statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
- --------------------------------------------------------------------------------------------------------
As of March 31, 1996 As of March 31, 1996, As of March 31, 1996,
($) As Adjusted(1)($) As Adjusted(1)(2) ($)
- --------------------------------------------------------------------------------------------------------
Notes Payable 250,000 2,833,735 1,433,735
Stockholders Equity:
Common Stock 262 272 322
Series A Convertible Preferred 50 50 50
Stock, $.0001 par value per share,
5,000,000 shares authorized,
500,000 shares of Series A
Convertible Preferred Stock issued
and outstanding
Series B Non-Convertible ------ ------ -------
Preferred Stock, $.0001 par value
per share, 20,000,000 shares
authorized, no shares issued and
outstanding (3)
Additional Paid In Capital 3,204,688 3,504,678 5,079,628
Retained Earnings (deficit) (99,750) (99,750) (99,750)
Total Capitalization 3,355,250 6,238,985 6,413,985
- --------------------------------------------------------------------------------------------------------
- ----------
(1) Adjusted to reflect the closing of the Artisan House Transaction.
(2) Adjusted to reflect the sale of 250,000 Units offered hereby and the net
proceeds therefrom of $1,575,000.
(3) Does not include 20,000,000 shares of Series B Non-Convertible Preferred
Stock issuable upon the exercise of an option held by Interiors, Inc. See
"Certain Transactions."
28
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefore. Holders of the Company's Series A Preferred Stock and Series B
Preferred Stock are not entitled to receive dividends. The Company has not in
the past and does not currently anticipate the declaration or payment of any
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance the development and expansion of its business. Future dividend
policy will be subject to the discretion of the Board of Directors and will be
contingent upon future earnings, if any, the Company's financial condition,
capital requirements, general business conditions and other factors. Therefore,
there can be no assurance that any dividends of any kind will ever be paid.
BRIDGE FINANCING
In March 1996, the Company borrowed an aggregate of $250,000 from nine (9)
unaffiliated lenders ( the "Bridge Lenders"). In exchange for making loans to
the Company, each Bridge Lender received a promissory note (the "Bridge Notes").
Each of the Bridge Notes bears interest at a rate of eight percent (8%) per
annum. The Bridge Notes are due and payable upon the earlier of (i) March 18,
1997 or (ii) the closing of an initial underwritten public offering of the
Company's securities. The Company intends to use a portion of the proceeds of
this Offering to repay the Bridge Lenders. See "Use of Proceeds." In addition,
the Bridge Lenders were issued the right to receive commencing on the Effective
Date an aggregate of 3,000,000 Class A Warrants, pro rata, based upon the
principal amount of the Bridge Loan made to the Company. The Company entered
into the bridge financing transactions because it required additional financing
and no other sources of financing were available to the Company at that time.
Further, the Company agreed to register the Class A Warrants as well as the
shares of Common Stock issuable upon exercise of the Class A Warrants in the
first registration statement filed by the Company following the date of the
loan. Therefore, the Registration Statement, of which this Prospectus forms a
part, relates to the resale of 3,000,000 Class A Warrants issuable to the Bridge
Lenders and the shares of Common Stock issuable upon the exercise thereof. See
"Selling Securityholders" "Certain Transactions" and "Underwriting."
29
SELECTED FINANCIAL INFORMATION
The selected historical financial data as of March 31, 1996 presented below
are derived from financial statements of the Company, which have been audited by
Mortenson and Associates, P.C., independent accountants, whose reports are
included elsewhere herein. The data set forth below should be read in
conjunction with and is qualified in its entirety by the Company's financial
statements, related notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations. See "Financial Statements," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The following summary financial information has been summarized
from the Company's financial statements included elsewhere in this Prospectus.
The information should be read in conjunction with the financial statements and
the related notes thereto See "Financial Statements."
Summary Statement of Operations
- ---------------------------------------------------------------------------------------------------
As of March 31, 1996 As of March 31, 1996, As of March 31, 1996,
($) As Adjusted(1)($) As Adjusted(1)(2)($)
- ---------------------------------------------------------------------------------------------------
Revenues ---- 4,809,422 4,809,422
Gross Profit ---- 2,213,039 2,213,039
Operating Profit (Loss) (100,000) 99,448 99,448
Net Income (Loss) (99,750) (20,054) (20,054)
Net Income (Loss) per share (.04) (.01) (.01)
Weighted Average number of 2,625,000 2,725,000 3,225,000
Common Shares outstanding
- ---------------------------------------------------------------------------------------------------
Summary Balance Sheet Data
- ---------------------------------------------------------------------------------------------------
As of March 31, 1996 As of March 31, 1996, As of March 31, 1996,
($) As Adjusted(1)($) As Adjusted(1)(2)($)
- ---------------------------------------------------------------------------------------------------
Working Capital (deficit) (144,750) (1,242,708) 332,292
Total Assets 3,355,250 7,334,080 7,499,080
Total Liabilities 250,000 3,928,830 2,518,830
Stockholder's Equity 3,105,250 3,405,250 4,980,250
- ---------------------------------------------------------------------------------------------------
- ----------
(1) Adjusted to reflect the closing of the Artisan House Transaction.
(2) Adjusted to reflect the sale of 250,000 Units offered hereby and the net
proceeds therefrom of $1,575,000.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Decor Group, Inc. [the "Company" or "Decor"] was formed in March of 1996.
The primary activities for Decor prior to the acquisition of Artisan House, Inc.
["Artisan"] have been investing and financing activities [See "Liquidity and
Capital Resources"]. In March of 1996, the Company entered into an Asset
Purchase Agreement to acquire Artisan House, Inc. for approximately $3,526,400.
Artisan is engaged in the manufacture marketing, selling and distributing wall
hanging sculptures.
Results of Operations
Artisan had income for the years ended January 31, 1996 and 1995 of
$451,083 and $330,517, respectively.
The sales for Artisan House, Inc. for the years ended January 31, 1996 and
1995 were $4,809,422 and $3,994,909, respectively, an increase of approximately
$800,000 or 20%. Sales increased because of the general acceptance by the
marketplace of new products such as "Casablanca", Norman Rockwell scenes, and
musical scenes. In addition, sales to large catalog houses increased during the
current period.
Artisan's selling, general and administrative expenses for the years ended
January 31, 1996 and 1995 were $1,684,591 and $1,464,224, respectively, an
increase of approximately $220,000 or 15%. Increases in selling, general and
administrative expenses were largely due to increased expenditures for
advertising, to support new product introductions, and increased commissions
resulting from sales increases.
Artisan's interest expense for the years ended January 31, 1996 and 1995
was approximately $84,000 and $68,000, respectively. Interest expense increased
because of the addition of an equipment lease for computer equipment and an
automobile lease for an Artisan House manager.
Liquidity and Capital Resources
Artisan House, Inc. at January 31, 1996 had working capital of
approximately $400,000. During the years ended January 31, 1996 and 1995, the
Company generated cash of approximately $132,000 and $208,000, respectively,
from operations. During the years ended January 31, 1996 and 1995, the Company
purchased equipment for approximately $17,000 and $67,000, respectively. During
the years ended January 31, 1996, the Company repaid officers' loans of $58,313
and $19,342, respectively, and repaid notes payable of $42,359 and $67,063,
respectively. At January 31, 1996, Artisan House's cash balance was $96,771.
31
Decor had a working capital deficit at March 31, 1996 of $144,750. The
Company utilized $148,000 for operating activities for the period March 1, 1996
through March 31, 1996. The Company utilized $150,000 in investing activities
for the deposit with respect to the acquisition of Artisan House, Inc. as of
March 31, 1996 and will incur additional expenditures as follows: (a) 2,250,000
paid to the seller at the Closing Date, (b) $100,000 90 days subsequent to the
Closing Date, (c) 60 equal monthly payments of approximately $11,753 beginning
120 days subsequent to the Closing Date, and (d) $150,000 on the date of the
final [60th] installment. The Company generated $345,000 in cash from financing
activities for the period from March 1, 1996 through March 31, 1996 resulting
from the sale of stock to the founders of the Company with cash proceeds of
$95,000 [balance of $8,000 received in May of 1996] and proceeds from bridge
loans of $250,000. The cash balance at March 31, 1996 was $47,000.
The Company anticipates that the net proceeds from the proposed public
offering will generate approximately $1,575,000. The proceeds are intended to
retire a portion of the debt incurred for the purchase of Artisan House, and for
working capital needs.
On March 3, 1996, the Company issued to Interiors, Inc. 500,000 shares of
Class A Convertible Preferred Stock and an option to purchase 20,000,000 shares
of Class B NonConvertible Voting Preferred Stock in exchange for Interiors, Inc.
issuing to the Company 200,000 shares of Common Stock valued at $600,000 and
200,000 shares of Series A Convertible Preferred Stock valued at $1,000,000 and
a guarantee with respect to certain indebtedness [See Note 11A].
In May 1996, the Company entered into a management agreement with
Interiors, Inc. which specializes in the home furnishings and decorative
accessories industries. The agreement calls for a management fee of $75,000 or
1.5% of gross sales, whichever is greater, per annum. The management fee will be
accrued quarterly and paid quarterly to the extent that there is excess cash
flow available to the Company as defined in the agreement. No payment in any
quarter will exceed 50% of excess cash flow as defined. The agreement has a term
of two years with renewal options at the mutual consent of both parties [See
Note 8].
In June 1996, the Company entered into an employment contract with the
President of the Company for which an initial base salary of approximately
$117,000 will take effect upon the close of the acquisition of Artisan House.
On May 31, 1996, the Company received a commitment letter for a revolving
credit agreement for a maximum loan amount of $1,100,000. The agreement requires
the satisfaction of a number of conditions prior to funding including the
completion of a due diligence review. The terms of the loan include an annual
interest rate of prime plus 4%, a management fee of 3% of sales, a security
interest in all of the Company's accounts receivable, inventory, and equipment,
and any proceeds therefrom, a guaranty of the Company's Chairman of the Board,
and a prepayment fee of $25,000 in the event of a prepayment. In the event that
the Company is unable to satisfy such conditions, the Company will not receive
the proceeds from such loan. If the
32
Company does not receive the proceeds from the loan, the Company will require
additional funds to close on the acquisition of Artisan House, Inc.
33
BUSINESS
General
Decor Group, Inc., a Delaware corporation (the "Company" or "Decor"), was
incorporated in March 1996. Artisan Acquisition Corporation, a Delaware
corporation wholly owned by the Company ("AAC"), was incorporated in March 1996
for the purpose of entering into an Asset Purchase Agreement with Artisan House,
Inc. ("Artisan House") pursuant to which AAC has agreed to purchase
substantially all of the operating assets, and assume certain liabilities, of
Artisan House (the "Artisan House Transaction") for an aggregate purchase price
of $3,526,400, subject to certain adjustments. The Company anticipates closing
the Artisan House Transaction prior to, or contemporaneously with, the closing
of this Offering. Unless otherwise indicated, references made hereinafter to the
Company include AAC and Artisan House. See "Business -Acquisition of Artisan
House."
Artisan House, located in Los Angeles, California and founded in 1964, is
engaged in the design, manufacturing and marketing of metal wall, table and
freestanding sculptures. Management believes that Artisan House's products
bridge the gap between high priced gallery art and mass produced decorative
pieces. Artisan House products retail from approximately $100 to over $400. The
primary goal of the Company is to supply a broad spectrum of design driven
sculpture and decorative accessories at moderate prices.
Artisan House markets its products through a network of independent
commissioned sales representatives, both domestically and internationally, as
well as through strategically located showrooms servicing the home furnishing
and decorative accessory industries. Artisan House has permanent showrooms
located in High Point, NC and San Francisco, CA that are leased and controlled
by the Artisan House, as well as sales representative showrooms in Atlanta and
Dallas.
Artisan House's typical customers include fine furniture stores, interior
decorators and major department stores such as Sears and JC Penny, large
furniture chains such as Levitz and Wickes, and catalogue houses. See "Business"
and "Recent Developments."
The Company believes that the home furnishing and decorative accessory
supply industry will consolidate as major retailers attempt to increase their
"single-sourcing" in order to reduce distribution and related expenses. The
Company intends to capitalize on the fragmented nature of the supply side of the
home decorative accessory industry and the consolidation of such industry
through the acquisition of manufacturers and distributors of art-related
decorative accessories. Through such acquisitions, the Company intends to
increase the number and nature of products manufactured by the Company. Other
than the acquisition of Artisan House, the Company is not currently in
discussions regarding the acquisition of any other business.
The Company's executive offices are located at 320 Washington Street, Mt.
Vernon, New York 10553. Its telephone number is (914) 665-5400. See "Risk
Factors" for a discussion of certain factors that should be considered in
evaluation the Company and its business.
34
Acquisition of Artisan House
On March 25, 1996, the Company's wholly-owned subsidiary, Artisan
Acquisition Co., ("AAC"), agreed to purchase substantially all of the assets
(the "Artisan House Transaction") and to assume certain of the liabilities of
Artisan House, Inc. ("AHI") pursuant to that certain Asset Purchase Agreement
(the "Agreement"), dated March 25, 1996, by and among AAC, the Company, AHI and
Henry Goldman ("Goldman"). AHI is engaged in the business of manufacturing,
marketing, selling and distributing wall hanging sculptures. The consideration
for the Artisan House assets to be purchased pursuant to the Agreement
(excluding the liabilities assumed by AAC) will be an aggregate of $3,526,400,
less the amount of cash reflected on the closing date balance sheet and retained
by AHI (the "Retained Cash Amount") and subject to adjustment if the net assets
of AHI are more then $835,000 or less than $750,000 (the "Balance Sheet
Adjustment") as set forth on a balance sheet to be delivered to AAC within
thirty days after the closing of the purchase (the "Closing"). The consideration
is to be satisfied by (i) the payment of $150,000 to AHI which was paid on the
date of execution of the Agreement; (ii) the payment of $2,250,000 at the
Closing; (iii) the delivery of a promissory note issued by AAC in the principal
amount of $926,400 less the Retained Cash Amount and subject to the Balance
Sheet Adjustment; and (iv) the issuance of 100,000 shares of common stock of the
Company. With respect to the Note, $100,000 is payable ninety days after the
Closing without any payment of interest; $676,400 (subject to the Balance Sheet
Adjustment) is payable over a five year period in sixty equal monthly
installments, the first installment of which is due one hundred twenty days
after the Closing; and $150,000 is payable on the date on which the last
installment is paid as set forth above, without any payment of interest. The
Note is secured by a second security interest in the assets purchased pursuant
to the Agreement which is subordinate to a first priority security interest,
such first interest not to exceed 55% of the value of said assets from time to
time (subject to a minimum of 55% of the value of said assets on the date of
closing). In the event that the shares of the Company issuable to AHI are worth
less than $200,000 on the second anniversary of the Closing, AAC shall, at its
option, either pay the difference to AHI in cash or the Company shall issue
additional shares having a fair market value equal to such difference to AHI. If
the Company has not effected a public offering of its common stock by said
second anniversary, AHI can require that AAC or Decor repurchase the shares for
the sum of $200,000.
The Closing was scheduled for May 31, 1996, subject to three extensions of
one month per extension, provided that AAC shall pay $15,000 to AHI for each
such extension (such payment to be deducted from the aggregate purchase price).
As of May 31, 1996, AHI agreed to extend the Closing to a date to be agreed upon
by the parties. The Closing is subject to AAC's due diligence investigation,
which permitted AAC to terminate the Agreement without penalty prior to April 8,
1996, if such investigation disclosed any material change in AHI's business,
operations or conditions or in its assets, liabilities, net worth or properties.
