THIS DOCUMENT IS A COPY OF THE ANNUAL REPORT ON FORM 10-KSB FILED
ON JULY 30 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
U.S SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended April 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______ to ______
Commission File No. 0-9848
INITIO, INC.
(Name of small business issuer in its charter)
Nevada 22-1906744
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
2500 Arrowhead Drive, Carson City, Nevada 89706
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: (702) 883-2711
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.01 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act of 1934 during the preceeding
12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to the filing requirements
for the past 90 days.
Yes X No____
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB, or any amendment to
this Form 10-KSB. ( )
State Issuer's Revenues for its most recent fiscal year: $12,404,850.
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: $4,128,476 (based upon the high and low prices of the
registrant's Common shares, $.01 par value, as of July 24, 1996).
State the number of shares outstanding or each issuer's classes of common
equity, as of the latest practicable date.
Common Shares, $.01 Par Value 4,679,664
(Title of Class) (No. of Shares Outstanding
at July 24, 1996)
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Form (check one):
Yes No X
PART I
Item 1. Description of Business.
(a) General Development of Business.
Initio, Inc. (the "Company") was incorporated under the
laws of the State of Delaware in 1968 and became a publicly-owned
corporation in 1970. Effective as of February 1, 1994, the Company
changed its State of incorporation from Delaware to Nevada. The Company's
principal offices are located at 2500 Arrowhead Drive, Carson City,
Nevada 89706 and its telephone number is (702) 883-2711.
The Company, through its wholly-owned subsidiary,
Deerskin Trading Post, Inc. ("Deerskin Trading Post"), is engaged in
the mail order retail sale of consumer products principally through
mail order catalogs, and to a lesser extent through space advertising.
The Company's "Deerskin" catalogs are primarily devoted to the sale of
leather goods and the Company's "Joan Cook" catalogs are primarily
devoted to the sale of housewares and gifts. The Company's customers
are located throughout the United States.
RECENT DEVELOPMENTS
Expansion of Warehouse Facility. The Company expanded
its existing warehouse facility in Carson City, Nevada by approximately
34,800 sq. ft at a total cost of approximatley $1,034,000. The
additional space is required to provide for the growing number of
products carried in all of the catalogs, particularly the Joan Cook
catalogs. In addition, the expansion allows the Company to improve its
packing and shipping operation as well as expediting the receipt and
restocking of vendor shipments. All of these improvements will allow the
Company to provide better customer service and more efficient operations.
The construction costs were financed by a $1,000,000 loan from
Sierra Bank of Nevada. This loan is secured by the Carson City real
property and bears interest at 9 1/4% per annum with interest payable
monthly through October 1995 at which time it was converted to a five
year adjustable rate (with the first rate adjustment possible in October
2000) fifteen year mortgage with monthly principal and interest payments
due to fully amortize the loan by August 31, 2010. Borrowing commenced
May 3, 1995.
Loan Agreement with United Jersey Bank. Pursuant to a
Line of Credit Loan and Security Agreement (the "Loan Agreement") entered
into with United Jersey Bank ("the Bank"), the Company's Deerskin Trading
Post subsidiary has a $4,000,000 line of credit with the Bank under which
it may borrow up to $4,000,000 less amounts subject to letters of credit
issued by the Bank on behalf of Deerskin Trading Post (the "Bank Loan").
The Loan Agreement was amended on March 15, 1996, when the Company
defaulted on the loan's 30 consecutive day "clean up" requirement. The
Bank waived the default in consideration of a reduction in the line from
$6,000,000 to $4,000,000 and an increase in the interest rate by 1/4% to
the Bank's base rate plus 3/4%. Maturity is August 31, 1996. Borrowings
under the Bank Loan, which are used for seasonal working capital
purposes, amounted to $2,600,000 in direct borrowings and $586,000 in
outstanding letters of credit at April 30, 1996. The Company has
guaranteed the obligations of Deerskin Trading Post under the Bank Loan.
To secure the Bank Loan, Deerskin Trading Post has granted a security
interest to the Bank in substantially all its assets. In addition to various
default provisions, representations and warranties, affirmative and negative
covenants, the Loan Agreement provides that, until repayment in full of the
Bank Loan, Deerskin Trading Post will not declare or pay any dividends, nor
merge with or consolidate into, any corporation or other entity, without the
Bank's prior consent.
Sale of Peabody Facility. As of July 1, 1996 the Company
entered into an agreement for the sale of the Peabody facility at a price
which represents a gain of approximately $275,000. It is anticipated
that the closing will take place in the fourth quarter of the fiscal year
ended April 30, 1997, at which time the Company will recognize the gain
and will review the need for a reserve for the costs associated with
the relocation of the Peabody operations, which will take place subsequent
to the closing. Since this agreement is conditioned upon the purchaser
obtaining building permits, among other things, there can be no assurance
that such conditions will be met.
(b) Narrative Description of the Business.
The Company, via its Deerskin Trading Post subsidiary,
is principally engaged in the mail order retail sale of consumer products
through its Deerskin and Joan Cook catalogs and to a lesser extent through
space advertising. The Company is currently engaged in a single industry
segment, i.e. specialty mail order retailing of consumer products.
The Company is a specialty mail order retailer of men's
and women's leather outerwear, footwear, other apparel and accessories
through the Deerskin catalog, and housewares and gifts through the Joan
Cook catalog. The Company also sells merchandise via space advertising.
The Company seeks to provide its customers with
competitively priced products that can be differentiated from competitive
items either by design, workmanship or price. The Company guarantees
customer satisfaction. If for any reason, or no reason, a customer
is not completely satisfied with any purchase, the Company will replace
it, exchange it or refund the amount paid for it, whichever the customer
prefers, provided the merchandise is returned unused and unaltered within
one year from the date of shipment. Refunds for Deerskin merchandise
shipped have ranged from 17% to 20% of gross sales in recent years. With
respect to Joan Cook merchandise, the Company has experienced refunds for
merchandise shipped ranging from 8% to 10% of Joan Cook's gross sales.
The Company believes that such refund experience for the Deerskin Catalog
is at the low end, and for the Joan Cook Catalog is at the high end, of
the percentages experienced by similar companies.
The Company also operates a catalog close-out center in
Danvers, Massachusetts which sells excess mail order merchandise as well
as "seconds", i.e., merchandise which fails to meet catalog standards. In
addition, this store sells current catalog merchandise.
Catalog Production. The Company's catalogs are produced
by an in-house art department which uses Macintosh desktop publishing
equipment to prepare for both catalog and media, layouts, copy, typesetting
and "mechanicals". The Company also has an in-house photographer. In
addition, independent photographers and models are engaged on a contract
basis as needed. The Company believes this combination of inhouse and
free-lance staff enables it to maintain both quality control and
flexibility in the production of its catalogs. The Company's art
department is located in its North Bergen, New Jersey facility.
The Company varies the quantity of its catalogs
mailed based on the selling season and the anticipated response
rates. In fiscal 1996, the Company produced three different
editions of its Deerskin catalog and made 11 mailings totaling
approximately 4,000,000 catalogs. The Deerskin catalog consists of
between 64 and 80 pages and offers approximately 300 items. During
the year, the Company changed the dimensions of the Deerskin
catalog to coordinate its production and mailing with the Joan Cook
catalog. This change allows the Company to take advantage of the
economies of scale which are available in the printing and mailing
of the catalogs. In fiscal 1996, the Company produced seven
editions of its Joan Cook catalog, and made 10 mailings totaling
approximately 3,390,000 catalogs. These Joan Cook catalogs
consisted of 64 pages and each catalog offered between 220 and 260 items.
Merchandising and Purchasing. The Deerskin catalog
offers a broad range of leather merchandise priced from $8 to $995.
Many items have been available in the Deerskin catalog for years and
each year new or redesigned items are added. Many of Deerskin's
items are manufactured in accordance with its design and specifications.
Joan Cook offers a broad range of household items and gifts priced from
under $10 to $200. Unlike Deerskin, Joan Cook's items are not generally
designed by the Company. The Company also offers Deerskin and Joan Cook
products through space advertising. The Company endeavors to offer its
customers outstanding selection, quality, value and service.
Deerskin's products are manufactured by approximately
200 suppliers. In excess of 50% of the merchandise purchased by
Deerskin is imported, primarily from manufacturers in Taiwan, Korea,
Hong Kong and the Peoples Republic of China. Products offered in
Joan Cook catalogs are manufactured by hundreds of manufacturers.
Unlike Deerskin, a relatively small percentage, or approximately 10%,
of the merchandise purchased for Joan Cook catalogs is imported by
the Company. No one supplier accounted for more than 10% of the
Company's purchases during the fiscal year ended April 30, 1996 and
the Company believes ample alternate sources exist, should present
supplier relationships be disrupted for any reason.
Marketing. The Company believes its ability to
segment, test and analyze mailing lists, and to select appropriate
recipients for a particular mailing, are a significant factor in its
business. In general, the Company seeks to mail catalogs only to
those list segments, at such times and frequencies as are expected to
meet acceptable goals. The Company maintains a proprietary customer
data base which is used for statistical modeling purposes which, as of
April 30, 1996, contained information with respect to approximately
4,500,000 customers. In addition, the Company rents from and exchanges
lists with other direct marketers in an attempt to gain new customers.
In the fiscal year ended April 30, 1996, the Company earned $175,000
from list renting activities.
Order Fulfillment and Distribution. Orders for merchandise
are received and processed at the Company's facility in Peabody, Massachusetts.
Data processing and some customer service operations are also conducted at
this location. Mail orders together with facsimile credit card orders are
opened, compared to payments, and entered into the Company's computer system
at the Company's Peabody facility. Telephone credit card orders are generally
entered into the Company's computer system by the telephone customer
representatives. After obtaining authorization via teleprocessing for credit
card orders, customer orders are processed and transmitted by telecommunication
line to the Company's Carson City, Nevada facility.
All distribution and warehousing activities are conducted at
the Carson City facility. Merchandise is received directly from foreign and
domestic vendors and inspected. As a result, particularly with respect to
Deerskin merchandise, many goods are identified as requiring pressing, minor
finishing and/or repairs, which is performed in the Company's Carson City,
Nevada facility. If merchandise is unacceptable, it is either returned to
the vendor or shipped to the catalog clearance center in Danvers,
Massachusetts for sale as "seconds".
As merchandise is received, the receiving department counts each
item and verifies the quantity, and, if appropriate, the size and color
of each item, against the purchase order displayed on the computer terminal.
A receiving report is printed and sent to the accounts payable department.
