SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
10 - QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended October 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES E
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-9848
------
INITIO, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified 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
None
- --------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve (12) months
(or for suchshorter period that the issuer was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the close of the latest practicable date:
Class Outstanding December 10,1997
- ----------------------------- -----------------------------
Common stock, $.01 par value 4,801,964
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One): YES ____ NO X
INDEX
PAGE
Consolidated Statements of Operations -
Six Months and Three Months ended October 31,1997 and
1996 3
Consolidated Balance Sheets-
As of October 31, 1997 and April 30, 1997 4
Consolidated Statement of Stockholders' Equity-
Six Months ended October 31, 1997 and Year Ended
April 30, 1997 5
Consolidated Statements of Cash Flows-
Six Months ended October 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-12
Management's Discussion and Analysis 13-15
Signatures 16
Page 2 of 16
<PAGE>
INITIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
October 31, October 31,
1997 1996 1997 1996
--------------------- -----------------------
NET SALES $4,167,864 $4,269,519 $3,057,510 $3,110,604
COSTS AND EXPENSES
Cost of Merchandise Sold $1,447,047 $1,628,543 $1,160,973 $1,230,076
Advertising $1,486,105 $1,510,923 $1,075,485 $1,149,221
---------- ---------- ---------- ----------
GROSS MARGIN $1,234,712 $1,130,053 $821,052 $731,307
General & Administrative
(including Fulfillment) $1,425,095 $1,451,313 $895,285 $898,766
---------- ---------- ---------- ----------
OPERATING (LOSS) ($190,383) ($321,260) ($74,233) ($167,459)
OTHER INCOME (EXPENSE)
Interest (Expense) net of
interest income of $31,968
and $32,495 for the six
months ended October 31, 1997
and 1996 and $16,155 and
$17,146 for the three months
ended October 31, 1997 and
1996, respectively ($127,195) ($172,060) ($69,643) ($100,825)
Gain on Marketable
Securities $180,378 $183,706 $125,322 $168,494
----------- --------- ---------- ---------
Total Other (Income) $53,183 $11,646 $55,679 $67,669
NET (LOSS) ($137,200) ($309,614) ($18,554) ($99,790)
========= ========= ======== ========
Loss per Share (Note 1(k) ):
(Loss) per Common Share ($0.03) ($0.07) $0.00 ($0.02)
========= ========= ========= =========
Weighted Average Shares 4,727,735 4,679,664 4,778,849 4,679,664
========= ========= ========= =========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
<PAGE>
INITIO, INC.
CONSOLIDATED BALANCE SHEETS
October 31, 1997 April 30, 1997
---------------- --------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash $247,033 $300,360
Marketable Securities $926,882 $636,072
Inventory $3,768,470 $3,247,406
Prepaid Advertising $1,003,938 $360,597
Assets Held for Sale (Note 9) $324,953 $324,953
---------- ----------
Total Current Assets $7,053,736 $5,550,336
FIXED ASSETS, at Cost (Note 3) $2,956,453 $2,947,327
Less: Accumulated Depreciation
and Amortization $1,198,725 $1,116,178
---------- ----------
$1,757,728 $1,831,149
TRADE NAMES, CUSTOMER LISTS, AND RELATED
INTANGIBLE ASSETS $1,462,872 $1,462,872
Less: Accumulated Amortization $173,716 $155,430
---------- ----------
$1,289,156 $1,307,442
OTHER ASSETS $11,484 $12,174
----------- ----------
TOTAL ASSETS $10,112,104 $8,701,101
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under Line of Credit
(Note 7) $2,350,000 $1,850,000
Accounts Payable $1,219,889 $458,515
Accrued Expenses & Other Current
Liabilities $244,882 $154,794
Customers' Unshipped Orders $70,543 $38,152
---------- ----------
Total Current Liabilities $3,885,314 $2,501,461
Mortgage Payable (Note 8) $894,450 $914,092
---------- ----------
TOTAL LIABILITIES $4,779,764 $3,415,553
Commitments (Note 6)
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value,
Authorized, 10,000,000 shares;
Issued 5,209,535 and 5,081,535
shares at October 31, and April
30, 1997, respectively $52,095 $50,815
Additional Paid-In Capital $8,754,903 $8,682,183
Accumulated Deficit ($3,258,148) ($3,120,948)
Treasury Stock, at Cost, 407,571
and 391,871 shares at October 31,
and April 30, 1997, respectively ($517,994) ($476,781)
Unrealized Gain on Marketable
Securities $301,484 $150,279
---------- ----------
TOTAL STOCKHOLDERS' EQUITY $5,332,340 $5,285,548
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $10,112,104 $8,701,101
=========== ==========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
<PAGE>
INITIO, INC.