If the Agreement is terminated prior to the Closing, (other than due to the
fault of AHI or Goldman), AHI may retain any payments made by AAC. The Agreement
also contains restrictions on AHI and Goldman from competing with AAC for a five
year period after the Closing. The Agreement further contains provisions
relating to the confidentially of information and the non-solicitation of
suppliers and employees by AAC should the transaction fail to close. Any
disputes are to be submitted to a binding arbitration in Los Angeles,
California. The Company anticipates that AAC, the Company's wholly owned
subsidiary, will close on acquisition of the Artisan House Transaction prior to,
or contemporaneously with, the closing of
35
this Offering.
The Agreement also provides that AAC enter into an Employment Agreement
with Goldman pursuant to which Goldman is employed as the Director of Export
Marketing at a salary of $50,000 per annum for the first 250 hours per annum,
and, thereafter, at a rate of $200 per hour. In addition, Goldman is to receive
a bonus equal to 5% of the excess of AAC's net export sales for each calendar
quarter over $25,000; provided that Goldman is employed by AAC on the date such
bonus is earned. Goldman is also entitled to (i) reimbursement of all reasonable
out-of-pocket expenses which must either be included in an annual budget or
approved by AAC (if over $100) and (ii) medical coverage for Goldman and his
wife. The Employment Agreement contains provisions protecting the confidential
information of AAC and restricting Goldman from competing with AAC. The
Agreement further provides for AAC to lease facilities from Goldman and his wife
for a five year term, with an initial monthly rent of approximately $14,000. The
Company believes that the rent payable to Mr. Goldman is at or below the fair
market value for such premises.
Manufacturing
Artisan House manufactures substantially all of its sculptures and
decorative pieces at its facility in Glendale, California. Virtually all of
Artisan House's products are made of assorted metals, such as brass, bronze,
steel and aluminum which are then formed and hand finished. Artisan House's
manufacturing operations include customized proprietary metal fabrication
equipment, using tools, jigs and dies especially created for the Company.
Production also includes finishing, which involves hand painting and toning. The
Company has developed and installed a finishing process which uses proprietary
techniques and management believes the results of this process substantially
improves the appearance of the product.
The Company maintains an inventory of various metal such as brass, bronze
and stainless steel and other materials for use in its manufacturing processes.
The Company's tool and die inventory allows for the manufacturing of a broad
range of designs. These tools can be used to produce over hundreds of styles of
decorative wall sculptures.
No single outside manufacturer supplies 5% or more of the Company's raw
materials, and the Company's management is not aware at this time of any product
or manufacturer which the Company cannot replace with a comparable product from
an alternative manufacturer. See "Risk Factors."
Products
Artisan House products include metal wall, table and freestanding
sculpture. The Company's product styles range from contemporary to neoclassical,
from Americana to transitional. Artisan House also manufactures products based
on popular themes such as sports, music, and nostalgia. In addition, the Company
has several licensing programs pursuant to which Artisan House produces
sculptures with designs derived from Norman Rockwell images, the popular 1940's
movie entitled, "Casablanca" and RCA's Little Nipper. In total, Artisan House
produces hundreds of different styles within its product line.
36
Marketing
Artisan House markets its products through a network of independent
commissioned sales representatives. Domestically, the Company has twenty-two
(22) commissioned sales representatives. Internationally, the Company has
distributors in Taiwan, Australia, the Untied Kingdom, France, Belgium, and
Holland. In addition, the Company has non-exclusive representation in the Middle
East, Japan and parts of Europe. Artisan House has permanent showrooms located
in High Point, NC and San Francisco, CA that are leased and controlled by the
Company, as well as sales representative showrooms in Atlanta and Dallas. These
showrooms are strategically located in an effort to efficiently service the home
furnishing and decorative accessory industries.
Suppliers
Substantially all of the products sold by the Company are manufactured by
the Company in its facility in Los Angeles, California. The Company purchases
metal and other materials from a wide variety of sources, and has at least two,
and often more, suppliers for each item used in its manufacturing process, and
is not dependent upon any one supplier. The Company currently purchases from a
vendor base of more than 150 suppliers. While there are many suppliers of most
materials, the Company has chosen to limit the majority of its purchases to the
one or two vendors with whom it has developed long-term relationships. The
Company generally does not need to enter into contracts with its suppliers as
most merchandise is readily available from multiple sources.
The suppliers for those decorative accessory products which are not
manufactured by the Company include items such as marble, glass, mirror, and
wood. The Company does not currently purchase 5% or more of any of its products
from any one outside supplier. Products purchased from suppliers are produced
exclusively for the Company and therefore are not commonly available. Management
does not anticipate that significant capital expenditures will be required in
the near future.
Competition
The sculpture and decorative accessory industry in the United States is
highly fragmented and consists primarily of small, local manufactures and
assemblers. Only a few companies are basic manufacturers of metal wall hangings
and sculptures. However, there can be no assurance that the Company's position
in this industry will continue.
Management believes that the sale of decorative accessories in the
wholesale market is also highly fragmented, with thousands of small, specialized
manufacturers and distributors and management is not aware of a manufacturer of
upscale decorative accessories similar to those distributed by Artisan House.
The Company believes that its competitive advantage lies in its ownership
of a substantial number of models, tools, jigs and dies and its continuing
ability to manufacture quality products. Management also believes that the
Company is further protected by what the Company considers to be its excellent
reputation with its customer base and management's estimation that the cost to
build
37
tools, jigs, dies and molds, make the entry of meaningful competition extremely
difficult. Management also believes that it would be difficult to establish a
trained work force of skilled crafts people. However, there can be no assurance
that such assets will continue to afford the Company any competitive advantage.
See "Business-Manufacturing."
Secured Loan Agreement
On May 31, 1996, the Company received a commitment from United Credit
Corporation ("UCC"), pursuant to which UCC has agreed to loan to the Company up
to an aggregate amount of $1,100,000 (the "Secured Loan") under a revolving
credit arrangement (the "Secured Loan Agreement"). UCC has agreed to fund the
Loan upon completion of its due diligence review. The terms of the Secured Loan
include (i) an annual interest rate of the prime rate, plus 4%, (ii) a
collateral management fee of 3% of sales, (iii) a security interest in all of
the Company's accounts receivable, inventory and equipment, and any proceeds
therefrom, (iv) a guaranty of the Company's obligations by Max Munn, the
Company's Chairman of the Board, Laurie Munn, the wife of Max Munn, Interiors,
Inc. and Italia Collection, Inc., a wholly owned subsidiary of Interiors, (v) a
prepayment fee of $25,000 in the event of a prepayment and (vi) a borrowing base
to be agreed upon by the parties.
Trademark Protection
The trademarks "Artisan House", "C. Jere", "Sautere", and "Glendale
Ironworks" have been registered with the United States Patent and Trademark
Office ("PTO"). The Company presently intends to make all appropriate filings
and registrations and take all other actions necessary, to protect all of its
intellectual property rights. There can be no assurance, however, that the
Company will be able to effectively protect such property rights. The failure by
the Company to protect such rights from unlawful and improper appropriation may
have a material adverse effect on the Company. Although to date no claims have
been brought against the Company alleging that it infringes on the intellectual
property rights of others, there can be no assurance that such claims will not
be brought against the Company in the future, or that if made, such claims will
not be successful. In addition to any potential monetary liability for damage,
the Company could be required to obtain a license in order to continue to use
the trademarks in question or could be enjoined from using such trademarks if
such license were not made available on acceptable terms. If the Company becomes
involved in such litigation, it may divert significant Company resources, which
could have a material adverse effect on the Company and its results or
operations, and, if such a claim were successful, the Company's business could
be materially adversely affected.
Research and Development
The Company continually seeks to develop additional designs and related
tooling. The Company estimates that it expends approximately $100,000 per annum
on such activities. So long as the Company generates sufficient cash flow, the
Company expects to continue to increase its expenditures for product development
as it expands its in-house manufacturing to expand its finishing and fabrication
capabilities. However, there can be no assurance that such product development
will yield profitable growth.
38
Government Regulation
The Company's operations are subject to numerous Federal, state and local
laws and regulations relating to the environment and health safety and other
regulatory matters. Certain materials used in the manufacturing of the Company's
products such as paints, solvents and other water-based related finishes may be
classified by Federal and certain state and local governments as "hazardous
materials." Control of those substances is regulated by the Environmental
Protection Agency ("EPA") and certain state and local environmental protection
agencies which require reports and inspect facilities to monitor compliance. In
addition, under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA"), any generator of hazardous waste sent to a hazardous
waste disposal site is potentially responsible for the clean up and remediation
costs required for such site in the event that the site is not properly closed
by the owner or operator, irrespective of the amount of waste sent to the site.
The Company's manufacturing facilities have been and will continue to be
inspected by the Occupational Safety and Health Administration and by certain
state and local inspection agencies and departments. The Company has obtained
all permits and anticipates that its facilities and operations will be in
substantial compliance with all material applicable laws and regulations.
Nevertheless, no assurance can be given that the Company will be able to obtain
such permits in the future or that future events, such as changes in or modified
interpretations of existing laws or regulations or enforcement policies, may
give rise to additional compliance costs that could have a material adverse
effect on the Company.
Employees
As of March 31, 1996, the Company had a total of approximately 71 full-time
employees. None of the Company's employees have been on strike, or threatened to
strike, since the Company's inception and the Company believes its relationship
with all of its personnel is satisfactory.
Legal Proceedings
There are no legal proceedings pending, or to the Company's knowledge
threatened, against the Company.
Properties
The Company has its principal offices at 320 Washington Street, Mt. Vernon,
New York, where it has sub-leased approximately 500 square feet of
administrative offices from Interiors, Inc., a stockholder of the Company. The
Company's manufacturing and warehousing facilities and factory showroom are
located at 1755 Glendale Boulevard, Los Angeles, California in a 38,000 square
foot leased facility. The Company's lease with Henry Goldman on the Los Angeles
facility expires five years following the date of closing of the Artisan House
Transaction. The Company has determined that there is substantial manufacturing
and warehousing space available in the vicinity if the Company were required to
expand or relocate some or all of its current facilities. However, there can be
no assurances that when the current sublease for the Company's principal
facility expires that the Company will be able to negotiate a renewal thereof on
acceptable terms or obtain alternative
39
manufacturing and warehousing space on terms acceptable to the Company.
The Company also operates two (2) leased showrooms, which are in San
Francisco, CA and High Point, NC.
The Company believes all of such facilities are adequate for its current
needs; however, there can be no assurance that the Company will be able to
obtain appropriate facilities on terms acceptable to the Company in the future.
MANAGEMENT
The names and ages of the Directors, executive officers and key personnel of the
Company are as follows:
Name Age Position(s) Held with the Company
- ---- --- ---------------------------------
Donald Feldman 58 President and Chief Financial Officer
Max Munn 51 Chairman of the Board
Matthew L. Harriton 31 Director
Michael Lulkin 41 Director and Secretary
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 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 the Chairman of the Board of Directors since the
Company's inception and was the President of the Company from inception until
May 9, 1996. Mr. Munn is currently President and Chief Executive Officer of
Interiors, and has been since September 1995. Mr. Munn has also been the
Executive Vice President-Operations and Secretary of Interiors, Inc., a
principal stockholder of, and consultant to, the Company, since February 1994
and a Director thereof since March 1994. He served as Vice President of
Interiors from May 1993 until September, 1995. From November 1990 to May 11,
1993, Mr. Munn served as a consultant to Interiors, Inc., as well as a
consultant directly and indirectly to Imperial Enterprises, Inc., a catalog
company in Japan, and the IEI Corporation, a direct marketer, in Princeton, NJ.
From 1981 to February 1990 he was Chairman, President and Chief Executive
Officer and from February 1990 to June 1990 he served as a consultant to
Collector's Guild International, Inc.. In June 1990 Collector's Guild filed a
petition for relief under the U.S. Bankruptcy Code and was subsequently
liquidated. Mr. Munn holds a Bachelor of Architecture from Massachusetts
Institute of Technology and subsequently did graduate level study
40
in Art History at Columbia University.
Donald Feldman, has served as President and Chief Financial Officer of the
Company since May 31, 1996. From June 1, 1995 until the effective date of this
Offering he served as Vice President of Sales and Marketing for Interiors, Inc.,
a principal stockholder of, and consultant to, the Company and from December
1995 Mr. Feldman served as a director of Interiors. From April 1990 to May 1995,
he served as Vice President of Sales and Marketing of Toyo Trading Co. in Los
Angeles, CA, a major importer and marketer of decorative accessories.
Previously, Mr. Feldman also served as Corporate Merchandise Manager for
Decorative Accessories for Sears Roebuck & Co.
Matthew L. Harriton, has served on the Company's Board of Directors since
March 1996 and as interim President of the Company from May 9, 1996 to May 31,
1996. Mr. Harriton has been the Chief Financial Officer of Embryo Development
Corporation since January 1996. Embryo Development Corporation is a public
company which trades on The Nasdaq SmallCap Market and which specializes in
developing and distributing medical devices. Prior to joining Embryo Development
Corporation, Mr. Harriton's professional experience included positions at CIBC
Wood Gundy Securities Corporation as an associate (from June 1994 to December
1995), Coopers & Lybrand as a senior associate (from December 1990 to May 1994),
and The First Boston Corporation as a senior accountant (from June 1986 to May
1988). Mr. Harriton has also served as a director of Perry's Majestic Beer, Inc.
since January 1996, a company involved in the microbrewery industry. He is a
graduate of Lehigh University and received his M.B.A. from Duke University's
Fuqua School of Business.
Michael Lulkin, has served on the Company's Board of Directors and as
Secretary of the Company since March 1996. Since May 1995, Mr. Lulkin has served
as the general counsel for PDK Labs, Inc., a manufacture of over-the-counter
pharmaceuticals which trades on The Nasdaq SmallCap Market. Prior to joining PDK
Labs, Mr. Lulkin was engaged in the private practice of law as a sole
practitioner for over 13 years. Mr. Lulkin also serves as a director and
Chairman of the Board of Directors of Embryo Development Corporation. Embryo
Development corporation is a public company which trades on The Nasdaq SmallCap
Market and which specializes in developing and distributing medical devices. He
graduated from State University of New York at Buffalo and received his J.D.
from Emory University School of Law.
There are no family relationships between the officers and directors of the
Company.
Executive Compensation
No cash or other compensation was paid or accrued by the Company to or on
behalf of the Company's Chief Executive Officer or any of the other executive
officers of the Company since its formation. Each director of the Company is
entitled to receive reasonable out-of-pocket expenses incurred in attending
meetings of the Board of Directors of the Company. The members of the Board of
Directors intend to meet at least quarterly during the Company's fiscal year,
and at such other times duly called.
41
Employment Agreements
The Company intends to enter into a three (3) year employment agreement
with Donald Feldman, pursuant to which Mr. Feldman serves as the Company's
President. The agreement will provide for Mr. Feldman to receive a salary of
$117,000 per annum.
1996 Stock Plan
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of, the 1996 Stock Plan
(hereinafter called the "1996 Plan"). The purpose of the 1996 Plan is to provide
an incentive and reward for those executive officers and other key employees in
a position to contribute substantially to the progress and success of the
Company, to closely align employees with the interests of stockholders of the
Company by linking benefits to stock performance and to retain the services of
such employees, as well as to attract new key employees. In furtherance of that
purpose, the 1996 Plan authorizes the grant to executives and other key
employees of the Company stock options, restricted stock, deferred stock, bonus
shares, performance awards, dividend equivalent rights, limited stock
appreciation rights and other stock-based awards, or any combination thereof.
The 1996 Plan is expected to provide flexibility to the Company's compensation
methods, after giving due consideration to competitive conditions and the impact
of federal tax laws. The Company anticipates that the stockholders will be
requested to approve the adoption of the 1996 Plan in the near future.
The maximum number of shares of Common Stock with respect to which awards
may be granted pursuant to the 1996 Plan is initially 500,000 shares. Shares
issuable under the 1996 Plan may be either treasury shares or authorized but
unissued shares. The number of shares available for issuance will be subject to
adjustment to prevent dilution in the event of stock splits, stock dividends or
other changes in the capitalization of the Company.