All merchandise is then bar coded and placed on a particular shelf in the
warehouse, which location is tracked by the computer. The computer system
generates a bar coded picking ticket which is attached to each piece of
merchandise. These tickets help to minimize the effort required to fill
orders. Orders are filled at packing stations where a packer chooses the
merchandise corresponding to the customer order displayed on the computer.
The packer then uses a bar code scanner which scans the information on the
picking ticket attached to the piece of merchandise into the computer system.
The computer compares such information to the customer order to ensure that
the merchandise being packed to fulfill the order is correct and complete.
Once the computer verifies that an order is correct and complete, the
merchandise is packed with a bar coded shipping label attached. The package
is then delivered via automated conveyor to a shipping station where the
information on the shipping label is scanned via long distance leased lines
into the computer system in Peabody, Massachusetts to verify that the order
is valid and has not been previously shipped, and to record the method of
shipment and to create the shipping manifest. While most orders are shipped
via UPS or the Postal Service, the Company also offers express service to
customers (guaranteed three day delivery) for an additional fee.
Merchandise Overstocks. The Company sells its overstock at
reduced prices, primarily through its catalog close-out center located in
Danvers, Massachusetts, and through "sales" pages in its catalogs and
clearance inserts.
Government Regulation. The Company must comply with Federal,
state and local laws affecting its business. In particular, the Company is
subject to Federal Trade Commission regulations governing its advertising and
trade practices. While the Company believes it is in compliance with such
regulations, in the event of non-compliance, it may be subject to cease and
desist orders, injunctive proceedings, civil fines and other penalties. To
date, such governmental regulations have not had a material adverse effect
on the Company.
The United States and the other countries in which the
Company's products are manufactured may, from time to time, impose new, or
adjust, existing quotas, duties, tariffs or other restrictions, with the
result that the Company's operations and its ability to continue to import
merchandise at desired levels could be adversely affected. The Company
cannot now predict the likelihood of any such events occurring or the effect
on its business of any such event.
Trademarks and Copyrights. The Company has federally
registered service marks and logos for "Deerskin" and "Joan Cook". In the
opinion of the management of the Company, the service marks "Deerskin" and
"Joan Cook" are of significant value because of their market recognition as
a result of many years of use and the significant quantity of catalogs
circulated.
The Company also possesses other intangible rights such as
copyrights and service marks on designs of its products, none of which
individually is material to the Company.
Employees. As of April 30, 1996, the Company employed
approximately 80 people, approximately half of whom are part-time or seasonal
employees. None of the Company's employees are covered by collective
bargaining agreements. The Company considers its employee relations to be
satisfactory.
Competition. The mail order business is highly competitive.
The Company is not aware of any other mail order catalogs devoted primarily
to the sale of leather goods. There are, however, a number of mail order
catalogs which sell housewares and gifts. The Company competes primarily
with other mail order catalogs and secondarily with retail stores, including
specialty shops and department stores. The Company believes that proper
selection of merchandise, offering the customer the opportunity to purchase
such merchandise at favorable prices and providing the customer with prompt,
reliable and courteous service, are major factors in the successful operation
of a mail order business. There can be no assurance that the Company will be
able to consistently select appropriate merchandise or offer such merchandise
at favorable prices. Many of the Company's competitors have substantially
greater financial resources than the Company.
Item 2. Description of Property.
The Company's operations are conducted in the following
facilities:
Location Use
Carson City, Nevada Principal Executive Offices; Distribution
and Warehousing
North Bergen, N. J. Administrative Offices; Merchandising;
Purchasing; Catalog Production
Peabody, Massachusetts Order and Data Processing
Danvers, Massachusetts Retail Close-Out Store
The Company owns an approximately 81,000 square foot
building on 7.5 acres of leased land in Carson City, Nevada. Annual
rent for this land is $700. The lease expires on September 30, 2037.
The Company is responsible for real estate taxes on this property. In
addition to housing the Company's principal executive offices, this
facility is used for distribution and warehousing.
In April, 1994, the Company entered into a lease for an 11,000
square foot facility located in North Bergen, New Jersey to replace its
Carlstadt, New Jersey facility. The Company's administrative offices,
merchandising, purchasing and catalog production departments are now
located in this facility. Annual gross rent, including utilities,
repairs and taxes, for the North Bergen facility is $104,529. This
lease expires in November 1998.
The Company owns a 45,000 square foot, three-story
building in Peabody, Massachusetts. This facility was partially closed
and listed for sale in the fiscal year ended April 30, 1991, but the
Company continues to receive and process orders and to operate its data
processing center at this location. An agreement of sale has been
entered into with anticipated closing during the fourth quarter of
fiscal year ended April 30, 1997. Peabody operations will be
relocated.
The Company owns a 20,000 square foot building on
leased land in Danvers, Massachusetts. Annual rent for this land is
$12,600. This lease and options contained therein expire on March 31,
2000. The Company is responsible for real estate taxes on this land.
This facility is used as a retail close-out store.
The Company considers that, in general, its physical
properties are well maintained, in good operating condition and adequate
for its present purposes.
Item 3. Legal Proceedings.
As of July 24, 1996 there were no legal proceedings pending
against the Company, nor, to the Company's knowledge, were any material
proceedings against it contemplated by any governmental authority.
Item 4. Submission of Matters to a Vote of Security Holders.
During the fourth quarter of the fiscal year ended
April 30, 1996, no matters were submitted to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information. The Company's Shares are traded
under the symbol "INTO" on NASDAQ. The following table indicates high and low
bid for the fiscal year ended April 30, 1996 and high and low bid and ask
quotations for the year ended April 30, 1995 in the over-the-counter market
for the periods indicated based upon information supplied by National
Quotation Bureau. Such over-the-counter market quotations reflect
interdealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions:
Fiscal Year Ended April 30, 1996
Bid
High Low
First Quarter 3 1/4 2 5/8
Second Quarter 2 7/8 2
Third Quarter 3 1/8 2
Fourth Quarter 2 5/8 2
Fiscal Year Ended April 30, 1995
Bid Ask
High Low High Low
First Quarter 2 1/4 2 1/4 2 5/8 2 1/2
Second Quarter 2 1/4 2 2 5/8 2 1/4
Third Quarter 2 5/8 2 1/8 2 7/8 2 3/8
Fourth Quarter 3 5/16 2 1/2 3 5/8 2 3/4
(b) Number of Holders of Common Stock. As of April 30, 1996 the
number of record holders of the Company's Shares was approximately 300,
which does not include individual participants in security position listings.
(c) Dividends. The Company has never paid a cash dividend.
Future dividend policy will be determined by the Board of Directors based
on the Company's earnings, financial condition, capital requirements and
other existing conditions. It is anticipated that cash dividends will not
be paid to the holders of Shares in the foreseeable future. The Loan
Agreement limits the ability of Deerskin Trading Post to declare and pay
any dividends without the Bank's prior consent.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Accompanying this Form 10-KSB are Consolidated Financial Statements
of the Company and its subsidiary for the fiscal years ended April 30, 1996
and April 30, 1995.
FINANCIAL CONDITION
The most significant changes in the Company's balance sheet from April
30,1995 to April 30, 1996 are as follows:
Marketable securities are considered available for sale and are
carried at fair market value. The unrealized holding gain of $5,714 at
April 30, 1996 and the unrealized holding loss of $53,880 at April 30,
1995, are excluded from earnings and reported as separate components of
stockholders' equity until realized in accordance with Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for
Certain Investments in Debt and Equity Securities". Marketable Securities
decreased $24,512 to $721,238 at April 30, 1996 from $745,750 at April 30,
1995 as a result of the sale of $830,458 of marketable securities and the
resultant gain of $129,230 on the realization of profits on several
security positions which were in the Company's investments portfolio,
offset by the purchase of $617,122 in marketable securities for the
Company's portfolio, and the unrealized gain of $59,594 in the marketable
securities for the twelve month period.
Inventory decreased $1,086,435 to $3,740,869 from $4,827,304.
During the year ended April 30, 1996, the Company reduced the number of
catalogs mailed due to increases in postage and paper costs. The decrease
in inventory is consistent with the Company's marketing plans. The Company
continues to closely monitor its inventories.
Prepaid Advertising decreased $82,212 to $237,837 at April 30, 1996
from $320,049 at April 30, 1995. This decrease is attributable to the
reduced circulation in the normal mailing schedule and amortization of
costs associated with the production and mailing of catalogs in the Spring
and Summer of calendar year 1996 compared to the same period in 1995.
Prepaid and Other Current Assets decreased $257,157 to $637,237 at
April 30, 1996 from $894,394 at April 30, 1995. This decrease is
attributable to the realization of certain joint venture payments received
during the year, the amortization of prepaid consulting fees, the reduction
of receivables and the reduction of inventory level related prepaid costs
involved in preparing, maintaining and storing the inventory for sale.
These costs are calculated as a percentage of inventory and are reviewed
and monitored periodically.
Fixed Assets increased $629,339 to $2,932,253 at April 30, 1996
from $2,302,914 at April 30, 1995. This increase is primarily attributable
to the addition of 34,800 square foot to the Carson City warehouse offset
by approximately $344,000 of fully depreciated assets removed from the
fixed asset accounts. The addition was put into service in October 1995 and
allows the Company to process orders more efficiently and to provide for
future growth. The expenses incurred at April 30, 1996 and April 30, 1995
for the warehouse addition were $1,034,000 and $114,500 respectively. The
construction was financed through Sierra Bank of Nevada which lent
$1,000,000. This loan is secured by the Carson City real property and
bears interest at 9 1/4% per annum. Interest was payable monthly through
October 1995 at which time the construction loan converted to a five year
adjustable rate (with the first rate adjustment possible in January 2000)
fifteen year mortgage with monthly principal and interest payments due to
fully amortize the loan by August 31, 2010. Borrowings increased from $0 at
April 30, 1995 to $1,000,000 at October 31, 1995, at which time the
construction loan converted. At April 30, 1996, the mortgage balance is
$984,485, of which $33,806 is current.
As of April 30, 1996 the Company has available for federal income
tax purposes net operating loss (hereinafter "NOL") carryforwards and other
net future tax deductions totalling approximately $3,340,000; approximately
$63,000 of the NOL expires in 2004, the balance thereafter. The future tax
benefit of such NOL should be recorded as an asset to the extent that the
Company assesses the realization of such future tax benefits to be "more
likely than not." During the fiscal year ended April 30, 1996, the Company
reassessed the future realization of the NOL and concluded that it is
uncertain whether the $1,500,000 previously benefited will be realized.
