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 January 31, 1998
----------------
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 March 16, 1998
- ---------------------------- ---------------------------
Common stock, $.01 par value 5,223,310
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One): YES NO X
---- ----
INDEX
PAGE
Consolidated Statements of Operations -
Nine Months and Three Months ended January 31, 1998
and 1997 3
Consolidated Balance Sheets-
As of January 31, 1998 and April 30, 1997 4
Consolidated Statement of Stockholders' Equity-
Nine Months ended January 31, 1998 and Year Ended
April 30, 1997 5
Consolidated Statements of Cash Flows-
Nine Months ended January 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-9
Management's Discussion and Analysis 9-11
Page 2 of 12
<TABLE>
INITIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Nine Months Ended Three Months Ended
January 31, 1998 January 31, 1997 January 31, 1998 January 31, 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $ 9,883,520 $ 10,390,902 $5,715,656 $6,121,383
--------- ---------- --------- ---------
COSTS AND EXPENSES
Cost of Merchandise Sold 3,586,214 4,058,495 2,139,167 2,429,952
Advertising 3,500,860 3,489,671 2,014,755 1,978,748
--------- --------- --------- ---------
7,087,074 7,548,160 4,153,922 4,408,700
--------- --------- --------- ---------
Gross Margin 2,796,446 2,842,736 1,561,734 1,712,683
General & Administrative 2,845,960 2,886,097 1,420,865 1,434,784
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (49,514) (43,361) 140,869 277,899
OTHER INCOME
Interest Income 43,803 49,531 11,835 17,036
Interest Expense (204,869) (267,030) (45,706) (62,475)
Gain on Marketable
Securities 233,948 324,529 53,570 140,823
---------- --------- ---------- ----------
72,882 107,030 19,699 95,384
--------- --------- ---------- ----------
Net Income $ 23,368 $ 63,669 $ 160,568 $ 373,283
========= ========= ========== ==========
Earnings per Share
Earnings per Common Share $0.00 $0.01 $0.03 $0.08
========= ========= ========= =========
Weighted Average Shares 4,769,705 4,679,664 4,801,964 4,679,664
========= ========= ========= =========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Page 3 of 12
INITIO, INC.
CONSOLIDATED BALANCE SHEETS
January 31, 1998 April 30, 1997
---------------- --------------
ASSETS (Unaudited) (Audited)
Current Assets
Cash $ 521,766 $ 300,360
Marketable Securities 856,055 636,072
Inventory 2,547,028 3,247,406
Prepaid Advertising 231,796 360,597
Assets Held for Sale 324,953 324,953
Prepaid and Other Current Assets 583,884 680,948
--------- ---------
5,065,502 5,550,336
--------- ---------
Fixed Assets, at Cost 2,961,168 2,947,327
Less: Accumulated Depreciation and
Amortization 1,238,208 1,116,178
--------- ---------
1,722,960 1,831,149
--------- ---------
Trade Names, Customer Lists, and Related
Intangible Assets 1,462,872 1,462,872
Less: Accumulated Amortization 182,859 155,430
--------- ---------
1,280,013 1,307,442
--------- ---------
Other Assets 14,338 12,174
--------- ---------
$ 8,082,813 $ 8,701,101
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Current Liabilites
Borrowings under Line of Credit $ 1,000,000 $ 1,850,000
Accounts Payable 414,563 458,515
Accrued Expenses & Other Current
Liabilities 318,295 154,794
Customers' Unshipped Orders 101,318 38,152
--------- ---------
1,834,176 2,501,461
Long Term Mortgage Payable 884,399 914,092
--------- ---------
2,718,575 3,415,553
--------- ---------
Stockholder's Equity
Common Stock, $0.01 par value,
Authorized, 10,000,000 shares;
Issued 5,209,535 and 5,081,535
shares at January 31, 1998
and April 30, 1997 52,095 50,815
Additional Paid-In Capital 8,754,903 8,682,183
Accumulated Deficit (3,097,580) (3,120,948)
Treasury Stock, at Cost, 407,571
and 391,871 shares at January
31, 1998 and April 30, 1977 (517,994) (476,781)
Unrealized Gain on Marketable
Securities 172,814 150,279
--------- ---------
5,364,238 5,285,548
--------- ---------
$ 8,082,813 $ 8,701,101
============ ============
The accompanying notes to the consolidated financial statements are
an integral part of these statements.