The 1996 Plan will be administered by a committee consisting of not less
than two (2) members of the Board of Directors who are "disinterested" within
the meaning of Rule 16b-3 promulgated under the Exchange Act and "outside
directors" within the meaning of Section 162(m) of the Code (including persons
who may be deemed outside directors by virtue of any transitional rule which may
be adopted by the Internal Revenue Service implementing such Section). The Board
will determine the persons to whom awards will be granted, the type of award
and, if applicable, the number of shares to be covered by the award. During any
calendar year no person may be granted under the 1996 Plan awards aggregating
more than 100,000 shares (which number shall be subject to adjustment to prevent
dilution in the event of stock splits, stock dividends or capitalization of the
Company).
Types of Awards
Stock Options. Options granted under the 1996 Plan may be "incentive stock
options" ("Incentive Options") within the meaning of Section 422 of the Code or
stock options which are not incentive stock options ("Non-Incentive Options"
and, collectively with Incentive Options, hereinafter referred to as "options").
The persons to whom Options will be granted, the number of shares subject
42
to each Option grant, the prices at which Options may be exercised (which shall
not be less than the fair market value of shares of common Stock on the date of
grant), whether an Option will be an Incentive Option or a Non-Incentive Option,
time or times and the extent to which Options may be exercised and all other
terms and conditions of options will be determined by the Committee.
Each Incentive Option shall terminate no later than ten (10) years from the
date of grant, except as provided below with respect to Incentive Options
granted to 10% Stockholders (as hereinafter defined No Incentive Option may be
granted at any time after October 2005. Each Non-Incentive Option shall
terminate no later than ten (10) years from the date of grant. The exercise
price at which the shares may be purchased may not be less than the Fair Market
Value of shares of Common Stock at the time the Option is granted, except as
provided below with respect to Incentive Options granted to 10% Stockholders.
Options granted to executive officers may not be exercised at any time prior to
six (6) months after the date of grant.
The exercise price of an Incentive Option granted to a person possessing
more than 10% of the total combined voting power of all shares of stock of the
Company or a parent or subsidiary of the Company ("10% Stockholder") shall in no
event be less than 110% of the Fair Market Value of the shares of the Common
Stock at the time the Incentive Option is granted. The term of an Incentive
Option granted to a 10% Stockholder shall not exceed five (5) years from the
date of grant.
The exercise price of the shares to be purchased pursuant to each Option
shall be paid (i) in full in cash, (ii) by delivery (i.e., surrender) of shares
of the Company's Common Stock owned by the option at the time of the exercise of
the Option (iii) in installments, payable in cash, if permitted by the Committee
or for any combination of the foregoing. The stock-for-stock payment method
permits an optionee to deliver one (1) or more shares of previously owned Common
Stock of the Company in satisfaction of the exercise price of subsequent
Options. The optionee may use the shares obtained on each exercise to purchase a
larger number of shares on the next exercise. (The foregoing assumes an
appreciation in value of previously acquired shares). The result of the
stock-for-stock payment method is that the optionee can generally avoid
immediate tax liability with respect to any appreciation in the value of the
stock utilized to exercise the Option.
Shares received by an optionee upon exercise of a Non-Incentive Option may
not be sold or otherwise disposed of for a period determined by the Board upon
grant of the Option, which period shall be not less than six (6) months nor more
than three (3) years from the date of acquisition of the shares (the "Restricted
Period"), except that, during the Restricted Period (i) the optionee may offer
the shares to the Company and the Company may, in its discretion, purchase up to
all the shares offered at the exercise price and (ii) if the optionee's
employment terminates during the Restricted Period (except in limited
instances), the optionee upon written request of the Company, must offer to sell
the shares to the Company at the exercise price within seven (7) business days.
The Restricted Period shall terminate in the event of a Change in Control of the
Company (as defined), or at the discretion of the Board. After the Restricted
Period, an optionee wishing to sell must first offer such shares to the Company
at the Fair Market Value.
Limited Stock Appreciation Rights. The Committee is authorized, in
connection with any Option granted under the 1996 Plan, to grant the holder of
such Option a limited stock appreciation
43
right ("LSAR"), entitling the holder to receive, within sixty (60) days
following a Change in Control, an amount in cash equal to the difference between
the exercise price of the Option and the market value of the Common Stock on the
effective date of the Change in Control. The LSAR may be granted in tandem with
an Option or subsequent to grant of the Option. The LSAR will only be
exercisable to the extent the related Option is exercisable and will terminate
if and when the Option is exercised.
Restricted and Deferred Stock. An award of restricted stock or deferred
stock may be granted under the 1996 Plan. Restricted stock is subject to
restrictions on transferability and other restrictions by the Committee at the
time of grant. In the event that the holder of restricted stock cease to be
employed by the Company during the applicable restrictive period, restricted
stock that is at the time subject to restrictions shall be forfeited and
reacquired by the Company. Except as otherwise provided by the Committee at the
time of the grant, a holder of restricted stock shall have all the rights of a
stockholder including, without limitation, the right to vote restricted stock
and the right to recover dividends thereon. An award of deferred stock is an
award that provides for the issuance of stock upon expiration of a deferral
period established by the Committee. Except as otherwise determined by the
Committee, upon termination of employment of the recipient of the award during
the applicable deferral period, all stock that is at the time subject to
deferral shall be forfeited until such time as the stock which is the subject of
the award is issued, the recipient of the award has no rights as a stockholder.
Dividend Equivalent Awards. A dividend equivalent gives the recipient the
right to receive cash or other property equal in value to the dividends that
would be paid if the recipient held a specified number of shares of Common
Stock. A dividend equivalent right may be granted as a component of another
award or as a freestanding award.
Bonus Shares and other Share Based Awards. The 1996 Plan authorizes the
Committee to grant shares as a bonus, or to grant shares or other awards in lieu
of obligations of the Company to pay cash under other plans or compensatory
arrangements, upon such terms as shall be determined by the Committee. The 1996
Plan also authorizes the Committee to grant other forms of awards based upon,
payable in, or otherwise related in whole or in part to, Common Stock,
including, without limitation, convertible or exchangeable debentures, or other
debt securities, other rights convertible or exchangeable into shares, purchase
rights for shares, awards contingent upon performance of the Company, and awards
valued by reference to the book value of shares of Common Stock or awards
determined by reference to the value of securities of, or the performance of,
specified subsidiaries.
44
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the date of this
Prospectus with respect to the beneficial ownership of the outstanding shares of
the Company's Common Stock by (i) any holder of more than five percent (5%) of
the outstanding shares; (ii) the Company's officers and directors; and (iii) the
directors and officers of the Company as a group:
Percentage Percentage
(%) of (%) of
Shares of Common Stock Common Stock
Name and Address Common Owned Before Owned After
of Beneficial Owner Stock Owned Offering Offering
------------------- ----------- -------- --------
M. D. Funding 1,827,500 69.6% 11.7%(1)
5 Old Woods
Harrison, NY 10528
Laurie Munn 200,000 7.6% 3.2%(2)
c/o Interiors, Inc.
320 Washington Street
Mt. Vernon, NY 10553
First National Funding 250,000 9.5% ---(3)
P.O. Box N-4755
Nassau, Bahamas
Matthew Harriton 50,000 1.9% .3%(4)
750 Lexington Avenue
27th Floor
New York, NY 10022
Donald Feldman --- --- ---
Decor Group, Inc.
320 Washington Street
Mt. Vernon, NY 10553
Max Munn 200,000(5) 7.6% 3.2%(2)
Interiors, Inc.
320 Washington Street
Mt. Vernon, NY 10553
Michael Lulkin --- --- ---
750 Lexington Avenue
27th Floor
New York, NY 10022
Interiors, Inc. 500,000(6) 19.0% 16.0%
320 Washington Street
Mt. Vernon, NY 10553
All officers and directors as 250,000(5) 9.5% 8%
a group (4 persons)
- ----------
(1) Assumes the sale of 1,462,000 shares of Common Stock registered under the
Registration Statement of which this Prospectus form a part. See "Selling
Securityholder."
(2) Assumes the sale of 100,000 shares of Common Stock registered under the
Registration Statement of which this Prospectus form a part. See "Selling
Securityholder."
(3) Assumes the sale of 200,000 shares of Common Stock registered under the
Registration Statement of which this
45
Prospectus forms a part. See "Selling Securityholder."
(4) Assumes the sale of 40,000 shares of Common Stock registered under the
Registration Statement of which this Prospectus forms a part. See "Selling
Securityholder."
(5) Includes 200,000 shares of Common Stock held by Laurie Munn, Mr. Munn's
wife. Mr. Munn disclaims beneficial ownership over such shares.
(6) Includes 500,000 shares of Common Stock issuable upon conversion of 500,000
shares of the Company's Series A Convertible Preferred Stock.
The foregoing table does not include (i) an option held by Interiors, Inc.
("Interiors") exercisable for 20,000,000 shares of the Company's Series B
Non-Convertible Preferred Stock at an exercise price of $.0001 per share which
when exercised will represent approximately 86% of the voting shares outstanding
and (ii) 500,000 shares of Series A Convertible Preferred stock held by
Interiors. See "Description of Securities."
46
CERTAIN TRANSACTIONS
In March, 1996, the Company issued (i) 1,827,500 shares of Common Stock to
M.D. Funding, Inc. for cash consideration of $73,100, (ii) 200,000 shares of
Common Stock to Laurie Munn, the wife of Max Munn, the Chairman of the Board of
the Company, for cash consideration of $8,000, (iii) 122,500 shares of Common
Stock to Judy Pace for cash consideration of $4,900, (iv) 250,000 shares of
Common Stock to First National Funding, Inc. for cash consideration of $10,000,
(v) 125,000 shares of Common Stock to Ulster Investments, Ltd. for cash
consideration of $5,000, (vi) 50,000 shares of Common Stock to Matthew Harriton,
a director and formerly the President of the Company, for cash consideration of
$2,000 and (vii) 25,000 Units to Gordon Brothers Capital Corporation for
management services rendered valued at an aggregate of $2,000.
In March 1996, the Company borrowed an aggregate of $250,000 from nine (9)
unaffiliated lenders ( the "Bridge Lenders"). In exchange for making loans to
the Company, each Bridge Lender received a promissory note (the "Bridge Notes").
Each of the Bridge Notes bears interest at a rate of eight percent (8%) per
annum. The Bridge Notes are due and payable upon the earlier of (i) March 18,
1997 or (ii) the closing of an initial underwritten public offering of the
Company's securities. The Company intends to use a portion of the proceeds of
this Offering to repay the Bridge Lenders. See "Use of Proceeds." In addition,
the Bridge Lenders were issued the right to receive commencing on the Effective
Date an aggregate of 3,000,000 Class A Warrants, pro rata, based upon the
principal amount of the Bridge Loan made to the Company. The Company entered
into the bridge financing transactions because it required additional financing
and no other sources of financing were available to the Company at that time.
Further, the Company agreed to register the Class A Warrants as well as the
shares of Common Stock issuable upon exercise of the Class A Warrants in the
first registration statement filed by the Company following the date of the
loan. Therefore, the Registration Statement, of which this Prospectus forms a
part, relates to the resale of 3,000,000 Class A Warrants issuable to the Bridge
Lenders and the shares of Common Stock issuable upon the exercise thereof. See
"Selling Securityholders" "Certain Transactions" and "Underwriting."
On March 25, 1996, the Company's wholly-owned subsidiary, Artisan
Acquisition Co., ("AAC"), agreed to purchase substantially all of the assets
(the "Artisan House Transaction") and to assume certain of the liabilities of
Artisan House, Inc. ("AHI") pursuant to that certain Asset Purchase Agreement
(the "Agreement"), dated March 25, 1996, by and among AAC, the Company, AHI and
Henry Goldman ("Goldman"). AHI is engaged in the business of manufacturing,
marketing, selling and distributing wall hanging sculptures. The consideration
for the Artisan House assets to be purchased pursuant to the Agreement
(excluding the liabilities assumed by AAC) will be an aggregate of $3,526,400,
less the amount of cash reflected on the closing date balance sheet and retained
by AHI (the "Retained Cash Amount") and subject to adjustment if the net assets
of AHI are more then $835,000 or less than $750,000 (the "Balance Sheet
Adjustment") as set forth on a balance sheet to be delivered to AAC within
thirty days after the closing of the purchase (the "Closing"). The consideration
is to be satisfied by (i) the payment of $150,000 to AHI which was paid on the
date of execution of the Agreement; (ii) the payment of $2,250,000 at the
Closing; (iii) the delivery of a
47
promissory note issued by AAC in the principal amount of $926,400 less the
Retained Cash Amount and subject to the Balance Sheet Adjustment; and (iv) the
issuance of 100,000 shares of common stock of the Company. With respect to the
Note, $100,000 is payable ninety days after the Closing without any payment of
interest; $676,400 (subject to the Balance Sheet Adjustment) is payable over a
five year period in sixty equal monthly installments, the first installment of
which is due one hundred twenty days after the Closing; and $150,000 is payable
on the date on which the last installment is paid as set forth above, without
any payment of interest. The Note is secured by a second security interest in
the assets purchased pursuant to the Agreement which is subordinate to a first
priority security interest, such first interest not to exceed 55% of the value
of said assets from time to time (subject to a minimum of 55% of the value of
said assets on the date of closing). In the event that the shares of the Company
issuable to AHI are worth less than $200,000 on the second anniversary of the
Closing, AAC shall, at its option, either pay the difference to AHI in cash or
the Company shall issue additional shares having a fair market value equal to
such difference to AHI. If the Company has not effected a public offering of its
common stock by said second anniversary, AHI can require that AAC or Decor
repurchase the shares for the sum of $200,000.
The Closing was scheduled for May 31, 1996, subject to three extensions of
one month per extension, provided that AAC shall pay $15,000 to AHI for each
such extension (such payment to be deducted from the aggregate purchase price).
As of May 31, 1996, AHI agreed to extend the Closing to a date to be agreed upon
by the parties. The Closing is subject to AAC's due diligence investigation,
which permitted AAC to terminate the Agreement without penalty prior to April 8,
1996, if such investigation disclosed any material change in AHI's business,
operations or conditions or in its assets, liabilities, net worth or properties.
If the Agreement is terminated prior to the Closing, (other than due to the
fault of AHI or Goldman), AHI may retain any payments made by AAC. The Agreement
also contains restrictions on AHI and Goldman from competing with AAC for a five
year period after the Closing. The Agreement further contains provisions
relating to the confidentially of information and the non-solicitation of
suppliers and employees by AAC should the transaction fail to close. Any
disputes are to be submitted to a binding arbitration in Los Angeles,
California. The Company anticipates that AAC, the Company's wholly owned
subsidiary, will close on acquisition of the Artisan House Transaction prior to,
or contemporaneously with, the closing of this Offering.
The Agreement also provides that AAC enter into an Employment Agreement
with Goldman pursuant to which Goldman is employed as the Director of Export
Marketing at a salary of $50,000 per annum for the first 250 hours per annum,
and, thereafter, at a rate of $200 per hour. In addition, Goldman is to receive
a bonus equal to 5% of the excess of AAC's net export sales for each calendar
quarter over $25,000; provided that Goldman is employed by AAC on the date such
bonus is earned. Goldman is also entitled to (i) reimbursement of all reasonable
out-of-pocket expenses which must either be included in an annual budget or
approved by AAC (if over $100) and (ii) medical coverage for Goldman and his
wife. The Employment Agreement contains provisions protecting the confidential
information of AAC and restricting Goldman from competing with AAC. The
Agreement further provides for AAC to lease facilities from Goldman and his wife
for a five year term, with an initial monthly rent of approximately $14,000. The
Company believes that the rent
48
payable to Mr. Goldman is at or below the fair market value for such premises.
