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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _______________ to _______________
Commission File No. 0-9848
Initio, Inc.
(Name of small business issuer in its charter)
Nevada 22-1906744
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 Arrowhead Drive, Carson City, Nevada 89706
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (702) 883-2711
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.01 par value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section13 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 Net Revenues for its most recent fiscal year: $11,134,000.
State the aggregate market value of the voting stock held by non-affiliates
ofthe registrant: $4,128,476 (based upon the high and low prices of the
registrant's Common Shares, $.01 par value, as of July 24, 1998).
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 4,778,474
(Title of Class) (No. of Shares Outstanding
at July 23, 1998)
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 ofDelaware in 1968 and became a publicly-owned corporation in 1970.
Effective asof 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 media advertising. The Company's "Deerskin" catalogs are
primarilydevoted to the sale of leather goods and the Company's "Joan Cook"
catalogs areprimarily devoted to the sale of housewares and gifts. The
Company's customers are located throughout the United States.
RECENT DEVELOPMENTS
Relocation of Mail Room and Call Center Customer orders for merchandise, by
mail and telephone, during the fiscal year ended April 30, 1998 were
received and processed at the Company's facility in Peabody, Massachusetts. At
the end of May, 1998 the Peabody mail and call center were closed and relocated
to the Company's centralized fulfillment center in Carson City, Nevada. On
December 3, 1997 the Company entered into a Purchase and Sale Agreement with
respect to Company's building at 119 Foster Street in Peabody, Massachusetts
for a sale price of $550,000. In April, 1998 the buyer under that agreement
defaulted and as a consequence the Company, pursuant to the terms of the
Purchase and Sale Agreement, kept the deposit of $52,500 as damages for breach
of contract by the buyer. The Company is presently in discussions with another
potential buyer of the property however, there can be no assurance, that such
negotiations will result in the execution of a Purchase and Sale Agreement and
a subsequent sale of the premises. At the present time the building is
unoccupied. As a consequence of the Company's closing of the Peabody facility
the Company has accrued $47,000 of severance and other "exit" costs at April
30, 1998.
Catalog Close-Out Store. The Company's Catalog Closeout Store which is
presently located in Danvers, Massachusetts has a lease which expires in
the next fiscal year and the Company does not anticipate renewing that lease.
In anticipation of the liquidation an inventory valuation provision of
$564,000 has been included in the results of operation for the year ended
April 30, 1998.
Loan Agreement With Pioneer Ventures Associates Limited Partnership. In
February, 1998 the Company entered into a agreement with Pioneer Ventures
Associates LP providing the Company with up to $5,000,000 in a
subordinated loan with interest at 8% per annum. In February, pursuant to the
terms of that agreement, the Company issued to Pioneer a convertible
subordinated debenture in the principal amount of $3,000,000, convertible at
$3.00 per share, with interest at 8% per annum. These funds were used by the
Company to replace its previously existing line of credit with Summit Bank. At
that time the Company received a commitment for up to an additional $2,000,000
to be used for certain specified purposes.
(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 media
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 media 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
or it, whichever the customer prefers, provided the merchandise is returned
unused and unaltered within one year from the date of shipment. For the year
ended April 30, 1998 the refunds for merchandise shipped were 16.3% for
Deerskin catalog orders and 5.9% for Joan Cook catalog orders, 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.
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 1998, the
Company produced three different editions of its Deerskin catalog and made
11 mailings totaling approximately 3,800,000 catalogs. The Deerskin catalog
consists of between 56 and 84 pages and offers between 290 and 360 items. In
fiscal 1998, 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 52 pages and each catalog offers approximately 300
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 and imported directly by the Company. 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 or imported
directly by the Company. The Company also offers Deerskin and Joan Cook
products through media advertising. The Company endeavors to offer its
customers outstanding selection, quality, value and service.
Deerskin's presently active products are manufactured by approximately
125 suppliers. In excess of 50% of the merchandise sold by Deerskin is
manufacturered in Hong Kong, India and the Peoples Republic of China.
Products offered in Joan Cook catalogs are manufactured by hundreds of
manufacturers. Unlike Deerskin, less than 10%, of the merchandise purchased for
Joan Cook catalogs is purchased outside the United States. Joan Cook has 350
suppliers. No one supplier accounted for more than 10% of the Company's
purchases during the fiscal year ended April 30, 1998 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, 1998, contained information with respect to
approximately 4,500,000 customers. In addition, the Company rents from and
exchanges lists with other direct marketers in an attempt to gain new
customers.
Order Fulfillment and Distribution. Commencing in June 1998 customer
orders are received and processed at the Company's facility in Carson City,
Nevada. Data processing and most 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. 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, if in stock, generally shipped within one business day.
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.
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. The
majority of the 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 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 the Postal
Service, the Company also offers express service to customers (guaranteed three
day delivery) for an additional fee.
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, 1998, the Company employed approximately 50
people, some of whom are part-time or seasonal employees. None of the
Company's employees are covered by collective bargaining agreements. The
Company considers its employee relations to be satisfactory.