Page 4 of 12
<TABLE>
INITIO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAIN (LOSS)
Shares Par PAID-IN ACCUMULATED TREASURY ON MARKETABLE
Issued Value CAPITAL DEFICIT SHARES SECURITIES TOTAL
------ ----- ---------- ----------- -------- ------------- ------
BALANCE, <C> <C> <C> <C> <C> <C> <C>
April 30, 1996
(Audited) 5,071,535 $50,715 $8,670,283 ($2,996,761) ($476,781) $5,714 $5,253,170
Net Income for
the Nine Months
Ended January
31, 1997 $63,669 $63,669
Increase in
Unrealized Gain
on Marketable
Securities $256,599 $256,599
BALANCE,
January 31,
1997 --------- ------- ---------- ----------- --------- -------- ----------
(Unaudited) 5,071,535 50,715 $8,670,283 ($2,933,092) ($476,781) $262,313 $5,573,438
Issuance of
Common Stock 10,000 100 $11,900 $12,000
Net Loss for
the Three Months
Ended April
30, 1997 ($187,856) ($187,856)
Decrease in
Unrealized Gain
on Marketable
Securities ($112,034) ($112,034)
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 Income for
the Nine Months
Ended January
31, 1998 $23,368 $23,368
Increase in
Unrealized Gain
on Marketable
Securities $22,535 $22,535
BALANCE,
January 31,
1998 --------- ------- ---------- ----------- --------- -------- ----------
(Unaudited) 5,209,535 $52,095 $8,754,903 ($3,097,580) ($517,994) $172,814 $5,364,238
========= ======= ========== =========== ========= ======== ==========
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Page 5 of 12
INITIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
---------------------------------
January 31,1998 January 31, 1997
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 23,368 $ 63,669
Adjustments to Reconcile Net Income
to Net Cash provided by Operating
Activities:
Depreciation and Amortization 149,459 158,690
Gain on Marketable Securities (233,948) (324,529)
Change in Assets and Liabilities Net of
Effects From Investing and Financing
Activities:
Inventory 700,378 627,928
Prepaid Advertising 128,801 5,448
Prepaid and Other Assets 94,901 (34,255)
Current Liabilities 182,714 943,015
--------- ---------
1,045,673 1,439,966
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures (13,841) (14,060)
Purchase of Marketable Securities (503,965) (645,651)
Proceeds Received from Sale of Marketable
Securities 540,465 1,117,937
--------- ---------
22,659 458,226
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit (850,000) (1,250,000)
Long Term Mortgage repayments (29,693) (24,030)
Issuance of Common Stock 74,000 0
Purchase of Treasury Shares (41,213) 0
--------- ----------
(846,906) (1,274,030)
--------- ----------
NET INCREASE IN CASH 221,426 624,162
CASH AT BEGINNING OF PERIOD 300,360 461,917
--------- ----------
CASH AT END OF PERIOD $ 521,786 $ 1,086,079
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for
interest $ 204,869 $ 267,030
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Page 6 of 12
INITIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Initio, Inc.
(the "Company"), and its wholly-owned subsidiary, Deerskin Trading Post, Inc.
("Deerskin"). All intercompany transactions have been eliminated.
(b) NATURE OF BUSINESS
The Company through Deerskin markets men's and women's leather outerwear,
apparel, footwear, accessories and small leather goods in the Deerskin
catalogs and gifts and housewares through its Joan Cook Housewares Catalogs.
