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 Six Months Ended October 31, 1996
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 December 9, 1996
____________________________ _____________________________
Common stock, $.01 par value 4,679,664
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (Check One): YES NO X
INDEX
PAGE
Consolidated Statements of Operations -
Six Months and Three Months ended October 31,
1996 and 1995 3
Consolidated Balance Sheets-
As of October 31, 1996 and April 30, 1996 4
Consolidated Statement of Stockholders' Equity-
Six Months ended October 31, 1996 and Year Ended
April 30, 1996 5
Consolidated Statements of Cash Flows-
Six Months ended October 31, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-10
Management's Discussion and Analysis 11-14
Signatures 15
Page 2 of 15
INITIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Three Months Ended
Oct. 31, 1996 Oct. 31, 1995 Oct. 31, 1996 Oct. 31, 1995
______________________________ ____________________________
NET SALES $4,269,519 $4,693,370 $3,110,604 $2,816,359
COSTS AND EXPENSES
Cost of Merchandise Sold $1,628,543 $1,552,575 $1,230,076 $960,999
Advertising $1,510,923 $1,992,433 $1,149,221 $1,090,591
__________ __________ __________ __________
GROSS MARGIN $1,130,053 $1,148,362 $731,307 $764,769
General & Administrative (including
Fulfillment $1,451,313 $1,951,112 $898,766 $990,307
__________ __________ __________ __________
OPERATING (LOSS) ($321,260) ($802,750) ($167,459) ($225,538)
OTHER INCOME (EXPENSE)
Interest (Expense) net of interest income of
$32,495 and $43,427 for the six months ended
October 31, 1996 and 1995 and $17,146 and
$24,185 for the three months ended October
31, 1996 and 1995, respectively ($172,060) ($167,454) ($100,825) ($94,401)
Gain on Marketable Securities $183,706 $106,892 $168,494 ($1,229)
_________ ________ ________ _________
Total Other (Expense) $11,646 ($60,562) $67,669 ($95,630)
_________ ________ _______ ________
NET (LOSS) ($309,614) ($863,312) ($99,790) ($321,168)
Loss per Share (Note 1(j) ):
(Loss) per Common Share ($0.07) ($0.18) ($0.02) ($0.07)
Weighted Average Shares 4,679,664 4,673,260 4,679,664 4,675,075
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Page 3 of 15
INITIO, INC.
CONSOLIDATED BALANCE SHEETS
October 31, 1996 April 30, 1996
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash $688,133 $461,917
Marketable Securities $746,041 $721,238
Inventory $4,148,464 $3,740,869
Prepaid Advertising $1,246,048 $237,837
Assets Held for Sale (Note 3) $324,953 $324,953
Prepaid and Other Current Assets $907,208 $637,237
__________ __________
Total Current Assets $8,060,847 $6,124,051
FIXED ASSETS, at Cost (Note 3) $2,945,738 $2,932,253
Less: Accumulated Depreciation and
Amortization $1,028,830 $941,582
$1,916,908 $1,990,671
TRADE NAMES, CUSTOMER LISTS, AND RELATED
INTANGIBLE ASSETS $1,462,872 $1,462,872
Less: Accumulated Amortization $137,144 $118,858
__________ __________
$1,325,728 $1,344,014
OTHER ASSETS $11,174 $11,174
__________ __________
TOTAL ASSETS $11,314,657 $9,469,910
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under Line of Credit (Note 7) $3,650,000 $2,600,000
Accounts Payable $1,341,450 $417,038
Accrued Expenses & Other Current
Liabilities $304,297 $184,209
Customers' Unshipped Orders $102,325 $64,814
__________ __________
Total Current Liabilities $5,398,072 $3,266,061
Mortgage Payable (Note 8) $932,569 $950,679
__________ __________
TOTAL LIABILITIES $6,330,641 $4,216,740
Commitments (Note 6)
STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value,
Authorized, 10,000,000 shares; Issued
5,071,535 shares at October 31, and
April 30,1996 $50,715 $50,715
Additional Paid-In Capital $8,670,283 $8,670,283
Accumulated Deficit ($3,306,375) ($2,996,761)
Treasury Stock, at Cost, 391,871
shares at October 31, and
April 30, 1996 ($476,781) ($476,781)
Unrealized Gain on Marketable Securities $46,174 $5,714
___________ ___________
TOTAL STOCKHOLDERS' EQUITY $4,984,016 $5,253,170
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,314,657 $9,469,910
The accompanying notes to the consolidated financial statements are
an integral part of these statements.