This resulted in a provision of $523,000.
Borrowings under the Line of Credit decreased $400,000 to
$2,600,000 at April 30, 1996 from $3,000,000 at April 30, 1995 resulting
primarily from the seasonal nature of the business. When the Company
defaulted on the loan's 30 consecutive day "clean up" requirement the Bank
waived the default in consideration of a reduction in the line from
$6,000,000 to $4,000,000 and an increase in the interest rate by 1/4% to
the Bank's base rate plus 3/4%. Maturity is August 31, 1996; the Company
anticipates this will be sufficient to meet its capital requirements
through the maturity date. Should this amount not be sufficient, however,
the Company may be required to seek additional sources of capital. See
"Recent Developments - Loan Agreement with United Jersey Bank" for further
discussion.
Accounts Payable and Accrued Expenses and Other Current Liabilities
decreased $276,284 from $877,531 at April 30, 1995 to $601,247 at April 30,
1996. This decrease is primarily attributable to the payment of a
securities transaction which was carried on margin at April 30, 1995 and
was subsequently paid.
Customer's Unshipped Orders decreased $24,211 to $64,814 at April
30, 1996 from $89,025 at April 30, 1995. The decrease is a result of the
normal seasonal decrease in customer orders during the period and an
improvement in the Company's in-stock position.
Cash balances were $461,917 and $617,768 at April 30, 1996 and
1995 respectively. This decrease of $155,851 was the result of all of the
foregoing.
RESULTS OF OPERATIONS
Fiscal Year Ended April 30, 1996 vs. Fiscal Year Ended April 30,
1995. Net Sales for the fiscal year ended April 30, 1996 totaled
$12,404,850, compared to $19,473,151 for the fiscal year ended April 30,
1995, a decrease of 36.3% or $7,068,301. The decline in net sales resulted
from a reduction in the number of catalogs mailed, the Company's response
to the substantial increases in advertising costs: the 14% postage increase
which took effect January 1, 1995 and the increase in paper costs which
began in July 1994 and continued to increase through 1995. Deerskin
catalog mailed approximately 4,000,000 catalogs in the current fiscal year
compared to approximately 6,834,000 in the fiscal year ended April 30,
1995, a decrease of approximately 2,832,000 catalogs or 41.4%. Deerskin
catalog sales decreased to $6,619,338 for the year ended April 30, 1996
from $8,520,747, a decline of $1,901,409 or 22.3%. Joan Cook mailed
approximately 3,390,000 and 8,678,000 catalogs in the fiscal years ended
April 30, 1996 and 1995 respectively, a decrease of 5,288,000 catalogs or
60.9% Joan Cook catalog sales decreased to $3,558,143 for the year ended
April 30, 1996 from $7,764,473, a decline of $4,206,330 or 54.2%.
In addition, net space sales have decreased $907,109 or 35.5%,to
$1,646,229 for the year ended April 30, 1996 from $2,553,338 for the year
ended April 30, 1995. This is the result of a decrease in space advertising
and a decrease in the customer response rate.
Net sales for the 4th quarter declined from $2,408,943 to
$1,666,345, a decrease of 30.8%.
Cost of merchandise remains substantially unchanged as a percentage
of net sales to 35.8% for the year ended April 30, 1996 from 35.6% for the
year ended April 30, 1995. The actual cost of merchandise for the year
ended April 30, 1996 was $4,438,879 and $6,927,104 for the comparable
period ended April 30, 1995.
Advertising cost was $4,628,286 or 37.3% of Net Sales, for the year
ended April 30, 1996, compared to $7,004,710 or 36.0% of Net Sales ended
April 30, 1995. The increased Advertising cost as a percentage of Net
Sales was caused by increased costs for paper, postage and the reduction in
circulation.
The significant increase in postage and paper costs which the
Company and the industry experienced beginning in August 1994
(approximately 30%) was a significant material adverse development
effecting the entire consumer catalog industry. As a result the Company
significantly reduced the number of catalogs mailed and, therefore,
experienced a significant reduction in sales. This had, and will continue
to have, a material adverse impact upon the result of operations. While
the Company does not anticipate any significant reduction in postage cost,
paper costs have begun to decline slightly and may decline further. This
will not benefit results until the second or third quarter of fiscal 1997.
The Company has responded to this situation by significantly
cutting back its general and administrative staff (including fulfillment in
the third quarter).The Company is also investigating other possible costs
reductions as well as the possibility of raising prices while remaining
competitive. The substantial increase in advertising costs must be viewed
as a negative development for the Company and significantly adversely
impacted results of operations during the fiscal year ended April 30, 1996
and will through the first half of fiscal year ending April 30, 1997.
General and Administrative expenses including fulfillment
expenses,which include the costs of telephone, order entry, credit card
fees, data processing, packaging materials, labeling, refurbishing of
merchandise, packing supplies, and postage, increased as a percentage of
Net Sales to 35.1% for the year ended April 30, 1996 from 29.7% from the
year ended April 30, 1995. During the quarter ended October 31, 1995 and
because of the increased postage and paper costs and the resultant cutback
in circulation, the Company restructured its operations. Benefits began to
be reflected in the second and third quarters; however because of the
decreased net sales, General and Administrative costs increased as a
percentage of sales largely due to the requirement of spreading the fixed
cost components over a reduced sales base.
As a result of all of the foregoing, the Operating Loss for the
fiscal year ended April 30, 1996 was $1,020,486 compared to $236,065 for
the prior year.
Gain on Marketable Securities was $129,230 for the fiscal year
ended April 30, 1996, compared to $194,898 for the fiscal year ended April
30,1995. This gain resulted from the realization of profits on several
security positions which were in the Company's investment portfolio and
which appreciated in value during this period.
Net interest expense for the fiscal year ended April 30, 1996 was
$305,627 compared to $172,289 for the fiscal year ended April 30, 1995.
The increase of $133,338 is attributable to the mortgage on the Carson City
addition which commenced in October 1995 and a reduction in interest income
from joint venture financing.
During the fiscal year ended April 30, 1996 the Company, due to the
uncertainties of future realization, fully offset the April 30, 1995
deferred tax asset of $523,000 ($0.11 per share) by a valuation allowance.
For the fiscal year ended April 30, 1996 the Company had a net loss
of $1,719,883 ($0.37 per share) compared to $174,303 ($.04 per share) for
the fiscal year ended April 30, 1995.
Liquidity, Capital Resources and Cash Flows.
Net working capital, including marketable securities of $721,238, amounted
to $2,857,790 at April 30, 1996, compared to $3,763,662 including marketable
securities of $745,750 at the end of the prior fiscal year. The Company
believes working capital plus available lines of credit are adequate to
meet its needs through April 30, 1997.
For the fiscal year ended April 30, 1996 cash provided by
operations was $52,873 compared to $49,727 used in operations for the
fiscal year ended April 30, 1995, resulting primarily from operating losses
and partially offset by decreases in the future tax benefit, inventory,
prepaid advertising, prepaid and other assets, and accounts payable,
accrued expenses and other current liabilities. Investing activities used
$760,003 in the fiscal year ended April 30, 1996 compared to $294,875 in
the fiscal year ended April 30, 1995. Investment activities include capital
expenditures of $973,339 primarily for the warehouse expansion in Carson City.
On March 20, 1995 the Company signed an agreement with Sierra Bank
of Nevada for a $1,000,000 construction loan to finance the approximately
34,800 sq. ft. expansion of its Carson City warehouse. This loan is
secured by the Carson City real property and bears interest at 9 1/4% per
annum with interest payable monthly through October 1995 at which time it
converted to a five year adjustable rate mortgage (with the first rate
adjustment possible in October 2000) fifteen year mortgage with monthly
principal and interest payments due to fully amortize the loan by August
31, 2010. Borrowing commenced May 3, 1995. As of April 30, 1996 the total
amount outstanding on this loan was $984,485, including the current
portion, $33,806.
Net cash decreased $155,851 in the fiscal year ended April 30, 1996
compared to an increase of $190,398 in the fiscal year ended April 30, 1995
as a result of all these factors.
As described in "Recent Developments - Loan Agreement with United
Jersey Bank" above, the Company's Deerskin Trading Post subsidiary has a
$4,000,000 line of credit with the Bank. As of April 30, 1996, the unused
amount of such line of credit was approximately $814,000. As of July 24,
1996, the unused amount of such line of credit was approximately $323,000.
The maturity date of the line of credit is August 31, 1996. In the event
the Company fails to reach an agreement with the Bank to extend the
Company's line of credit beyond August 31, 1996, the Company would be
required to find alternative sources of financing. Although the Company
anticipates that the Bank will extend the existing credit facility on terms
no less favorable to the Company than those presently existing, there can
be no assurance that such will prove to be the case. In the event that
such facility is not renewed, the Company would be required to seek
alternative sources of financing, which might be on terms significantly
less favorable. In the event that such terms were deemed unacceptable to
the Company, the Company might be required to substantially reduce its
catalog distribution and restructure its operations accordingly.
Item 7. Financial Statements.
Financial Statements are attached hereto.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During fiscal years 1996 and 1995 there were no changes in or
disagreement with the Company's principal independent accountant on
accounting or financial disclosure.
PART III
Item 9. Directors and Executive Officers of the Company
The Company's Board of Directors is a classified board,
with one-third of the directors being elected each year for a term of three
years. The following table sets forth certain information with respect to
each director and executive officer of the Company:
Name and Age Positions with Term Served As
the Company Expires Director Since
Daniel A. DeStefano, 64 Chairman of the Board, 1996 1969
Director
Martin Fox, 61 President, Director 1996 1978
Albert P. Brodell, Jr. 73 Secretary, Director 1997 1982
Phillip Langsdorf, 48 Director 1996 1992
Audrey Remes, 51 Treasurer, Chief Financial
Officer and Chief
Accounting Officer
There is no family relationship among any of the directors or
executive officers of the Company.
Mr. DeStefano was a founder of the Company and has been Chairman
of the Board of the Company since 1969.
Mr. Fox joined the Company in 1972 and has been President of the
Company for more than five years.
Mr. Langsdorf has been a Vice President of White Flower Farms, a
direct mail specialty catalog company concentrating on the marketing of
horticultural materials, since 1991. Prior to such time, he served as
Executive Vice President-Operations of Deerskin for more than five years.
Mr. Brodell has served the Company in various executive
capacities since 1981. Mr. Brodell, a Certified Public Accountant who is
now semi-retired, was formerly a partner in Arthur Andersen & Co., having
left such firm in 1967.