Competition. The mail order business is highly competitive. The
Company is not aware of any other mail order catalogs devoted primarily to the
sale of leather goods. There are, however, a number of mail order catalogs
which sell housewares and gifts. The Company competes primarily with other
mail order catalogs and secondarily with retail stores, including specialty
shops and department stores. The Company believes that proper selection of
merchandise, offering the customer the opportunity to purchase such
merchandise at favorable prices and providing the customer with prompt, reliable
and courteous service, are major factors in the successful operation of a mail
order business. There can be no assurance that the Company will be able to
consistently select appropriate merchandise or offer such merchandise at
favorable prices. Many of the Company's competitors have substantially greater
financial resources than the Company.
Item 2. Description of Property.
The Company's operations are conducted in the following facilities:
Location Use
Carson City, Nevada Principal Executive Offices; Order Entry, Data
Processing; Distribution and Warehousing
North Bergen, New Jersey Administrative Offices; Merchandising;
Purchasing; Catalog Production
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.
The Company leases an 11,000 square foot facility located in North
Bergen, New Jersey. 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 approximated $115,000. This lease expires in November
1998.
The Company owns a 45,000 square foot, three-story building in Peabody,
Massachusetts which is held for resale.
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, 1998 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, 1998, 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, 1998 and 1997 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, 1998 April 30, 1997
Bid: Bid:
High Low High Low
First Quarter 2 5/8 1 1/16 2 1/8 1 5/8
Second Quarter 2 11/16 2 1/8 2 1/8 1 1/2
Third Quarter 3 1/16 1 3/4 2 1 1/2
Fourth Quarter 2 15/16 1 11/16 1 7/8 1 1/8
(b) Number of Holders of Common Stock. As of April 30, 1998 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.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Management's Discussion and Analysis of Financial Condition and Results
of Operations, follow page 14.
Item 7. Financial Statements.
Financial Statements, follow page 19.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During fiscal years 1998 and 1997 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, 66 Chairman of the Board, 1999 1969
Director
Martin Fox, 63 President, Secretary,
Director 1999 1978
Michael Bandler, 48 Chief Financial Officer,
Director 2001 1998
James J. Holzinger,* 60 Director 2001 1998
Robert Lerman, 63 Director 2000 1998
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. Holzinger is, since 1996, retired. From 1993 - 1996, he was an
Executive Vice President in the commercial lending department of Summit Bank.
Mr. Lerman became a Director in February, 1998. Since 1998, he has been
president and a Director of Pioneer Ventures Corp. which is the manager
of the general partner of Pioneer Ventures Associates Limited Partnership.
Mr. Lerman is also the President and a Director of Pioneer Partners Corp.,
the general partner of an investment partnership, Bridge Investors I Limited
Partnership for more than five years.
Mr. Bandler became a Director of the Company in October, 1997. He was
appointed Chief Financial Officer in March, 1998. He is a Certified
Public Accountant and for more than five years has been President of Michael
Bandler & Company, a consulting firm.
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.
* Mr. Holzinger is finishing the term of Mr. Phillip Langsdorf who
resigned
as of July 10, 1998.
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,
1998, 1998 and 1996:
SUMMARY COMPENSATION TABLE
Name and
Principal
Position Year Annual Compensation
Martin Fox, President 1998 $1,500
1997 $1,500
1996 $114,000
Daniel DeStefano, 1998 $1,500
Chairman of the Board 1997 $1,500
1996 $100,800
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. Such options were terminated and cancelled as of March 25, 1998,
and on that date the Company granted 250,000 stock options each to Mr. Fox and
Mr. DeStefano at an exercise price of $1.95 pursuant to the Company's 1996
Employee Stock Option Plan. These options are immediately exercisable to the
extent of 20% with an additional 20% exercisable on March 25 each subsequent
year. Neither Mr. Fox nor Mr. DeStefano 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 option plans, the 1991 Stock Option Plan (the
"1991 Plan") and the 1996 Stock Option Plan (the "1996 Plan").
No further grants will be issued under the 1991 Plan. At April
30, 1998, 42,500 options were outstanding exercisable with respect to the
1991 Plan.
Pursuant to the 1996 Plan, 500,000 shares were made available for the
grant of stock options. The awards can take the form of Incentive Stock
Options ("ISOs") or Non-qualified Stock Options (NQSOs") and may be granted to
key employees, directors and consultants, with terms not to exceed ten years.
Options granted under this Plan vest 20% immediately upon grant, with an
additional 20% vesting on each subsequent anniversary of the grant date,
or as set forth by the Board of Directors. 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 and has ranged from $1.75 to
$2.75 per share. The exercise price of NQSOs shall be determined by the board
of directors whengranted. 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. At April 30, 1998, 86,777 options were exercisable under
the 1996 Plan.
As of April 30, 1998, options to purchase 604,442 shares of the
Company's Common Stock at prices ranging from $1.75 to $1.95 were outstanding
under the 1996 Plan.
