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, 1997
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.
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(Name of small business issuer in its charter)
Nevada 22-1906744
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 Arrowhead Drive, Carson City, Nevada 89706
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(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 preceding 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: $12,116,370.
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 of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Shares, $.01 Par Value 4,689,664
- ----------------------------- -------------------------------------------
(Title of Class) (No. of Shares Outstanding at July 23, 1997)
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. During the Fiscal Year Ended April
30, 1996, 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 allow the Company
to provide better customer service and improve productivity in 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
1996 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, 1996.
Loan Agreement with Summit Bank. Pursuant to a Line of Credit Loan
and Security Agreement (the "Loan Agreement") entered into with United Jersey
Bank, now Summit Bank, ("the Bank") on September 7, 1994, the Company's
Deerskin Trading Post subsidiary has a line of credit with the Bank under
which, based on periodic amendments and modifications detailing other terms
and conditions, it may borrow directly or for outstanding letters of credit
issued by the Bank on behalf of Deerskin Trading Post (the "Bank Loan"). 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.
An amendment was signed on January 31, 1997 for a line of $3,300,000
including amounts subject to letters of credit and bears interest at the
Bank's base rate plus 3/4% with interest payable monthly. Maturity is
January 31, 1998. Such agreement contains various formula provisions which
the Company is presently in compliance with.
The Company anticipates this will be sufficient to meet its capital
requirements through the maturity date of the loan.
Borrowings under the Bank Loan, which are used for seasonal working
capital purposes, amounted to $1,850,000 in direct borrowings and $430,000 in
outstanding letters of credit at April 30, 1997.
(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
merchandise shipped were 19.11% for Deerskin and 7.48% for Joan Cook,
respectively.
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". Independent photographers and models are engaged on a contract
basis as needed. The Company believes this combination of in-house 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 1997, the
Company produced three different editions of its Deerskin catalog and made
11 mailings totaling approximately 4,500,000 catalogs. The Deerskin catalog
consists of between 56 and 80 pages and offers approximately 300 items.
During the year, the Company changed the dimensions of the Joan Cook catalog
to coordinate its production and mailing with the Deerskin 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 1997,
the Company produced four editions of its Joan Cook catalog, and made 12
mailings totaling approximately 2,700,000 catalogs. These Joan Cook catalogs
consisted of between 52 and 64 pages and each catalog offered between 260 and
325 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, 1997 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, 1997, contained information with respect to
approximately 4,600,000 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, 1997, the Company earned
$137,000 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, 1997, the Company employed approximately
65 people, approximately 15 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
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Carson City, Nevada Principal Executive Offices; Distribution and
Warehousing
North Bergen, New Jersey 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.
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 23, 1997 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, 1997, 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 years ended April 30, 1997 and 1996 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 inter-
dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions:
Fiscal Year Ended April 30, 1997 April 30, 1996
Bid: Bid:
High Lo High Low
First Quarter 2 1/8 1 5/8 3 1/4 2 5/8
Second Quarter 2 1/8 1 1/2 2 7/8 2
Third Quarter 2 1 1/2 3 1/8 2
Fourth Quarter 1 7/8 1 1/8 2 5/8 2
(b) Number of Holders of Common Stock. As of April 30, 1997 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, 1997
and April 30, 1996.
FINANCIAL CONDITION
The most significant changes in the Company's balance sheet from April 30,
1996 to April 30, 1997 are as follows:
Marketable securities are considered available for sale and are
carried at fair market value. The unrealized holding gains of $150,279 at
April 30, 1997 and $5,714 at April 30, 1996, are excluded from earnings and
reported as a separate component 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 $85,166 to $636,072 at April 30, 1997
from $721,238 at April 30, 1996 as a result of the sale of $1,319,128 of
marketable securities and the resultant gain of $443,685 on the realization
of profits on several security positions which were in the Company's
investments portfolio, offset by the purchase of $645,712 in marketable
securities for the Company's portfolio, and the increase in unrealized
holding gains of $144,565 in the marketable securities for the twelve month
period.
Inventory decreased $493,463 to $3,247,406 from $3,740,869. The
decrease in inventory is attributable to the Company's more aggressive
pricing policy in regard to merchandise in its retail catalog outlet store
and the closeout of its shoe inventory therein.
Prepaid Advertising increased $122,760 to $360,597 at April 30, 1997
from $237,837 at April 30, 1996. This increase is attributable to the
increased circulation in the Joan Cook Summer and Deerskin Spring mailing
schedule and amortization of costs associated with the production and mailing
of these catalogs in the Spring and Summer of calendar year 1997 compared to
the same period in 1996.
Prepaid and Other Current Assets increased $43,711 to $680,948 at
April 30, 1997 from $637,237 at April 30, 1996. This increase is
attributable to an increase of approximately $108,000 in credit card
receivables because of the timing of the Company's annual physical inventory
performed one week earlier this year than in the fiscal year ended April 30,
1996 and an increase in the list rental receivable partially offset by the
repayment of the $80,000 demand note from an officer/director.
Fixed Assets were relatively unchanged increasing $15,074 to
$2,947,327 at April 30, 1997 from $2,932,253 at April 30, 1996.
As of April 30, 1997 the Company has available for federal income tax
purposes net operating loss (hereinafter "NOL") carryforwards and other net
future tax deductions totalling approximately $3,330,000; 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 $750,000 to $1,850,000
at April 30, 1997 from $2,600,000 at April 30, 1996 attributable to savings
in General and Administrative expense including fulfillment as a result of
the benefits of the Company's restructuring of its operations and to a pay
reduction taken by Co-Chief Executive Officers, Messrs. Fox and DeStefano.
Accounts Payable and Accrued Expenses and Other Current Liabilities
were relatively unchanged increasing only $12,062 from $601,247 at April 30,
1996 to $613,309 at April 30, 1997.
Customer's Unshipped Orders decreased $26,662 to $38,152 at April 30,
1997 from $64,814 at April 30, 1996. The decrease is a result of an
improvement in the Company's in-stock position and the timing of the
Company's annual physical inventory.
Cash balances were $300,360 and $461,917 at April 30, 1997 and 1996
respectively. This decrease of $161,557 was the result of all of the
foregoing.
RESULTS OF OPERATIONS
Fiscal Year Ended April 30, 1997 vs. Fiscal Year Ended April 30, 1996.
Net Sales for the fiscal year ended April 30, 1997 totaled $12,116,370,
compared to $12,404,850 for the fiscal year ended April 30, 1996, a decrease
of 2.3% or $288,480. The Company mailed approximately 4,500,000 Deerskin
catalogs in the current fiscal year compared to approximately 4,000,000 in
the fiscal year ended April 30, 1996, an increase of approximately 500,000
catalogs or 12.5%. Deerskin catalog sales increased to $6,971,833 for the
year ended April 30, 1997 from $6,619,338, an increase of $352,495 or 5.3%.