Ms. Remes, a Certified Public Accountant, has been Treasurer,
chief financial officer and chief accounting officer of the Company since
March 1989.
Each officer's term expires at each annual meeting of the Board
of Directors of the Company, or when their successors are elected and
qualified to serve in their stead.
The Company pays directors, other than full time employees, an
annual retainer of $3,000 plus $500 and out-of-pocket expenses for each
Board meeting attended. In addition, Mr. Brodell may receive consulting
fees from time to time.
The Securities and Exchange Commission has adopted rules relating
to filing ownership reports under Section 16(a) of the Securities Exchange
Act of 1934. One such rule requires disclosure of filings which, under the
Commission's rules, are not deemed to be timely. During its review of the
filings and transactions made by the executive officers and directors for
fiscal 1996, the Company discovered that Mr. DeStefano and Mr. Fox each
failed to file a timely report with respect to the acquisition of 125,000
options to purchase the Company's common stock in April 1996. Such reports
are being filed.
Item 10. Executive Compensation.
The following table sets forth the cash compensation (consisting
entirely of salary) paid (or accrued for) by the Company to its President
and Chairman of the Board, the only two executive officers whose aggregate
remuneration exceeded $100,000, for the Company's fiscal years ended April
30, 1996, 1995 and 1994:
SUMMARY COMPENSATION TABLE
Name and
Principal
Position Year Annual Compensation
Martin Fox, President 1996 $110,200
1995 $153,000
1994 $130,000
Daniel DeStefano, 1996 $102,600
Chairman of the Board 1995 $153,000
1995 $130,000
During the fiscal year ended April 30, 1996 the Company granted to Mr. Fox
and Mr. DeStefano options, exercisable immediately and expiring in five
years, to each purchase 125,000 shares of the Company's common stock at
$2.00 per share. Neither of them had any other outstanding stock options or
stock appreciation rights. Furthermore, neither of them received awards
under long-term incentive plans that are stock based during the three
fiscal years referred to above.
The Company does not have employment agreements with any of its
executive officers.
In December 1991, the Company adopted its 1991 Stock Option
Plan which provides for the issuance of either incentive or non-qualified
options for up to 350,000 shares of the Company's common stock to officers,
directors and other key employees. Incentive options must be granted at not
less than the current fair market value of the Company's Shares at the date
of grant, are exercisable to the extent of 20% of the options on the date
of grant with an additional 20% becoming exercisable on each subsequent
anniversary of such date of grant, and expire six years after the date of
grant. As of April 30, 1996, options to purchase 158,900 shares of the
Company's Common Stock at exercise prices ranging from $1.00 to $1.875 per
share have been granted under such Plan to 15 employees. None of such
employees are executive officers of the Company, except for Ms. Remes, who
has options to purchase 35,000 shares (25,000 of which are currently
exercisable) at $1.00 per share and 10,000 shares (6,000 of which are
currently exercisable) at $1.875 per share, which were granted in February
1992 and October 1993, respectively. Of the outstanding options, options
to purchase 132,300 shares are currently exercisable. As of April 30,
1996, options to purchase 155,500 shares may be granted in the future under
such Plan.
In addition, two employees (neither of whom are executive
officers of the Company) hold non-qualified stock options, granted during
1988 to purchase 32,000 shares of the Company's Common Stock at an exercise
price of $1.00 per share. These options are currently exercisable.
During the fiscal year ended April 30, 1995, the Company committed
to grant a key employee incentive stock options to purchase 200,000 shares of
its common stock at the then current market price of $2,375 per share under
this plan. In September 1995, the employee's relationship with the Company
was discontinued and as part of the settlement of the Company's obligation
to such employee, the options were cancelled and the Company issued 7,619
shares of common stock which the company valued at $12,858.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners. The following
table sets forth, as of July 24, 1996, information concerning the only
persons who are known by the Company to own beneficially more than five
percent of the outstanding Shares of the Company and information concerning
ownership of outstanding Shares by all current directors and executive
officers of the Company as a group. Except as otherwise indicated, all such
persons have both sole voting and investment power over the Shares shown as
being beneficially owned by them.
Name and Address of Amount and Nature Percent
Beneficial Owner Of Beneficial Ownership of class
Martin Fox
2500 Arrowhead Drive
Carson City, Nevada 89706 1,423,724 (1) 29.6%
Daniel A. DeStefano
2500 Arrowhead Drive
Carson City, Nevada 89706 954,496 (2) 19.9%
DeStefano Children Trust
c/o John McConeghy
42 Sterling Lane
Wayne, New Jersey 07470 530,546 (3) 11.3%
Melvyn I. Weiss
One Pennsylvania Plaza
New York, New York 10119 283,650 (4) 6.1%
All Executive Officers and
Directors as a Group (5 persons) 2,514,160 (5) 51.0%
(1) This amount includes 136,984 Shares owned by trusts for the benefit
of Mr. Fox's children of which Mr. Fox is a trustee and of which Mr. Fox
disclaims beneficial ownership. Mr. Fox has shared voting and investment power
over the Shares owned by such trusts. This amount also includes 108,578 Shares
owned by the Martin Fox Retirement Trust. This amount does not include
53,433 Shares owned by a trust for the benefit of unrelated persons of
which Mr. Fox is a trustee and of which Mr. Fox disclaims beneficial
ownership. This amount also includes 125,000 shares which Mr. Fox has the
right to acquire pursuant to a currently exercisable stock option.
(2) This amount includes 72,138 Shares owned by the Daniel DeStefano
Retirement Trust. This amount also includes 125,000 shares which Mr. DeStefano
has the right to acquire pursuant to a currently exercisable stock option.
(3) Owned by the DeStefano Children Trust for the benefit of Mr.
DeStefano's adult children, of which the trustees are Messrs. John McConeghy
and Fred DeStefano (Mr. Daniel A. DeStefano's brother).
(4) This amount also includes 136,984 Shares owned by trusts for the
benefit of Mr. Fox's adult children of which Mr. Weiss is a trustee and of
which Mr. Weiss disclaims beneficial ownership. Mr. Weiss has shared voting
and investment power over the Shares owned by such trusts.
(5) See footnotes (1), (2) and (4) above. Also includes 20,940 shares
owned by the Albert Brodell Retirement Trust and 84,000 Shares directly owned
by Mr. Brodell and spouse, a director and the Secretary of the Company, and
31,000 Shares which Ms. Remes, Treasurer of the Company, has the right to
acquire pursuant to currently exercisable stock options.
Item 12. Certain Relationships and Related Transactions
From time to time during the last two fiscal years, Mr. Fox, a
director, principal stockholder and the President of the Company, has
borrowed various sums of money from the Company. The aggregate amount of
such indebtedness was $80,000 as of April 30, 1996. Mr. Fox's indebtedness
to the Company is evidenced by a note which, together with interest at a
rate of 6% per annum, is payable on demand.
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Index of Exhibits annexed hereto.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
quarterly period ended April 30, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: July 29, 1996 INITIO, INC.
/s/ Martin Fox
By: Martin Fox, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date: July 29, 1996
/s/ Martin Fox
Martin Fox,
President and Director
Date: July 29, 1996
/s/ Daniel DeStefano
Daniel DeStefano,
Chairman of the Board and
Director
Date: July 29, 1996
/s/ Audrey C. Remes
Audrey C. Remes,
Treasurer, Chief
Financial Officer and
Chief Accounting Officer
Date: July 29, 1996
/s/ Albert P. Brodell, Jr.
Albert P. Brodell, Jr.,
Secretary and Director
Date: July 29, 1996
/s/ Phillip Langsdorf
Phillip Langsdorf,
Director
INDEX OF EXHIBITS
Exhibit Page
Number Description Number
(3) (a) Articles of Incorporation of the Company --
incorporated by reference to Exhibit 3(a) to the SB2.
(b) By-Laws of the Company -- incorporated by
reference to Exhibit 3(b) to the SB-2.
(c) Certificate of Ownership and Merger of Initio,
Inc., a Delaware corporation and Initio, Inc., a
Nevada corporation (the "Company") -- incorporated
by reference to Exhibit 2(e) to the Company's Registration
Statement on Form SB-2 (File No. 33-57750) (The "SB-2").
(10) (a) 1991 Stock Option Plan, adopted by the Board of Directors
on November 8, 1991 and by the shareholders on December 20,
1991 -- incorporated by reference to Exhibit 10(a) to the SB-2
(This document represents a compensatory plan).
(b) Sublease from Julie Pomerantz, Inc. to Deerskin Trading Post,
Inc.,dated as of April 18, 1994, relating to premises located
at 2001 Tonnelle Avenue, North Bergen, New Jersey, guaranteed
by the Company.
(c) Lease of Land under the Company's premises at 2500 Arrowhead
Drive, Carson City, Nevada -- incorporated by reference to
Exhibit No.(20)(b) to the Company's Annual Report on Form 10-K
for the fiscal year ended February 6, 1981.
(d) Lease for premises located at Route 1 and Route 114,
Danvers, Massachusetts -- incorporated
by reference to Exhibit 10(d) to the SB-2.
(e) Subordinated Debenture due December 31, 1994 in the principal
amount of $1,000,000 issued by the Company to Sherwood --
incorporated by reference to Exhibit 10(r) to the SB-2.
(f) Common Stock Purchase Warrant issued August 29, 1992 by the
Company to Sherwood for the purchase of 75,000 shares of the
Company's common stock incorporated by reference to Exhibit
10(s) to the SB-2.
(g) Construction Agreement dated December 29, 1994, between the
Company and Shaw Construction Co.-- incorporated by reference
to Exhibit 10(v) to the Company's Annual Report on Form 10-KSB
for the fiscal year ended April 30, 1995.
Exhibit Page
Number Description Number
(h) Loan Agreement dated March 20, 1995 between The Company and
Sierra Bank of Nevada -- incorporated by reference to Exhibit
10(w) to the Company's Annual Report on Form 10-KSB for the
fiscal year ended April 30, 1995.
(i) Eleventh Amendment to Line of Credit and Loan Security Agreement,
dated as of March 15, 1996, between United Jersey Bank and
Deerskin Trading Post, Inc.
(j) Third Restated Promissory Note, dated as of March 15, 1996,
between United Jersey Bank and Deerskin Trading Post, Inc.
(21) List of Subsidiaries -- incorporated by reference to
Exhibit 21 to the SB-2.