In May 1996, the Company entered into a three (3) year Management Services
Agreement with Interiors, Inc. ("Interiors"). Interiors has, pursuant to such
agreement, agreed to advise the Company on the manufacturing, sale, marketing
and distribution of the Company's products. In exchange for such services, the
Company has agreed to pay to Interiors an annual amount equal to the greater of
(i) $75,000 or (ii) 1 1/2% of gross sales, subject to certain cashflow
restrictions.
DESCRIPTION OF SECURITIES
The Company is offering 250,000 Units, each Unit consisting of two (2)
shares of Common Stock, par value $.0001 per share, and one (1) Class A Warrant.
Upon completion of this Offering, the securities comprising the Units will be
separately transferable.
Common Stock
The Company is authorized to issue up to 20,000,000 shares of Common Stock,
of which 2,625,000 will be issued and outstanding as of the date of this
Prospectus. All of the issued and outstanding shares of Common Stock will be
fully paid, validly issued and non-assessable.
Subject to the rights of holders of Preferred Stock, holders of shares of
Common Stock of the Company are entitled to share equally on a per share basis
in such dividends as may be declared by the Board of Directors out of funds
legally available therefor. There are presently no plans to pay dividends with
respect to the shares of Common Stock. See "Dividend Policy." Upon liquidation,
dissolution or winding up of the Company, after payment of creditors and the
holders of any senior securities of the Company, including Preferred Stock, if
any, the assets of the Company will be divided pro rata on a per share basis
among the holders of the shares of Common Stock. The Common Stock is not subject
to any liability for further assessments. There are no conversion or redemption
privileges nor any sinking fund provisions with respect to the Common Stock and
the Common Stock is not subject to call. The holders of Common Stock do not have
any pre-emptive or other subscription rights.
Holders of shares of Common Stock are entitled to cast one (1) vote for
each share held at all stockholders' meetings including the annual meeting, for
all purposes, including the election of directors. The Common Stock does not
have cumulative voting rights.
Preferred Stock
The Company's Certificate of Incorporation authorizes 35,000,000 shares of
Preferred Stock, whereby the Board of Directors of the Company shall have the
authority, without further action by the holders of the outstanding shares of
Common Stock, to issue shares of Preferred Stock from time to time in one or
more classes or series, to fix the number of shares constituting any class or
series
49
and the stated value thereof, if different from the par value, and to fix the
term of any such series or class, including dividend rights, dividend rates,
conversion or exchange rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price and the liquidation
preference of such class or series. As of the date of this Prospectus, there are
5,000,000 shares of Series A Convertible Preferred Stock authorized and
20,000,000 shares of Series B NonConvertible Preferred Stock authorized, of
which 500,000 shares issued and outstanding, respectively. The Company does not
anticipate issuing dividends to the holders of its Preferred Stock. See
"Dividends."
Series A Convertible Preferred Stock
The number of shares constituting the Series A Convertible Preferred Stock
(the "Series A Preferred Stock") is 5,000,000, $.0001 par value per share,
500,000 of which are issued and outstanding as of the Effective Date of the
Offering.
Dividends. Each issued and outstanding share of Series A Preferred Stock of
the Company shall not be entitled to receive dividends.
Voting. The holders of Series A Preferred Stock shall not have the right to
vote on matters presented to the stockholders of the Company, except as provided
by the General Corporation Law of the State of Delaware.
Rights on Liquidation, Dissolution or Winding Up. In the event of any
liquidation, dissolution, or winding up of the affairs of the Company, whether
voluntary or involuntary, each issued and outstanding share of Series A
Preferred Stock shall entitle the holder of record thereof to payment at the
rate of $.0001 dollars per share, plus an amount equal to all accrued and unpaid
annual dividends, if any, before any payment or distribution of the net assets
of the Company (whether stated capital or surplus) shall be made to or set apart
for the holders of record of the issued and outstanding of any other shares of
preferred stock and shares of Common Stock ("Junior Securities").
Conversion. Shares of the Series A Preferred Stock of the Company shall be
convertible from time to time, subject to adjustment, at the option of the
holders of record thereof into one (1) share of the Company's Common Stock,
subject to certain anti-dilution provisions.
The Series B Non-Convertible Preferred Stock
The number of shares constituting the Series B Non-Convertible Preferred
Stock (the "Series B Preferred Stock") is 20,000,000, par value $.0001 per
share, none of which are issued and outstanding as of the Effective Date of the
offering. Interiors, Inc., a stockholder of, and consultant to, the Company
holds an option to purchase 20,000,000 shares of Series B Preferred Stock.
Dividends. Each issued and outstanding share of Series B Preferred Stock of
the Company shall not be entitled to receive dividends.
50
Voting. The holders of Series B Preferred Shares shall have the right to
vote on matters presented to the stockholders of the Company (including the
holders of Common Stock), each share of Series B Preferred Stock to have the
voting power of one (1) share of Common Stock.
Rights on Liquidation, Dissolution or Winding Up. In the event of any
liquidation, dissolution, or winding up of the affairs of the Company, whether
voluntary or involuntary, each issued and outstanding share of Series B
Preferred Stock shall entitle the holder of record thereof to payment at the
rate of $.0001 dollars per share, plus an amount equal to all accrued and unpaid
dividends, if any, before any payment or distribution of the net assets of the
Company (whether stated capital or surplus) shall be made to or set apart for
the holders of record of the issued and outstanding of any shares of Common
Stock.
Conversion. Shares of the Series B Preferred Stock of the Company shall not
be convertible into shares of Common Stock.
Class A Warrants
Each Class A Warrant entities the holder to purchase one (1) share of
Common Stock at a price of $4.00 per share for a period of four (4) years
commencing one (1) year from the Effective Date of this Offering. Each Class A
Warrant is redeemable by the Company for $.05 per Class A Warrant at any time
after _______, 1997 upon thirty (30) days' prior written notice, if the closing
price of the Common Stock, as reported by the principal exchange on which the
Common Stock is traded, The Nasdaq SmallCap Market or the National Quotation
Bureau Incorporated, as the case may be, exceeds $12.00 per share for twenty
(20) consecutive trading days prior to the date of the notice of redemption.
Upon thirty (30) days' written notice to all holders of Class A Warrants, the
Company shall have the right, subject to compliance with Rule 13E-4 under the
Securities Exchange Act of 1934 and the filing of Schedule 13E-4 and, if
required, a post-effective amendment to this registration statement, to reduce
the exercise price and/or extend the term of the Class A Warrants.
The Class A Warrants can only be exercised when there is a current
effective registration statement covering the shares of Common Stock underlying
the Class A Warrants. If the Company does not or is unable to maintain a current
effective registration statement, the holders of Class A Warrant certificates
will be unable to exercise the Class A Warrants and the Class A Warrants may
become valueless. Moreover, if the shares of Common Stock underlying the Class A
Warrants are not registered or qualified for sale in the state in which a holder
of Class A Warrant certificates resides, such holder might not be permitted to
exercise the Warrants. See "Risk Factors- Current Prospectus and State Blue Sky
Registration in Connection with the Exercise of the Warrants. Each Class A
Warrant may be exercised by surrendering the Warrant certificate, with the form
of election to purchase on the reverse side of the Class A Warrant certificate
properly completed and executed, together with payment of the exercise price, or
$4.00 per share, to the Transfer Agent. The Class A Warrants may be exercised
whole or from time to time in part. If less than all of the Class A Warrants
evidenced by a Warrant certificate are exercised, a new Class A Warrant
certificate will be issued for the remaining number of Class A Warrants.
51
Holders of the Class A Warrants are protected against dilution of the
equity interest represented by the underlying shares of Common Stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends. If the Company merges, reorganizes or is acquired in such a way as to
terminate the Class A Warrants, the Class A Warrants may be exercised
immediately prior to such action. In the event liquidation, dissolution or
winding up of the Company, holders of the Class A Warrants are not entitled to
participate in the Company's assets.
For the life of the Class A Warrants, the holders thereof are given the
opportunity, at nominal cost, to profit from a rise in the market price of the
Common Stock. The exercise of the Class A Warrants will result in the dilution
of the then book value of the Common Stock of the Company held by the public
investors and would result in a dilution of their percentage ownership of the
Company.
Delaware Anti-Takeover Law
The Company is governed by the provisions of Section 203 of the General
Corporation Law of Delaware, an anti-takeover law enacted in 1988. In general,
the law prohibits a Delaware public corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three (3) years
after the date of the transaction in which the person became an interested
stockholder, unless it is approved in a prescribed manner. As a result of
Section 203, potential acquirors of the Company may be discouraged from
attempting to effect acquisition transactions with the Company, thereby possibly
depriving holders of the Company's securities of certain opportunities to sell
or otherwise dispose of such securities at above-market prices pursuant to such
transactions.
Limitation on Liability of Directors
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of the performance of their duties as directors and
officers provided that this provision shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of stockholders or otherwise.
Article Ninth of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section 102
of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers and directors of the Company for any
claim arising against such persons in their
52
official capacities if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
The Company does not currently have any liability insurance coverage for
its officers and directors.
Commission Policy
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and other agents of the Company, the Company
has been informed that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
Transfer Agent & Registrar
The transfer agent and registrar for the Company's securities is American
Stock Transfer & Trust Company (the "Transfer Agent").
SELLING SECURITYHOLDERS
This offering includes 25,000 Units owned and offered by Gordon Brothers
Capital Corporations (the "Unit Holder"). The Company will not receive any of
the proceeds from the sale of such Units by the Unit Holder. The registration
statement of which this Prospectus forms a part also covers the sale of (i)
3,000,000 Class A Warrants issuable to the Bridge Lenders and (ii) 2,002,000
shares of Common Stock held by certain investors in the Company (the "Selling
Stockholder"; the Bridge Lenders and the Selling Stockholders are collectively
referred to as the Securityholders"). The officers and directors of the Company
as well as certain members of their immediate families (including certain
Selling Securityholders) have agreed not to sell or transfer the securities of
the Company held thereby for a period of twenty-four (24) months following the
Effective Date, subject to earlier release by the Underwriter. The Company will
not receive any of the proceeds on the sale of the securities by the Selling
Securityholders. The resale of the securities of the Selling Securityholders are
subject to Prospectus delivery and other requirements of the Securities Act of
1933, as amended (the "Act"). Sales of such securities or the potential of such
sales at any time may have an adverse effect on the market prices of the
securities offered hereby. See "Risk Factors - Shares Eligible for Future Sale
May Adversely Affect the Market."
The securities offered hereby may be sold from time to time directly by
the Selling
53
Securityholders. Alternatively, the Selling Securityholders may from time to
time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. The Selling Securityholders
and intermediaries through whom such securities are sold may be deemed
"underwriters" within the meaning of the Act with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares being offered and the terms of the
Offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for sales purchased from the
Selling Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers and the proposed selling price to the public.
Sales of securities by the Selling Securityholder or even the potential of
such sales would likely have an adverse effect on the market prices of the
securities offered hereby.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriter has agreed to purchase from the Company
250,000 Units offered hereby from the Company and 25,000 Units from the Unit
Holder, on a "firm commitment" basis, if any are purchased. The Underwriter has
advised the Company that it proposes to offer the Units to the public at $10.00
per Unit as set forth on the cover page of this Prospectus and that it may allow
to certain dealers who are NASD members concessions not to exceed $____ per
Unit, of which not in excess of $____ per Unit may be reallowed to other dealers
who are members of the NASD. After the initial public offering, the public
offering price, concession and reallowance may be changed by the Underwriter.
The public offering price of the Units and the exercise price and other
terms of the Class A
54
Warrants was arbitrarily determined by negotiations between the Company and the
Underwriter and do not necessarily relate to the assets, book value or results
of operations of the Company or any other established criteria of value.
The Company has granted an option to the Underwriter, exercisable during
the thirty (30) day period from the date of this Prospectus, to purchase up to a
maximum of 37,500 additional Units at the Offering price, less the underwriting
discount, to cover over-allotments, if any.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities arising under the Act. Insofar
as indemnification for liabilities arising under the Act may be provided to
officers, directors or persons controlling the Company, the Company has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy and is therefore unenforceable.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance of three percent (3%) of the aggregate Offering price of the Units
offered hereby, including any Units purchased pursuant to the Over-Allotment
Option.
The Company has agreed to sell to the Underwriter, or its designees, for an
aggregate purchase price of $25, an option (the "Underwriter's Unit Purchase
Option") to purchase up to an aggregate of 25,000 Units. The Underwriter's Unit
Purchase Option shall be exercisable during a four (4) year period commencing
one (1) year from the Effective Date. The Underwriter's Unit Purchase Option may
not be assigned, transferred, sold or hypothecated by the Underwriter until
twelve (12) months after the Effective Date of this Prospectus, except to
officers of the Underwriter or to selling group members in this Offering. Any
profits realized upon the sale of the Units issuable upon exercise of the
Underwriter's Unit Purchase Option may be deemed to be additional underwriting
compensation. The exercise price of the Units issuable upon exercise of the
Underwriter's Unit Purchase Option during the period of exercisability shall be
one hundred twenty percent (120%) of the initial public offering price of the
Units. The exercise of the Underwriter's Unit Purchase Option and the number of
shares covered thereby are subject to adjustment in certain events to prevent
dilution. For the life of the Underwriter's Unit Purchase Option, the holders
thereof are given, at a nominal cost, the opportunity to profit from a rise in
the market price of the Company's Units, Common Stock and Class A Warrants with
a resulting dilution in the interest of other stockholders. The Company may find
it more difficult to raise capital for its business if the need should arise
while the Underwriter's Unit Purchase Option is outstanding. At any time when
the holders of the Underwriter's Unit Purchase Option might be expected to
exercise it, the Company would probably be able to obtain additional capital on
more favorable terms.
If the Company enters into a transaction (including a merger, joint
venture, equity financing, debt financing, or the acquisition of another entity)
introduced to the Company by the Underwriter, the Company has agreed to pay the
Underwriter a finder's fee equal to five percent (5%) of the first $4,000,000 of
consideration involved in the transaction, ranging in $1,000,000 increments down
to
55
two percent (2%) of the excess, if any, over $6,000,000.
Upon the closing of the sale of the Units offered hereby, the Company will
enter into a two (2) year financial advisory and investment banking agreement
with the Underwriter, pursuant to which the Company will be obligated to pay the
Underwriter $100,000 in advance upon the closing of the Offering, for financial
and investment advisory services to the Company.
The Company has agreed with the Underwriter that the Company will pay to
the Underwriter a warrant solicitation fee (the "Warrant Solicitation Fee")
equal to four percent (4%) of the exercise price of the Class A Warrants
exercised beginning one (1) year after the Effective Date and to the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Commission. Such Warrant Solicitation Fee will be paid to the Underwriter if
(a) the market price of the Common Stock on the date that any Class A Warrants
is exercised is greater than the exercise price of the Class A Warrant; (b) the
exercise of such Class A Warrant was solicited by the Underwriter; (c) prior
specific written approval for exercise is received from the customer if the
Class A Warrant is held in a discretionary account; (d) disclosure of this
compensation agreement is made prior to or upon the exercise of such Class A
Warrant; (e) solicitation of the exercise is not in violation of Rule 10b-6 of
the Exchange Act; and (f) solicitation of the exercise is in compliance with
NASD Notice to Member 81-38. In addition, unless granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, the Underwriter will be
prohibited from engaging in any market making activities or solicited brokerage
activities with respect to the Company's securities for the period from nine (9)
business days prior to any solicitation of the exercise of any Class A Warrant
or nine (9) business days prior to the exercise of any Class A Warrant based on
a prior solicitation until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right the
Underwriter may have to receive such a fee for the exercise of Class A Warrants
following such solicitation. As a result, the Underwriter may be unable to
continue to provide a market for the Company's securities during that certain
period while the Class A Warrants are exercisable. See "Risk Factors - Lack of
Prior Market for Units, Common Stock and Class A Warrants; No Assurance of
Public Trading Market."