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, 1998, 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 1,459,588 (1) 30.2%
Daniel A. DeStefano
2500 Arrowhead Drive
Carson City, Nevada 89706 920,010 (2) 19.0%
DeStefano Children Trust
c/o John McConeghy
42 Sterling Lane
Wayne, New Jersey 07470 530,546 (3) 11.1%
Melvyn I. Weiss
One Pennsylvania Plaza
New York, New York 10119 283,650 (4) 5.9%
Pioneer Ventures Associates 1,000,000 (5) 17.3%
Limited Partnership
651 Day Hill Road
Windsor, Connecticut 06095
Robert Lerman 1,019,895 (6) 17.6%
651 Day Hill Road
Windsor, Connecticut 06095
All Executive Officers and
Directors as a Group (5 persons) 3,459,493 (5) 58.8%
(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 50,000 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 50,000 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) Pioneer Ventures Associates Limited Partnership is the owner of a
$3,000,000 convertible subordinated debenture which is convertible into a
maximum of 1,000,000 shares of the Company's common stock.
(6) This amount includes 1,000,000 shares which may be acquired by
Pioneer Ventures Associates Limited Partnership upon conversion of the
convertible Subordinated Debenture due May 1, 20003, (ii) 4,400 shares held by
Robert and Ellen Lerman, (iii) 1,960 and 3,500 shares held by Texas
Enterprises, Inc.. and Pioneer Capital Corp., respectively, of which Mr. Lerman
is the owner of 50% of the issued shares of such corporations, (iv) 9,935
shares held by the Robert A. Lerman Money Pension Plan & Trust, and (v) 100
shares held by Ellen Lerman, his wife. See "Certain Relationships and Related
Transactions."
(7) See footnotes (1), (2) and (6) above. This amount includes 10,000
shares owned by Mr. Holzinger. This amount also includes 5,000 shares which
Mr. Bandler, a Director and Chief Financial Officer of the Company has the
right to acquire pursuant to a currently exercisable stock option.
Item 12. Certain Relationships and Related Transactions
On February 25, 1998, the Company entered into the Debenture Commitment
Agreement with Pioneer Ventures Associates Limited Partnership ("PVALP")
pursuant to which PVALP has agreed to make certain loans to the Company
to be repaid by the Company in accordance with the terms of convertible
subordinated debentures (the "Debentures"). PVALP has initially loaned
$3,000,000 to the Company and the Company has issued the First Subordinated
Debenture due May 1, 2003 (the "First Debenture").
The terms of the First Debenture include the condition that the
principal stockholders of the Company (the "Principal Stockholders"), which
include Mr. DeStefano and Mr. Fox, enter into the Voting Agreement.
The Voting Agreement provides that so long as there is any unpaid
principal amount or interest outstanding under the Debentures or so long as
the conversion shares are held by PVALP, the Principal Stockholders will
vote all of their Common Stock for the election of PVALP's designee as a
director of the Company. Mr. Robert Lerman, a director of the Company is
PVALP's nominee, and the President of Pioneer Ventures Corp., the managing
member of the general partner of PVALP. In addition, in the event of a default
under the Debenture Commitment Agreement, the Principal Shareholders agree to
elect that number of nominees to the Board of directors designated by PVALP
such that the Board of Directors becomes comprised of a majority of nominees of
PVALP. The Principal Shareholders also agree to vote in favor of the PVALP
nominees so long as any interest or principal remains unpaid.
The Voting Agreement also provides that the Principal Shareholders may
not transfer any Common Stock to any affiliate without PVALP's prior written
consent. "Affiliate" is defined in the Voting Agreement as (a) any
spouse, parent, parent-in-law, grandparent, grandchild, sibling, uncle, aunt,
niece, nephew or first cousin of the transferor or (b) any person which the
transferor directly or indirectly controls or (c) any transfer to a person if
the transferor remains a beneficial owner, as that term is used in Section 13
(d) of the Securities Exchange Act of 1934, as amended, of the transferred
shares.
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, 1998.
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: 8/13/98 INITIO, INC.
/s/ Martin Fox
---------------------------
By: Martin Fox, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: 8/13/98 /s/ Martin Fox
----------------------
Martin Fox,
President and Director
Date: 8/13/98 /s/ Daniel DeStefano
----------------------
Daniel DeStefano,
Chairman of the Board
and Director
Date: 8/13/98 /s/ Michael Bandler
----------------------
Michael Bandler,
Treasurer, Chief Financial
Officer and Director
Date: 8/13/98 /s/ Robert A. Lerman
-----------------------
Robert A. Lerman,
Director
Date: 8/13/98 /s/ James J. Holziner
-----------------------
James J. Holzinger,
Director
INDEX OF EXHIBITS
(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) 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
(f) Eleventh Amendment to Line of Credit and Loan Security Agreement,
dated as of March 15, 1998, between United Jersey Bank and Deerskin Trading
Post, Inc.
(g) Third Restated Promissory Note, dated as of March 15, 1998, between
United Jersey Bank and Deerskin Trading Post, Inc.
(h) Fourteenth Amendment to Line of Credit Loan and Security Agreement,
dated as of January 31, 1998, between Summit Bank and Deerskin Trading Post,
Inc.
(i) 1996 Stock Option Plan
(j) Debenture Commitment Agreement, dated as of February 25, 1998, by and
between the Company and PVALP incorporated by reference to Schedule 13D
dated February 25, 1998 filed by Martin Fox.
(k) Convertible Subordinated Debenture due May 1, 2003 incorporated by
reference to Schedule 13D dated February 25, 1998 filed by Martin Fox
(l) Voting Agreement, dated as of February 25, 1998, by and between
PVALP and the Principal Stockholders incorporated by reference to Schedule 13D
dated February 25, 1998 filed by Martin Fox.