EXHIBIT 10 (i)
ELEVENTH AMENDMENT TO LINE OF CREDIT LOAN AND SECURITY AGREEMENT
This Eleventh Amendment to Line of Credit Loan and Security Agreement
(the "Amendment") dated as of March 15, 1996 by and between UNITED
JERSEY BANK, a state banking association organized under the laws of
the State of New Jersey (the "Lender") with an office at 210 Main
Street, Hackensack, New Jersey 07602 and DEERSKIN TRADING POST, INC.,
a Nevada corporation (the "Borrower") with an office located at 725
Dell Road, Carlstadt, New Jersey 07072.
WHEREAS, on March 10, 1992, the Lender provided a line of credit loan
(the "Loan") to the Borrower pursuant to the terms and conditions of a
certain Line of Credit Loan and Security Agreement dated March 10,
1992 (the "Agreement") as amended by that certain First Amendment to
Line of Credit Loan and Security Agreement dated as of September 1,
1992 (the "First Amendment"), that certain Second Amendment to Line of
Credit Loan and Security Agreement dated as of October 30, 1992 (the
"Second Amendment"), that certain Third Amendment to Line of Credit
Loan and Security Agreement dated as of November 30, 1992 (the "Third
Amendment"), that certain Fourth Amendment to Line of Credit Loan and
Security Agreement dated as of March 11, 1993 (the "Fourth
Amendment"), that certain Fifth Amendment to Line of Credit Loan and
Security Agreement dated as of August 27, 1993 (the "Fifth
Amendment"), that certain Sixth Amendment to Line of Credit Loan and
Security Agreement dated as of October 29, 1993 (the "Sixth
Amendment"), that certain Seventh Amendment to Line of Credit Loan and
Security Agreement dated as of May 31, 1994 (the "Seventh Amendment"),
that certain Eighth Amendment to Line of Credit Loan and Security
Agreement dated as of August 31, 1994 (the "Eighth Amendment"), that
certain Ninth Amendment to Line of Credit Loan and Security Agreement
dated as of August 31, 1995 (the "Ninth Amendment"), that certain
Tenth Amendment to Line of Credit Loan and Security Agreement dated as
of October 31, 1995 (the "Tenth Amendment") (the Agreement as amended
by the First Amendment, Second Amendment, Third Amendment, Fourth
Amendment, Fifth Amendment, Sixth Amendment, Seventh Amendment, Eighth
Amendment, Ninth Amendment and Tenth Amendment is hereinafter referred
to as the "Loan Agreement"), as evidenced by a certain Promissory Note
in the principal amount of Five Million Five Hundred Thousand
($5,500,000.00) Dollars dated March 10, 1992 (the "Original Note") as
modified by that certain First Modification of Promissory Note dated
as of September 1, 1992 (the "First Modification") that certain Second
Modification of Promissory Note dated as of October 30, 1992 (the
Second Modification"), that certain Third Modification of Promissory
Note dated as of November 30, 1992, (the "Third Modification"), as
restated by that certain Restated Promissory Note in the principal
amount of Eight Million ($8,000,000) Dollars dated March 11, 1993 (the
"Restated Note"), as restated by that certain Second Restated
Promissory Note in the principal amount of Six Million ($6,000,000)
Dollars dated as of August 27, 1993 (the "Second Restated Note"), as
modified by that certain First Modification of Second Restated
Promissory Note dated as of October 29, 1993 (the "First Modification
of Second Restated Note"), as modified by that certain Second
Modification of Second Restated Promissory Note dated as of May 31,
1994 (the "Second Modification of Second Restated Note") as modified
by that Third Modification of Second Restated Promissory Note dated as
of August 31, 1994 (the "Third Modification of Second Restated Note"),
as modified by that certain Fourth Modification of Second Restated
Promissory Note dated as of August 31, 1995 (the "Fourth Modification
of Second Restated Note"), as modified by that certain Fifth
Modification of Second Restated Promissory Note dated as of October
31, 1995 (the "Fifth Modification of Second Restated Note") (the
Original Note as modified by the First Modification, Second
Modification, Third Modification and as restated by the Restated Note,
the Second Restated Note and as modified by the First Modification of
Second Restated Note, Second Modification of Second Restated Note,
Third Modification of Second Restated Note, Fourth Modification of
Second Restated Note and Fifth Modification of Second Restated Note is
hereinafter referred to as the "Note");
WHEREAS, the Borrower has requested that the Lender waive the
clean-up provision required under the Loan Agreement for the period of
time commencing May 1, 1995 though August 1, 1996; and
WHEREAS, the Lender is willing to waive the clean-up provision
for the period of time commencing May 1, 1995 through August 31, 1996
subject to the terms and conditions set forth within this Amendment.
NOW THEREFORE, in consideration of the recitals and the mutual
covenants contained herein, the parties hereto agree as follows:
1. All capitalized terms used herein and not otherwise defined
herein shall have the meanings ascribed to them pursuant to the Loan
Agreement and the Note. Notwithstanding anything to the contrary
contained in either the Loan Agreement or the Note, the terms of this
Amendment shall control.
2. The definition of "Loan" in Section 1.1 of the Loan
Agreement is hereby stricken and replaced with the following:
""Loan" shall mean the line of credit loan in a principal amount
not to exceed $4,000,000 to be made available by the Bank to the
Borrower as set forth in Section 2.1 of the Loan Agreement."
3. The definition of "Loan Documents" in Section 1.1 of the
Loan Agreement is hereby stricken and replaced with the following:
""Loan Documents" shall mean collectively this Agreement, the
First Amendment to Line of Credit Loan and Security Agreement,
the Second Amendment to Line of Credit Loan and Security
Agreement, the Third Amendment to Line of Credit Loan and
Security Agreement, the Fourth Amendment to Line of Credit Loan
and Security Agreement, the Fifth Amendment to Line of Credit
Loan and Security Agreement, the Sixth Amendment to Line of
Credit Loan and Security Agreement, the Seventh Amendment to Line
of Credit Loan and Security Agreement, the Eighth Amendment to
Line of Credit Loan and Security Agreement, the Ninth Amendment
to Line of Credit Loan and Security Agreement, the Tenth
Amendment to Line of Credit Loan and Security Agreement, the
Eleventh Amendment to Line of Credit Loan and Security Agreement,
the Note, the First Modification of Promissory Note, the Second
Modification of Promissory Note, the Third Modification of
Promissory Note, the Restated Promissory Note, the Second
Restated Promissory Note, the First Modification of Second
Restated Promissory Note, the Second Modification of Second
Restated Promissory Note, the Third Modification of Second
Restated Promissory Note, the Fourth Modification of Second
Restated Promissory Note, the Fifth Modification of Second
Restated Promissory Note, the Third Restated Promissory Note and
all other agreements, documents, instruments and certificates
executed and delivered or to be executed and delivered to or for
the benefit of the Bank in connection herewith or therewith."
4. The reference to the "Note" in Section 2.3 of the Loan
Agreement shall be deemed to refer to the Note as amended and restated
by that certain Third Restated Promissory Note attached hereto as
Exhibit A and by this reference made a part hereof as fully as if set
forth herein.
5. Subsection 2.1(a) of the Loan Agreement is hereby stricken
and replaced with the following:
"(a) From time to time, during the period from March 15, 1996
until the Business Day prior to the Loan Maturity Date, in the
manner hereinafter set forth, the Borrower may borrow from the
Bank under the Loan upon the terms and conditions contained
herein. The Bank will lend to the Borrower, through one or more
Loan Advances, from March 15, 1996 through and including the Loan
Maturity Date an amount equal to $4,000,000 minus the amount then
available to a beneficiary under any letter of credit issued by
the Bank on behalf of the Borrower (the "Available Amount"). The
proceeds of the Loan Advances shall be used by the Borrower for
general working capital purposes."
6. Subsection 2.4 of the Loan Agreement is hereby stricken and
replaced with the following:
"2.4 Interest Rate. The Note shall bear interest from March 10,
1992 on the outstanding daily principal amount thereof, at a
fluctuating rate per annum equal to the Base Rate plus one half
of one (.50%) percent through and including August 26, 1993.
Beginning August 27, 1993, the Note shall bear interest on the
outstanding daily principal amount thereof at a fluctuating rate
per annum equal to the Base Rate plus one (1%) percent through
and including May 31, 1994. Thereafter, beginning June 1, 1994,
the Note shall bear interest on the outstanding daily principal
amount thereof, at a fluctuating rate per annum equal to the Base
Rate plus three quarters of one percent (.75%) through and
including August 31, 1994. Thereafter, beginning September 1,
1994, the Note shall bear interest on the outstanding daily
principal amount thereof, at a fluctuating rate per annum equal
to the Base Rate plus one half of one (.50%) percent through and
including March 14, 1996. Thereafter, beginning March 15, 1996,
the Note shall bear interest at the outstanding daily principal
amount thereof, at a fluctuating rate per annum equal to the Base
Rate plus three quarters of one (.75%) percent. Interest on the
Note shall be payable on the dates provided for therein.
Interest shall be calculated on the basis of a 360-day year for
the actual number of days elapsed. The rate of interest on the
Note shall be adjusted automatically as of the opening of
business on each day on which any change in the Base Rate is
established by the Bank at its principal office."
7. Subsection 2.15 of the Loan Agreement is hereby stricken and
replaced with the following:
"2.15 Clean-up Period. During each twelve (12) month period,
commencing on May 1, 1994, the Borrower shall reduce the
aggregate principal amount outstanding under the Loan to zero for
a period of thirty (30) consecutive days. Such clean-up period
must be commenced by January 15th of each year. Notwithstanding
anything to the contrary set forth above, the clean-up period
shall be waived for the period of time commencing May 1, 1995
through August 31, 1996."
8. The Borrower acknowledges and agrees that: (a) as of March
15, 1996, the Available Amount under the Loan is One Million Six
Hundred Twenty Two Thousand Four Hundred Sixty Eight and 50/100
($1,622,468.50) Dollars; (b) the obligation of the Borrower to repay
the Loan is absolute and unconditional and is not subject to any
defense, counterclaim, set-off, right of recoupment, abatement or
other claim or determination, and (c) the Note is and shall continue
to be governed by and secured by the terms and provisions of the Loan
Agreement, and as set forth in this Amendment.
9. The failure of the Borrower to comply with any term or
provision of the Amendment shall constitute an Event of Default under
the Loan Agreement and Note.
10. The Lender and the Borrower hereby agree and consent to the
terms and provisions of the Amendment and the transactions
contemplated hereby.