The Company also markets its products utilizing space advertising and
operates one retail closeout outlet. The Deerskin catalog business is highly
seasonal with principal sales occurring in November and December.
(c) 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 Company makes a provision for
returns and exchanges based upon the Company's historical experience.
(d) PREPAID ADVERTISING
Costs of producing and mailing catalogs are deferred and amortized over the
estimated productive life of each mailing . The Company assesses the
realizability of deferred advertising costs on a regular basis. Advertising
costs related to 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 space
promotion make any contribution to operating income.
(e) 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.
(f) FIXED ASSETS
Fixed assets are stated at cost and are depreciated by the straight line
method, over their estimated useful lives.
(g) INTANGIBLE ASSETS
Trade names, customer lists, and related intangible assets are amortized on
a straight line basis over 40 years.
(h) STOCK BASED COMPENSATION
The Company has elected to continue accounting for its stock-based
compensation awards to employees and directors based upon intrinsic value
pursuant to APB Opinion No. 25.
(i) EARNINGS PER COMMON SHARE
Earnings per common share for the periods presented are based on the
weighted average number of common shares outstanding during the period
together with the effect of dilutive options.
(j) INCOME TAXES
Deferred income taxes are recognized for the tax consequences of temporary
timing differences between financial and tax reporting. The effect on
deferred taxes of changes in tax rates is recognized as income in the
period of change.
Page 7 of 12
At January 31, 1998, 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.
NOTE 2-MARKETABLE SECURITIES
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, while small Realized gains and losses, are included in the
Consolidated Statement of Operations.
NOTE 3- STOCK OPTIONS
The Company has two Stock Option Plans, the 1991 Stock Option Plan (the "1991
Plan") and the 1996 Stock Option Plan (the "1996 Plan").
Under the 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. No further grants will be issued.
At January 31, 1998, 108,900 options were exercisable.
The Company's 1996 Plan authorizes the granting of stock options for up to
500,000 shares of the Company's stock to key employees, directors and
consultants. The following tables reflects activity under the plan for the
nine months ended January 31, 1998 and 1997:
Nine Months Ended Nine Months Ended
January 31, 1998 January 31, 1997
----------------- -----------------
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
Options Outstanding Options Exercisable
------------------- ---------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Range of at Remaining Exercise at Exercise
Exercise Prices 1/31/98 Contractual Life Price 1/31/98 Price
- --------------- ----------- ---------------- -------- ----------- --------
$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
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.
NOTE 4-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
January 31, 1998 are as follows:
Page 8 of 12
Year Ending April 30,
1998 $29,482
1999 $70,270
2000 $13,650
2001 $ 1,050
2002 $ 1,050
Thereafter $43,750
--------
$159,252
(b) LETTERS OF CREDIT
Outstanding letters of credit, issued to import merchandise, approximated
$26,000 and $430,000 at January 31, 1998 and April 30, 1997, respectively.
NOTE 5 - BANK BORROWINGS
In 1994, the Company signed an agreement for a bank line of credit secured
by most of the Company's assets. In January 1998 the line was reduced to
$1,300,000 and has subsequently been repaid in full.
In 1995 the Company borrowed $1,000,000 from a bank. This loan is secured by
the Company's Carson City real property and initially bears interest at
9 1/4% per annum with interest paid monthly . The term of the loan is 15
years.
NOTE 6 - SUBSEQUENT EVENT
In December, 1997 the Company entered into an agreement for the sale of its
Peabody facility . It is anticipated that the closing of this transaction
will take place in April, 1998, at which time the Company will recognize an
approximate $200,000 gain.
In February, 1998 the Company issued $3,000,000 principal amount of a five
year 8% convertible subordinated debenture, convertible at $3.00 per share.
These funds were used by the Company to replace its existing bank line of
credit. The Company also received a commitment for an additional $2,000,000
to be used for certain specified purposes.
Page 9 of 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
During the nine months ending January 31, 1998, the Company's cash increased
$221,000, and borrowings under the Company's line of credit decreased
$850,000 primarily as a result of the seasonal reduction of inventory levels
and a management effort to improve asset utilization.
