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 July 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES 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 such shorter 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 September 8,1997
- -------------------------- -----------------------------
Common stock, $.01 par value 4,749,664
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One): YES NO X
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Consolidated Statements of Operations -
Three Months ended July 31, 1997 and 1996 3
Consolidated Balance Sheets-
As of July 31, and April 30, 1997 4
Consolidated Statement of Stockholders' Equity-
Three Months ended July 31, 1997 5
Consolidated Statements of Cash Flows-
Three Months ended July 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7 - 12
Management's Discussion and Analysis 13 - 14
Signatures 15
<PAGE>
INITIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
July 31, 1997 July 31, 1996
------------- -------------
NET SALES $1,110,354 $1,158,915
COSTS AND EXPENSES
Cost of Merchandise Sold $286,074 $398,467
Advertising $410,620 $361,703
-------- --------
GROSS MARGIN $413,660 $398,745
General & Administrative
(including Fulfillment) $529,810 $552,547
-------- --------
OPERATING LOSS ($116,150) ($153,802)
OTHER (EXPENSE)
Interest (Expense) net of
Interest Income of $15,813
and $15,349 for the three
months ended July 31, 1997
and 1996, respectively ($57,552) ($71,236)
Gain on Marketable Securities $55,056 $15,213
-------- --------
Total Other (Expense) ($2,496) ($56,023)
-------- --------
NET LOSS ($118,646) ($209,825)
========= =========
Earnings (Loss) per Share (Note 1(j)):
Net Loss Per Common Share ($0.03) ($0.04)
========= =========
Weighted Average Shares 4,699,363 4,679,664
========= =========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
<PAGE>
INITIO, INC.
CONSOLIDATED BALANCE SHEETS
July 31, 1997 April 30, 1997
------------- --------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash $138,742 $300,360
Marketable Securities $749,480 $636,072
Inventory $4,053,138 $3,247,406
Prepaid Advertising $304,423 $360,597
Assets Held for Sale (Note 3) $324,953 $324,953
Prepaid and Other
Current Assets $644,732 $680,948
---------- --------
Total Current Assets $6,215,468 $5,550,336
FIXED ASSETS, at Cost (Note 3) $2,954,798 $2,947,327
Less: Accumulated Depreciation
and Amortization $1,162,404 $1,116,178
---------- ----------
$1,792,394 $1,831,149
TRADE NAMES, CUSTOMER LISTS,
AND RELATED INTANGIBLE ASSETS $1,462,872 $1,462,872
Less: Accumulated Amortization $164,573 $155,430
---------- ----------
$1,298,299 $1,307,442
OTHER ASSETS $12,174 $12,174
---------- ----------
TOTAL ASSETS $9,318,335 $8,701,101
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under Line of
Credit (Note 7) $2,550,000 $1,850,000
Accounts Payable $508,245 $458,515
Accrued Expenses & Other
Current Liabilities $161,220 $154,794
Customers' Unshipped Orders $11,115 $38,152
---------- ----------
Total Current Liabilities $3,230,580 $2,501,461
Mortgage Payable (Note 8) $904,271 $914,092
---------- ----------
TOTAL LIABILITIES $4,134,851 $3,415,553
Commitments (Note 6)
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value,
Authorized, 10,000,000
shares; Issued 5,141,535
and 5,081,535 shares at
July 31, and April
30, 1997 respectively $51,415 $50,815
Additional Paid-In Capital $8,687,583 $8,682,183
Accumulated Deficit ($3,239,594) ($3,120,948)
Treasury Stock, at Cost,
391,871 shares at July 31
and April 30, 1997 ($476,781) ($476,781)
Unrealized Gain on Marketable
Securities $160,861 $150,279
---------- ----------
TOTAL STOCKHOLDERS' EQUITY $5,183,484 $5,285,548
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $9,318,335 $8,701,101
========== ==========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
<PAGE>
<TABLE>
INITIO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL TREASURY (LOSS) ON
Shares Par PAID-IN ACCUMULATED SHARES MARKETABLE
Issued Value CAPITAL (DEFICIT) (at Cost) SECURITIES TOTAL
-------------------- ---------- ----------- ----------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, April 30,
1996 (Audited) 5,071,535 $50,715 $8,670,283 ($2,996,761) ($476,781) $5,714 $5,253,170
Net (Loss) for the
Three Months Ended
July 31, 1996 ($209,825) ($209,825)
Unrealized Gain on
Marketable Securities $5,038 $5,038
--------- ------- ---------- ----------- ---------- ------ ----------
BALANCE, July 31,
1996 (Unaudited) 5,071,535 $50,715 $8,670,283 ($3,206,586) ($476,781) $10,752 $5,048,383
Issuance of Common
Stock 10,000 $100 $11,900 $12,000
Net Income for the
Nine Months Ended
April 30, 1997 $85,638 $85,638