The Company mailed approximately 2,700,000 and 3,390,000 Joan Cook catalogs
in the fiscal years ended April 30, 1997 and 1996 respectively, a decrease of
690,000 catalogs or 20.4% Joan Cook catalog sales decreased to $3,112,672
for the year ended April 30, 1997 from $3,558,143, a decline of $445,471 or
12.5%.
Space sales decreased $195,379 or 11.9%,to $1,450,850 for the year
ended April 30, 1997 from $1,646,229 for the year ended April 30, 1996.
This was a direct result of a decrease in space advertising.
Net sales for the 4th quarter increased to $1,725,468 from $1,666,345
an increase of 3.5% or $59,123, resulting from increased catalog circulation
in the comparable period of the current year.
Cost of merchandise increased as a percentage of net sales to 39.1%
for the year ended April 30, 1997 from 35.8% for the year ended April 30,
1996. The actual cost of merchandise for the year ended April 30, 1997 was
$4,737,716 and $4,438,879 for the comparable period ended April 30, 1996.
The results reflect the overall sales mix during the period; the Joan Cook
catalog and space advertising generally have lower costs of merchandise. The
Company has adopted a more aggressive policy in regard to merchandise in its
retail catalog outlet store which resulted in an increase in the cost of
goods sold in that operation from 55% to 65%. More significantly in the
three months ended October 31, 1996, the Company chose to significantly
reduce its offering in both the catalog and in the store of its men's and
women's shoes, and closed out virtually all its remaining shoe inventory at a
loss of approximately $85,000.
Advertising cost was $4,064,190 or 33.5% of Net Sales for the year
ended April 30, 1997, compared to $4,628,286 or 37.3% of Net Sales for the
year ended April 30, 1996. The decreased Advertising cost as a percentage of
Net Sales resulted from a rollback in the significantly increased paper costs
which the Company and the industry experienced beginning in August 1994 and
more efficient circulation.
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, decreased as a percentage of Net Sales to
30.0% for the year ended April 30, 1997 from 35.1% from the year ended April
30, 1996. During the quarter ended October 31, 1996 and because of the
increased postage and paper costs and the resultant cutback in circulation,
the Company restructured its operations. The reduction in the current year is
primarily attributable to the benefits of the restructuring and $210,000 is
attributable to a pay reduction (in the current period) taken by the Co-Chief
Executive officers, Messrs. Fox and DeStefano.
As a result of all of the foregoing, the Operating Loss for the
fiscal year ended April 30, 1997 was $315,336 compared to $1,020,486 for the
prior year.
Gain on Marketable Securities was $443,685 for the fiscal year ended
April 30, 1997, compared to $129,230 for the fiscal year ended April 30,1996.
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, 1997 was
$252,536 compared to $305,627 for the fiscal year ended April 30, 1996. The
decrease of $53,091 is attributable to reduced borrowing on the line of
credit with Summit Bank.
During the fiscal year ended April 30, 1996 the Company, due to the
uncertainties of future realization, fully offset the April 30, 1996 deferred
tax asset of $523,000 ($0.11 per share) by a valuation allowance.
For the fiscal year ended April 30, 1997 the Company had a net loss
of $124,187 ($0.03 per share) compared to $1,719,883($0.37 per share) for
the fiscal year ended April 30, 1996.
Liquidity, Capital Resources and Cash Flows.
Net working capital, including marketable securities of $636,072,
amounted to $3,048,875 at April 30, 1997, compared to $2,857,790 including
marketable securities of $721,238 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 the term of the loan.
For the fiscal year ended April 30, 1997 cash used in operations was
$33,312 compared to $52,873 provided by operations for the fiscal year ended
April 30, 1996, resulting primarily from operating losses and increases in
prepaid advertising, prepaid expenses and other assets and customers unshipped
orders partially offset by a decrease in inventory. Investing activities
provided $658,342 in the fiscal year ended April 30, 1997 compared to $760,003
in the fiscal year ended April 30, 1996. Year ended April 30, 1996 included
approximately $970,000 capital expenditure for the Carson City warehouse
expansion. Financing activities used $786,587 of cash.
Net cash decreased $161,557 in the fiscal year ended April 30, 1997
compared to a decrease of $155,851 in the fiscal year ended April 30, 1996 as
a result of all these factors.
As described in "Recent Developments - Loan Agreement with Summit
Bank" above, the Company's Deerskin Trading Post subsidiary has a $3,300,000
line of credit with the Bank. As of April 30, 1997, the unused amount of
such line of credit was approximately $1,020,000. As of July 23, 1997, the
unused amount of such line of credit was approximately $725,000. The
maturity date of the line of credit is January 31, 1998. In the event the
Company fails to reach an agreement with the Bank to extend the Company's
line of credit beyond January 31, 1998, the Company would be required to
find alternative sources of financing. 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, following page 17.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During fiscal years 1997 and 1996 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, 65 Chairman of the Board, 1999 1969
Director
Martin Fox, 62 President, Director 1999 1978
Albert P. Brodell, Jr.,74 Secretary, Director 1997 1982
Phillip Langsdorf, 49 Director 1998 1992
Audrey Remes, 52 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 Director of Mail Order for Wolferman's, Inc.
since August, 1996; prior to which and since 1991 he was a Vice President of
White Flower Farms, a direct mail specialty catalog company concentrating on
the marketing of horticultural materials. 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.
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, 1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE
Name and
Principal
Position Year Annual Compensation
- --------------------------- ---- -------------------
Martin Fox, President 1997 $0
1996 $114,000
1995 $153,000
Daniel DeStefano, 1997 $0
Chairman of the Board 1996 $100,800
1995 $153,000
During fiscal year ended April 30, 1997, Messrs. Fox and DeStefano
waived compensation.
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.
The Company has two stock options plans, the 1991 Stock Option Plan (the
"1991 Plan") and the 1996 Stock Option Plan (the "1996 Plan").
The 1991 Plan was approved and adopted in December 1991. Pursuant to the
Plan, a total of 350,000 shares of Common Stock were made available for the
grant of stock options. Under the Company's 1991 Plan, options have been
granted to key employees and directors for terms up to ten years at an
exercise price of not less than the fair value of the shares at the dates of
grant and are exercisable in whole or in part at stated times from the date of
grant. No further grants will be issued under the 1991 Plan. At April 30,
1997, 144,000 options were exercisable with respect to the 1991 Plan.
The 1996 Plan was approved and adopted in October 1996. The Company's plan
authorizes the granting of stock options, the exercise of which would allow
up to an aggregate of 500,000 shares of the Company's common stock to be
acquired by the holders of said options. The awards can take the form of
Incentive Stock Options ("ISOs") or Non-qualified Stock Options ("NQSOs").
Stock Options may be granted to key employees, directors and consultants.