The Company has agreed not to issue any securities for a period of two (2)
months from the Effective Date, without the prior written consent of the
Underwriter. The officers and directors of the Company and certain of their
immediate family members (including certain Selling Securityholders) have agreed
not to sell or transfer the securities of the Company held thereby for a period
of twenty-four (24) months following the Effective Date, subject to earlier
release by the Underwriter.
The Underwriter has limited experience as an underwriter of public
offerings. There can be no assurance that the Underwriter's limited experience
as an underwriter of public offerings will not adversely affect the proposed
public offering of the Units, the subsequent development of a trading market, if
any, or the market for and liquidity of the Company's securities. Therefore,
purchasers of the securities offered hereby may suffer a lack of liquidity in
their investment or a material diminution of the value of their investment.
56
In connection with the Offering, the Underwriter has agreed to indemnify
the Company, its directors, and each person who controls it within the meaning
of Section 15 of the Securities Act with respect to any statement in or omission
from the registration statement or the Prospectus or any amendment or supplement
thereto if such statement or omission was made in reliance upon information
furnished in writing to the Company by the Underwriter specifically for or in
connection with the preparation of the registration statement, the prospectus,
or any such amendment or supplement thereto.
The foregoing is a summary of certain provisions of the Underwriting
Agreement and Underwriter's Unit Purchase Option which have been filed as
exhibits hereto.
Determination of Public Offering Price
Prior to this Offering, there has been no public market for the Units, the
Common Stock and the Class A Warrants. The initial public offering price for the
Units and the exercise price of the Class A Warrants have been determined by
negotiations between the Company and the Underwriter. Among the factors
considered in the negotiations were the market price of the Company's Common
Stock, an analysis of the areas of activity in which the Company is engaged, the
present state of the Company's business, the Company's financial condition, the
Company's prospects, an assessment of management, the general condition of the
securities market at the time of this Offering and the demand for similar
securities of comparable companies. The public offering price of the Units and
the exercise price of the Class A Warrants does not necessarily bear any
relationship to assets, earnings, book value or other criteria of value
applicable to the Company.
The Company anticipates that the Units, the Common Stock and the Class A
Warrants will be listed for quotation on The Nasdaq SmallCap Market under the
symbols,_____ , _____ and _____ , respectively, but there can be no assurances
that an active trading market will develop, even if the securities are accepted
for quotation. The Underwriter intends to make a market in all of the
publicly-traded securities of the Company.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon for
the Company by Bernstein & Wasserman, LLP, 950 Third Avenue, New York, NY 10022.
Bernstein & Wasserman, LLP, has served, and continues to serve, as counsel to
the Underwriter in matters unrelated to this Offering. Certain legal matters
will be passed upon for the Underwriter by Lester Morse, P.C., 111 Great Neck
Road, Great Neck, NY 11021.
EXPERTS
57
Certain of the financial statements of the Company included in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, have been examined by Mortenson &
Associates, P.C., independent certified public accountants, whose reports
contain an explanatory paragraph regarding uncertainties as to the ability of
the Company to continue as a going concern, which appear elsewhere herein and in
the Registration Statement.
ADDITIONAL INFORMATION
This Prospectus constitutes part of a Registration Statement on Form SB-2
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act and omits certain information contained
in the Registration Statement. Reference is hereby made to the Registration
Statement and to its exhibits for further information with respect to the
Company and the Units, the Common Stock and Class A Warrants offered hereby.
Statements contained herein concerning provisions of documents are necessarily
summaries of such documents, and each statement is qualified in its entirety by
reference to the copy of the applicable document filed with the Commission.
The Registration Statement, including the exhibits thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at: 450 Fifth Street, Washington, D.C. 20549; and at the offices of
the Commission located at 7 World Trade Center, New York, NY 10048; and copies
of such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, Washington, D.C. 20549 at prescribed rates.
58
DECOR GROUP, INC.
================================================================================
INDEX TO FINANCIAL STATEMENTS
================================================================================
Page to Page
------------
Pro Forma Combined Financial Statements
Introduction....................................................... A-1 ..
Notes to the Pro Forma Financial Statements........................ A-2 ..A-3
Balance Sheet - March 31, 1996..................................... A-4 ..A-5
Statement of Operations - For the Period Ended March 31, 1996...... A-6 ..
Decor Group, Inc.
Independent Auditor's Report....................................... B-1 ..
Balance Sheet as of March 31, 1996................................. B-2 ..
Statement of Stockholders' Equity from Inception [March 1, 1996]
through the period ended March 31, 1996............................ B-3 ..
Statement of Operations for the period from Inception
[March 1, 1996] through the period ended March 31, 1996............ B-4 ..
Statement of Cash Flows from Inception [March 1, 1996] through
the period ended March 31, 1996.................................... B-5 ..
Notes to Financial Statements...................................... B-6 ..B-8
Artisan House, Inc.
Independent Auditor's Report....................................... C-1 ..
Balance Sheet as of January 31, 1996............................... C-2 ..
Statements of Operations for the years ended January 31, 1996
and 1995........................................................... C-3 ..
Statements of Stockholders' Equity for the years ended January 31,
1996 and 1995...................................................... C-4 ..
Statements of Cash Flows for the years ended January 31, 1996
and 1995........................................................... C-5 ..
Notes to Financial Statements...................................... C-6 ..C-8
A-1
DECOR GROUP, INC.
================================================================================
PRO FORMA COMBINED FINANCIAL STATEMENTS [UNAUDITED]
================================================================================
The following pro forma combined balance sheet as of March 31, 1996, and the pro
forma combined statement of operations for the year ended March 31, 1996 give
effect to Decor Group, Inc. [the "Company"] entering into an agreement to
acquire certain assets and assume certain liabilities of Artisan House, Inc.
["Artisan"] on March 25, 1996. The agreement calls for a purchase price of
$3,526,400 subject to certain adjustments.
The pro forma information is based on the historical financial statements of
Decor Group, Inc. and Artisan House, Inc. giving effect to the transaction under
the purchase method of accounting and the assumptions and adjustments in the
accompanying notes to the pro forma financial statements.
The acquisition will be accounted for using the purchase method. The pro forma
balance sheet assumes the transaction of closing the acquisition was consummated
by March 31, 1996. The pro forma statement of operations gives effect to this
transaction as if it had occurred at the beginning of the fiscal year presented.
The historical statements of operations will reflect the effect of this
transaction from the date on which it occurred. The pro forma combined
statements are based on the historical financial statements of Decor Group, Inc.
and Artisan House, Inc. Decor Group, Inc. was formed March 1, 1996, therefore,
operations for March 31, 1996 represents one months activity. Artisan House,
Inc.'s operations for the period ended January 31, 1996 represents twelve months
activity.
A-1
DECOR GROUP, INC.
================================================================================
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS [UNAUDITED]
================================================================================
[A] To calculate net assets acquired of Artisan House, Inc.:
Total Assets at January 31, 1996 $2,150,184
Less: Assets Not Acquired (Outlined Below) (190,084)
----------
Acquired Assets at January 31, 1996 1,960,100
Total Liabilities at January 31, 1996 1,680,659
Less: Accrued Rent Not Assumed (170,733)
Accrued Interest Payable Not Assumed (409,632)
Capitalization of Stockholder's Loan Payable (501,093)
----------
Liabilities Assumed at January 31, 1996 599,201
----------
Net Assets Acquired $1,360,899
------------------- ==========
Assets not acquired:
Cash $ 96,771
Prepaid Expenses 68,923
Property and Equipment - Net 6,581
Other Assets 17,809
----------
Total $ 190,084
===== ==========
[B] To record capitalization of stockholder's loan payable of $501,093.
[C] To record acquisition of net assets of Artisan House, Inc. with annual
amortization of goodwill and other intangible assets of approximately
$200,000.
Amortization of goodwill will be amortized over ten years and amortization
of the other intangible assets will be over fifteen years under the
straight-line method.
Goodwill is computed as follows:
Cash paid on deposit $150,000
Cash paid at closing 2,250,000
Secured note 829,629
Stock [100,000 Shares of Decor] 300,000
-------
Cost of Acquisition 3,529,692
Estimated Value of Tangible Net Assets Acquired 1,360,899
---------
A-2
Excess Purchase Price $2,168,730
----------
Purchase Price Allocation:
Registered Trademark 150,000
Copyrights and Artwork 150,000
Customer Lists 200,000
----------
Total Other Intangible Assets $500,000
----------
Remainder - Goodwill $1,668,730
==========
The asset purchase agreement calls for total consideration of $3,526,400 subject
to certain adjustments. A component of the aggregate consideration is a secured
note of $926,400 which will be reduced by the cash balance retained by the
seller at the close of the transaction. At January 31, 1996, the cash balance
was $96,771; hence, for pro forma calculation the secured note balance adjusted
for the retained cash account, is $829,629. $100,000 of this secured note is due
in 90 days after the close of the acquisition and $64,601 in principal is due
within one year after the closing.
[D] To record elimination of former President's annual employment contract of
approximately $113,000 and addition of annual employment contract for new
President of $117,000.
[E] To record annual 8% interest expense of $20,000 on $250,000 bridge note
payable and interest expense of $66,000 on acquisition notes of $829,629.
[F] To record annual consulting agreement of $50,000 and minimum annual
management services agreement of $75,000.
[G] To record annual savings on stockholder's loan payable which has been
converted to equity and carried an annual interest cost of $43,613.
[H] To adjust pro forma income taxes.
A-3
DECOR GROUP, INC.
================================================================================
PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1996.
[UNAUDITED]
================================================================================
Historical Financial Statements
Decor Artisan
Group, Inc. House, Inc.
March 31, January 31, Pro Forma
1 9 9 6 1 9 9 6 Adjustments Combined
----------- ----------- ----------- -----------
Assets:
Current Assets:
Cash $ 47,000 $ 96,771 $ (96,771) [A] $ 47,000
Accounts Receivable -- 838,108 -- 838,108
Note Receivable - Related Party 50,000 -- -- 50,000
Stock Subscription Receivable 8,000 -- -- 8,000
Inventory -- 911,951 -- 911,951
Other 250 161,422 (68,923) [A] 92,749
----------- ----------- ----------- -----------
Total Current Assets 105,250 2,008,252 (165,694) 1,947,808
----------- ----------- ----------- -----------
Investments 1,750,000 -- (150,000) [C] 1,600,000
----------- ----------- ----------- -----------
Property and Equipment - Net -- 121,880 (6,581) [A] 115,299
----------- ----------- ----------- -----------
Other Assets:
Goodwill -- -- 1,668,730 [C] 1,668,730
Deferred Financing Costs 1,500,000 -- -- 1,500,000
(17,809) [A]
Other Assets -- 20,052 500,000 [C] 502,243
----------- ----------- ----------- -----------
Total Other Assets 1,500,000 20,052 2,150,921 3,670,973
----------- ----------- ----------- -----------
Total Assets $ 3,355,250 $ 2,150,184 $ 1,828,646 $ 7,334,080
=========== =========== =========== ===========
See Notes to Unaudited Pro Forma Combined Financial Statements.
A-4
DECOR GROUP, INC.
================================================================================
PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1996.
[UNAUDITED]
================================================================================
Historical Financial Statements
Decor Artisan
Group, Inc. House, Inc.
March 31, January 31, Pro Forma
1 9 9 6 1 9 9 6 AdjustmentS Combined
----------- ----------- ----------- -----------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ -- $ 193,646 $ -- $ 193,646
Accrued Expenses -- 163,135 -- 163,135
Notes Payable 250,000 169,134 2,414,601 [C] 2,833,735
Loan Payable - Stockholder -- 501,093 (501,093) [B] --
Accrued Interest Payable - Stockholder -- 409,632 (409,632) [A] --
Accrued Rent Payable - Stockholder -- 170,733 (170,733) [A] --
----------- ----------- ----------- -----------
Total Current Liabilities 250,000 1,607,373 1,333,143 3,190,516
----------- ----------- ----------- -----------
Long-Term Liabilities:
Notes Payable -- 73,286 665,028 [C] 738,314
----------- ----------- ----------- -----------
Stockholders' Equity:
Preferred Stock 50 -- -- 50
Common Stock 262 80,000 10 [C] 272
(80,000) [C]
Additional Paid-in Capital 3,204,688 200,000 299,990 [C] 3,504,678
487,052 [A]
501,093 [B]
(1,188,145) [C]
Retained Earnings (99,750) 189,525 (189,525) [C] (99,750)
----------- ----------- ----------- -----------
Total Stockholders' Equity 3,105,250 469,525 (169,525) 3,405,250
----------- ----------- ----------- -----------
Total Liabilities and Stockholders'
Equity $ 3,355,250 $ 2,150,184 $ 1,828,646 $ 7,334,080
----------- ----------- ----------- -----------
See Notes to Unaudited Pro Forma Combined Financial Statements.
A-5
DECOR GROUP, INC.
================================================================================
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
[UNAUDITED]
================================================================================
Historical Financial Statements
Decor
Group, Inc. Artisan
for the Period House, Inc.
March 1, 1996 For the
Through Year ended
March 31, January 31, Pro Forma
1 9 9 6 1 9 9 6 Adjustments Combined
----------- ----------- ----------- -----------
Sales - Net $ -- $ 4,809,422 $ -- $ 4,809,422
Cost of Goods Sold -- 2,596,383 -- 2,596,383
----------- ----------- ----------- -----------
Gross Profit -- 2,213,039 -- 2,213,039
Selling, General and Administrative
Expenses 100,000 1,684,591 200,000 [C] 2,113,591
4,000 [D]
125,000 [F]
[Loss] Income from Operations (100,000) 528,448 (329,000) 99,448
----------- ----------- ----------- -----------
Other [Income] Expense:
Interest Expense - Stockholder -- 43,613 (43,613) [G] --
Interest Income (250) (2,218) -- (2,468)
Interest Expense -- 40,466 86,000 [E] 126,466
Other (4,496) -- (4,496)
----------- ----------- ----------- -----------
Other Expense - Net (250) 77,365 42,387 119,502
----------- ----------- ----------- -----------
[Loss] Income Before Pro Forma
Income Taxes (99,750) 451,083 (371,387) (20,054)
Provision for Pro Forma Income Taxes -- 180,000 180,000 [H] --
----------- ----------- ----------- -----------
Net [Loss] Income $ (99,750) $ 271,083 $ (191,387) $ (20,054)
=========== =========== =========== ===========
Number of Shares 2,625,000 2,725,000
========= =========
Net [Loss] Per Share $ (.04) $ (.01)
=========== ===========
See Notes to Unaudited Pro Forma Combined Financial Statements.
A-6
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholders of
Decor Group, Inc.
New York, New York
We have audited the accompanying balance sheet of Decor Group, Inc. as of
March 31, 1996, and the related statements of operations, stockholders' equity,
and cash flows for the period from inception [March 1, 1996] through March 31,
1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides 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 Decor Group, Inc. as of
March 31, 1996, and the results of its operations, and its cash flows for the
period from inception [March 1, 1996] to March 31, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 7 to the
financial statements, the Company has not generated cash from operations and has
negative a working capital deficit of approximately $145,000. 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 7. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
MORTENSON AND ASSOCIATES, P. C.
Certified Public Accountants.
Cranford, New Jersey
May 24, 1996
B-1
DECOR GROUP, INC.
================================================================================
BALANCE SHEET AS OF MARCH 31, 1996.