(21) List of Subsidiaries -- incorporated by reference to Exhibit 21 to the
SB-2.
Initio, Inc.
Management's Discussion and Analysis of Financial Condition and the
Results of Operations
The following discussion and analysis provides information which
management
believes is relevant to an assessment and understanding of the Company's
results of operations and financial condition. The discussion should be
read in
conjunction with the Company's Financial Statements and Notes thereto.
Management's discussion and analysis contains " forward looking
statements "
about the Company's future prospects. These statements are subject to
risks and
uncertainties which could cause actual results to differ materially from
those
expected by Management. Reader's are therefore cautioned not to rely upon
on
any such forward looking beliefs or judgments in making investment
decisions.
Results of Operation
Gross Shipments, declined in each of the significant areas of the
Company's
business.
Year Ending Year Ending
Gross Shipments April 30th, 1998 April 30th, 1997 Change % Change
Deerskin Catalog $ 7,706,504 $ 8,196,813 ($ 490,309) ( 6.0 )
Joan Cook Catalog 3,128,670 3,289,374 ( 160,704 ) ( 4.9 )
Media Advertising 1,143,638 1,532,040 ( 388,402 ) ( 25.4 )
Retail Closeout 363,873 470,073 ( 106,200 ) ( 22.6 )
Other 361,860 255,095 106,765 41.8
----------- --------- ----------
Total $ 12,704,545 $13,743,395 ( $ 1,038,850 ) (7.5 )
Deerskin catalog circulation was reduced approximately 15 %, to 3,801,000
books this season from 4,470,00 last year, while average response rates
increased approximately 10 % to $2,080 per thousand catalog mailed. Management
believes that this year's result was limited by an unusually warm winter in
many partsof the country.
Joan Cook catalog circulation was increased approximately 2.7 % books this
season to 2,737,000 books from 2,666,000 last year while average response
rates declined approximately 6.4 % to $ 1,130 per thousand catalogs
mailed. Response rates of external lists were particularly adverse.
Media circulation was materially curtailed when results in October and
November 1997 were little better than breakeven. This trend worsened in
January, 1998. The decline in retail closeout gross sales reflects the absence
of a second outlet in the current period, a bulk sale of shoes in the earlier
year and the continuation of a long term decline in the Danvers store's results.
The other category includes list rental income, which increased $ 33,000 or
26.5 % and sales to a supplier who began their own catalog, which increased
$ 73,000 or 56.6 %. The Company has since determined that its' participation
in the suppliers catalog did not meet acceptable profitability standards and
has terminated the relationship.
The Company is having constructed an Internet store at this time and
anticipates the commencement of significant e - commerce in time for this
season's primary selling period.
Customer refunds decreased $ 82,877, or 5.0 %, in the current period but
increased as a percentage of relevant shipments to 12.4%.
Year Ending Year Ending %
Refunds April 30th, 1998 April 30th, 1997 Change Change
Deerskin Catalog $ 1,298,835 $ 1,361,538 ( $ 62,703 ) (4.6 )
Joan Cook Catalog 184,871 176,703 8,168 4.6
Media Advertising 57,886 74,102 ( 16,216 (21.9 )
Retail Closeout 29,409 41,535 ( 12,126 ) (29.2 )
Total $ 1,571,001 $ 1,653,878 ( $ 82,877 ) (5.0 )
Year Ending Year Ending
Refunds as a % of Shipments April 30th, 1998 April 30th, 1997
Deerskin Catalog 16.8 16.6
Joan Cook Catalog 5.9 5.4
Media Advertising 5.1 4.8
Retail Closeout 8.1 8.8
Average 12.4 12.1
As a consequence of the foregoing, the Company's Net Sales declined $955,973,
or 7.9 %.
Year Ending Year Ending %
Net Sales April 30th, 1998 April 30th, 1997 Change Change
Deerskin Catalog $ 6,407,669 $ 6,835,275 ($427,606 ) (6.3 )
Joan Cook Catalog 2,943,799 3,112,671 ( 168,872 ) (5.7 )
Media Advertising 1,085,752 1,457,938 ( 372,186 ) (5.4 )
Retail Closeout 334,464 428,538 ( 94,074 ) (21.9 )
Other 361,860 255,095 106,765 41.8
Total $ 11,133,544 $ 12,089,517 ( $ 955,973 ) (7.9 )
Merchandise cost declined $ 80,186, or 1.7 %, but increased as a percentage of
Net Sales to 41.6 % from 39.0% in the earlier period. In anticipation of a
liquidation of the Danvers retail store inventory, the Company has included
in merchandise a $ 564,000 charge this year. Mitigating this increase has
been a change in the Company's approach to pricing new catalog products,
resulting in increased margins and the reduction in minimal margin retail
closeout sales.
Advertising Costs declined $ 174,002, or 4.2 %, Company wide entirely
because of the decreased circulation of and increased response rates of the
Deerskin catalog.