ISOs and NQSOs are granted in terms not to exceed ten years. ISOs granted
under this Plan generally vest 20% immediately upon grant, with an additional
20% vesting on each subsequent anniversary of the grant date. Vesting
requirements other than the aforementioned are set forth by the Board of
Directors when the award is granted. Options may be exercised in whole or
in part. The exercise price of the ISOs is the market price of the Company's
common stock on the date of grant. The exercise price of NQSOs shall be
determined by the Board of Directors when granted. Any plan participant who
is grants ISOs and possesses more than 10% of the voting rights of the
Company's outstanding common stock must have an option price of at least 110%
of the fair market value on the date of grant and the option must be
exercised within five years from the date of grant. Under the Company's 1996
Plan, options have been granted to key employees and directors for terms of
up to ten years, at exercise prices ranging from $1.75 to $2.00 and are
exercisable in whole or in part at stated times from the date of grant up
to four years from the date of grant. At April 30, 1997, 270,086 options
were exercisable under the Company's 1996 Plan.
As of April 30, 1997, options to purchase 505,332 shares of the Company's
Common Stock at exercise prices ranging from $1.00 to $2.375 per share have
been granted under the Plan to 28 employees and directors. None of such
employees are executive officers of the Company, except for Ms. Remes, who
has options to purchase 25,000 shares (all of which are currently exercisable)
at $1.00 per share, 10,000 shares (8,000 of which are currently exercisable)
at $1.875 per share and 9,500 shares (1,900 or which are currently
exercisable) at $1.75 per share, which were granted in February 1992, October
1993 and November 1996 respectively.
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.
Item 11. Security Ownership of Certain Beneficial Owners
and Management.
Security Ownership of Certain Beneficial Owners. The following table
sets forth, as of July 15, 1997, 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 of
Beneficial Owner Of Beneficial Ownership Class
- ----------------------- ----------------------- ----------
Martin Fox
2500 Arrowhead Drive
Carson City, Nevada 89706 1,443,724 (1) 30.0%
Daniel A. DeStefano
2500 Arrowhead Drive
Carson City, Nevada 89706 974,496 (2) 20.2%
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) 6.0%
All Executive Officers and
Directors as a Group (5) 2,573,060 (5) 51.7%
(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
128,578 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 112,138 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 60,940 shares
owned by the Albert Brodell Retirement Trust and 49,000 Shares directly owned
by Mr. Brodell and spouse, a director and the Secretary of the Company, and
34,900 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
Mr. Fox, a director, principal stockholder and the President of the
Company, borrowed 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 was evidenced by a note which, together with interest at a rate of
6% per annum, was payable on demand. Mr. Fox repaid the indebtedness during
the fisal year ended April 30, 1997.
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, 1997.
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 29,1997 INITIO, INC.
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 29,1997
Martin Fox,
President and Director
Date: July 29,1997
Daniel DeStefano,
Chairman of the Board
and Director
Date: July 29,1997
Audrey C. Remes,
Treasurer, Chief
Financial Officer and
Chief Accounting Officer
Date: July 29,1997
Albert P. Brodell, Jr.,
Secretary and Director
Date: July 29,1997
Phillip Langsdorf,
Director
INDEX OF EXHIBITS
Exhibit
Number Description
(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 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
(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, 1996
(h) Loan Agreement dated March 20, 1996 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, 1996
(i) Eleventh Amendment to Line of Credit and Loan
Security Agreement, dated as of March 15, 1997,
between United Jersey Bank and Deerskin Trading Post, Inc.
(j) Third Restated Promissory Note, dated as of March 15, 1997,
between United Jersey Bank and Deerskin Trading Post, Inc.
(k) Fourteenth Amendment to Line of Credit Loan and Security
Agreement, dated as of January 31, 1997, between Summit Bank
and Deerskin Trading Post, Inc.
(l) 1996 Stock Option Plan
(21) List of Subsidiaries -- incorporated by reference to
Exhibit 21 to the SB-2.
ANNUAL REPORT
For the year ended April 30, 1997
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, 1997 and 1996 4
Consolidated Balance Sheets-
As of April 30, 1997 and 1996 5
Consolidated Statement of Stockholders' Equity- 6
Years ended April 30, 1997 and 1996
Consolidated Statements of Cash Flows-
Years ended April 30, 1997 and 1996 7
Notes to Consolidated Financial Statements 8 - 11
Page 2 of 11
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, 1997 and 1996, 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, 1997 and 1996 and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles.
July 28, 1997
Arthur Andersen LLP
New York, New York
INITIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended
April 30, 1997 April 30, 1996
NET SALES $12,116,370 $12,404,850
COSTS AND EXPENSES
Cost of Merchandise Sold $4,737,716 $4,438,879
Advertising $4,064,190 $4,628,286
----------- ----------
GROSS MARGIN $3,314,464 $3,337,685
General & Administrative
(including Fulfillment) $3,629,800 $4,358,171
----------- -----------
OPERATING LOSS ($315,336) ($1,020,486)
OTHER EXPENSE
Interest Expense net of Interest
Income of $68,335 and $71,375
for the years ended April 30, 1997
and 1996, respectively ($252,536) ($305,627)
Gain on Marketable Securities $443,685 $129,230
----------- -----------
Total Other Expense $191,149 ($176,397)
----------- -----------
NET LOSS BEFORE PROVISION FOR INCOME ($124,187) ($1,196,883)
PROVISION FOR INCOME TAX (Note 4) $0 ($523,000)
----------- -----------
NET LOSS ($124,187) ($1,719,883)
=========== ===========
Earnings (Loss) per Share (Note 1(j)):
Loss per Common Share ($0.03) ($0.37)
=========== ===========
Weighted Average Shares 4,681,280 4,676,445
=========== ===========
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
INITIO, INC.