11. The Borrower shall pay all of the Lender's costs and
expenses incurred in connection with the preparation, execution and
delivery of the Amendment, including, without limitation, reasonable
legal fees and disbursements of Lender's counsel.
12. Except as expressly otherwise provided herein, the terms of
the Loan Agreement are hereby restated by the Borrower, shall remain
in force and effect and are incorporated herein by reference. In the
event of a conflict between the terms of this Amendment and the Loan
Agreement, the terms of this Amendment shall control.
13. The Borrower acknowledges that the Lender has no obligation
to make any further amendments to the Loan Agreement or any other Loan
Document executed in connection therewith, including but not limited
to this Amendment and the Note.
14. This Amendment shall be construed in accordance with, and
shall be governed by, the laws of the State of New Jersey. This
Amendment shall be binding upon and insure to the benefit of the
parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the undersigned have caused this Eleventh
Amendment to the Line of Credit Loan and Security Agreement to be
executed by their corporate officers and sealed with their seal as of
the date first set forth above.
UNITED JERSEY BANK
BY: /s/ William S. Clement
William S. Clement
Vice President
DEERSKIN TRADING POST, INC.
BY: /s/ Martin Fox
Martin Fox
Chairman
ATTEST:
/s/ Audrey C. Remes
Audrey C. Remes
EXH. 10 (j)
EXHIBIT A
THIRD RESTATED PROMISSORY NOTE
Principal Amount: $4,000,000.00 Dated: March 15, 1996
FOR VALUE RECEIVED, DEERSKIN TRADING POST, INC., a Nevada
corporation having an office at 725 Dell Road, Carlstadt, New Jersey,
07072 (collectively the "Payor"), promises to pay to the order of
UNITED JERSEY BANK, a state banking association organized under the
laws of the State of New Jersey (the "Bank" or "Holder"), its
successors and assigns, at its offices at 210 Main Street, Hackensack,
New Jersey 07602, or at such other address as Holder shall notify
Payor in writing, the principal sun of FOUR MILLION ($4,000,000.00)
DOLLARS or so much thereof as shall have been advanced to Payor
pursuant to the Loan Agreement (as defined below), together with
interest on the unpaid principal balance, payable as provided below.
1. Subject to Loan Documents.
(a) The obligations of the Payor under this Note are secured
by the "Collateral", as such term is defined in the Line of Credit
Loan and Security Agreement entered into between the Bank and Payor on
March 10, 1992, as amended and modified by: (i)that certain First
Amendment to the Line of Credit Loan and Security Agreement dated as
of September 1, 1992, (ii)that certain Second Amendment to Line of
Credit Loan and Security Agreement dated as of October 30, 1992, (iii)
that certain Third Amendment to Line of Credit Loan and Security
Agreement dated as of November 30, 1992, (iv) that certain Fourth
Amendment to Line of Credit Loan and Security Agreement dated as of
March 11, 1993, (v) that certain Fifth Amendment to Line of Credit
Loan and Security Agreement dated as of August 27, 1993, (vi) that
certain Sixth Amendment to Line of Credit Loan and Security Agreement
dated as of October 29, 1993, (vii) that certain Seventh Amendment to
Line of Credit Loan and Security Agreement dated as of May 31, 1994,
(viii) that certain Eighth Amendment to Line of Credit Loan and
Security Agreement dated as of August 31, 1994, (ix) that certain
Ninth Amendment to Line of Credit Loan and Security Agreement dated as
of August 31, 1995, (x) that certain Tenth Amendment to Line of Credit
Loan and Security Agreement dated as of October 31, 1995 and (xi) that
certain Eleventh Amendment to Line of Credit Loan and Security Agreement
dated as of the date hereof (collectively the "Loan Agreement").
(b) The terms and provisions of the Loan Agreement and
all other documents and instruments referred to therein or executed and
delivered pursuant thereto are incorporated herein by reference (all
of the foregoing are hereinafter collectively referred to as the "Loan
Documents").
2. Rate of Interest. The principal amount outstanding under
this Note shall bear interest at the Bank's Base Rate plus three
quarters of one percent (.75%) on a floating basis. The Bank's Base
Rate of interest is the rate of interest adopted by the Bank from time
to time. The Base Rate is a means of pricing some loans to customers
of the Bank. The Base Rate is not tied to any external rate of
interest actually charged at any given time by the Bank to any
particular class or category of customers of the Bank. Interest shall
be computed on the basis of the actual number of days elapsed over a
period of 360 days.
3. Repayment. Principal and interest shall be paid during the
term of this Note in the following manner:
(a) Payor shall make consecutive monthly payments of
interest at the Bank's Base Rate plus three quarters of one percent
(.75%) on a floating basis on the principal balance outstanding under
this Note commencing April 1, 1996, and on the first (1st) day of each
and every month thereafter.
(b) Payor shall make a final payment of the entire unpaid
principal balance and accrued interest under this Note and all other
costs, expenses and charges of any nature whatsoever due or assessable
hereunder on August 31, 1996 (the "Maturity Date").
(c) Except with respect to the payment due on the Maturity
Date, as set forth above, upon the failure of Payor to make any payments
hereunder within ten (10) days of the date when due, Payor shall pay a late
payment charge on all amounts overdue in an amount equal to five (5%) percent
of the overdue amount (but in no event less than $25.00 nor more than
$2,500.00).
4. Event of Default. The following shall constitute an Event of
Default under this Note:
(a) Failure to make any interest payments required hereunder
within five (5) days of the date when due.
(b) Failure to make any principal payments required
hereunder on the date when due.
(c) The occurrence of any Event of Default under any of the
Loan Documents.
5. Acceleration Upon Default. Upon the occurrence of a Default,
the entire unpaid principal balance of this Note together with accrued
interest shall, at the option of Holder, immediately become due and
payable without notice or demand. Upon acceleration by Holder as
herein above provided, all amounts due hereunder, whether principal,
interest or otherwise, which have not been paid as of the date of such
acceleration, shall bear interest from such date to the date payment
in full is received by Holder at the rate of interest set forth in
this Note plus five (5%) percent per annum, instead of the rate
established in Paragraph 2 of this Note.
6. Cumulative Remedies; Waivers by Payor. No remedy referred to
herein is intended to be exclusive, but each shall be cumulative and
in addition to any other remedy above or otherwise available to the
Holder under any of the Loan Documents, at law or in equity. Payor
hereby waives presentment, demand for payment, protest and notice of
dishonor of the Note and all other notices and demands. Trial by jury
is also waived.
7. Non-Waiver. Failure to insist on the strict performance of
any or all of the terms, provisions, and covenants contained in this Note
shall not be construed as a waiver or relinquishment for the future of any
term, provision or covenant herein.
8. Collection Fees. If suit is brought to collect this Note of
any part hereof, Payor expressly agrees to pay all of Holder's reasonable
costs and expenses of collection, including reasonable attorneys' fees.
9. Prepayment. This Note may be prepaid in full or in part at
any time without penalty.
10. Usury. All provisions of this Note and the Loan Documents
are expressly subject to the condition that in no event, whether by
reason of acceleration of maturity of the indebtedness evidenced
hereby or otherwise, shall the amount paid or agreed to be paid to the
undersigned hereunder and deemed interest under applicable law exceed
the maximum rate of interest on the unpaid principal balance of this
Note allowed by applicable law (the "Maximum Allowable Rate"), which
shall mean the law in effect on the date of this Note, except that if
there is a change in such law which results in a higher Maximum
Allowable Rate being applicable to this Note, then this Note shall be
governed by such amended law from and after its effective date. In
the event that fulfillment of any provision of this Note or the Loan
Documents results in the interest rate hereunder being in excess of
the Maximum Allowable Rate, the obligation to be fulfilled shall
automatically be reduced to eliminate such excess. If, notwithstanding
the foregoing, the Bank or any other holder of this Note receives an
amount which under applicable law would cause the interest rate hereunder
to exceed the Maximum Allowable Rate, the portion thereof which would be
excessive shall automatically be applied to and deemed a prepayment of
the unpaid principal balance of this Note and not a payment of interest.
11. Governing Law. This Note shall be governed by and construed
in accordance with the laws of the State of New Jersey.
12. Promissory Note. This Note amends and restates the
Promissory Note dated March 10, 1992 as amended and modified by
(i)that certain First Modification of Promissory Note dated as of
September 1, 1992, (ii) that certain Second Modification of Promissory
Note dated as of October 30, 1992, (iii) that certain Third
Modification of Promissory Note dated as of November 30, 1992, (iv)
that certain Restated Promissory Note dated as of March 11, 1993, (v)
that certain Second Restated Promissory Note dated as of August 27,
1993, (vi)that certain First Modification of Second Restated
Promissory Note dated as of October 29, 1993, (vii) that certain
Second Modification of Second Restated Promissory Note dated as of May
31, 1994, (viii) that certain Third Modification of Second Restated
Promissory Note dated as of August 31, 1994, (ix) that certain Fourth
Modification of Second Restated Promissory Note dated as of August 31,
1995, and (x) that certain Fifth Modification of Second Restated
Promissory Note dated as of October 31, 1995. This Note is the "Note"
referred to in Section 2.3 of the Loan Agreement.
IN WITNESS WHEREOF, Payor has duly executed this Note the day and
year first above written.
ATTEST: DEERSKIN TRADING POST, INC.
/s/ AUDREY REMES By: /s/ MARTIN FOX,
AUDREY REMES MARTIN FOX
Chairman
ANNUAL REPORT
For the Fiscal Year Ended
April 30, 1996
Consolidated Financial Statements of
INITIO, INC.
and Subsidiary
2500 Arrowhead Drive Carson
City, Nevada 89706
Phone: (702) 883-2711
Subsidiary of Initio, Inc.:
Percentage of
Subsidiary Ownership
Deerskin Trading Post, Inc. 100 %
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Report of Independent Public Accountants 3
Consolidated Statements of Operations -
Years ended April 30, 1996 and 1995 4
Consolidated Balance Sheets-
As of April 30, 1996 and 1995 5
Consolidated Statement of Stockholders' Equity-
Years ended April 30, 1996 and 1995 6
Consolidated Statements of Cash Flows-
Years ended April 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8 - 12
Page 2 of 12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Initio, Inc.:
We have audited the accompanying consolidated balance sheets of Initio, Inc.