Year Ending Year Ending %
Advertising costs April 30th, 1998 April 30th, 1997 Change
Change
Deerskin Catalog $ 1,950,821 $ 2,249,204 ( $ 298,383)(13.2 )
Joan Cook Catalog 1,353,149 1,252,336 100,813 8.0
Media Advertising 566,325 551,042 15,283 2.7
Retail Closeout 56,466 48,181 8,285 17.1
Total $ 3,926,761 $ 4,100,763 ( $ 174,002) (4.2 )
Year Ending Year Ending
Advertising costs, as a April 30th, 1998 April 30th, 1997
% of Net Sales
Deerskin Catalog 30.4 32.9
Joan Cook Catalog 46.0 40.2
Media Advertising 52.2 37.8
Retail Closeout 16.8 11.2
Overall 35.3 33.9
Fulfillment, General and Administrative increased $ 130,287, or 3.6 % in
the current period. Several, unusual events are the cause of this change. In
May, 1998, the Company closed its Peabody operation, transferring all
fulfillment processing to Carson City. Exit costs from Peabody, as well as
startup costs in Carson City, have been charged to this year's operations.
Also, in the current period the Company reduced its mail order inventories
causing previously deferred purchasing, processing and warehouse costs
approximating $120,000 to be charged to operations in the fulfillment, general
and administrative category.
Net Interest expense decreased in the later period, reflecting lower
merchandise inventory levels, and hence lower bank borrowings. Gains from
the sale of marketable increased and the Company realized a gain when a
purchaser of the Peabody property failed to consummate the transaction and
forfeited their deposit.
Liquidity and Financial Resources
In February, 1998, the Company issued $ 3,000,000 principal amount of a
five year, 8 % debenture which is convertible into the Company's common stock
at $ 3.00 per share. The Company also obtained a commitment for an additional
$2,000,000 to be used for specified purposes including Internet activities.
In the current period, through careful planning, the Company reduced
inventory levels and as a result bank borrowings. In February, 1998, the
Company completed repayment of its short term borrowings with a portion of
the proceeds from the issuance of the subordinated debenture. The Company has
obtained a new bank facility to permit the issuance of letters of credit for
import purposes.
At April 30th, 1998, the Company's cash balances were $ 2,249,000 and
marketable securities, valued at current market prices, stood at more
than $1,073,000. At the same time, the Company's entire current liabilities
were $430,000.
It is Management's belief that the Company now has available adequate
resources, to conduct its operations, in the coming fiscal year.
Year 2000 Compliance
The Company is presently in the process of evaluating its information
technology for the Year 2000 Compliance. The Company does not expect that
the cost of modification, will be material to the results of operation or
financial condition of the Company. The Company does not anticipate any
material disruption in its operations because of failure of Year 2000
Compliance, and has yet to make inquiry of its significant suppliers or
financial institutions.
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, 1998 and 1997,
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 present
fairly, in all material respects, the financial position of Initio, Inc. and
subsidiary as of April 30, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
July 22, 1998
Arthur Andersen LLP
New York, New York
Initio, Inc.
Consolidated Statement of Operations
For the Year Ended
30-Apr-98 30-Apr-97
Net Sales 11,133,544 12,089,517
Costs and Expenses
Merchandise 4,632,363 4,712,549
Advertising 3,926,761 4,100,763
--------- ---------
8,559,124 8,813,312
--------- ---------
2,574,420 3,276,205
Fulfillment, General and
Administrative 3,703,682 3,573,375
--------- ---------
Operating Loss (1,129,262) (297,170)
Other Income ( Expense )
Interest Income 62,042 43,168
Interest Expense (284,378) (320,870)
Gain on the Sale 498,752 443,685
of Marketable Securities
Other 48,257 7,000
------- -------
324,673 172,983
------- -------
Net Loss (804,589) (124,187)
======= =======
Loss per Common Share
Basic ($0.17) ($0.03)
Diluted ($0.17) ($0.03)
Weighted Average Shares
Basic 4,842,737 4,681,280
Diluted 4,842,737 4,681,280
The accompanying notes are an integral part of these financial
statements.
Initio, Inc.
Consolidated Balance Sheets
As at
30-Apr-98 30-Apr-97
Assets
Current Assets
Cash $2,249,992 $300,361
Marketable Securities 1,073,308 636,072
Inventory 1,790,259 3,247,405
Prepaid Advertising 228,192 360,597
Property Held for Sale 324,953 324,953
Other Current Assets 460,364 680,948
--------- ---------
Total Current Assets 6,127,068 5,550,336
Property and Equipment 3,018,171 2,947,327
Less;Accumulated Depreciation 1,266,561 1,116,178
--------- ---------
Net Property and Equipment 1,751,610 1,831,149
Customer List 1,462,872 1,462,872
Less; Accumulated Amortization 192,003 155,430
--------- ---------
Net Customer List 1,270,869 1,307,442
Other Assets 95,454 12,174
Total Assets $9,245,001 $8,701,101
========= =========
The accompanying notes are an integral part of these financial
statements.
Initio, Inc.