CONSOLIDATED BALANCE SHEETS
April 30, 1997 April 30, 1996
ASSETS
CURRENT ASSETS:
Cash $300,360 $461,917
Marketable Securities $636,072 $721,238
Inventory $3,247,406 $3,740,869
Prepaid Advertising $360,597 $237,837
Assets Held for Sale $324,953 $324,953
Prepaid and Other Current Assets $680,948 $637,237
---------- ----------
Total Current Assets $5,550,336 $6,124,051
FIXED ASSETS, at Cost (Note 3) $2,947,327 $2,932,253
Less: Accumulated Depreciation and
Amortization $1,116,178 $941,582
---------- ----------
$1,831,149 $1,990,671
TRADE NAMES, CUSTOMER LISTS, AND RELATED
INTANGIBLE ASSETS $1,462,872 $1,462,872
Less: Accumulated Amortization $155,430 $118,858
---------- ----------
$1,307,442 $1,344,014
OTHER ASSETS $12,174 $11,174
---------- ----------
TOTAL ASSETS $8,701,101 $9,469,910
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under Line of Credit (Note 7) $1,850,000 $2,600,000
Accounts Payable $458,515 $417,038
Accrued Expenses & Other Current Liabiliti $154,794 $184,209
Customers' Unshipped Orders $38,152 $64,814
---------- ----------
Total Current Liabilities $2,501,461 $3,266,061
Mortgage Payable (Note 8) $914,092 $950,679
---------- ----------
TOTAL LIABILITIES $3,415,553 $4,216,740
Commitments (Note 6)
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value,
Authorized, 10,000,000 shares; Issued
5,081,535 and 5,071,535 shares at April
30, 1997 and 1996, respectively $50,815 $50,715
Additional Paid-In Capital $8,682,183 $8,670,283
Accumulated Deficit ($3,120,948) ($2,996,761)
Treasury Stock, at Cost, 391,871
shares at April 30, 1997 and 1996 ($476,781) ($476,781)
Unrealized Gain on Marketable Securities $150,279 $5,714
----------- ----------
TOTAL STOCKHOLDERS' EQUITY $5,285,548 $5,253,170
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,701,101 $9,469,910
=========== ==========
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
<TABLE>
INITIO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION> UNREALIZED
COMMON STOCK ADDITIONAL TREASURY (LOSS) ON
Shares Par PAID-IN ACCUMULATED SHARES MARKETABLE
Issued Value CAPITAL (DEFICIT) (at Cost) SECURITIES TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
April 30,
1995 5,063,316 $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
5,071,535 $50,715 $8,670,283 ($2,996,761) ($476,781) $5,714 $5,253,170
Stocks
Issued 10,000 $100 $11,900 $12,000
Net (Loss)
for the Year
Ended April 30, 1997 ($124,187) ($124,187)
Unrealized Gain on
Marketable Securities $144,565 $144,565
_________ ______ _________ __________ _________ ________ __________
BALANCE, April
30, 1997
5,081,535 $50,815 $8,682,183 ($3,120,948) ($476,781) $150,279 $5,285,548
========= ======= ========== =========== ========= ======== ==========
<F1>
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
INITIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
April 30, 1997 April 30, 1996
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($124,187) ($1,719,883)
Adjustments to Reconcile Net Loss
to Net Cash Used In Operating Activities:
Decrease in Future Tax Benefit $0 $523,000
Depreciation and Amortization $211,168 $236,589
Directors' Fees Paid With Common
Stock $12,000 $0
Compensation Paid With Common Stock $0 $12,858
Gain on Marketable Securities ($443,685) ($129,230)
Decrease (Increase) in:
Inventory $493,463 $1,086,435
Prepaid Advertising ($122,760) $82,212
Prepaid and Other Assets ($44,710) $261,387
(Decrease) Increase in:
Accounts Payable, Accrued
Expenses and Other
Current Liabilities $12,061 ($276,284)
Customers' Unshipped Orders ($26,662) ($24,211)
Net Cash Provided By (Used In) --------- ---------
Operating Activities ($33,312) $52,873
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures ($15,074) ($973,339)
Purchase of Marketable Securities ($645,712) ($617,122)
Proceeds Received from Sale of
Marketable Securities $1,319,128 $830,458
Net Cash Provided By (Used In) ---------- ---------
Investing Activities $658,342 ($760,003)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings under Line of
Credit ($750,000) ($400,000)
Mortgage ($36,587) $950,679
Issuance of Common Stock $0 $600
Net Cash Provided By Financing --------- --------
Activities ($786,587) $551,279
NET INCREASE (DECREASE) IN CASH ($161,557) ($155,851)
CASH, BEGINNING OF YEAR $461,917 $617,768
--------- ---------
CASH, END OF YEAR $300,360 $461,917
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year
for interest $320,871 $377,002
========= =========
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
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")
through 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, 1997 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, maintenance and storage 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.
Page 8 of 12
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) STOCK BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation". This statement establishes a
fair value based method of accounting for an employee stock option or similar
equity instrument but allows companies to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees".
Companies electing to continue using the accounting under APB Opinion No. 25
must, however, make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting defined in SFAS No.
123 had been applied (Note 5). These disclosure requirements are effective
for fiscal years beginning after December 15, 1995. The Company has elected
to continue accounting for its stock-based compensation awards to employees
and directors under the accounting prescribed by APB Opinion No. 25 and to
provide the disclosures required by SFAS No. 123. As required, the Company
has adopted SFAS No. 123 to account for stock-based compensations awards to
outside consultants.
(j) RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued SFAS 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. Adoption of this statement in the first quarter of
1997 did not have a material effect on the Company's financial position.
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." This statement establishes standards for computing and
presenting earnings per share ("EPS"), replacing the presentation of
currently requird primary EPS with a presentation of Basic EPS. For entities
with complex capital structures, the statement requires the dual presentation
of both Basic EPS and Diluted EPS on the face of the statement of operations.
Under this new standard, Basic EPS is computed based on the weighted average
number of shares actually outstanding during the year. Diluted EPS includes
the effect of potential dilution from the exercise of outstanding dilutive
stock options and warrants into common stock using the treasury stock method.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, and earlier application is not permitted. The
Company does not expect the adoption of this statement to have a material
effect on its financial position or results of operations.
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement establishes standards for
reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. The objective of the statement
is to report a measure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with owners ("comprehensive income"). Comprehensive income is
the total of net income and all other non-owner changes in equity.
(k) EARNINGS (LOSS) PER COMMON SHARE
Earnings (Loss) per common 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, 1997.
NOTE 2-MARKETABLE SECURITIES
On May 1, 1994, the Company adopted SFAS 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.
Page 9 of 12
All marketable securities are classified as available for sale. These
securities are stated at estimated fair value based upon market quotes.
Unrealized gains and losses are computed on the basis of specific
identification and are included as a separate component of Stockholders'
Equity. Realized gains, realized losses, and declines in value, judged to
be other than temporary, are included on the Statement of Operations.
Unrealized gains on marketable securities amounted to $150,279 and $5,714
at April 30, 1997 and 1996, respectively.
NOTE 3-FIXED ASSETS
April 30, 1997 April 30, 1996
Building & Other Leasehold Improvements $2,235,190 $2,225,810
Equipment $ 712,137 $ 706,443
---------- ----------
$2,947,327 $2,932,253
Less: Accumulated Depreciation
and Amortization $1,116,178 $941,582
---------- ----------
$1,831,149 $1,990,671
When an asset is fully depreciated, its cost and related depreciation or
amortization is removed from the fixed assets accounts. During the fiscal
year ended April 30, 1996 , the Company removed approximately $344,000 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, 1997, 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 is 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
reassessed the future realization of the NOL and concluded that it was
uncertain whether the $1,500,000 previously benefited will be realized.
This resulted in a provision of $523,000 for the year ended April 30, 1996.
At April 30, 1997, the deferred tax asset created as a result of net
operating loss carryforwards has been fully reserved against.
NOTE 5 - STOCKHOLDERS' EQUITY
Stock Option Plan -
The Company has two stock option plans, the 1991 Stock Option Plan (the
"1991 Plan") and the 1996 Stock Option Plan (the "1996 Plan"). The
Company accounts for awards granted to employees, directors and key
employees under APB Opinion No. 25, under which compensation cost has
been recognized for stock options granted at an exercise price less than the
market value of the options on the grant date. Had compensation cost for all
stock option grants in fiscal years 1997 and 1996 been determined consistent
with SFAS No. 123, the Company's net loss per share would have been increased
to the following pro forma amounts:
1997 1996
Net loss: As Reported ($124,187) ($1,719,883)
Pro Forma ($148,754) ($1,873,033)
Primary EPS: As Reported ($.03) ($.37)
Pro Forma ($.03) ($.40)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior
to 1995, and additional awards in future years are anticipated.