Unrealized Gain on
Marketable Securities $139,527 $139,527
--------- ------- --------- ----------- ---------- -------- ----------
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
Net (Loss) for the
Three Months Ended ($118,646) ($118,646)
July 31, 1997
Unrealized Gain on
Marketable Securities $10,582 $10,582
-------- ------- ---------- ----------- ---------- ------- ----------
BALANCE, July 31,
1997 (Unaudited) 5,141,535 $51,415 $8,687,583 ($3,239,594) ($476,781) $160,861 $5,183,484
========= ======= ========== =========== ========= ======== ==========
</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)
THREE MONTHS ENDED
July 31, 1997 July 31, 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($118,646) ($209,825)
Adjustments to Reconcile Net Loss to
Net Cash
Used In Operating Activities:
Depreciation and Amortization $55,369 $56,496
Gain on Marketable Securities ($55,055) ($15,213)
Decrease (Increase) in:
Inventory ($805,732) ($814,290)
Prepaid Advertising $56,174 ($117,657)
Prepaid and Other Assets $36,217 ($87,252)
(Decrease) Increase in:
Accounts Payable, Accrued
Expenses and Other Current
Liabilities $56,155 $277,572
Customers' Unshipped Orders ($27,037) ($51,694)
---------- ---------
Net Cash (Used In) Operating Activities ($802,555) ($961,863)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures ($7,471) ($11,225)
Purchase of Marketable Securities ($132,206) ($481,105)
Proceeds Received from Sale of Marketable
Securities $84,435 $25,000
---------- ---------
Net Cash (Used In) Investing Activities ($55,242) ($467,330)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit $700,000 $1,075,000
Mortgage ($9,821) ($8,701)
Issuance of Common Stock $6,000 $0
---------- ----------
Net Cash Provided By Financing Activities $696,179 $1,066,299
---------- ----------
NET INCREASE (DECREASE) IN CASH ($161,618) ($362,894)
CASH, AT BEGINNING OF PERIOD $300,360 $461,917
---------- ----------
CASH, AT END OF PERIOD $138,742 $99,023
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $73,365 $86,585
========== ==========
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 mail specialty catalog company.
It markets men's and women's leather outerwear, apparel,
footwear, accessories and small leather goods through its
Deerskin Catalogs and gifts and housewares through its Joan Cook
Housewares Catalogs. The Company also operates one retail
closeout outlet in Danvers, Massachusetts. The Deerskin Catalog
business is highly seasonal with principal sales occurring
between early November and early December. The Joan Cook line is
significantly less seasonal although the Company experiences some
increase in demand in the holiday season.
(b) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of
Initio, Inc., and its wholly-owned subsidiary, Deerskin Trading
Post, Inc. All intercompany transactions have been eliminated.
(c) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
(d) REVENUE RECOGNITION
Revenue is recognized as merchandise is shipped to customers.
Payments received for merchandise not yet shipped are reflected
as "Customers' Unshipped Orders," a current liability.
The Deerskin and Joan Cook catalogs have significantly different
refund rates which relate to the size, color, fit and items
damaged in transit of the merchandise sold. In each period, the
Company accrues a reserve for returns and exchanges which it
anticipates will occur related to the sales of the period. Such
accrual is based upon the Company's historical experience.
Revenue on retail sales is recognized at the point of sale.
(e) PREPAID ADVERTISING
Costs of producing and mailing catalogs are deferred and
amortized over the estimated productive life of each mailing
based on projected sales. As prescribed under SOP 93-7, the
Company only capitalizes as assets those costs which are
incremental direct costs with independent third parties and
payroll and payroll-related costs of employees who are directly
associated with, and devote time to, the advertising. In
addition, individual advertising efforts are established as stand
alone cost pools which are amortized on a cost pool basis over
the estimated period of benefit determined based upon estimated
future revenues. As required, the Company assesses the
realizability of the assets created based on the likelihood of
achieving the estimated revenues on a quarterly basis. As of
July 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 15
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
July 31, 1997.
Page 8 of 15
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 $160,861
and $150,279 at July 31, and April 30, 1997 respectively.