Consolidated Balance Sheets
As at
30-Apr-98 30-Apr-97
Liabilities and Stockholders' Equity
Current Liabilities
Short Term Debt $0 $1,850,000
Accounts Payable 171,498 458,515
Customers' Unshipped Orders 34,121 38,152
Accrued Expenses and Other
Current Liabilities 224,966 154,794
------- ---------
Total Current Liabilities 430,585 2,501,461
Mortgage Payable 874,105 914,092
Subordinated Convertible Debenture 3,000,000 0
Commitments ( see accompanying notes )
Stockholders' Equity
Common Stock, $ .01 par value, Authorized
10,000,000 shares, issued 5,271,935 and
5,081,535 shares respectively 52,719 50,815
Additional Paid In Capital 8,876,678 8,682,183
Accumulated Deficit (3,925,537) (3,120,948)
Unrealized Gain on Marketable Securities 514,406 150,279
--------- ---------
5,518,266 5,762,329
Less; Treasury Stock, 429,398 and 391,871
shares respectively 577,955 476,781
--------- ---------
Total Stockholders' Equity 4,940,311 5,285,548
Total Liabilities and Stockholders'
Equity $9,245,001 $8,701,101
========== =========
The accompanying notes are an integral part of these financial
statements.
Initio, Inc.
Consolidated Statement of Stockholders' Equity
Unrealized
Additional Gain On
Common Paid In Accumulated Treasury Marketable
Stock Capital Deficit Stock Securities
Total
Balance April 30,
1996 50,715 8,670,283 (2,996,761) (476,781) 5,714 5,253,170
Issuance of 10,000
Common Shares to 100 11,900 12,000
Directors
Unrealized Gain 144,565 144,565
Net Loss (124,187) (124,187)
------ --------- --------- ------- ------- ---------
Balance April 30,
1997 50,815 8,682,183 (3,120,948) (476,781)150,279 5,285,548
Issuance of 60,000 Common
Shares to
Employees 600 65,400 66,000
Exercise of Employee Stock
Options for 130,400 Common
Shares 1,304 129,095 130,399
Repurchase of 37,527 Common
Shares from Employees (101,174) (101,174)
Unrealized Gain on Marketable
Securities 364,127 364,127
Net Loss (804,589) (804,589)
------ --------- --------- ------- ------- ---------
Balance April 30,
1998 52,719 8,876,678 (3,925,537)(577,955)514,406 4,940,311
====== ========= ========= ======= ======= =========
The accompanying notes are an integral part of these financial statements.
Initio, Inc.
Consolidated Statement of Cash Flows
For the Year Ended
30-Apr-98 30-Apr-97
Cash Flows from Operating Activities;
Net Loss ($804,589) ($124,187)
Depreciation and Amortization 186,956 211,168
Compensation Paid with Common Stock 60,000 12,000
Gain on the Sale of Marketable Securities (498,752) (443,685)
Decrease ( Increase ) in Current Assets
Inventory 1,457,146 493,463
Prepaid Advertising 132,405 (122,760)
Other Current Assets 180,584 (44,710)
Increase ( Decrease ) in Current Liabilities
Accounts Payable (287,017) 41,477
Customers' Unshipped Orders (4,031) (26,662)
Accrued Expenses and Other Current
Liabilities 70,172 (29,416)
------- ------
Net Cash Provided By ( Used In )
Operating Activities 492,874 (33,312)
Cash Flows from Investing Activities
Purchase of Property and Equipment (70,844) (15,074)
Net Proceeds from Marketable Securities 425,646 673,416
------- -------
Net Cash Provided By
Investing Activities 354,802 658,342
Cash Flows from Financing Activities
Net Repayment of Short Term Debt (1,850,000) (750,000)
Debenture Proceeds 3,000,000 0
Debenture Costs (43,280) 0
Mortgage Repayment (39,987) (36,587)
Sale of Common Stock, Net of Treasury
Stock Repuchase 35,222 0
--------- -------
Net Cash Provided By ( Used In )
Financing Activities 1,101,955 (786,587)
Net Increase ( Decrease ) in Cash 1,949,631 (161,557)
Cash at Start of Year 300,361 461,918
--------- -------
Cash at End of Year $2,249,992 $300,361
========= =======
Cash Paid for Interest $284,378 $320,870
======= =======
The accompanying notes are an integral part of these financial statements.
Initio, Inc.
Notes to the Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Nature of Business
Initio, Inc., (the " Company "), through its wholly owned subsidiary,
Deerskin Trading Post, Inc. (" Deerskin "), markets leather goods by way of
the Deerskin catalog and gifts and housewares through its' Joan
Cook catalog. The Company also promotes its products through media advertising
and has operated a retail closeout outlet. The Company's business is highly
seasonal with increased sales in November and December.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and Deerskin. All intercompany items have been eliminated.
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 balances in the financial statements.
Actual results can and do differ from management's best estimates.
Revenue Recognition
Revenue is realized at the time of shipment to customers. Payments for
orders not yet shipped are reflected as Customers' Unshipped Orders, a current
liability. As Revenue is recognized, customer returns are provided for
based upon the Company's historical experience.
Advertising Recognition
Advertising costs of non test programs, including only incremental direct
costs with independent third parties and payroll and payroll related costs of
employees who are directly associated with advertising, are initially
deferred. Catalog costs are amortized based upon anticipated revenue flows.
Media costs are expensed to the extent of gross profit generated and make no
contribution until costs are fully recovered. Test costs are expensed as
incurred. The Company continually monitors its' prepaid advertising, making
write downs, on a program by program basis, as required.