In April 1996, the Company granted two officers/directors stock 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.
The 1991 Plan was approved and adopted in December 1991. Pursuant to the
1991 Plan, a total of 350,000 shares of CommonStock were made available for
the grant of stock options. Under the Company's 1991 Plan, options have been
granted to key employees and directors for terms of up to ten years at an
exercise price not less than the fair value of the shares at the dates of
grant and are exercisable in whole or in part at stated times from the
date of grant. No further grants will be issued under the 1991 Plan. At
April 30, 1997, 144,400 options were exercisable with respect to the 1991
Plan.
The 1996 Plan was approved and adopted in October 1996, and subsequently
approved by the stockholders.The Company's 1996 Stock Option Plan authorizes the
granting of stock options, the exercise of which would allow up to an aggregate
of 500,000 shares of the Company's common stock to be acquired by the holders of
said options. The awards can take the form of Incentive Stock Options
("ISOs") or Non-qualified Stock Options (NQSOs"). Stock Options may be
granted to key employees, directors and consultants. ISOs and NQSOs are
granted in
Page 10 of 12
terms not to exceed ten years. ISOs granted under this Plan generally vest
20% immediately upon grant, with an additional. 20% vesting on each
subsequent anniversary of the grant date. Vesting requirements other than
the aforementioned are set forth by the Board of Directors when the award is
granted. Options may be exercised in whole or in part. The exercise price
of the ISOs is the market price of the Company's common stock on the date of
grant. The exercise price of NQSOs shall be determined by the board of
directors when granted. Any plan participant who is granted ISOs and
possesses more than 10% of the voting rights of the Company's outstanding
common stock must have an option price of at least 110% of the fair
market value on the date of grant and the option must be exercised within
five years from the date of grant. Under the Company's 1996 Plan,
options have been granted to key employees and directors for terms of up to
ten years, at exercise prices ranging from $1.75 to $2.00 and are
exercisable in whole or in part at stated times from the date of grant up to
four years from the date of grant. At April 30, 1997, 270,086 options were
exercisable under the Company's 1996 Plan.
The following table reflects activity under the plan for the two-year period
ended April 30, 1997.
Year ended Year ended
April 30, 1997 April 30, 1996
Weighted Weighted
Average Exercise Average Exercise
Shares Price Shares Price
Outstanding at -------- ------ -------- --------
beginning of year 408,900 $1.73 359,500 $1.90
Granted 109,802 $1.75 250,000 $2.00
Exercised - - (600) $1.00
Forfeited (8,296) $1.76 - -
Cancelled (5,074) $1.83 (200,000) $2.38
------- ----- --------- -----
Outstanding at
end of year 505,332 $1.74 408,900 $1.73
Exercisable at end of ------- ----- ------- -----
year 414,486 $1.73 382,300 $1.73
------- ----- ------- -----
Weighted average fair
value of options
granted $0.81 $0.94
The fair value of each stock option grant is estimated as of the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions:
1997 1996
Risk-Free Interest Rates 6.4% 5.9%
Expected Lives 4 years 4 years
Expected Volatility 51% 51%
Expected Dividend Yields 0% 0%
The following table summarizes information about stock options outstanding at
April 30, 1997:
Options Outstanding Options Exercisable
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Range of at Remaining Exercise at Exercise
Exercise Prices 4/30/97 Contractual Life Price 4/30/97 Price
$1.00 to $1.50 102,400 0.84 $1.00 102,400 $1.00
$1.51 to $2.38 402,932 8.25 $1.92 312,086 $1.97
$1.00 to $2.27 505,332 6.75 $1.74 414,486 $1.73
Page 11 of 12
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
30,1997 are as follows:
Year Ending April 30,
1998 $124,832
1999 $ 70,270
2000 $ 13,650
Thereafter $ 43,750
--------
$254,602
Rent expense for the fiscal years 1997 and 1996 was $128,933 and $117,764
respectively.
(b) LETTERS OF CREDIT
Outstanding letters of credit, issued primarily for imported merchandise,
approximated $430,000 and $586,000 at April 30,1997 and April 30, 1996,
respectively.
NOTE 7 - SHORT TERM BORROWINGS
On September 7, 1994, Deerskin Trading Post, Inc., signed an agreement with
United Jersey Bank , now Summit Bank ("the Bank"), for a line of credit
secured by the Company's assets and guaranteed by the Company. Periodic
amendments and modifications detail other terms and conditions.
An amendment was signed on January 31, 1997 for a line of $3,300,000
including amounts subject to letters of credit issued by the Bank on the
Company's behalf, and bears interest at the Bank's base rate plus 3/4% with
interest payable monthly. Maturity is January 31, 1998. Such agreement
contains various formula provisions which the Company is presently in
compliance with.
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 $1,850,000 and $2,600,
000 at April 30, 1997 and 1996, respectively. The Company's interest rates
at April 30, 1997 and 1996 were 9.25% and 8.75% 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, $36,850 of the mortgage is included in
"Accrued Expenses and Other Liabilities."
NOTE 9 - RELATED PARTY TRANSACTIONS
The 6% $80,000 demand note from an officer/director included in "Prepaid and
Other Current Assets" at April 30, 1996 was paid during fiscal year ended
April 30, 1997.
Page 12 of 12
EXHIBIT (k)