<TABLE>
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, 1996
(Audited) 5,071,535 $50,715 $8,670,283 ($2,996,761) ($476,781) $5,714 $5,253,170
Net (Loss) for the Six
Months Ended
October 31, 1996 ($309,614) $309,614
Unrealized Gain on
Marketable Securities $40,460 $40,460
--------- ------- ---------- ---------- ---------- --------- ----------
BALANCE, October
31, 1996
(Unaudited) 5,071,535 $50,715 $8,670,283 ($3,306,375) ($476,781) $46,174 $4,984,016
Issuance of
Common Stock 10,000 $100 $11,900 $12,000
Net Income for the
Six Months Ended April
30, 1997 $185,427 $185,427
Unrealized Gain on
Marketable Securities $104,105 $104,105
--------- ------- ---------- ---------- ----------- -------- ----------
BALANCE, April
30, 1997
(Audited) 5,081,535 $50,815 $8,682,183 ($3,120,948) ($476,781) $150,279 $5,285,548
Issuance of Common
Stock 60,000 $600 $5,400 $6,000
Options
Exercised 68,000 $680 $67,320 $68,000
Purchase of Treasury
Shares ($41,213) ($41,213)
Net (Loss) for the
Six Months Ended
October 31, 1997 ($137,200) ($137,200)
Unrealized Gain on
Marketable Securities $151,205 $151,205
BALANCE,
October 31,
1997 --------- ------- ---------- ----------- --------- -------- ----------
(Unaudited) 5,209,535 $52,095 $8,754,903 ($3,258,148) ($517,994) $301,484 $5,332,340
========= ======= ========== =========== ========= ======== ==========
</FN>
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
<PAGE>
INITIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
October 31, 1997 October 31, 1996
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($137,200) ($309,614)
Adjustments to Reconcile Net Loss to Net Cash
Used In Operating Activities:
Depreciation and Amortization $100,833 $105,534
Gain on Marketable Securities ($180,378) ($183,706)
Decrease (Increase) in:
Inventory ($521,064) ($407,595)
Prepaid Advertising ($643,341) ($1,008,211)
Prepaid and Other Assets ($100,821) ($269,970)
(Decrease) Increase in:
Accounts Payable, Accrued
Expenses and Other Current
Liabilities $851,462 $1,044,500
Customers' Unshipped Orders $32,391 $37,511
--------- ----------
Net Cash (Used In) Operating Activities ($598,118) ($991,551)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures ($9,126) ($13,485)
Purchase of Marketable Securities ($257,363) ($640,651)
Proceeds Received from Sale of
Marketable Securities $298,135 $840,013
Net Cash Provided by Investing
Activities -------- --------
$31,646 $185,877
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit $500,000 $1,050,000
Mortgage ($19,642) ($18,110)
Issuance of Common Stock $74,000 $0
Purchase of Treasury Shares ($41,213) $0
Net Cash Provided By Financing -------- ----------
Activities $513,145 $1,031,890
-------- ----------
NET INCREASE (DECREASE) IN CASH ($53,327) $226,216
CASH, AT BEGINNING OF PERIOD $300,360 $461,917
-------- ----------
CASH, AT END OF PERIOD $247,033 $688,133
======== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $159,163 $204,555
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
<PAGE>
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
mailspecialty catalog company. It markets men's and women's leather outerwear,
apparel, footwear, accessories and small leather goods through its Deerskin
Catalogs andgifts and housewares through its Joan Cook Housewares Catalogs.
The Company alsooperates one retail closeout outlet in Danvers, Massachusetts.
The Deerskin Catalogbusiness is highly seasonal with principal sales
occurring between early Novemberand 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 itswholly-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
thataffect the reported amounts of assets and liabilities at the date of the
financialstatements and the reported amounts of revenues and expenses during
the reportingperiod. Actual results could differ from those estimates.