In February, 1998 the Company issued $3,000,000 principal amount of a five
year 8% convertible subordinated debenture convertible and repaid its bank
line of credit. The Company also obtained an additional $2,000,000
commitment to be used for expansion of its internet operations and/or
acquisitions. The Company anticipates commencing a new bank relationship in
the not distant future. In the meantime the Company has available sufficient
funds to meet its anticipated operational needs.
Results of Operations
Because of the seasonal nature of the Company's business, the results of
interim periods are not indicative of results for the entire year.
Net sales for the three months ended January 31, 1998, decreased 6.6% or
$405,000 compared to the three months ended January 31, 1997. Net Sales for
the nine months ended January 31, 1998 decreased 4.8% or $507,000.
Deerskin catalog net sales for the nine months ended January 31, 1998
decreased $416,000 or 6.6%; and for the three months ended January 31, 1998
these sales decreased 7.8% or $340,000. It is believed this decrease
resulted from a reduced circulation plan as well as the mild winter.
Joan Cook catalog net sales for the nine month period ended January 31, 1998
increased $169,000 or 6.8% and for the three months ended January 31, 1998
increased $85,000 or 8.8%. These increases reflect earlier catalog mail
dates and are not expected to continue.
Space advertising net sales decreased $260,000 or 20.9% and $147,000 or
20.9% for the nine and three months ended January 31, 1998 respectively.
There has been an adverse change in space cost pricing which will limit the
Company's activities in this area.
Cost of merchandise decreased as a percentage of net sales for both the nine
months and three months ended January 31, 1998, respectively. This result
reflects the overall sales mix change and the Joan Cook catalog lower
merchandise cost.
Advertising cost increased in absolute terms as well as a percentage of net
sales for the nine and three months ending January 31, 1998. These changes
were caused primarily by reduced response rates thought to be caused by the
mild winter and an adverse space pricing environment.
General and Administrative expenses, were relatively stable for the nine and
three months ending January 31, 1998 reflecting management's intentional cost
cutting and improved efficiency offset by costs associated with the pending
consolidation of operations in Carson City, Nevada.
Page 10 of 12
Realized Gains on Marketable Securities decreased for the nine months and
three months ended January 31, 1998. Variation of reported gains result from
the timing of realization of investment results. Net Interest Expense for
the nine months and three months ended January 31, 1998 decreased as bank
borrowings declined.
As a result of of the foregoing Net Income for the three months ended January
31, 1998 declined to $161,000 from $373,000 while Net Income for the nine
months ended January 31, 1998 declined to $23,000 from $63,000 in the
comparative prior period.
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.
Page 11 of 12
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: March 24, 1998 /s/ Martin Fox
------------------------------------------
Martin Fox
President and Office of the Chief Executive
Date: March 24, 1998 /s/ Daniel DeStefano
------------------------------------------
Daniel DeStefano
Chairman of the Board and Office of
the Chief Executive
Date: March 24, 1998 /s/ Michael D. Bandler
------------------------------------------
Michael D. Bandler
Treasurer and Chief Financial Officer
Page 12 of 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> JAN-31-1998
<CASH> 521,786
<SECURITIES> 856,055
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 2,547,028
<CURRENT-ASSETS> 5,065,502
<PP&E> 2,961,168
<DEPRECIATION> 1,238,208
<TOTAL-ASSETS> 8,082,813
<CURRENT-LIABILITIES> 1,834,176
<BONDS> 0
0
0
<COMMON> 52,095
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,082,813
<SALES> 9,883,520
<TOTAL-REVENUES> 9,883,520
<CGS> 3,586,214
<TOTAL-COSTS> 7,087,074
<OTHER-EXPENSES> 2,845,960
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161,066
<INCOME-PRETAX> 23,368
<INCOME-TAX> 0
<INCOME-CONTINUING> 23,368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,368
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