================================================================================
Assets:
Current Assets:
Cash $ 47,000
Stock Subscription Receivable 8,000
Note Receivable - Related Party 50,000
Accrued Interest Receivable - Related Party 250
-----------
Total Current Assets 105,250
-----------
Non-Current Assets:
Investment - Related Party [8] 1,600,000
Investment in Artisan House, Inc. 150,000
Deferred Financing Costs 1,500,000
-----------
Total Non-Current Assets 3,250,000
-----------
Total Assets $ 3,355,250
===========
Liabilities and Stockholders' Equity:
Current Liabilities:
Bridge Loan Payable $ 250,000
-----------
Commitments and Contingencies --
-----------
Stockholders' Equity:
Preferred Stock, $.0001 Par Value Per Share, 35,000,000
Blank Check Shares Authorized of which 5,000,000 are
Convertible Non-Voting Series A - 500,000 Shares Issued
and Outstanding; 20,000,000 Non-Convertible Voting Series
B - No Shares Issued and Outstanding [Note 8] 50
Additional Paid-in Capital - Preferred Stock 1,599,950
Common Stock - $.0001 Par Value, Authorized 20,000,000
Shares, Issued and Outstanding, 2,625,000 Shares 262
Additional Paid-in Capital - Common Stock 1,604,738
Retained Earnings [Deficit] (99,750)
-----------
Total Stockholders' Equity 3,105,250
-----------
Total Liabilities and Stockholders' Equity $ 3,355,250
===========
See Notes to Financial Statements.
B-2
DECOR GROUP, INC.
================================================================================
STATEMENT OF STOCKHOLDERS' EQUITY FROM INCEPTION [MARCH 1, 1996] THROUGH THE
PERIOD ENDED MARCH 31, 1996.
================================================================================
Preferred Stock Additional Common Stock Additional Retained Total
---------------- Paid-in ---------------- Paid-in Earnings Stockholders'
Shares Amount Capital Shares Amount Capital [Deficit] Equity
------ ------ ------- ------ ------ ------- --------- ------
Common Stock Issued
to Founders -- $-- $ -- 2,625,000 $262 $ 104,738 $ -- $ 105,000
Bridge Financing Warrants -- -- -- -- -- 1,500,000 -- 1,500,000
500,000 Shares of Class A
Convertible Preferred Stock and
and Option to Purchase 20,000,000
Shares of Class B Non-Convertible
Preferred Stock 500,000 50 1,599,950 -- -- -- -- 1,600,000
Net [Loss] for the period ended
March 31, 1996 -- -- -- -- -- -- (99,750) (99,750)
------- --- ---------- --------- ---- ---------- -------- -----------
Balance - March 31, 1996 500,000 $50 $1,599,950 2,625,000 $262 $1,604,738 $(99,750) $ 3,105,250
======= === ========== ========= ==== ========== ======== ===========
See Notes to Financial Statements.
B-3
DECOR GROUP, INC.
================================================================================
STATEMENT OF OPERATIONS FOR THE PERIOD FROM INCEPTION [MARCH 1, 1996] TO
MARCH 31, 1996.
================================================================================
Revenues $ --
Cost of Revenues --
---------
Gross Profit --
---------
Selling, General and Administrative Expenses:
Acquisition Fees 98,000
Professional Fees 2,000
---------
Total Selling, General and Administrative Expenses 100,000
---------
[Loss] from Operations (100,000)
---------
Other Income:
Interest Income - Related Party 250
---------
[Loss] Before Provision for Income Taxes (99,750)
Provision for Income Taxes --
---------
Net [Loss] $ (99,750)
=========
See Notes to Financial Statements.
B-4
DECOR GROUP, INC.
================================================================================
STATEMENT OF CASH FLOWS FOR THE PERIOD FROM INCEPTION [MARCH 1, 1996] TO MARCH
31, 1996.
================================================================================
Operating Activities:
Net [Loss] $ (99,750)
---------
Adjustment to Reconcile Net [Loss] to Net Cash
[Used for] Operating Activities:
Stock Issued for Services 2,000
Note Receivable (50,000)
Accrued Interest Receivable (250)
---------
Net Cash - Operating Activities (148,000)
---------
Investing Activities:
Partial Payment on Acquisition of Artisan House, Inc. (150,000)
---------
Financing Activities:
Proceeds from Sale of Common Stock 95,000
Proceeds from Bridge Loans 250,000
---------
Net Cash - Financing Activities 345,000
---------
Net Increase in Cash 47,000
Cash - Beginning of Period --
---------
Cash - End of Period $ 47,000
=========
Supplemental Disclosures of Cash Flow Information:
Cash paid for the years for:
Interest $ --
Income Taxes $ --
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
During the period, the Company incurred deferred financing costs of
$1,500,000 resulting from the issuance of warrants for a $250,000 bridge loan.
On March 3, 1996, the Company issued to Interiors, Inc. 500,000 shares of
Class A Convertible Preferred Stock and an option to purchase 20,000,000 shares
of Class B Non-Convertible Preferred Stock in exchange for Interiors, Inc.
issuing to the Company 200,000 shares of Common Stock valued at $600,000 and
200,000 shares of Series A Convertible Preferred Stock valued at $1,000,000 and
a guarantee with respect to certain indebtedness.
See Notes to Financial Statements.
B-5
DECOR GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
[1] Summary of Significant Accounting Policies
[A] Nature of Operations - Decor Group, Inc., a Delaware corporation [the
"Company" or "Decor"], was formed March 1, 1996.
[B] Capital Stock - In March 1996, the Company issued 2,625,000 shares of common
stock to seven parties for total consideration of $105,000. At March 31, 1996,
$8,000 is reflected as a stock subscription receivable, which was received May
21, 1996.
[C] Earnings Per Share - The number of shares to be used for earnings per share
calculation purposes will be based on the 2,625,000 common shares issued in the
initial capitalization and on the 3,000,000 common shares assumed issued from
the warrants in connection with the bridge loan, as if they were outstanding
since inception. Convertible preferred stock is not included because the effect
would be anti-dilutive [See Note 6].
[D] Cash Equivalents - The Company's policy is to classify all highly liquid
debt instruments purchased with an initial maturity of three months or less to
be cash equivalents. There were no cash equivalents at March 31, 1996.
[E] Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles 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.
[F] Goodwill - Amounts paid in excess of the estimated value of net assets
acquired of Artisan House, Inc. will be charged to goodwill. Goodwill is related
to revenues the Company anticipates realizing in future years. The Company has
decided to amortize its goodwill over a period of up to ten years under the
straight-line method. The Company's policy is to evaluate the periods of
goodwill amortization to determine whether later events and circumstances
warrant revised estimates of useful lives. The Company also evaluates whether
the carrying value of goodwill has become impaired by comparing the carrying
value of goodwill to the value of projected undiscounted cash flows from
acquired assets or businesses. Impairment is recognized if the carrying value of
goodwill is less than the projected undiscounted cash flow from the acquired
assets or business.
[2] Business Combination - Artisan House
On March 25, 1996, the Company entered into an agreement to acquire certain
assets and assume certain liabilities of Artisan House, Inc. for $3,526,400,
subject to adjustment prior to closing of which $150,000 was paid in cash,
$2,250,000 will be paid at the closing of the acquisition and a secured
promissory note for $926,400 will be issued, subject to reduction by the cash
balance of Artisan House at the closing date of which the issuance $100,000 will
be paid 90 days after the closing and the balance will be paid in 60
B-6
equal monthly installments of $11,753 with final payment of $150,000 at maturity
with interest at 8%, and 100,000 shares of Decor common stock valued at $300,000
will be issued. Artisan House, Inc. is engaged in the business of manufacturing,
marketing, selling and distributing wall hanging sculptures. The transaction
will be recorded under the purchase method.
Goodwill of approximately $1,668,730 will be amortized over 10 years under the
straight-line method. Operations of Artisan will be included with the Company
from the date of the close of the acquisition onward.
Simultaneously with the execution of the Artisan House Asset Purchase Agreement,
on March 25, 1996 the Company entered into a consulting agreement with the
Seller for base annual compensation of $50,000.
The following unaudited pro forma combined results of operations accounts for
the acquisition as if it had occurred at the beginning of the year. The pro
forma results give effect to amortization of goodwill and other intangible
assets, interest expense, employment contracts and consulting agreements.
Total Revenues $ 4,809,422
===========
Net [Loss] $ (20,054)
===========
Net [Loss] Per Common Share $ (.01)
===========
Weighted Average Number of Shares Outstanding 2,725,000
===========
These pro forma amounts may not be indicative of results that actually would
have occurred if the combination had been in effect on the date indicated or
which may be obtained in the future.
[3] Related Party Transactions
On March 5, 1996, the Company advanced $50,000 with 8% interest to a company who
renders management services to the Company. The Company was repaid on April 16,
1996. Interest income of $250 was recorded as of March 31, 1996 [See Notes 8 and
11A].
[4] 1996 Stock Option Plan
In March 1996, the Board of Directors of the Company adopted, and the
stockholders of the Company approved the adoption of the 1996 Stock Option Plan.
The maximum number of shares of common stock with respect to which awards may be
granted pursuant to the 1996 Plan is initially 500,000 shares.
B-7
[5] Proposed Public Offering
The Company is filing a registration statement for 250,000 units at $10 per
unit. Each unit consists of 2 shares of common stock and one Class A Redeemable
Common Stock purchase warrant exercisable at $4.00 per share for a four year
period commencing one year from the effective date. The Warrants are redeemable
by the company for $.05 per warrant, in 1997, upon 30 days prior written notice,
under certain quoted price conditions. The anticipated net proceeds from this
offering are approximately $1,575,000.
[6] Bridge Loan
On March 31, 1996, the Company borrowed an aggregate of $250,000 from nine [9]
lenders [the "Bridge Lenders"]. In exchange for making loans to the Company,
each Bridge Lender received a promissory note [the "Bridge Note"]. Each of the
Bridge Notes bears interest at the rate of eight percent [8%] per annum. The
Bridge Notes are due and payable upon the earlier of (i) March 18, 1997 or (ii)
the closing of an initial underwritten public offering of the Company's
securities. The Company intends to use a portion of the proceeds of this
offering to repay the Bridge Lenders. The Bridge Lenders have the right to
receive a total of 3,000,000 Class A Warrants for 3,000,000 shares of common
stock which will be registered in the Company's first registration statement,
whereby the Company recorded a deferred financing cost of $1,500,000, and will
amortized it over the life of the bridge loan.
[7] Going Concern
As shown in the accompanying financial statements, the Company did not generate
cash from operations and had a working capital deficiency of approximately
$145,000 for the period ended March 31, 1996. These factors create an
uncertainty about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern. The Company acquired
Artisan House, Inc. for $3,529,629 [See Note 2], and is pursuing a public
offering of common stock as a vehicle for financing future operations [See Note
5]. The continuation of the Company as a going concern is dependent upon the
success of these plans.
[8] Investment - Related Party
On March 3, 1996, the Company issued to Interiors, Inc. 500,000 shares of Series
A Non-Voting Convertible Preferred Stock and an option to purchase 20,000,000
shares of Series B Non-Convertible Voting Preferred Stock at an exercise price
of $.0001 in exchange for Interiors, Inc. issuing to the Company 200,000 shares
of Common Stock valued at $600,000 and 200,000 shares of Series A Convertible
Preferred Stock valued at $1,000,000 and a guarantee with respect to certain
indebtedness. The investment is classified as available for sale. As of March
31, 1996, Interiors, Inc. owns approximately 16% of the Company assuming the
500,000 shares of Series A Convertible Preferred Stock were converted into
common stock. Following the proposed public offering Interiors, Inc. will own
approximately 86.5% of the total voting stock outstanding assuming the exercise
of the options to purchase 20,000,000 shares of Class B Preferred Stock [See
Note 11A].
[9] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting
B-8
Standards ["SFAS"] No. 123, "Accounting for Stock-Based Compensation," in
October 1995. SFAS No. 123 uses a fair value based method of accounting for
stock options and similar equity instruments as contrasted to the intrinsic
valued based method of accounting prescribed by Accounting Principles Board
["APB"] Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
has not decided if it will adopt SFAS No. 123 or continue to apply APB Opinion
No. 25 for financial reporting purposes. SFAS No. 123 will have to be adopted
for financial note disclosure purposes in any event. The accounting requirements
of SFAS No. 123 are effective for transactions entered into in fiscal years that
begin after December 15, 1995; the disclosure requirements of SFAS No. 123 are
effective for financial statements for fiscal years beginning after December 15,
1995.
[10] Financial Instruments
The carrying amount of cash, notes receivable and notes payable approximates
fair value because of their short maturities.
[11] Subsequent Events [Unaudited]
[A] Management Agreements - Related Party - On May 28, 1996, the Company entered
into a management agreement with Interiors, Inc. which specializes in the home
furnishings and decorative accessories industries. The agreement calls for a
management fee of $75,000 or 1.5% of gross sales, whichever is greater, per
annum. The management fee will be accrued quarterly and paid quarterly to the
extent that there is excess cash flow available to the Company as defined in the
agreement. No payment in any quarter will exceed 50% of excess cash flow as
defined. The agreement has a term of two years with renewal options at the
mutual consent of both parties [See Note 8].
[B] Employment Agreement - President - In June 1996, the Company entered into an
employment contract with the President of the Company for which an initial base
salary of $117,000 will take effect upon the close of the acquisition of Artisan
House.
[C] Commitment Letter - Secured Loan Agreement
On May 31, 1996, the Company received a commitment letter for a revolving credit
agreement for a maximum loan amount of $1,100,000. The agreement requires the
satisfaction of a number of conditions prior to funding including the completion
of a due diligence review. The terms of the loan include an annual interest rate
of prime plus 4%, a management fee of 3% of sales, a security interest in all of
the Company's accounts receivable, inventory, and equipment, and any proceeds
therefrom, a guaranty of the Company's Chairman of the Board, and a prepayment
fee of $25,000 in the event of a prepayment. In the event that the Company is
unable to satisfy such conditions, the Company will not receive the proceeds
from such loan. If the Company does not receive the proceeds from the loan, the
Company will require additional funds to close on the acquisition of Artisan
House, Inc.
. . . . . . . . . . . . . .
B-9
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Stockholder of
Artisan House, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of Artisan House, Inc. as of
January 31, 1996, and the related statements of operations, stockholder's
equity, and cash flows for each of the two fiscal years in the period ended
January 31, 1996. 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 generally accepted auditing
standards. 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 Artisan House, Inc. as of
January 31, 1996, and the results of its operations and its cash flows for each
of the two fiscal years in the period ended January 31, 1996, in conformity with
generally accepted accounting principles.
MORTENSON AND ASSOCIATES, P. C.
Certified Public Accountants.
Cranford, New Jersey
May 15, 1996
C-1
ARTISAN HOUSE, INC.
================================================================================
BALANCE SHEET AS OF JANUARY 31, 1996.
================================================================================
Assets:
Current Assets:
Cash $ 96,771
Accounts Receivable - Net 838,108
Inventory 911,951
Prepaid Expenses 161,422
----------
Total Current Assets 2,008,252
Property and Equipment - Net 121,880
Other Assets 20,052
----------
Total Assets $2,150,184
==========
Liabilities and Stockholder's Equity:
Current Liabilities:
Accounts Payable $ 193,646
Accrued Expenses 163,135
Loan Payable - Stockholder 501,093
Notes Payable 169,134
Accrued Interest Payable - Stockholder 409,632
Accrued Rent Payable - Stockholder 170,733
----------
Total Current Liabilities 1,607,373
----------
Long-Term Liability:
Notes Payable 73,286
----------
Commitments and Contingencies --
----------
Stockholder's Equity:
Common Stock - No Par Value, 75,000 Shares Authorized,
8,000 Issued and Outstanding 80,000
Additional Paid-in Capital 200,000
Retained Earnings 189,525
Total Stockholder's Equity 469,525
----------
Total Liabilities and Stockholder's Equity $2,150,184
==========
See Notes to Financial Statements.
C-2
ARTISAN HOUSE, INC.