(d) REVENUE RECOGNITION
Revenue is recognized as merchandise is shipped to customers. Payments
received formerchandise 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
prescribedunder SOP 93-7, the Company only capitalizes as assets those costs
which areincremental 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 October 31, 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 7 of 16
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." This 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 October 31, 1997.
Page 8 of 16
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.
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 $301,484 and $150,279
at October 31, and April 30, 1997 respectively.
NOTE 3-FIXED ASSETS
October 31, 1997 April 30, 1997
---------------- --------------
Building & Other Leasehold Improvements $2,235,190 $2,235,190
Equipment $ 721,263 $ 712,137
---------- ----------
$2,956,453 $2,947,327
Less: Accumulated Depreciation
and Amortization $1,198,725 $1,116,178
---------- ----------
$1,757,728 $1,831,149
========== ==========
When an asset is fully depreciated, its cost and related depreciation or
amortization is removed from the fixed assets 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 October 31, 1997, the Company has available for federal income tax
purposes, net operating loss carryforwards (NOL) and other net future tax
deductions totaling approximately $3,400,000; 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." At October 31, 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
1998 and 1997 been determined consistent with SFAS No. 123, the Company's
net loss and loss per share would have been increased to the following pro
forma amounts:
Six Months Six Months
Ended Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Net loss: As Reported ($137,200) ($309,614)
Pro Forma ($144,952) ($309,614)
Primary EPS: As Reported ($.03) ($0.07)
Pro Forma ($.03) ($0.07)
Page 9 of 16
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 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 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 October
31, 1997, 108,900 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 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 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 October 31, 1997, 269,414 options were exercisable under the
Company's 1996 Plan.
The following table reflects activity under the plan for the six months ended
October 31, 1997 and 1996:
Six Months Ended Six Months Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- -------- ------
Outstanding at beginning of year 505,332 $1.735 408,900 $1.735
Granted - -
Exercised (46,000) $1.00 -
Forfeited (2,688) $1.75 -
Cancelled (672) $1.75 -
------- -------
Outstanding at end of quarter 455,972 $1.81 408,900 $1.735
------- -------
Exercisable at end of quarter 378,314 $1.511 397,600 $1.728
------- -------
Page 10 of 16
The following table summarizes information about stock options outstanding at
October 31, 1997:
Options Outstanding Options Exercisable
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
at Remaining Exercise at Exercise
Range of 10/31/97 Contractual Price 10/31/97 Price
Exercise Prices Life
- --------------- ----------- ----------- -------- ----------- ---------
$1.00 to $1.50 56,400 0.28 $1.00 56,400 $1.00
$1.51 to $2.38 399,572 7.74 $1.92 321,914 $1.58
------- -------
$1.00 to $2.27 455,972 6.81 $1.81 378,314 $1.51
======= =======
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 October 31,1997 are as
follows:
Year Ending April 30,
1998 $ 60,029
1999 $ 70,270
2000 $ 13,650
2001 $ 1,050
2002 $ 1,050
Thereafter $ 43,750
--------
$189,799
Rent expense for the six months ended October 31, 1997 and the fiscal year
ended April 30, 1997 was $66,894 and $128,933 respectively.
(b) LETTERS OF CREDIT
Outstanding letters of credit, issued primarily for imported merchandise,
approximated $183,000 and $430,000 at October 31,and April 30, 1997,
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 $2,350,000 and
$1,850,000 at October 31, and April 30,1997, respectively. The Company's
interest rate was 9.25% on both October 31 and April 30, 1997.
Page 11 of 16
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. The mortgage balance at October 31, 1997,
amounted to $933,065; the current portion, $38,615, is included in "Accrued
Expenses and Other Liabilities."
NOTE 9 - SUBSEQUENT EVENT
As of December 3, 1997 the Company entered into an agreement for the sale of
the Peabody facility at a price which represents a gain of approximately
$200,000. It is anticipated that the closing will take place in the fourth
quarter of the fiscal year ended April 30, 1998, at which time the Company
will recognize the gain and will review the need for a reserve for the costs
associated with the relocation of the Peabody operations, which will take
place subsequent to the closing.