FOURTEENTH AMENDMENT TO LINE OF CREDIT
LOAN AND SECURITY AGREEMENT
This Fourteenth Amendment to Line of Credit Loan and Security
Agreement (the "Amendment") is dated as of January 31, 1997 by and between
SUMMIT BANK (f/d/a/ 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
2001 Tonnelle Avenue, North Bergen, New Jersey 07047.
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 of Line of Credit Loan and Security
Agreement dated as of October 29, 1993 (the "Sixth Amendment"), that certain
Seventh Amendment of Line of Credit Loan and Security Agreement dated as of
May 31, 1994 (the "Seventh Amendment"), that certain Eighth Amendment of Line
of Credit Loan and Security Agreement dated as of August 31, 1994 (the
"Eight 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"), that certain Eleventh
Amendment of Line of Credit Loan and Security Agreement dated as of March 15,
1996 (the "Eleventh Amendment"), that certain Twelfth Amendment to Line of
Credit Loan and Security Agreement dated as of August 31, 1996 (the "Twelfth
Amendment") and that certain Thirteenth Amendment of Line of Credit Loan and
Security Agreement dated as of November 30, 1996 (the "Thirteenth 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, Tenth Amendment, Eleventh
Amendment, Twelfth Amendment, the Thirteenth Amendment, as hereinafter may be
further amended, 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 ($8,000,000.00) Dollars dated March 11, 1993 (the "Restated
Note"), as restated by that certain Second Restated Promissory Note in the
principal amount of Six Million ($6,000,000.00) Dollars dated 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
certain 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"), as restated by that certain Third Restated Promissory
Note in the principal amount of Four ($4,000,000.00) Million Dollars dated
as of March 15, 1996 (the "Third Restated Note"), as modified by that certain
First Modification of Third Restated Promissory Note dated as of August 31,
1996 (the "First Modification of Third Restated Promissory Note"), and as
modified by that certain Second Modification of Third Restated Promissory
Note as of November 30, 1996 (the "Second Modification of Third Restated
Promissory Note") and as amended and restated by that certain Amended and
Restated Promissory Note dated that date hereof in the principal amount of
$3,300,000.00 (the "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 the Second Restated Note, Fourth Modification of
Second Restate Note, Fifth Modification of Second Restated Note and as
restated by the Third Restated Note and as modified by the First Modification
of Third Restated Note, as modified by the Second Modification of Third
Restated Note and as amended and restated by the Restated Note, and as may
be amended from time to time, is hereinafter referred to as the "Note");
WHEREAS, pursuant to the terms and conditions of the Loan Agreement
and the Note, the entire balance of all principal and interest under the Loan
became due and payable on January 31, 1997;
WHEREAS, the Borrower has requested that the Lender extend the term
of the Loan to January 31, 1988; and
WHEREAS, the Lender is willing to extend the term of the Loan 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 the following terms shall replace the
definition of those terms previously defined in Section 1.1 of the Loan
Agreement:
-2-
"Available Amount Maximum" means, Three Million and 00/100 Dollars
($3,000,000.00) less the aggregate amount of issued and outstanding letters
of credit in excess of $300,000.
"Borrowing Base" means, at any date of determination thereof, an
amount determined by the Lender with reference to the most recent Borrowing
Base Certificate delivered to the Lender to be equal to the the sum of (a)
50% of Eligible Inventory, plus (b) the lesser of (i) 50% of the face amount
of issued and outstanding letters of credit and (ii) the Letter of Credit
Submit and (c) 100% of the Market Value of that portion of the Pledged
Securities deems acceptable to the Lender in its absolute discretion.
"Borrowing Base Certificate" means, the Borrowing Base Certificate
substantially in the Form of Exhibit A1 to be delivered by the Borrower under
the terms of this Loan Agreement.
"Eligible Inventory" means, as of any date of determination thereof,
all inventory of the Borrower as to which the Lender holds a first priority
perfected security interest, provided that such Inventory: (a) is located
in the United States; (b) does not include damaged or defective goods
identified by the Borrower or as determined by the Lender in its sole and
absolute discretion exercised in a commercially reasonable manner;
and (c) does not include consignment goods.
"Letter of Credit Sublimit" means, Six Hundred Thousand ($600,000.00).
"Loan" means, the line of credit established pursuant to Section II
hereof in the principal amount not to exceed Three Million Three Hundred
Thousand ($3,300,000.00).
"Loan Documents" means, collectively this Agreement, as amended by
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 Twelfth
Amendment to Line of Credit Loan and Security Agreement, the Thirteenth
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 Restated Note, the Pledge Agreement the Second
Modification of Second Restated Promissory Note, the Third Modification
-3-
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, the First Modification
Third Restated Promissory Note, the Second Modification of Third Restated
Promissory Note, the Pledge Agreement, and all other agreements, documents,
instruments and certificates executed and delivered or to be executed and
delivered to or for the benefit of the Lender in connection herewith or
therewith.
"Loan Maturity Date" shall mean January 31, 1998."
"Market Value" shall mean the market value of the Pledged Securities
as determined by the Lender.
"Pledged Agreement" means, the Pledge and Security Agreement dated
the date hereof from the Guarantor in favor of the Lender pursuant to which
the Guarantor has pledged the Pledged Securities to secure the Obligations.
"Pledged Securities" shall have the meaning ascribed to that term in
the Pledge Agreement.
3. Section 2.1 of the Loan Agreement is amended to delete section
2.1 in its entirety and replace it with the following new Section 2.1:
2.1 The Loan Advances: Conditions Precedent to Future
Advances.
(a) From time to time, during the period from the date
hereof until the Business Day prior to the Loan Maturity
Date, in the manner hereinafter set forth, the Borrower may
borrow from the Lender under the Loan upon the terms and
conditions contained herein. The Lender will lend to the
Borrower, through one or more Loan Advances, from the date
hereof through and including the Loan Maturity Date an amount
equal to Loan; provided, however the aggregate amount of all
Loan Advances outstanding at any time shall never exceed the
lesser of (x) the Available Amount Maximum or (y) the
Borrowing Base (the "Available Amount"). The proceeds of the
Loan Advances shall be used by the Borrower for general
working capital purposes.
(b) The obligation of the Lender to make any Loan Advance
(other than a Loan Advance made in connection with a letter
of credit issued by the Lender on behalf of the Borrower)
shall be subject to satisfaction of each of the following on
the date of such Loan Advance;
(i) Receipt by the Lender of a written request
for funds by the Borrower;
(ii) Duly executed Borrowing Base Certificate;
(iii) All of the representations and warranties of
the Borrower in the Loan Documents shall be true,
correct and
-4-
complete as though made on and as of the date of the
Loan Advance;
(iv) No event has occurred and is continuing, or
would result from the Loan Advance being made, which
constitutes or would constitute a Default or Event of
Default;
(v) No action shall be pending or threatened
challenging the validity or enforceability of any of
the Loan Documents;
(vi) The Lender shall continue to have a valid and
enforceable recorded and/or perfected first priority
lien and security interest in the Collateral (other
than Collateral subject to Permitted Liens) and no
action or proceeding shall be pending or threatened
challenging or contesting the same;
(vii) The amount of such Loan Advance, when
aggregated with all then outstanding principal amount
under the Loan shall not exceed the Available Amount;
and
(viii) There is and has been no material adverse
change in the financial condition, results of
operation or otherwise of the Borrower which would in
the judgment of the Lender, impair the Borrower's
ability to repay all or any portion of the Note.
(c) If required by the Lender, the Borrower shall have
confirmed such matters by the delivery of one or more
certificates, including without limitation, a
Borrowing Base Certificate, dated the date of such
Loan Advance in form and substance satisfactory to
the Lender.
4. Section 2.4 of the Loan Agreement is amended by deleting it
in its entirety and replacing it with the following new Section 2.4:
2.4 Interest Rate. The Note shall bear interest
from the date hereof 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%). Interest on the principal
outstanding shall be payable on the first day of each
month during the term of this Loan Agreement until
the Loan Maturity Date when all outstanding principal,
accrued and unpaid interest and other charges owing
hereunder shall be due and payable. 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.
5. Section 2.8 of the Loan Agreement is amended to the following
additional paragraph:
Notwithstanding anything thereto the contrary, the Lender
shall not be obligated to issue letters of credit in the
aggregate amount that exceeds the Letter of Credit Sublimit.
-5-
6. Section 3.1(a) of the Loan Agreement is amended to add the
following new Subsection between Subsection 3.1(a)(i) and (ii): "(ia) all
Pledged Securities."