================================================================================
STATEMENTS OF OPERATIONS
================================================================================
Years ended
January 31,
-----------------------
1 9 9 6 1 9 9 5
------- -------
Sales - Net $ 4,809,422 $ 3,994,909
Total Cost of Goods Sold 2,596,383 2,134,086
----------- -----------
Gross Profit 2,213,039 1,860,823
----------- -----------
Selling, General and Administrative Expenses:
Selling, Advertising and Promotion 1,011,314 856,874
General and Administrative Expenses 673,277 607,350
----------- -----------
Total Selling, General and Administrative Expenses 1,684,591 1,464,224
----------- -----------
Income from Operations 528,448 396,599
----------- -----------
Other [Income] Expenses:
Interest Expense - Stockholder 43,613 44,182
Interest Expense 40,466 23,460
Interest Income (2,218) (1,483)
Other Income (6,751) (2,601)
Loss on Asset Disposals 2,255 2,524
----------- -----------
Other Expenses - Net 77,365 66,082
----------- -----------
Income Before Provision for Pro Forma Income Taxes 451,083 330,517
Provision for Pro Forma Income Taxes 180,000 132,000
----------- -----------
Pro Forma Net Income $ 271,083 $ 198,517
=========== ===========
See Notes to Financial Statements.
C-3
ARTISAN HOUSE, INC.
================================================================================
STATEMENTS OF STOCKHOLDER'S EQUITY
================================================================================
Total
Common Stock Additional Retained Stockholder's
---------------------- Paid-in Earnings Equity
Shares Amount Capital [Deficit] [Deficit]
------ ------ ------- --------- ---------
Balance at January 31, 1994 8,000 $80,000 $200,000 $(592,075) $(312,075)
Net Income -- -- -- 330,517 330,517
----- ------- -------- --------- ---------
Balance at January 31, 1995 8,000 80,000 200,000 (261,558) 18,442
Net Income -- -- -- 451,083 451,083
----- ------- -------- --------- ---------
Balance at January 31, 1996 8,000 $80,000 $200,000 $ 189,525 $ 469,525
===== ======= ======== ========= =========
See Notes to Financial Statements.
C-4
ARTISAN HOUSE, INC.
================================================================================
STATEMENTS OF CASH FLOWS
================================================================================
Years ended
January 31,
--------------------
1 9 9 6 1 9 9 5
------- -------
Operating Activities:
Net Income $ 451,083 $ 330,517
--------- ---------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Provision for Bad Debts 19,243 12,691
Depreciation and Amortization 35,895 20,865
Interest Capitalized into Notes Payable 7,000 --
Loss on Asset Disposals 2,255 2,524
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (200,224) (118,511)
Inventory (180,278) (43,198)
Other Assets 3,828 7,289
Prepaid Expenses (68,841) (17,251)
Increase [Decrease] in:
Accounts Payable (5,460) (8,505)
Accrued Expenses 55,725 16,459
Accrued Expenses - Stockholder 12,041 5,528
--------- ---------
Total Adjustments (318,816) (122,109)
--------- ---------
Net Cash - Operating Activities 132,267 208,408
--------- ---------
Investing Activities:
Purchase of Property and Equipment (16,952) (67,052)
Increase in Cash Surrender Value of Life Insurance (1,803) --
--------- ---------
Net Cash - Investing Activities (18,755) (67,052)
--------- ---------
Financing Activities:
Repayment of Loan Payable - Stockholder (58,313) (19,342)
Repayment of Notes Payable (42,359) (67,063)
--------- ---------
Net Cash - Financing Activities (100,672) (86,405)
--------- ---------
Net Increase in Cash 12,840 54,951
Cash - Beginning of Years 83,931 28,980
--------- ---------
Cash - End of Years $ 96,771 $ 83,931
========= =========
See Notes to Financial Statements.
C-5
ARTISAN HOUSE, INC.
================================================================================
STATEMENTS OF CASH FLOWS
================================================================================
Years ended
January 31,
-------------------
1 9 9 6 1 9 9 5
------- -------
Supplemental Disclosures of Cash Flow Information:
Cash paid for the years for:
Interest $44,759 $28,643
Income Taxes $ 4,995 $ 8,977
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
During the year ended January 31, 1996, the Company acquired $35,033 of
equipment utilizing financing arrangements.
During the year ended January 31, 1996, $7,000 of accrued interest payable
was added into the principal amount of a new note payable.
See Notes to Financial Statements.
C-6
ARTISAN HOUSE, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
[1] Organization and Summary of Significant Accounting Policies
Organization - Artisan House, Inc. [the "Company"] a California Corporation, was
incorporated on November 18, 1982. The Company is engaged in the business of
manufacturing, marketing, selling and distributing wall hanging sculptures. The
Company manufacturers its products at one location in southern California and
sells through sales representatives and from its showrooms in San Francisco and
North Carolina to furniture retailers and department stores throughout the
United States and internationally.
Cash and Cash Equivalents - The Company classifies all highly liquid debt
instruments purchased with an initial maturity of three months or less to be
cash equivalents. The Company had no cash equivalents at January 31, 1996.
Inventory - Inventory is stated at the lower of cost or market, is comprised of
materials, labor and factory overhead, and is determined on the first-in,
first-out ["FIFO"] basis.
Property and Equipment - Property and equipment is stated at cost and is net of
accumulated depreciation. The cost of additions and improvements are capitalized
and expenditures for repairs and maintenance are expensed in the period
incurred. Depreciation and amortization of property and equipment is provided
utilizing the straight-line method over the estimated useful lives of the
respective assets as follows:
Vehicles 3 Years
Machinery and Equipment 5 - 10 Years
Furniture and Fixtures 7 Years
Leasehold improvements are amortized utilizing the straight-line method over the
shorter of the remaining term of the lease or the useful life of the
improvement.
Income Taxes - The Company has elected to be taxed as an S corporation whereby
the stockholders are liable for federal and state income taxes on their
respective share of the Company's taxable income. A California S corporation is
subject to a nominal tax on income. The pro forma effects of income tax expense
as if the entity had been a C corporation are shown based on an effective tax
rate of 40% for the years ended January 31, 1996 and 1995.
Risk Concentrations - Financial instruments that potentially subject the Company
to concentrations of credit risk include cash and accounts receivable arising
from its normal business activities. The Company places its cash with a high
credit quality financial institution and periodically has cash balances subject
to credit risk beyond insured amounts.
C-7
ARTISAN HOUSE, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #2
================================================================================
The Company routinely assesses the financial strength of its customers, and
based upon factors surrounding the credit risk of its customers, has established
an allowance for uncollectible accounts of $57,182 and as a consequence,
believes that its accounts receivable credit risk exposure beyond this allowance
is limited. The Company does not obtain collateral on its accounts receivable.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles 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.
Advertising Costs - The Company expenses advertising costs as incurred.
Advertising expense was $49,862 and $30,426 for the years ended January 31, 1996
and 1995, respectively.
[2] Inventories
The components of inventory are as follows:
Raw Materials $ 297,224
Work-in Process 221,157
Finished Goods 393,570
---------
Total $ 911,951
=========
[3] Property and Equipment
Property and equipment consist of the following:
Machinery and Equipment $ 171,088
Leasehold Improvements 125,727
Furniture and Fixtures 108,149
Office and Computer Equipment 66,058
Vehicles 76,040
---------
Total - At Cost 547,062
Less: Accumulated Depreciation (425,182)
---------
Net $ 121,880
=========
Depreciation and amortization was $35,895 and $20,865 for the years ended
January 31, 1996 and 1995, respectively.
C-8
ARTISAN HOUSE, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #3
================================================================================
[4] Related Party Transactions
The Company was indebted to its sole stockholder and president in the amounts of
$501,093 and $409,632 for principal and accrued interest, respectively at
January 31, 1996. The loan carries interest at 8% with no fixed repayment plan
or maturity date. Interest expense on the loan was $43,613 and $44,182 for the
years ended January 31, 1996 and 1995, respectively.
The Company rents its principal premises from its sole stockholder and president
under a lease expiring in October 1997. Monthly rent is $16,500 and the Company
is responsible for maintenance, utilities and real estate taxes. Accrued but
unpaid rent at January 31, 1996 was $170,733. Future minimum lease payments
included in future lease commitments are $198,000 and $148,500 for the years
ended January 31, 1997 and January 31, 1998, respectively.
The Company had sales of $13,034 and $6,344 during the years ended January 31,
1996 and 1995, respectively, to a company owned by the sole stockholder and
president of the Company. The related party relationship ceased in July 1995.
[5] Notes Payable
Revolving line of credit [A] $ 136,539
Note payable with interest at bank prime plus 1.25% maturing in April 1999,
collateralized by substantially all the assets of the Company and
guaranteed by the Company's stockholder. 76,000
----------
Total - Forward $ 212,539
Total - Forward $ 212,539
Note payable with interest ranging from 9.5% to 13.4% maturing through 2001,
collateralized by various equipment, and guaranteed
by the Company's stockholder. 29,881
----------
Total 242,420
Less: Current Portion 169,134
----------
Long-Term Portion $ 73,286
==========
Bank prime at January 31, 1996 was 8.25%.
C-9
ARTISAN HOUSE, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #4
================================================================================
[A] The Company is party to a revolving line of credit agreement. The line of
credit provides for advances based on a percentage of accounts receivable as
defined in the agreement to a maximum available balance of $350,000. At January
31, 1996, the Company can borrow up to the full $350,000. The line of credit
carries interest at bank prime plus 1%, matures November 6, 1996, is
collateralized by substantially all the assets of the Company, and is guaranteed
by the stockholder of the Company. The weighted average interest rate on
short-term borrowings for the year ended January 31, 1996 was $11.6%.
Annual maturities of long-term debt are as follows:
January 31,
- -----------
1997 $ 169,134
1998 34,525
1999 28,613
2000 7,572
2001 2,576
Thereafter --
---------
Total $ 242,420
=========
[6] Commitments and Contingencies
The Company leases office space under operating leases which expire through
2000. The leases provide for various terms including additional rent based on
increases in operating costs. The Company also leases equipment under operating
leases expiring through 2001.
Future minimum lease payments under noncancelable operating leases with
remaining terms of one year or more are as follows at January 31, 1996:
January 31,
1997 $ 277,661
1998 230,056
1999 69,882
2000 36,895
2001 3,008
Thereafter --
---------
Total $ 617,502
=========
Rent expense, including real estate taxes and escalation charges, for the years
ended January 31, 1996 and 1995 was $285,800 and $282,691, respectively.
C-10
ARTISAN HOUSE, INC.
NOTES TO FINANCIAL STATEMENTS, Sheet #5
================================================================================
[7] Financial Instruments
The carrying amount of cash, accounts receivable and trade payables approximates
fair value because of their short maturities. The carrying amount of notes
payable and loan payable - stockholder approximates their fair value because
they bear interest at various rates that approximates the Company's cost of
capital.
[8] New Authoritative Pronouncements
The Financial Accounting Standards Board ["FASB"] issued Statement of Financial
Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," in March of
1995. SFAS No. 121 established accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used, and for long-lived assets and certain
identifiable intangibles to be disposed of. SFAS No. 121 is effective for
financial statements issued for fiscal years beginning after December 15, 1995.
Adoption of SFAS No. 121 is not expected to have a material impact on the
Company's financial statements.
. . . . . . . . . . . . . . . . . . .
C-11
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Underwriter. Neither the delivery
of this Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof. This Prospectus does not constitute an offer of
any securities other than the securities to which it relates or an offer to any
person in any jurisdiction in which such an offer would be unlawful.
TABLE OF CONTENTS
Page
----
Available Information.........
Prospectus Summary..........
The Company...................
The Offering....................
Summary Financial
Information....................
Risk Factors.....................
Use of Proceeds.................
Dilution...............
Capitalization......................
Dividend Policy...............
Selected Financial Data.......
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations...................
Business......................
Management....................
Principal Stockholders........
Certain Transactions..........
Description of
Securities...................
Selling Securityholders.......
Underwriting..................
Legal Matters.................
Experts.......................
Additional Information........
Financial Statements..........
----------
Until , 1996 (25 days after the date of this Prospectus), all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
250,000 Units
Each Unit Consists of Two (2) Shares of Common Stock, par value $.0001 per
share, and One (1) Class A Redeemable Common Stock Purchase Warrant
DECOR GROUP, INC.
----------
PROSPECTUS
----------
VTR Capital, Inc.
_______, 1996
----------
SUBJECT TO COMPLETION, DATED _____________, 1996
ALTERNATE
PROSPECTUS
DECOR GROUP, INC.
2,002,000 shares of Common Stock
and
3,000,000 Class A Warrants
This Prospectus relates to the sale of (i) 3,000,000 Class A Redeemable
Common Stock Purchase Warrants ("Class A Warrants") issuable to certain
unaffiliated bridge lenders to the Company (the "Bridge Lenders") and (ii)
2,002,000 shares of Common Stock which are held by certain stockholders of the
Company (the "Selling Stockholders"). The Bridge Lenders and the Selling
Stockholders are hereinafter collectively referred to as the "Selling
Securityholders." The officers and directors of the Company as well as certain
members of their immediate families (including certain Selling Securityholders)
holding an aggregate of 250,000 shares of Common Stock) have agreed not to sell
or transfer the securities of the Company held thereby for a period of
twenty-four (24) months following the Effective Date, subject to earlier release
by the Underwriter. The Company will not receive any of the proceeds on the sale
of the securities by the Selling Securityholders. The resale of the securities
of the Selling Securityholders are subject to Prospectus delivery and other
requirements of the Securities Act of 1933, as amended (the "Act"). Sales of
such securities or the potential of such sales at any time may have an adverse
effect on the market prices of the securities offered hereby. See "Selling
Securityholders" and "Risk Factors - Shares Eligible for Future Sale May
Adversely Affect the Market."
The Class A Warrants shall be exercisable commencing one (1) year after the
date hereof (the "Effective Date"). Each Class A Warrant entitles the holder to
purchase one (1) share of Common Stock at a price of $4.00 per share during the
four (4) year period commencing one (1) year from the Effective Date. The Class
A Warrants are redeemable by the Company for $.05 per Warrant, at any time after
, 1997, upon thirty (30) days' prior written notice, if the closing bid price of
the Common Stock, as reported by the principal exchange on which the Common
Stock is traded, The Nasdaq SmallCap Market or the National Quotation Bureau
Incorporated, as the case may be, equals or exceeds $12.00 per share, for any
twenty (20) consecutive trading days ending five (5) days prior to the date of
the notice of redemption. Upon thirty (30) days' written notice to all holders
of the Class A Warrants, the Company shall have the right to reduce the exercise
price and/or extend the term of the Class A Warrants. See "Description of
Securities."
The Company has applied for inclusion of the Units, the Common Stock and
the Class A Warrants on The Nasdaq Small Cap Market, although there can be no
assurances that an active trading market will develop even if the securities are
accepted for quotation. Additionally, even if the Company's securities are
accepted for quotation and active trading develops, the Company is still
required to maintain certain minimum criteria established by The Nasdaq Small
Cap Market, of which there can be no assurance. See "Risk Factors - Lack of
Prior Market for Units, Common Stock and Class A Warrants; No Assurance of
Public Trading Market."
The Common Stock offered by this Prospectus may be sold from time to time
by the Selling Securityholders, or by their transferees. No underwriting
arrangements have been entered into by the Selling Securityholders. The
distribution of the securities by the Selling Securityholders may be effected in
one or more transactions that may take place on the over-the-counter market
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more
dealers for resale of such shares as principals at market prices prevailing at
the time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the Selling Securityholders in connection with
sales of such securities.
The Selling Securityholders and intermediaries through whom such securities
may be sold may be deemed "underwriters" within the meaning of the Securities
Act of 1933, as amended (the "Act"), with respect to the securities offered and
any profits realized or commissions received may be deemed underwriting
compensation. The Company has agreed to indemnify the Selling Securityholders
against certain liabilities, including liabilities under the Act.
The Company will not receive any of the proceeds from the sale of the
securities by the Selling Securityholders. All costs incurred in the
registration of the securities of the Selling Securityholders are being borne by
the Company. See "Selling Securityholders."