Page 12 of 16
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Financial Condition
The most significant changes in the Company's balance sheet from April
30, 1997, the end of the preceding fiscal year, to October 31, 1997 are
as follows:
- Cash decreased $53,000 to $247,000 at October 31,
1997 from $300,000 at April 30, 1997, mainly attributable to
increases in inventory and prepaid advertising.
- Marketable securities are considered available for sale and are carried
at fair market value. The unrealized holding gains of $301,000 and
$150,000 at October 31, and April 30, 1997, respectively, are excluded
from earnings and reported as separate components of stockholders' equity
until realized in accordance with Statement of Financial Accounting
Standards No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in
Debt and Equity Securities".
- Inventory increased $521,000 to $3,768,000 from $3,247,000. The
increase in inventory is a seasonal requirement to support the Company's
planned, mailorder sales for the current fiscal year. The Company
continues to closely monitor its inventories.
- Prepaid advertising increased $643,000 to $1,004,000 at October 31, 1997
from $361,000 at April 30, 1997. This increase is primarily attributable
to the normal mailing schedule and amortization of costs associated with
the production and mailing of catalogs through the fiscal year.
- Prepaid and Other Current Assets increased $101,000 to $782,000 at
October 31, 1997 from $681,000 at April 30, 1997 resulting primarily from
increases in receivables and in prepaid expenses including capitalized
costs involved in the purchasing of the inventory for sale, which costs
are calculated as a percentage of inventory which increased during this
period. These costs are reviewed periodically and adjusted when necessary.
- Borrowings under the Line of Credit increased $500,000 to $2,350,000 at
October 31, 1997 from $1,850,000 at April 30, 1997 to provide cash for
use in operating activities; primarily the increases in inventory, prepaid
advertising, and prepaid and other current assets.
The Company's line of credit with Summit Bank for $3,300,000 including
amounts subject to letters of credit issued by the Bank on the Company's
behalf, bears interest at the Bank's based 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. In the event that the Company should fail 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 seek alternative sources of
financing. The Company is presently negotiating alternative arrangements
with several financial institutions but there can be no assurance that the
Company will be able to negotiate such alternative sources of financing or
that if it should do so it will not be on terms less favorable to the
Company than those presently existing. The Company's ability to pursue
its normal business activities are dependent upon obtaining such extension
of its existing line of credit or alternative financing. Such alternative
sources of financing might include debt and/or equity or quasi-equity
financing.
Page 13 of 16
- Accounts Payable and Accrued Expenses and Other Current Liabilities
increased $852,000 from $613,000 at April 30, 1995 to $1,465,000 at
October 31, 1997. This increase is attributable to: the increase in
trade payables for the purchase of inventory to support sales which
increase during this period, the increase in prepaid advertising for
catalog preparation and mailings which also increase this period, and to
an increase in the required accruals for refunds, which are reflect in
the net sales.
- Customer's Unshipped Orders for which checks have been received
increased $33,000 to $71,000 at October 31, 1997 from $38,000 at April
30, 1997. The increase is a result of the normal seasonal increase in
customer orders during the period.
Results of Operations
Three months and six months Ended October 31, 1997 vs. October 31, 1996.
Because of the seasonal nature of the Company's business, the results of the
interim period are not necessarily indicative of results for the entire year.
- Net Sales for the three months ended October 31, 1997, decreased 1.7%
or $53,000 to $3,058,000 from $3,111,000 for the three months ended
October 31, 1996. Net Sales for the six months ended October 31, 1997
decreased to $4,168,000 from $4,270,000 for the six months ended October
31, 1996, a decrease of $102,000 or 2.4%.
Deerskin catalog Net Sales for the six months ended October 31, 1997
decreased to $1,847,000 from $1,940,000 for the six months ended October
31, 1996, a decrease of $93,000 or 4.8%; for the three months ended
October 31, 1997 net sales decreased 2.1% or $32,000 to $1,519,000 from
$1,551,000 for the three months ended October 31, 1996. This decrease
resulted from a somewhat reduced circulation plan and lower responses
from some prospect mailings.