(a Nevada corporation) and subsidiaries as of April 30, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. 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 presently fairly,
in all material respects, the financial position of Initio, Inc. and
subsidiaries as of April 30, 1996 and 1995 and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
July 24, 1996
Arthur Andersen LLP
New York, New York
INITIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended
April 30, 1996 April 30, 1995
NET SALES $12,404,850 $19,473,151
COSTS AND EXPENSES
Cost of Merchandise Sold 4,438,879 6,927,104
Advertising 4,628,286 7,004,710
---------- ----------
GROSS MARGIN 3,337,685 5,541,337
General & Administrative
(including Fulfillment) 4,358,171 5,777,402
---------- ----------
OPERATING LOSS (1,020,486) (236,065)
OTHER EXPENSE
Interest Expense net of Interest Income of
$71,375 and $116,517 for the years ended
April 30, 1996 and 1995, respectively (305,627) (172,289)
Gain on Marketable Securities 129,230 194,898
Other Income 0 750
---------- ----------
Total Other Expense (176,397) 23,359
---------- ----------
Net Loss Before Provision for Income Tax and
Cum. Effect of Change in Accounting Principle (1,196,883) (212,706)
Provision For Income Tax (Note 4) (523,000) 0
Cumulative Effect of Change in Accounting Principle 0 38,403
---------- ----------
NET LOSS ($1,719,883) ($174,303)
---------- ----------
Earnings (Loss) per Share (Note 1(k)):
Net Loss Before Cumulative Effect of Change
in Accounting Principle ($0.37) ($0.05)
Cumulative Effect of Change in Accounting Principle $0.00 $0.01
----------- -----------
Loss per Common Share ($0.37) ($0.04)
=========== ===========
Weighted Average Shares 4,676,445 4,437,541
=========== ===========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
Page 4 of 12
INITIO, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS April 30, 1996 April 30, 1995
- ------ -------------- --------------
CURRENT ASSETS:
Cash $ 461,917 $ 617,768
Marketable Securities 721,238 745,750
Inventory 3,740,869 4,827,304
Prepaid Advertising 237,837 320,049
Assets Held for Sale (Note 10) 324,953 324,953
Prepaid and Other Current Assets 637,237 894,394
---------- -----------
Total Current Assets 6,124,051 7,730,218
FIXED ASSETS, at Cost (Note 3) 2,932,253 2,302,914
Less: Accumulated Depreciation and Amortization 941,582 1,085,564
---------- -----------
1,990,671 1,217,350
TRADE NAMES, CUSTOMER LISTS, AND RELATED
INTANGIBLE ASSETS 1,462,872 1,462,872
Less: Accumulated Amortization 118,858 82,287
---------- -----------
1,344,014 1,380,585
FUTURE FEDERAL INCOME TAX BENEFITS (Note 4) 0 523,000
OTHER ASSETS 11,174 15,404
---------- -----------
TOTAL ASSETS $9,469,910 $10,866,557
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under Line of Credit (Note 7) $2,600,000 $3,000,000
Accounts Payable 417,038 401,319
Accrued Expenses & Other Current Liabilities 184,209 476,212
Customers' Unshipped Orders 64,814 89,025
---------- ----------
Total Current Liabilities 3,266,061 3,966,556
Mortgage Payable (Note 8) 950,679 0
---------- ----------
TOTAL LIABILITIES $4,216,740 $3,966,556
Commitments (Note 6)
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value,
Authorized, 10,000,000 shares; Issued
5,071,535 and 5,063,316 shares at
April 30, 1996 and 1995, respectively $ 50,715 $ 50,633
Additional Paid-In Capital 8,670,283 8,656,907
Accumulated Deficit (2,996,761) (1,276,878)
Treasury Stock, at Cost, 391,871
shares at April 30, 1996 and 1995 (476,781) (476,781)
Unrealized Gain (Loss) on Marketable Securities 5,714 (53,880)
---------- -----------
TOTAL STOCKHOLDERS' EQUITY $5,253,170 $6,900,001
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,469,910 $10,866,557
========== ===========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
Page 5 of 12
<TABLE>
INITIO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Unrealized
COMMON STOCK Additional Treasury (Loss) on
Shares Par Paid-In Accumulative Shares Marketable
Issued Value Capital (Deficit) (at Cost) Securities TOTAL
---------- ------- ---------- ------------ ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 30, 1994 14,778,316 $47,783 $8,079,757 ($1,102,575) ($476,781) $0 $6,548,184
Options Exercised 285,000 $2,850 $532,150 $535,000
Options Issued $45,000 $45,000
Net (Loss) for the Year
Ended April 30, 1995 ($174,303) ($174,303)
Unrealized (Loss) on
Marketable Securities ($53,880) ($53,880)
---------- ------- ---------- ------------ ---------- --------- -----------
BALANCE, April 30, 1995 15,063,316 $50,633 $8,656,907 ($1,276,878) ($476,781) ($53,880) $6,900,001
Options Exercised 600 $6 $594 $600
Stock Issued 7,619 $76 $12,782 $12,858
Net (Loss) for the Year
Ended April 30, 1996 ($1,719,883) ($1,719,883)
Unrealized Gain on
Marketable Securities $59,594 $59,594
---------- ------- ---------- ------------ ---------- --------- -----------
BALANCE, April 30, 1996 15,071,535 $50,715 $8,670,283 ($2,996,761) ($476,781) $5,714 $5,253,170
========== ======= ========== ============ ========== ======== ===========
<S>
The accompanying notes to the consolidated financial statements are an integral part of these statements.
Page 6 of 12
</TABLE>
INITIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
April 30, 1996 April 30, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($1,719,883) ($174,303)
Adjustments to Reconcile Net Loss to Net Cash
Used In Operating Activities:
Cumulative Effect of Accounting Change 0 (38,403)
Decrease in Future Tax Benefit 523,000 0
Depreciation and Amortization 236,589 215,694
Amortization of Discount on Debenture 0 11,111
Compensation Paid With Common Stock 12,858 $0
Gain on Marketable Securities (129,230) (194,898)
Decrease (Increase) in:
Inventory 1,086,435 (44,285)
Prepaid Advertising 82,212 130,251
Prepaid and Other Assets 261,387 46,704
(Decrease) Increase in:
Accounts Payable, Accrued Expenses
and Other Current Liabilities (276,284) 52,908
Customers' Unshipped Orders (24,211) (54,506)
----------- -----------
Net Cash Provided By (Used In) Operating Activities $52,873 ($49,727)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures ($973,339) ($313,821)
Purchase of Marketable Securities (617,122) (348,353)
Proceeds Rec'd from Sale of Marketable Securities 830,458 367,299
----------- -----------
Net Cash (Used In) Investing Activities ($760,003) ($294,875)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Subordinated Debenture $0 ($1,000,000)
Net Borrowings under Line of Credit (400,000) 1,000,000
Mortgage 950,679 0
Issuance of Common Stock 600 535,000
----------- -----------
Net Cash Provided By Financing Activities $551,279 $535,000
----------- -----------
NET INCREASE (DECREASE) IN CASH ($155,851) $190,398
CASH, AT BEGINNING OF PERIOD $617,768 427,370
----------- -----------
CASH, AT END OF PERIOD $461,917 $617,768
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $377,002 $288,806
=========== ===========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
Page 7 of 12
INITIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) NATURE OF BUSINESS - Initio, Inc., a Nevada Corporation, (the
"Company") and its wholly-owned subsidiary, Deerskin Trading Post, Inc. is a
direct mail specialty catalog company. It markets men's and women's
leather outerwear, apparel, footwear, accessories and small leather goods
through its Deerskin Catalogs and gifts and housewares through its Joan Cook
Housewares Catalogs. The Company also operates one retail closeout outlet
in Danvers, Massachusetts. The Deerskin Catalog business is highly seasonal
with principal sales occurring between early November and early December.
The Joan Cook line is significantly less seasonal although the Company
experiences some increase in demand in the holiday season.
(b) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Initio, Inc.,
and its wholly-owned subsidiary, Deerskin Trading Post, Inc. All intercompany
transactions have been eliminated.
(c) 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 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.
(d) REVENUE RECOGNITION
Revenue is recognized as merchandise is shipped to customers. Payments
received for merchandise not yet shipped are reflected as "Customers'
Unshipped Orders," a current liability.
The Deerskin and Joan Cook catalogs have significantly different refund rates
which relate to the size, color, fit and items damaged in transit of the
merchandise sold. In each period, the Company accrues a reserve for returns
and exchanges which it anticipates will occur related to the sales of the
period. Such accrual is based upon the Company's historical experience.
Revenue on retail sales is recognized at the point of sale.
(e) PREPAID ADVERTISING
Costs of producing and mailing catalogs are deferred and amortized over the
estimated productive life of each mailing based on projected sales. As
prescribed under SOP 93-7, the Company only capitalizes as assets those
costs which are incremental direct costs with independent third parties and
payroll and payroll-related costs of employees who are directly associated
with, and devote time to, the advertising. In addition, individual
advertising efforts are established as stand alone cost pools which are
amortized on a cost pool basis over the estimated period of benefit
determined based upon estimated future revenues. As required, the Company
assesses the realizability of the assets created based on the likelihood of
achieving the estimated revenues on a quarterly basis. As of April 30, 1996
no writedowns were required to report the capitalized advertising expenses at
net realizable value. Prepaid advertising includes costs incurred for
catalogs to be mailed in the future. Catalog and space advertising costs
associated with test programs are expensed as incurred.
Advertising costs related to non-test space promotions are initially
deferred, then expensed to the extent of gross profits realized until fully
recovered; therefore, only after advertising costs have been fully recovered,
does a particular promotion make any contribution to operating income.
Deferred costs are reviewed quarterly for recoverability and adjusted, if
necessary.
(f) INVENTORY
Merchandise inventory is valued at the lower of cost or market, using the
first-in, first-out (FIFO) cost method.
Included in inventory costs are certain costs involved in the preparation,
maintaining and storing of the inventory for sale. These costs are
calculated as a percentage of inventory and are reviewed and monitored
periodically.
(g) FIXED ASSETS
Fixed assets are stated at cost and are depreciated by the straight line
method, using estimated useful lives which approximate 40 years for buildings
and 3 to 10 years for equipment.
Improvements to leased premises are amortized over the lesser of their
estimated useful lives or the remaining term of the lease.
Repair and maintenance costs are charged directly to expense. Renewals and
betterments of fixed assets are charged to fixed assets. Upon retirement or
other disposition of property, or when the asset is fully depreciated,
whichever is sooner, the cost and related depreciation or amortization are
removed from the accounts.
Fixed assets held for sale are stated at net book value, which is less than
current fair market value.