NOTE 3-FIXED ASSETS
July 31, 1997 July 31, 1997
------------- -------------
Building & Other Leasehold Improvements $2,235,190 $2,235,190
Equipment $719,608 $712,137
---------- ----------
$2,954,798 $2,947,327
Less: Accumulated Depreciation and
Amortization $1,162,404 $1,116,178
---------- ----------
$1,792,394 $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 July 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 July 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:
Three Months Three Months
Ended Ended
July 31, 1997 July 31, 1996
------------- ------------
Net loss: As Reported ($118,646) ($209,825)
Pro Forma ($122,521) ($215,967)
Primary EPS: As Reported ($.03) ($0.04)
Pro Forma ($.03) ($0.05)
Page 9 of 15
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 July 31, 1997, 144,400 options were
exercisable with respect to the 1991 Plan.
The 1996 Plan was approved and adopted in October 1996 and
subsequently approved by the stockholders. The Company's 1996
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 July 31, 1997,
269,414 options were exercisable under the Company's 1996 Plan.
The following table reflects activity under the plan for the
three months ended July 31, 1997 and 1996:
Three Months Ended Three Months Ended
July 31, 1997 July 31, 1996
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
Outstanding at beginning of year 505,332 $1.732 408,900 $1.735
Granted - -
Exercised - -
Forfeited (2,688) $1.75 -
Cancelled ( 672) $1.75 -
------- -------
Outstanding at end of quarter 501,972 $1.735 408,900 $1.735
======= =======
Exercisable at end of quarter 413,814 $1.425 382,300 $1.732
======= =======
Page 10 of 15
The following table summarizes information about stock options
outstanding at July 31, 1997:
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Range of Exercise at Remaining Exercise at Exercise
Prices 7/31/97 Contractual Price 7/31/97 Price
Life
- ----------------- ----------- ----------- -------- ----------- --------
$1.00 to $1.50 102,400 0.59 $1.00 102,400 $1.00
$1.51 to $2.38 399,572 7.99 $1.92 311,414 $1.53
$1.00 to $2.27 501,972 6.48 $1.74 413,814 $1.43
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 July 31,1997 are as follows:
Year Ending April 30, 1998 $ 92,956
1999 $ 70,270
2000 $ 13,650
2001 $ 1,050
2002 $ 1,050
Thereafter $ 43,750
---------
$ 222,726
Rent expense for the three months ended July 31, 1997 and the
fiscal year ended April 30, 1997 was $30,570 and $128,933
respectively.
(b) LETTERS OF CREDIT
Outstanding letters of credit, issued primarily for imported
merchandise, approximated $104,000 and $430,000 at July 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
$2,550,000 and $1,850,000 at July 31, and April 30,1997,
respectively. The Company's interest rate was 9.25% on both July
31 and April 30, 1997.
Page 11 of 15
NOTE 8 - MORTGAGE
On March 20, 1995 Deerskin Trading Post, Inc. signed an agreement
with Sierra Bank of Nevada for a $1,000,000 construction loan to
finance the approximately 34,800 sq. ft. expansion of its Carson
City warehouse which was put into service in October 1995. This
loan is secured by the Carson City real property and bears
interest at 9 1/4% per annum with interest paid monthly through
October 1995 at which time it converted to a five year adjustable
rate (with the first rate adjustment possible in October 2000)
fifteen year mortgage with monthly principal and interest
payments due to fully amortize the loan by August 31, 2010.
Borrowings amounted to $1,000,000; the current portion, $37,715
of the mortgage is included in "Accrued Expenses and Other
Liabilities."
<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 July 31,
1997 are as follows:
- Cash decreased $161,618 to $138,742 at July
31,1997 from $300,360 at April 30, 1997, primarily
attributable to the increase in inventory.
- Marketable Securities are considered available for
sale and are carried at fair market value. An
unrealized gain of $160,861 at July 31, 1997 is
excluded from earnings and reported as a separate
component of stockholders' equity until realized in
accordance with Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments
in Debt and Equity Securities".
As of July 31, 1997 Marketable Securities
increased to $749,480 from $636,072 at April 30, 1997,
an increase of $113,408. Changes in Marketable
Securities occur as part of the Company's ongoing
investment strategy.
- Inventory increased $805,732 to $4,053,138 from
$3,247,406. 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 and
believes its inventory position is substantially on
plan relative to the anticipated sales and marketing
projections.
- Prepaid Advertising decreased $56,174 to $304,423
at July 31, 1997 from $360,597 at April 30, 1997. This
decrease 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 decreased $36,216
to $644,732 at July 31, 1997 from $680,948 at April 30,
1997 primarily from the increase in capitalized costs
involved in the purchasing of the inventory for sale.