Joan Cook catalog Net Sales for the six months ended October 31, 1997
increased to $1,587,000 from $1,503,000 for the six months ended October
31, 1996, an increase of $84,000 or 5.6%. For the three month period
ended October 31, 1997 sales were $905,000 compared to $938,000 for the
comparable period ended October 31, 1996, a decrease of $33,000 or 3.5%.
This decrease is primarily attributable to reduced responses from
prospect mailings.
Space advertising Net Sales for the six months ended October 31, 1997
decreased to $568,000 from $681,000 for the six months ended October 31,
1996, a decrease of $113,000 or 16.6%; for the three month periods the
increase was $8,000 or 1.6%, to $512,000 from $504,000.
- Cost of merchandise decreased as a percentage of Net Sales to
34.7% and 38.0% for the six months and three months ended October 31,
1997, respectively, from 38.2% and 39.5% for the comparable periods
ended October 31, 1996. The actual cost of merchandise for the six
months ended October 31, 1997 was $1,447,000 and $1,629,000 for the
comparable period ended October 31, 1996. Cost of merchandise for the
three months ended October 31, 1997 was $1,161,000 and $1,230,000 for the
three months ended October 31, 1996. These results reflect somewhat less
markdowns and a slightly increased gross margin.
Page 14 of 16
- Advertising cost was $1,486,000 or 35.7% of Net Sales, for the six
months ended October 31, 1997, compared to $1,511,000 or 35.4% of Net
Sales for the six months ended October 31, 1996. For the three months
ended October 31, 1997, advertising cost was 35.2% of Net Sales or
$1,075,000 compared to 36.9% of Net Sales or $1,149,000 for the three
months ended October 31, 1996. The decreased Advertising cost as a
percentage of Net Sales resulted from the more efficient circulation and
improved customer response rates in the six months ended October 31,
1997.
- General and Administrative expenses, including fulfillment expenses
which include the costs of telephone, order entry, credit card fees, data
processing, packaging materials, labeling, refurbishing of merchandise,
packing supplies and outgoing freight charges, increased as a percentage
of Net Sales to 34.2% from 34.0% for the six months ended October 31,
1997. Costs for the six months ended October 31, 1997 were $1,425,000
compared to $1,451,000 for the six months ended October 31, 1996. For the
three months ended October 31, 1997 General and Administrative costs were
$895,000 or 29.3% of Net Sales, compared to $899,000 or 28.9%.
- As a result of all the foregoing, Operating Loss for the three months
ended October 31, 1997 decreased to $74,000 compared to $167,000 for the
three months ended October 31, 1996. Operating Loss for the six months
ended October 31, 1997 decreased to $190,000 from $321,000 for the
comparable period in the prior year.
- Realized Gains on Marketable Securities was $180,000 for the six months
ended October 31, 1997 and $184,000 for the six months ended October 31,
1996. For the three months ended October 31, 1997, the Realized Gains on
Marketable Securities was $125,000, compared to gains of $168,000 for the
three months ended October 31, 1996. These gains resulted from the
liquidation of several security positions which were in the Company's
investment portfolio and the realization of profits on those which
appreciated in value and the losses on those which declined.
- As a result of the foregoing, as well as an decrease of $45,000 in Net
Interest Expense for the six months ended October 31, 1997 compared to
October 31, 1996, Net Loss is $137,000 for the six months ended October
31, 1997, compared to $310,000 for the six months ended October 31, 1996,
a decrease of $173,000. Net Loss for the three months ended October 31,
1997 was $19,000 compared to $100,000 for the three months ended October
31, 1996. This represents a decrease of $81,000.
Forward Looking Statements
The foregoing management discussion and analysis contains certain
forward-looking statements which are based on current information and
management assumptions including, among other factors, changing marketing
and economic conditions. Actual results may differ materially from the
forward-looking statements container herein.
Page 15 of 16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INITIO, INC.
Date: December 18, 1997 /s/ Martin Fox
-------------------------------------------
Martin Fox
President and Office of the Chief Executive
Date: December 18, 1997 /s/ Daniel DeStefano
-------------------------------------------
Daniel DeStefano
Chairman of the Board and Office of
the Chief Executive
Date: December 18, 1997 /s/ Audrey C. Remes
-------------------------------------------
Audrey C. Remes
Treasurer and Chief Financial Officer
Page 16 of 16
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<PERIOD-END> OCT-31-1997
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