7. All references in the Loan Agreement to the terms "Loan
Maturity Date" or "Maturity Date" shall mean January 31, 1998.
8. Section V of the Loan Agreement is amended to add a section
5.19, which shall read as follows:
5.19 Borrowing Base Certificate and Compliance. On the
tenth business day of each month and prior to each Loan
Advance, the Borrower shall deliver to the Lender a duly
executed Borrowing Base Certificate.
9. All references to the term "Note" in the Loan Agreement
(including Section 2.3) shall be deemed to refer to the Restated
Note and by this reference made a part hereof as fully as if set
forth herein.
10. The Borrower acknowledges and agrees that: (a) as of January
31, 1997, the principal amount outstanding under the Loan was $1,350,000.00
(exclusive of letters of credit); (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.
11. The failure of the Borrower to comply with any term or
provision of this Amendment shall constitute an Event of Default under the
Loan Agreement and Note.
12. The Lender and the Borrower hereby agree and consent to the
terms and provisions of this Amendment and the transactions contemplated
hereby.
13. The Borrower shall pay all of the Lender's costs and expenses
incurred in connection with the preparation, execution and delivery of this
Amendment, including, without limitation, reasonable legal fees and
disbursements of Lender's counsel.
14. Except as expressly otherwise provided herein, the terms of
the Loan Agreement are hereby restated by the Borrower, shall remain in full
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.
15. 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.
16. 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 inure to the benefit of the parties hereto and
their respective successors and assigns.
-6-
IN WITNESS WHEREOF, the undersigned have caused this Fourteenth
Amendment to 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.
SUMMIT BANK
By:
Martin Feig,
Vice President
ATTEST: DEERSKIN TRADING POST, INC.
By:
Martin Fox, Chairman
-7-
EXHIBIT (l)
INITIO, INC.
1996 STOCK OPTION PLAN
1. Purpose of Plan. This 1996 Stock Option Plan (the
"Plan") is designed to assist INITIO, INC. (the "Company") in
retaining the services of key employees, non-employee directors
and such consultants as may be designated and to provide them
with an incentive and inducement to contribute fully to the
further growth and development of the business of the Company and
its subsidiaries.
2. Definitions. In addition to other definitions
contained elsewhere in the Plan, as used in the Plan the
following terms have the following meanings unless the context
otherwise indicates or requires:
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as the same may
from time to time be amended.
"Committee" means the Committee referred to in Section 4 hereof.
"Common Stock" means the Common Stock of the Company, par value
$.01 per share.
"Designated beneficiary" means the person designated by an
optionee to be entitled on his death to any remaining rights
arising out of an option, such designation to be made in
accordance with such regulations as the Committee or Board may
establish.
"Disinterested Person" means "disinterested person" as defined in
Rule 16b-3(c)(i), or any successor provision, promulgated under
the Securities Exchange Act of 1934.
"Fair market value" means the mean between dealer closing "bid"
and "ask" prices on the over-the-counter market on the last day
on which the Company's shares of Common Stock were traded
immediately preceding the date an option is granted pursuant to
the Plan, as reported by the National Association of Security
Dealers Automated Quotation System ("NASDAQ"), or NASDAQ's
successor, or if not reported on NASDAQ, the fair market value of
such Common Stock as determined by the Committee or the Board in
good faith and based on all relevant factors.
"Stock Options" means any stock options granted to an optionee
under the Plan.
"Stock Option Agreement" means a stock option agreement entered
into pursuant to the Plan.
3. Stock Options; Stock Subject to Plan. The stock to
be issued upon exercise of Stock Options granted under the Plan
shall consist of authorized but unissued shares, or of treasury
shares, of Common Stock, as determined from time to time by the
Board. The maximum number of shares for which Stock Options may
be granted under the Plan is 500,000 shares, subject to
adjustment as provided in Section 7. If any Stock Option granted
under the Plan shall expire or terminate for any reason
whatsoever without having been exercised in full, the unpurchased
shares shall become available for new options.
4. Administration.
(a) The Plan shall be administered by a Stock Option
Committee or, if such Committee not be appointed, by the Board.
If the Board administers the Plan, all of the directors acting in
this regard must be Disinterested Persons. For purposes of the
Plan, the Board or its appointed Committee shall be referred to
as the "Committee". The Committee, if any, shall be appointed by
the Board and shall consist of not less than two members, each of
whom is a Disinterested Person. The Board shall fill all
vacancies on the Committee and may remove any member of the
Committee at any time with or without cause, provided that the
Board replaces such member with a Disinterested Person. The
Committee shall select its own chairman and shall adopt, alter or
repeal such rules and procedures as it may deem proper and shall
hold its meetings at such times and places as it may determine.
The Committee shall keep minutes of its meetings and of actions
taken by it without a meeting. A majority of the Committee
present at any meeting at which a quorum is present, or acts
approved in writing by all members of the Committee without a
meeting, shall be the acts of the Committee.
(b) Unless otherwise determined by the Board, the
Committee shall have full and final authority in its discretion,
but subject to the express provisions of the Plan, to
(i) prescribe, amend and rescind rules and regulations relating
to the Plan; (ii) interpret the Plan and the respective Stock
Options; and (iii) make all other determinations necessary or
advisable for administering the Plan. All determinations and
interpretations by the Committee or the Board shall be binding
and conclusive upon all parties. No member of the Committee or
the Board shall be liable for any action or determination made in
good faith in respect of the Plan or any Stock Option granted
under it.
(c) The provisions of this Section 4 shall survive any
termination of the Plan.
5. Terms and Exercise of Stock Option.
(a) Each Stock Option shall terminate no later than
ten years after the date on which it shall have been granted.
The date of termination pursuant to this paragraph is referred to
hereinafter as the "termination date of the option".
(b) Unless otherwise determined by the Committee,
Stock Options shall be exercisable with respect to 20% of the
shares subject to the Stock Option on the date of grant and an
additional 20% on each of the succeeding four anniversaries of
the date of grant. Any shares which may be purchased on any such
date or other period which are not purchased on such date or
other period may be purchased at any time or from time to time
during any subsequent time period during the term of the Stock
Option.
(c) A Stock Option shall be exercised by written
notice to the Secretary or Treasurer of the Company at its then
principal office. The notice shall specify the number of shares
as to which the Stock Option is being exercised and shall be
accompanied by payment in full of the purchase price for such
shares; provided, however, that an optionee at his or her
discretion may, in lieu of cash payment, (i) deliver Common Stock
already owed by him or her, valued at fair market value on the
date of delivery, as payment for the exercise of any Stock Option
or (ii) request that the Company withhold, from the number of
shares of Common Stock that may otherwise be obtained upon the
exercise of the Stock Option, that number of shares having an
aggregate fair market value equal to the Stock Option exercise
price. In the event a Stock Option is being exercised, in whole
or in part, pursuant to Section 6(c) hereof by any person other
than the optionee, a notice of election shall be accompanied by
proof satisfactory to the Company of the rights of such person to
exercise said Stock Option. An optionee shall not, by virtue of
the granting of a Stock Option, be entitled to any rights of a
shareholder in the Company and such optionee shall not be
considered a record holder of shares purchased by him or her
until the date on which he or she shall actually be recorded as
the holder of such shares upon the stock records of the Company.