These costs, calculated as a percentage of inventory,
which increased during this period, are reviewed
periodically and adjusted when necessary.
- As of July 31, 1997 the Company has available for
federal income tax purposes net operating loss
(hereinafter "NOL") carryforwards and other net future
tax deductions totalling approximately $3,400,000;
approximately $63,000 of the NOL expires in 2004, the
balance thereafter. The future tax benefit of such NOL
should be recorded as an asset to the extent that
management assesses the realization of such future tax
benefits to be "more likely than not ".
- Borrowings under the Line of Credit increased
$700,000 to $2,550,000 at July 31, 1997 from $1,850,000
at April 30, 1997 to provide cash primarily for the
increase in inventory .
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. There can be no assurance that the
Company would be able to find such alternative sources
of financing or that if it should do so it would 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 15
- Accounts Payable and Accrued Expenses & Other
Current Liabilities increased a total of $56,156 from
$613,309 at April 30, 1997 to $669,465 at July 31,1997.
This increase is primarily attributable to the increase
in inventory .
- Customer's Unshipped Orders decreased $27,037 to
$11,115 at July 31, 1997 from $38,152 at April 30,
1997. The decrease is a result of the normal seasonal
decrease in customer orders during this period.
RESULTS OF OPERATIONS
Three months Ended July 31, 1997 vs. Three months Ended July 31, 1996.
Because of the seasonal nature of the Company's business, the
results of the interim period are not indicative of results for the entire
year.
- Net Sales for the three months ended July 31,1997
decreased to $1,110,354 from $1,158,915 for the three
months ended July 31, 1996, a decrease of $48,561
4.2%. The principal reason is the decrease in media
sales as a result of a decrease in space advertising.
- Cost of merchandise decreased as a percentage of
Net Sales to 25.8% for the three months ended July 31,
1997, from 34.4% for the three months ended July 31,
1996. The actual cost of merchandise for the three
months ended July 31, 1997 was $286,074 compared to
$398,467 for the comparable period ended July 31,
1996. This change is primarily due to a decrease in media
sales which generally has a lower cost of merchandise.
- Advertising cost was $410,620 for the three
months ended July 31, 1997, compared to $361,703 for
the three months ended July 31, 1996. For the three
months ended July 31, 1997, advertising cost increased
to 37.0% of Net Sales from 31.2% for the three
months ended July 31, 1996. The increase in
advertising cost is primarily due to a change in postal
regulations necessitating the change of the format of
the Joan Cook catalog from a 'slim jim' format to a
magazine format which is inherently less cost
effective.
- For the three months ended July 31, 1997, General
& Administrative expenses including fulfillment
expenses, which include the costs of telephone, order
entry, credit card fees, data processing, packaging
materials, labeling, refurbishing of merchandise,
packing supplies, and postage decreased to $529,810 ,
compared to $552,547 for the three months ended July
31, 1996, remaining constant at 47.7% of net sales.
- As a result of all the foregoing, the Operating
Loss for the three months ended July 31, 1997 decreased
to $116,150 from $153,802 for the comparable period
in the prior year, a decrease of $37,652.
- Gain on Marketable Securities was $55,056 for the
three months ended July 31, 1997 compared to $15,213
for the three months ended July 31, 1996. This gain
resulted from the realization of profits on closed
security positions.
- As a result of the foregoing, as well as an
decrease of $13,684 in Net Interest Expense, the Net
Loss decreased to $118,646 for the three months ended
July 31, 1997, from $209,825 for the three months ended
July 31, 1996.
<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: /s/ Martin Fox
------------------------------------------
Martin Fox
President and Office of the Chief Executive
Date: /s/ Daniel DeStefano
-----------------------------------
Daniel DeStefano
Chairman of the Board and Office of
the Chief Executive
Date: /s/ Audrey C. Remes
-------------------------------------
Audrey C. Remes
Treasurer and Chief Financial Officer
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JUL-31-1997
<CASH> 138,742
<SECURITIES> 749,480
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 4,053,138
<CURRENT-ASSETS> 6,215,468
<PP&E> 2,954,798
<DEPRECIATION> 1,162,404
<TOTAL-ASSETS> 9,318,335
<CURRENT-LIABILITIES> 3,230,580
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0
0
<COMMON> 51,415
<OTHER-SE> 5,132,069
<TOTAL-LIABILITY-AND-EQUITY> 9,318,335
<SALES> 1,110,354
<TOTAL-REVENUES> 1,110,354
<CGS> 286,074
<TOTAL-COSTS> 1,226,504
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