(h) INTANGIBLE ASSETS
The Company's policy for measuring impairment of the value of its intangible
assets arising from the acquisition of the Joan Cook catalog is to compare
the sum of expected future cash flows from the catalog's operations over the
remaining amortizable life of such intangible assets with the unamortized
value on its books. If the sum of the expected future cash flows is greater
than the amount of the intangible assets unamortized book value, no
adjustment is required.
Management believes the asset Trade Names, Customer Lists, and Related
Intangible Assets is so interconnected that it cannot reasonably be
separated. This is in accordance with APB Opinion No. 16, "Business
Combinations."
Trade names, customer lists, and related intangible assets are being
amortized on a straight line basis over 40 years based upon the fact that the
Joan Cook name has high consumer recognition and in the opinion of
management constitutes a non-wasting asset.
(i) RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying value. The Company will adopt Statement No. 121 in the
first quarter of 1997 and, based on current circumstances, does not believe
the effect of adoption will be material.
(j) ACCRUED EXPENSES & OTHER CURRENT LIABILITIES
As of April 30, 1995 included in "Accrued Expenses & Other Current Liabilities"
was an amount of $262,818 due to a broker which related to a margin account.
(k) EARNINGS (LOSS) PER SHARE
Earnings (Loss) per share for the periods presented are based on the weighted
average number of common shares outstanding during the period together with
outstanding options and warrants to the extent such are dilutive, assuming
that the exercisable options and warrants discussed in Note 5 had been
exercised at April 30, 1996.
NOTE 2-MARKETABLE SECURITIES
On May 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting For Certain Investments in Debt and Equity
Securities." This Statement requires the classification of debt and equity
securities based on whether the securities will be held to maturity, are
considered trading securities or are available for sale. Classification
within these categories may require the securities to be reported at their
fair market value with unrealized gains and losses included either in current
earnings or reported as a separate component of stockholders' equity,
depending on the ultimate classification. The adoption of this Statement,
which classified all marketable securities as available for sale, resulted in
a cumulative effect of change in accounting principle of $38,403 for the year
ended April 30, 1995.
At April 30, 1996, unrealized gains on marketable securities amounted to
$5,714 and at April 30, 1995, unrealized losses were $53,880.
NOTE 3-FIXED ASSETS
April 30, 1996 April 30, 1995
Building & Other Leasehold Improvements $2,225,810 $1,274,240
Construction in Progress 0 114,520
Equipment 706,443 914,154
---------- ----------
2,932,253 2,302,914
Less: Accumulated Depreciation
and Amortization 941,582 1,085,564
---------- ----------
$1,990,671 $1,217,350
========== ==========
When an asset is fully depreciated, its cost and related depreciation or
amortization is removed from the fixed assets accounts. During the fiscal
years ended April 30, 1996 and April 30, 1995, the Company removed
approximately $344,000 and $582,000, respectively, of fully depreciated and
fully amortized assets from the related fixed asset and accumulated
depreciation and amortization accounts.
NOTE 4-INCOME TAXES
Under the liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes of changes in tax rates is
recognized as income in the period .
At April 30, 1996, the Company has available for federal income tax
purposes, net operating loss carryforwards (NOL) and other net future tax
deductions totaling approximately $3,300,000; approximately $63,000 of the
NOL expires in 2004, the balance thereafter.
The future tax benefit of such NOL should be recorded as an asset to the
extent that management assesses the realization of such future tax benefits
to be "more likely than not." During the fiscal year ended April 30, 1996,
the Company reassesed the future realization of the NOL and concluded that it
is uncertain whether the $1,500,000 previously benefited will be realized.
This resulted in a provision of $523,000.
NOTE 5 - COMMON STOCK
The Company issued in September 1992, a subordinated debenture for
$1,000,000 together with warrants to purchase, on or before September 23,
1997, 75,000 shares of the Company's common stock at $2.25 per share.
In December 1991, the Company adopted a stock option plan which provides for
the issuance of either incentive or non-qualified options to officers,
directors and other key employees for up to 350,000 shares of the Company's
common stock.
During the fiscal year ended April 30, 1995, the Company committed to grant
a key employee incentive stock options to purchase 200,000 shares of its
common stock at the then current market price of $2.375 per share under this
plan. In September 1995, the employee's relationship with the Company was
discontinued and as part of the settlement of the Company's obligation to
such employee, the options were cancelled and the Company issued 7,619 shares
of common stock which the Company valued at $12,858 and expensed during the
current period; this amount is included in "General & Administrative"
Expenses.
In April 1996 the Company granted two officers/directors options, exercisable
immediately and expiring in five years, to each purchase 125,000 shares of
the Company's common stock at $2.00 per share.
Incentive options must be at not less than current fair market value at the
date of grant, are exercisable to the extent of 20% of the optioned shares on
date of grant with an additional 20% becoming exercisable on each subsequent
anniversary of such date and expire after six years.
Activity under the Company's stock option plan during the fiscal year ending
April 30, 1995 through April 30,1996 was:
Price Range
Fiscal Year 1995: Shares Of Options
At April 30, 1995:
Outstanding 159,500 $1.00 - $1.875
Exercisable 94,000 $1.00 - $1.875
Exercised 35,000 $1.00
Fiscal year 1996:
At April 30, 1996:
Outstanding 158,900 $1.00 - $1.875
Exercisable 132,300 $1.00 - $1.875
Exercised 600 $1.00
In 1988, the Company granted two key employees non-qualified options to
purchase 32,000 shares of its common stock at $1.00 per share. All of these
options became exercisable at April 30, 1992 and they expire March 1, 1998.
On January 1, 1995 the Company retained Pioneer Capital Corp., as a
consultant, compensating it by granting it an option expiring April 30,
1995, to purchase 250,000 shares of the Company's common stock at $2.00 per
share. This option was exercised in full. This option was valued at $45,000
The Company is expensing this cost over the 18 month term of the agreement.
A total of 671,400 of the Company's common shares (either authorized and
unissued or treasury stock) are reserved for possible issuance upon exercise
of the warrants issued in connection with the sale of the subordinated
debenture (75,000 shares), for the Stock Option Plans (346,400 shares), and
for the options granted to the officers/directors (250,000 shares).
As described in Note 7, Deerskin Trading Post, Inc., signed an agreement with
its bank for a line of credit (the "Agreement"). The Agreement limits the
ability of Deerskin to declare and pay any dividends without the bank's prior
consent.
NOTE 6-COMMITMENTS
(a) LEASES
The Company rents premises for warehousing and administrative purposes.
Future minimum rental payments under noncancelable operating leases,
including ground leases, expiring at various dates through 2037, as of April
30,1996 are as follows:
Year Ending April 30, 1997 $128,206
1998 124,832
1999 70,270
2000 13,650
2001 1,050
Thereafter 44,800
--------
$382,808
Rent expense for the fiscal years 1996 and 1995 was $117,764 and $119,649,
respectively.
(b) LETTERS OF CREDIT
Outstanding letters of credit, issued primarily for imported merchandise,
approximated $586,000 and $700,800 at April 30,1996 and April 30, 1995,
respectively.
NOTE 7 - SHORT TERM BORROWINGS
On September 7, 1994, Deerskin Trading Post, Inc., signed an agreement with
United Jersey Bank ("the Bank") for a line of credit of $6,000,000 less
amounts subject to letters of credit issued by the Bank on its behalf,
secured by its assets, guaranteed by the Company, maturing August 31, 1995,
and bearing interest at the Bank's base rate plus 1/2% with interest payable
monthly. This loan required a 30 consecutive day "clean up" requirement
which the Company met in the quarter ended January 31, 1995. This loan was
extended until August 31, 1996 with no change in the terms and conditions.
The Company failed in the period ended January 31, 1996 to meet this
requirement and United Jersey Bank waived the default in consideration of a
reduction in the line of from $6,000,000 to $4,000,000 and an increase in the
interest rate by 1/4%. The Company signed this agreement, maturing August
31, 1996, with the Bank on March 15, 1996. The Company anticipates this will
be sufficient to meet its capital requirements through the maturity date of
the loan.
Direct borrowings under this line of credit amounted to $2,600,000 and
$3,000,000 at April 30, 1996 and April 30, 1995, respectively. The
Company's interest rates at April 30 1996 and 1995 were 8.75% and
9 1/2%, respectively.
NOTE 8 - MORTGAGE
On March 20, 1995 Deerskin Trading Post, Inc. signed an agreement with
Sierra Bank of Nevada for a $1,000,000 construction loan to finance the
approximately 34,800 sq. ft. expansion of its Carson City warehouse which was
put into service in October 1995. This loan is secured by the Carson City
real property and bears interest at 9 1/4% per annum with interest paid
monthly through October 1995 at which time it converted to a five year
adjustable rate (with the first rate adjustment possible in October 2000)
fifteen year mortgage with monthly principal and interest payments due to
fully amortize the loan by August 31, 2010. Borrowings amounted to
$1,000,000; the current portion, $33,806 of the mortgage is included in
"Accrued Expenses and Other Liabilities."
NOTE 9 - RELATED PARTY TRANSACTIONS
As of April 30, 1996, the Company held a 6% $80,000 demand note from an
officer/director. This amount is included in "Prepaid and Other Current
Assets."
NOTE 10 - SUBSEQUENT EVENT
As of July 1, 1996 the Company entered into an agreement for the sale of the
Peabody facility at a price which represents a gain of approximately
$275,000. It is anticipated that the closing will take place in the fourth
quarter of the fiscal year ended April 30, 1997, at which time the Company
will recognize the gain and will review the need for a reserve for the costs
associated with the relocation of the Peabody operations, which will take
place subsequent to the closing. Since this agreement is conditioned upon
the purchaser obtaining building permits, among other things, there can be no
assurance that such conditions will be met.
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1996
<PERIOD-END> APR-30-1996
<CASH> 461,917
<SECURITIES> 721,238
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 3,740,869
<CURRENT-ASSETS> 6,124,051
<PP&E> 2,932,253
<DEPRECIATION> 941,582
<TOTAL-ASSETS> 9,469,910
<CURRENT-LIABILITIES> 3,266,061
<BONDS> 0
0
0
<COMMON> 50,715
<OTHER-SE> 5,202,455
<TOTAL-LIABILITY-AND-EQUITY> 9,469,910
<SALES> 12,404,850
<TOTAL-REVENUES> 12,404,850
<CGS> 4,438,879
<TOTAL-COSTS> 13,425,336
<OTHER-EXPENSES> (129,230)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 305,627
<INCOME-PRETAX> 0
<INCOME-TAX> 523,000
<INCOME-CONTINUING> (1,719,883)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,719,883)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
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