Inventory
Merchandise inventory is valued at the lower of cost or market, using the
first-in, first-out method. Purchasing, preparation and storage costs of
the mail order inventory, calculated on a percentage basis, are deferred
until the inventory is sold.
Property and Equipment
Fixed assets are recorded at cost and then depreciated, using the
straight line method over their estimated useful lives, which generally
approximates 40 years for buildings and 3 to 10 years for equipment. Leasehold
improvements are amortized over the lesser of their useful lives or the
remaining lease terms. Disposed of and retired assets are removed from the
accounts of the Company, as are fully depreciated assets.
Customer Lists
The Company assigns no value to internally generated customer lists.
However, the customer list acquired as part of the Joan Cook acquisition is
being amortized over 40 years on a straight line basis.
Stock Based Compensation
The Company has elected to continue to account for its' stock based
compensation of employees, using the intrinsic value approach, pursuant
to APB No. 25. However, the Company makes proforma disclosure of net income
and earnings per share as if the fair value method of accounting for stock
based compensation had been adopted.
Loss Per Common Share
In accordance with the Statement of Financial Standards ( " SFAS " ) No.
128, "Earnings per Share ", adopted by the Company as at April 30th,
1998, and applied retroactively April 30th, 1997 results, Basic Loss per
Common Share, as well as Diluted Loss Per Common Shares has been computed
based upon the weighted average number of actually outstanding shares of the
Company's common stock. Inclusion of outstanding employee stock options and
the Company's convertible debenture would have had an antidilutive effect in
both periods and therefore have been excluded from the calculations.
Long Lived Assets
It is the Company's policy to record long lived assets, both tangible and
intangible, at cost and to spread that cost over the useful life of the
assets. These assets are reviewed periodically for impairment, giving due
consideration to expected future revenue flows. No adjustment was required
during the years ended April 30th, 1998 or April 30th, 1997.
Reclassification
Prior year balances have been reclassified to conform with the current
year's presentation.
Recently Issued Accounting Standards
The Company will conform to SFAS 130, " Reporting Comprehensive Income
" and SFAS 131 " Disclosures about Segments of an Enterprise and Related
Information " for its' fiscal year beginning May 1st, 1998.
2. Marketable Securities
The Company has classified all its marketable securities as available for
sale, and are presented at estimated fair market value, which has been
determined based upon security market quotes. Realized gains and losses,
calculated based upon specific identification of shares sold, are included in
the Statement of Operations. Unrealized gains, amounting to $ 514,406 and
$ 150,279 at April 30th, 1998 and April 30th, 1997 respectively, are included
as a separate item in the Stockholders' Equity section of the Consolidated
Balance Sheets.
3. Income Taxes
At April 30th, 1998, the Company had available, for Federal Income Tax
purposes, approximately $ 4,100,000 of net operating loss and other future tax
benefits, which expire in 2004 and thereafter. These benefits are not reflected
in the Company's Consolidated Financial Statements as a result of the
uncertainty of future utilization.
4. Stockholders' Equity
Stock Option Plans
The Company has two stock option plans, the 1991 Stock Option Plan ("1991
Plan " ) and the 1996 Stock Option Plan ("1996 Plan"). Under both Plans
options to buy the Company's common stock have been granted to key
employees and / or directors of the Company, for terms ranging from five to
ten years and which become exercisable at fixed times. No further options
will be granted pursuant to the 1991 plan. Options which may result in the
issuance of up to 500,000 shares of the Company's common stock may be issued
pursuant to the 1996 Plan.
Pursuant to the 1996 Plan the Company may award either Incentive Stock
Options or Non Qualified Stock Options. The terms for either may not exceed
ten years, while vesting is either 20 % annually or as the Company's Board of
Directors provides. Exercise prices approximate the market price for the
Company's stock, except that in the case of award to holders of more than
10 % of the Company's stock the exercise is to be set by the Company's Board of
Directors.
Activity for the Plans is as follows for the years ended;
April 30th, 1998 April 30th, 1997
Shares Average Price Shares Average Price
Outstanding at beginning of year 505,332 $ 1.74 408,900 $1.73
Granted 525,000 1.95 109,802 1.75
Exercised ( 98,400 ) 1.00 0
Forfeited ( 34,990 ) 1.69 ( 8,296 ) 1.76
Cancelled ( 250,000 ) 2.00 ( 5,074 ) 1.83
------- ---- ------- ----
Outstanding at end of year 646,942 1.92 505,332 1.74
======= =======
Exercisable at year end 179,277 1.90 414,486 1.73
======== ========
Options Outstanding
At April 30th, 1998
Exercise Price shares expires in exercisable
1.875 42,500 1998 42,500
1.75 79,442 2001 31,777
1.95 525,000 2003 105,000
------ ------
646,942 179,277
====== ======
As a result of the 1991 and 1996 Plans, had the Company adopted the full
value approach to accounting for employee stock options the Company's results
of operations would have been for the years ended;
April 30th, 1998 April 30th, 1997
Net loss; As reported ( $ 804,589 ) ( $ 124,187 )
Proforma ( $ 828,564 ) ( $ 148,754 )
Loss Per Share;
Basic; As reported ( $ .17 ) ( $ .03 )
Proforma ( $ .17 ) ( $ .03 )
Diluted As reported ( $ .17 ) ( $ .03 )
Proforma ( $ .17 ) ( $ .03 )
The foregoing disclosure has been computed using the Black Scholes option
pricing model with the following weighted average assumptions;
1998 1997
Risk free Interest Rate 5.63 % 6.4 %
Expected Lives 4 years 4 years
Expected Volatility 50 % 51 %
Expected Dividend Yield 0 % 0 %
Employee Stock Sale
In May, 1997, the Company sold 60,000 shares of its common stock to two
key employees at a bargain price. The Company obtained the right to repurchase
these shares, in varying amounts, should the employees terminate their
employment in less than three years. The difference between the fair
value of the shares, and the purchase price, $ 60,000, is being realized over
the term of the repurchase agreement as additional employee compensation.