The Company shall not be required to issue any fractional shares
upon exercise of any Stock Option and shall not be required to
pay to the person exercising the Stock Option the cash equivalent
of any fractional share interest unless so determined by the
Committee.
(d) In the event an optionee elects to deliver Common
Stock already owned by such optionee or to request that Common
Stock be withheld in accordance with subsection (c) above, upon
exercise of a Stock Option granted hereunder, the Company shall
be entitled to require as a condition thereto that the optionee
remit an amount which the Company deems sufficient to satisfy all
Federal, State and other governmental withholding tax
requirements related thereto. The Company shall have the right,
in lieu of or in addition to the foregoing to withhold such sums
from compensation otherwise due to the optionee.
6. Other Stock Option Conditions.
(a) No Stock Option shall be transferred by the
optionee otherwise than by will or by the laws of descent and
distribution. During the lifetime of the optionee the Stock
Option shall be exercisable only by such optionee or by his or
her legal representative.
(b) In the event of the termination of an optionee's
employment by the Company at any time for any reason (excluding
disability or death), his or her option and all rights thereunder
shall be exercisable by the optionee at any time within thirty
(30) days thereafter but in no event later than the termination
date of his or her Stock Option. Notwithstanding the foregoing,
in the event an Optionee is permanently and totally disabled
(within the meaning of Section 105(d)(4), or any successor
section, of the Code), his or her Stock Option and all rights
thereunder shall be exercisable by the optionee (or his or her
legal representative) at any time within six (6) months of
termination of employment, but in no event later than the
termination date of his Stock Option.
(c) If an Optionee shall die while in the employ of
the Company, his or her Stock Option may be exercised by his or
her designated beneficiary or beneficiaries (or if none have been
effectively designated, by his or her executor, administrator or
the person to whom his or her rights under his or her Stock
Option shall pass by will or by the laws of descent and
distribution) at any time within six (6) months after the date of
death, but not later than the termination date of his or her
Stock Option.
(d) Each Stock Option granted pursuant to the Plan
shall be evidenced by a written Stock Option Agreement, duly
executed by the Company and the optionee, in such form and
containing such provisions as the Committee may from time to time
authorize or approve.
7. Adjustments. The Stock Option Agreements shall
contain such provisions as the Committee shall determine to be
appropriate for the adjustment of the kind and number of shares
subject to each outstanding Stock Option, or the Stock Option
prices, or both, in the event of any changes in the outstanding
Common Stock of the Company by reason of stock dividends, stock
splits, recapitalizations, reorganizations, mergers,
consolidations, combinations or exchanges of shares, and the
like. In the event of any such change or changes in the
outstanding Common Stock, and as often as the same shall occur,
the kind and aggregate number of shares available under the Plan
may be appropriately adjusted by the Committee, whose
determination shall be binding and conclusive.
8. Amendment and Termination.
(a) Unless the Plan shall have been otherwise
terminated as provided herein, it shall terminate on, and no
option shall be granted thereunder, after December 31, 2006. The
Board may at any time prior to that date alter, suspend or
terminate the Plan as it may deem advisable. Except as otherwise
hereinafter provided, no alteration, suspension or termination of
the Plan may, without the consent of the optionee to whom any
Stock Option shall have theretofore been granted (or the person
or persons entitled to exercise such Stock Option under
Section 6(c) of the Plan), terminate such optionee's Stock Option
or adversely affect such optionee's rights thereunder.
(b) Anything herein to the contrary notwithstanding,
in the event that the Board shall at any time declare it
advisable to do so in connection with any proposed sale or
conveyance of all or substantially all of the property and assets
of the Company or of any proposed consolidation or merger of the
Company (unless the Company shall be the surviving corporation in
such merger), the Company may give written notice to the holder
of any Stock Option that his or her Stock Option may be exercised
only within thirty (30) days after the date of such notice but
not thereafter, and all rights under said Stock Option which
shall not have been so exercised shall terminate at the
expiration of such thirty (30) days, provided that the proposed
sale, conveyance, consolidation or merger to which such notice
shall relate shall be consummated within six (6) months after the
date of such notice. If such proposed sale, conveyance,
consolidation or merger shall not be consummated within said time
period, no unexercised rights under any Stock Option shall be
affected by such notice except that such Stock Option may not be
exercised between the date of expiration of such thirty (30) days
and the date of the expiration of such six (6) months.
9. Indemnification. Any member of the Committee or the
Board who is made, or threatened to be made, a party to any
action or proceeding, whether civil or criminal, by reason of the
fact that such person is or was a member of the Committee or the
Board insofar as it relates to the Plan shall be indemnified by
the Company, and the Company may advance such person's related
expenses, to the full extent permitted by law and/or the
Certificate of Incorporation of the Company.
10. Effective Date of the Plan. The Plan shall become
effective on the date of adoption by the Board.
11. Expenses. Except as otherwise provided herein for
the payment of Federal, State and other governmental taxes, the
Company shall pay all fees and expenses incurred in connection
with the Plan.
12. Government Regulations, Registrations and Listing of
Stock.
(a) The Plan, and the grant and exercise of Stock
Options thereunder, and the Company's obligation to sell and
deliver stock under such Stock Options, shall be subject to all
applicable Federal and State laws, rules and regulations and to
such approvals by any regulatory or governmental agency as may be
required.
(b) The Company may in its discretion require, whether
or not a registration statement under the Securities Act of 1933
and the applicable rules and regulations thereunder (collectively
the "Act") is then in effect with respect to shares issued upon
exercise of any Stock Option, or the offer and sale of such
shares is exempt from the registration provisions of such Act,
that as a condition precedent to the exercise of any Stock
Option, the person exercising the Stock Option give to the
Company a written representation and undertaking, satisfactory in
form and substance to the Company, that such person is acquiring
the shares for his or her own account for investment and not with
a view to the distribution or resale thereof and otherwise
establish to the Company's satisfaction that the offer or sale of
the shares issuable upon exercise of the Stock Option will not
constitute or result in any breach or violation of the Act or any
similar act or statute or any rules or regulations thereunder.
In the event that a Registration Statement under the Act is not
then in effect with respect to the Common Shares issued upon the
exercise of such Stock Option, the Company may place upon any
stock certificate an appropriate legend referring to the
restrictions on disposition under the Act.
(c) In the event the class of shares issuable upon the
exercise of any Stock Option is listed on any national securities
exchange or NASDAQ, the Company shall not be required to issue or
deliver any certificate for shares upon the exercise of any Stock
Option prior to the listing of the shares so issuable on such
national securities exchange or NASDAQ and prior to the
registration of the same under the Securities Exchange Act of
1934 or any similar act or statute.
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<PERIOD-END> APR-30-1997
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