----------
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK
OFFERED HEREBY AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS
OF THEIR ENTIRE INVESTMENT. SEE "DILUTION" and "RISK FACTORS."
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is _____________, 1996
Alt - ii
ALTERNATE
COMPANY OFFERING
On the date of this Prospectus, a Registration Statement under the Act with
respect to an underwritten public offering (the "Offering") of 250,000 Units by
the Company and 25,000 Units owned and offered by Gordon Brothers Capital
Corporation (the "Unit Holder") was declared effective by the Securities and
Exchange Commission ("SEC"), and the Company commenced the sale of Units offered
thereby. Each Unit is comprised of two (2) shares of Common Stock and one (1)
Class A Warrant. Sales of securities under this Prospectus by the Selling
Securityholders or even the potential of such sales may have an adverse effect
on the market price of the Company's securities.
SELLING SECURITYHOLDERS
This Prospectus relates to the sale of (a) 3,000,000 Class A Redeemable
Common Stock Purchase Warrants ("Class A Warrants") issuable to certain
unaffiliated bridge lenders to the Company (the "Bridge Lenders") and (b)
2,002,000 shares of Common Stock which are held by certain stockholders of the
Company (the "Selling Stockholders"). The Bridge Lenders and the Selling
Stockholders are hereinafter collectively referred to as the "Selling
Securityholders." The officers and directors of the Company as well as certain
members of their immediate families (including certain Selling Securityholders)
holding an aggregate of 250,000 shares of Common Stock) have agreed not to sell
or transfer the securities of the Company held thereby for a period of
twenty-four (24) months following the Effective Date, subject to earlier release
by the Underwriter. The Company will not receive any of the proceeds on the sale
of the securities by the Selling Securityholders. The resale of the securities
of the Selling Securityholders are subject to Prospectus delivery and other
requirements of the Securities Act of 1933, as amended (the "Act"). Sales of
such securities or the potential of such sales at any time may have an adverse
effect on the market prices of the securities offered hereby. See "Selling
Securityholders" and "Risk Factors - Shares Eligible for Future Sale May
Adversely Affect the Market."
The following table sets forth the holders of the shares of Common Stock
which are being offered by the Selling Securityholders and the number of shares
owned before the Offering, the number of shares being offered and the number of
shares and the percentage of the class to be owned after the Offering is
complete.
Alt - iii
- ------------------------------------------------------------------------------------------------------------------------------------
Name Shares of Class A Shares of Class A Shares of Class A Percent of Percent of
Common Warrants Common Warrants Stock Owned Warrants Common Class A
Stock Owned Owned Stock Offered After Owned After Stock After Warrants
Before Before Offered Hereby Offering Offering Offering After
Offering Offering(1) Hereby Offering
- ------------------------------------------------------------------------------------------------------------------------------------
M.D. Funding, Inc. 1,827,500 480,000 1,462,000 480,000 365,500 0 11.2% 0
- ------------------------------------------------------------------------------------------------------------------------------------
Laurie Munn(2) 200,000 0 100,000 0 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Judy Pace 122,500 0 100,000 0 22,500 0 .7% 0
- ------------------------------------------------------------------------------------------------------------------------------------
First National 250,000 120,000 200,000 0 50,000 0 1.6% 0
Funding, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Ulster Investments, 125,000 120,000 100,000 120,000 25,000 0 .8% 0
Ltd.
- ------------------------------------------------------------------------------------------------------------------------------------
Matthew Harriton(3) 50,000 0 40,000 0 10,000 0 .3% 0
- ------------------------------------------------------------------------------------------------------------------------------------
Clint Hill 0 1,000,000 0 1,000,000 0 0 0 0
Investments, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
Dune Holdings, Inc. 0 1,200,000 0 1,200,000 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Michael Yordy 0 20,000 0 20,000 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Harold Yordy 0 20,000 0 20,000 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Bruce Ungerleider 0 20,000 0 20,000 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Stephen Osman 0 20,000 0 20,000 0 0 0 0
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2,575,000 3,000,000 2,002,000 3,000,000 573,000 0 ---- 0
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Assumes the issuance of Class A Warrants to the Bridge Lenders as of the
Effective Date.
(2) Ms. Munn is the wife of Max Munn, the Chairman of the Board of the Company.
(3) Mr. Harriton is a director of the Company.
Alt - iv
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents. The
distribution of securities by the Selling Securityholders may be effected in one
or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such shares as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary or
specifically negotiated brokerage fees or commissions may be paid by the Selling
Securityholders in connection with such sales of securities. The securities
offered by the Selling Securityholders may be sold by one or more of the
following methods, without limitations: (a) a block trade in which a broker or
dealer so engaged will attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the transaction; (b)
purchases by a broker or dealer as principal and resale by such broker or dealer
for its account pursuant to this Prospectus; (c) ordinary brokerage transactions
and transactions in which the broker solicits purchasers, and (d) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by the Selling Securityholders may
arrange for other brokers or dealers to participate. The Selling Securityholders
and intermediaries through whom such securities are sold may be deemed
"underwriters" within the meaning of the Act with respect to the securities
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a Prospectus will be distributed
which will set forth the number of shares being offered and the terms of the
Offering, including the name or names of any underwriters, dealers or agents, if
any, the purchase price paid by any underwriter for sales purchased from the
Selling Securityholder and any discounts, commissions or concessions allowed or
reallowed or paid to dealers and the proposed selling price to the public.
Sales of securities by the Selling Securityholders or even the potential of
such sales would likely have an adverse effect on the market prices of the
securities offered hereby. See "Company Offering."
Alt - v
No dealer, salesman or other person has been authorized to give any
information or to make any representations not contained in this Prospectus and
if given or made, such information or representations must not be relied upon as
having been authorized by the Company or any Underwriter. Neither the delivery
of this Prospectus nor any sale made hereunder shall under any circumstances
create any implication that there has been no change in the affairs of the
Company since the date hereof. This Prospectus does not constitute an offer of
any securities other than the securities to which it relates or an offer to any
person in any jurisdiction in which such an offer would be unlawful.
TABLE OF CONTENTS
Page
----
Available Information.........
Prospectus Summary............
The Company..................
The Offering..................
Summary Financial
Information.................
Risk Factors..................
Use of Proceeds...................
Dilution...............
Capitalization......................
Dividend Policy...............
Selected Financial Data.......
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations...................
Business......................
Management....................
Principal Stockholders........
Certain Transactions..........
Description of
Securities...................
Selling Securityholders.......
Underwriting..................
Legal Matters.................
Experts.......................
Additional Information........
Financial Statements..........
[ALTERNATE]
2,002,000 Shares of Common Stock
and
3,000,000 Class A Warrants
DECOR GROUP, INC.
----------
PROSPECTUS
----------
VTR Capital, Inc.
___________, 1996
----------------
Alt - vi
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
In connection with the Offering, the Underwriter agreed to indemnify the
Company, its directors, and each person who controls it within the meaning of
Section 15 of the Act with respect to any statement in or omission from the
registration statement or the Prospectus or any amendment or supplement thereto
if such statement or omission was made in reliance upon information furnished in
writing to the Company by the Underwriter specifically for or in connection with
the preparation of the registration statement, the prospectus, or any such
amendment or supplement thereto.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of the performance of their duties as directors and
officers provided that this provision shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of Stockholders or otherwise.
Article Ninth of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to the extent
permitted by law to indemnify the officers and directors of the Company for any
claim arising against such persons in their official capacities if such person
acted in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
The Company does not currently have any liability insurance coverage for
its officers and directors.
II-1
Items 25. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with this Offering are as follows:
SEC filing fee* .............................................. $ 10,000
The Nasdaq SmallCap Market
filing fee ................................................. $ 11,000
NASD filing fee .............................................. $ 2,000
Accounting fees and expenses* ................................ $125,000
Legal fees and expenses* ..................................... $200,000
Blue Sky fees and expenses* .................................. $ 55,000
Printing and engraving* ...................................... $ 75,000
Transfer Agent's and Registrar's fees* ....................... $ 4,000
Miscellaneous expenses* ...................................... $ 18,000
--------
Total ........................................................ $500,000
========
- ----------------
* Estimated
Item 26. Recent Sales of Unregistered Securities.
The following information sets forth all securities of the Company sold by
it since inception, which securities were not registered under the Securities
Act of 1933, as amended:
In March, 1996, the Company issued (i) 1,827,500 shares of Common Stock to
M.D. Funding, Inc. for cash consideration of $73,100, (ii) 200,000 shares of
Common Stock to Laurie Munn, the wife of Max Munn, the Chairman of the Board of
the Company, for cash consideration of $8,000, (iii) 122,500 shares of Common
Stock to Judy Pace for cash consideration of $4,900, (iv) 250,000 shares of
Common Stock to First National Funding, Inc. for cash consideration of $10,000,
(v) 125,000 shares of Common Stock to Ulster Investments, Ltd. for cash
consideration of $5,000, (vi) 50,000 shares of Common Stock to Matthew Harriton,
a director and formerly the President of the Company, for cash consideration of
$2,000 and (vii) 25,000 Units to Gordon Brothers Capital Corporation for
management services rendered valued at an aggregate of $2,000.
In March 1996, the Company borrowed an aggregate of $250,000 from nine (9)
unaffiliated lenders ( the "Bridge Lenders"). In exchange for making loans to
the Company, each Bridge Lender received a promissory note (the "Bridge Notes").
Each of the Bridge Notes bears interest at a rate of eight percent (8%) per
annum. The Bridge Notes are due and payable upon the earlier of (i) March 18,
1997 or (ii) the closing of an initial underwritten public offering of the
Company's securities. The Company intends to use a portion of the proceeds of
this Offering to repay the Bridge Lenders. See "Use of Proceeds." In addition,
the Bridge Lenders were issued the right to receive commencing on the Effective
Date an aggregate of 3,000,000 Class A Warrants, pro rata, based upon the
principal amount of the Bridge Loan made to the Company. The Company entered
into the bridge financing transactions because it required additional financing
and no other sources of financing were available to the Company at that time.
Further, the Company agreed to register the Class A Warrants as well as the
shares of Common Stock issuable upon exercise of the Class A Warrants in the
first registration statement filed by the Company following the date of the
loan. Therefore, the Registration Statement, of which this
II-2
Prospectus forms a part, relates to the resale of 3,000,000 Class A Warrants
issuable to the Bridge Lenders and the shares of Common Stock issuable upon the
exercise thereof. See "Selling Securityholders" "Certain Transactions" and
"Underwriting."
The Company has relied on Section 4(2) of the Securities Act of 1933, as
amended, for its private placement exemption, such that the sales of the
securities were transactions by an issuer not involving any public offering.
Reference is also made hereby to "Certain Transactions," "Dilution,"
"Principal Stockholders" and "Description of Securities" in the Prospectus for
more information with respect to the previous issuance and sale of the Company's
securities.
All of the aforesaid securities have been appropriately marked with a
restricted legend and are "restricted securities" as defined in Rule 144 of the
rules and the regulations of the Securities and Exchange Commission, Washington
D.C. 20549. All of the aforesaid securities were issued for investment purposes
only and not with a view to redistribution, absent registration. All of the
aforesaid persons have been fully informed and advised concerning the
Registrant, its business, financial and other matters. Transactions by the
Registrant involving the sales of these securities set forth above were issued
pursuant to the "private placement" exemptions under the Securities Act of 1933,
as amended, as transactions by an issuer not involving any public offering. The
Registrant has been informed that each person is able to bear the economic risk
of his investment and is aware that the securities were not registered under the
Securities Act of 1933, as amended, and cannot be re-offered or re-sold until
they have been so registered or until the availability of an exemption
therefrom. The Transfer Agent and registrar of the Registrant will be instructed
to mark "stop transfer" on its ledgers to assure that these securities will not
be transferred absent registration or until the availability of an exemption
therefrom is determined.
II-3
Item 27. Exhibits.
1.01 Form of Underwriting Agreement.
1.02 Form of Selected Dealers Agreement.
3.01 Certificate of Incorporation of the Company dated March 1, 1996.
3.02 By-Laws of the Company.
4.01+ Specimen Certificate for shares of Common Stock.
4.02+ Specimen Certificate for shares of Series A Convertible Preferred Stock.
4.03+ Specimen Certificate for shares of Series B Non-Convertible Preferred
Stock.
4.04+ Specimen Certificate for Class A Redeemable Common Stock Purchase
Warrant.
4.05+ Form of Warrant Agreement by and among the Company and American Stock
Transfer & Trust Company.
4.06 Form of Underwriter's Unit Purchase Option.
4.07+ Option Agreement between the Company and Interiors, Inc.
5.01+ Opinion of Bernstein & Wasserman, counsel to the Company.
10.01 Asset Purchase Agreement among the Company, Artisan Acquisition Co.,
Artisan House, Inc. and Henry Goldman dated as of March 25, 1996.
10.02+ Management Services Agreement between the Company and Interiors, Inc.
10.03+ Employment Agreement between the Company and Donald Feldman.
10.04 Form of Bridge Loan Agreements.
10.05 Form of Subscription Agreements.
10.06+ 1996 Stock Plan.
10.07+ Commitment Letter from United Credit Corporation.
10.08+ Financial Advisory Agreement with the Underwriter.
23.01+ Consent of Bernstein & Wasserman, LLP (to be included in Exhibit 5.01).
23.02 Consent of Mortenson & Associates, LLP.
- ----------
+ To be filed by amendment.
II-4
Item 28. Undertakings.
(a) Rule 415 Offering
The undersigned Registrant will:
1. File, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Act;
(ii) Reflect in the prospectus any facts or events which, individually or
in the aggregate, represent a fundamental change in the information set forth in
the registration statement;
(iii) Include any additional or changed material information on the plan of
distribution.
2. For determining liability under the Act, treat each such post-effective
amendment as a new registration statement of the securities offered, and the
Offering of such securities at that time shall be deemed to be the initial bona
fide offering.
3. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the Offering.
(b) Equity Offerings of Nonreporting Small Business Issuers
The undersigned Registrant will provide to the Underwriter at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriter to permit prompt
delivery to each purchaser.
(c) Indemnification
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or controlling persons of the Registrant
pursuant to the provisions referred to in Item 22 of this Registration Statement
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(d) Rule 430A
The undersigned Registrant will:
1. For determining any liability under the Act, treat the information
omitted from the form of Prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in the form of a prospectus filed by
the small business issuer under Rule 424(b)(1) or
II-5
(4) or 497(h) under the Act as part of this Registration Statement as of the
time the Commission declared it effective.
2. For any liability under the Act, treat each post-effective amendment
that contains a form of prospectus as a new registration statement for the
securities offered in the Registration Statement, and that the Offering of the
securities at that time as the initial bona fide Offering of those securities.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant, certifies that it has reasonable grounds to believe
that it meets all the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in New
York, New York on June 4, 1996.
DECOR GROUP, INC.
By:/s/Donald Feldman
-----------------------------------
Donald Feldman
President and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendments thereto has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Donald Feldman President and June 4, 1996
- ------------------------------ Chief Financial Officer
Donald Feldman
/s/ Max Munn Chairman of the Board June 4, 1996
- ------------------------------- of Directors
Max Munn
/s/ Matthew L. Harriton Director June 4, 1996
- -------------------------------
Matthew L. Harriton
/s/ Michael Lulkin Director June 4, 1996
- -------------------------------
Michael Lulkin
EXHIBIT INDEX
Item No. Exhibits.
- -------- ---------
1.01 Form of Underwriting Agreement.
1.02 Form of Selected Dealers Agreement.
3.01 Certificate of Incorporation of the Company.
3.02 By-Laws of the Company.
4.06 Form of Underwriters Unit Purchase Warrant.
10.01 Asset Purchase Agreement.
10.04 Form of Bridge Loan Agreements.
10.05 Form of Subscription Agreements.
10.08 Financial Advisory Series Agreement.
23.02 Consent of Mortenson & Associate, L.L.P.