5. Commitments
Leases
The Company rents premises for its offices and the land upon which it has
constructed its' Carson City operations center and Danvers closeout
retail store. Rent expense approximated $ 130,000 for each of the years ended
April 30th, 1998 and April 30th, 1997. Future minimum rental payments under
operating leases, expiring at various dates through 2037, at April 30th,
1998 were as follows;
Year Ended
April 30th, 1999 $ 70,270
April 30th, 2000 13,650
Thereafter 45,850
--------
129,770
=======
The Company's lease for its New Jersey office facility expires in
November, 1998 and will not be renewed. A smaller replacement , at a lower
annual rent, is currently being sought. The lease for the land under the
Company's closeout retail store expires in the year 2000. The Company does not
anticipate a lease renewal.
Letters of Credit
The Company had outstanding $ 585,000 and $ 430,000, at April 30th, 1998
and April 30th, 1997, respectively, of letters of credit issued to effect the
direct import of merchandise.
6. Short Term Borrowings
The Company's bank line of credit expired by its terms during the year
ended April 30th, 1998 and has not been replaced. Another bank has extended
the Company, for this year, $ 600,000 credit facility to secure the issuance
of letters of credit. Advances under the new line bear interest at the bank's
prime rate plus 1.25 %, though no borrowings have been made to date.
7. Mortgage
In 1995, the Company borrowed $ 1,000,000, of which $ 913,000 was
outstanding at April 30th, 1998, from a bank to finance the expansion of the
Company's warehouse facility. The loan is secured by the warehouse, payable in
monthly installments, bears interest at the rate of 9 1/4 %, subject to
adjustment in the future, and is due in 2010.
8. Subordinated Convertible Debenture
In February, 1998, the Company issued $ 3,000,0000 principal amount of a
five year, 8 %, debenture which is convertible, at $ 3.00 per share, into
the Company's common stock. The Company has also obtained a
commitment for an additional $ 2,000,000 to be used for acquisitions and/or
internet activities. The conversion price of future borrowings is
contingent upon the future market price of the Company's common stock. To
date, no additional borrowings have been consummated. As a condition of the
debt, a representative of the debenture holder has been elected to the
Company's Board of Directors. The costs of this debt issuance have been
deferred and are being amortized over the term of the debenture, using the
effective interest rate method.
9. Related Party Transactions
The Chairman and President of the Company have for the years ended April
30th, 1998 and April 30th, 1997 waived all but nominal current cash
compensation, though they continue to receive fringe benefits such as
participation in the Company health plans. In March, 1998, these individuals
were granted options, pursuant to the Company's 1996 Plan, to purchase 250,000
shares, each, of the Company's common stock at $ 1.95 per share, 110 % of
the market price of the Company's common stock at the time of grant. At the
same time options to purchase 125,000 shares, each, of the Company's common
stock at $ 2.00 per share, previously granted to these officers of the
Company, were cancelled.
10. Subsequent Events
The Company's Danvers outlet store land lease expires in the year 2000. In
anticipation of an inventory liquidation, a valuation provision of $564,000
has been included in merchandise costs for the year ended April 30th, 1998,
to present the inventory at estimated net realizable value.
Exhibit 27
This schedule contains summary information extracted from the Company's
accompanying audited financial statements and is qualified in its
entirety by reference to such financial statements.
Period 12 months 12 months
Fiscal Year End April 30, 1998 April 30, 1997
Period End April 30, 1998 April 30, 1997
Cash $ 2,249,992 $ 300,361
Securities 1,073,308 636,072
Receivables 0 0
Allowances 0 0
Inventory 1,790,259 3,247,405
Current Assets 6,127,068 5,550,336
Property, Plant and Equipment 3,018,171 2,947,327
Accumulated Depreciation 1,266,561 1,116,178
Total Assets 9,569,954 9,026,054
Current Liabilities 430,585 2,501,461
Bonds 3,000,000 0
Preferred 0 0
Common 52,719 50,815
Other Stockholders Equity 4,887,592 5,234,733
Total Liabilities & Stockholders' 9,569,954 9,026,054
Net Sales 11,133,544 12,089,517
Cost of Goods Sold 4,632,363 4,712,549
Other Expenses 7,630,443 7,674,138
Interest Expense 284,378 320,870
Net Loss 804,589 124,187
Basis Loss Per Share .17 .03
Diluted Loss Per Share .16 .03