Page 4 of 15
INITIO, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
UNREALIZED
COMMON STOCK ADDITIONAL TREASURY (LOSS) ON
Shares Par PAID-IN ACCUMULATED SHARES MARKETABLE
Issued Value CAPITAL (DEFICIT) (at Cost) SECURITIES TOTAL
_______________________________________________________________________________________________
BALANCE, April 30, 1995
(Audited) 5,063,316 $50,633 $8,656,907 ($1,276,878)($476,781) ($53,880) $6,900,001
Option Exercised 600 $6 $594 $600
Stock Issued 7,619 $76 $12,782 $12,858
Net (Loss) for the Six Months Ended
October 31, 1995 ($863,312) ($863,312)
Unrealized (Loss) on Marketable Securities ($45,246) ($45,246)
_________ _______ __________ _________ _________ _________ _________
BALANCE, October 31, 1995
(Unaudited) 5,071,535 $50,715 $8,670,283 ($2,140,190) ($476,781) ($99,126) $6,004,901
Net (Loss) for the Six Months Ended
April 30, 1996 ($856,571) ($856,571)
Unrealized Gain on Marketable Securities $104,840 $104,840
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 5,071,535 $50,715 $8,670,283 ($3,306,375) ($476,781) $46,174 $4,984,016
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
Page 5 of 15
INITIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
Oct. 31, 1996 Oct. 31, 1995
_____________ _____________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) ($309,614) ($863,312)
Adjustments to Reconcile Net (Loss) to Net Cash
Used In Operating Activities:
Depreciation and Amortization $105,534 $121,425
Gain on Marketable Securities ($183,706) ($106,892)
Decrease (Increase) in:
Inventory ($407,595) ($496,120)
Prepaid Advertising ($1,008,211) ($722,196)
Prepaid and Other Assets ($269,970) ($56,686)
Increase (Decrease) in:
Accounts Payable, Accrued Expenses and
Other Current Liabilities $1,044,500 ($253,295)
Customers' Unshipped Orders $37,511 $20,414
---------- ---------
Net Cash (Used In) Operating Activities ($991,551) ($2,356,662)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures ($13,485) ($963,151)
Purchase of Marketable Securities ($640,651) ($289,344)
Sale of Marketable Securities $840,013 $442,934
_________ ________
Net Cash Provided by (Used In) Investing
Activities $185,877 ($809,561)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Borrowings under Line of Credit $1,050,000 $2,300,000
Mortgage ($18,110) $1,000,000
Issuance of Common Stock $0 $13,458
__________ __________
Net Cash Provided By Financing Activities $1,031,890 $3,313,458
NET INCREASE (DECREASE) IN CASH $226,216 $147,235
CASH, AT BEGINNING OF PERIOD $461,917 $617,768
________ ________
CASH, AT END OF PERIOD $688,133 $765,003
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $204,555 $210,881
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
Page 6 of 15
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 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. The Company, on a quarterly basis, assesses the
realizability of the assets created based on the likelihood of achieving the
estimated revenues . As of October 31, 1996 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 receiving,
preparation, maintaining and storing of the mailorder 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.
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.
Page 7 of 15
(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) RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement 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. The Company adopted Statement No. 121 in the first quarter
of 1997 and, based on current circumstances, does not believe the effect of
adoption is material.
(j) EARNINGS (LOSS) PER SHARE
Earnings (Loss) per 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, 1996.
NOTE 2-MARKETABLE SECURITIES
On May 1, 1994, the Company adopted Statement of Financial Accounting
Standards 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.
At October 31, 1996, unrealized gains on marketable securities amounted
to $46,174 and at April 30, 1996, unrealized gains were $5,714.
NOTE 3-FIXED ASSETS
October 31, 1996 April 30, 1996
________________ ______________
Building & Other Leasehold Improvements $2,233,600 $2,225,810
Equipment $712,138 $706,443
__________ __________
$2,945,738 $2,932,253
Less: Accumulated Depreciation and
Amortization $1,028,830 $941,582
__________ __________
$1,916,908 $1,990,671
When an asset is fully depreciated, its cost and related depreciation or
amortization is removed from the fixed assets accounts.
As of July 1, 1996 the Company entered into an agreement for the sale of the
Peabody facility at a price which represents a gain of approximately
$275,000. Since this agreement is conditioned upon the purchaser obtaining
building permits, among other things, there can be no assurance that such
conditions will be met.
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 rate
s 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, 1996, the Company has available for federal income tax purposes,
net operating loss carryforwards (NOL) and other net future tax deductions
totaling approximately $3,600,000; 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." During the fiscal year ended April 30, 1996,
the Company reassesed the future realization of the NOL and concluded that it
is uncertain whether the benefit previously recorded will be realized. This
resulted in a write down of $523,000.
NOTE 5 - COMMON STOCK
The Company issued in September 1992, a subordinated debenture for $1,000,000
together with warrants to purchase, on or before September 23, 1997, 75,000
shares of the Company's common stock at $2.25 per share.
Page 8 of 15
In December 1991, the Company adopted a stock option plan which provides for
the issuance of either incentive or non-qualified options to officers,
directors and other key employees for up to 350,000 shares of the Company's
common stock.
During the fiscal year ended April 30, 1995, the Company committed to grant
a key employee incentive stock options to purchase 200,000 shares of its
common stock at the then current market price of $2.375 per share under this
plan. In September 1995, the employee's relationship with the Company was
discontinued and as part of the settlement of the Company's obligation to
such employee, the options were cancelled and the Company issued 7,619 shares
of common stock which the Company valued at $12,858 and expensed during that
period.
In April 1996 the Company granted two officers/directors 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.
Incentive options must be at not less than current fair market value at the
date of grant, are exercisable to the extent of 20% of the optioned shares
on date of grant with an additional 20% becoming exercisable on each
subsequent anniversary of such date and expire after six years. Activity
under the Company's stock option plan during the fiscal year ending April 30,
1996 through October 31, 1996 was:
Price Range
Shares Of Options
Fiscal year 1996:
At April 30, 1996:
Outstanding 158,900 $1.00 - $1.875
Exercisable 132,300 $1.00 - $1.875
Exercised 600 $1.00
At October 31, 1996:
Outstanding 158,900 $1.00 - $1.875
Exercisable 147,600 $1.00 - $1.875
In 1988, the Company granted two key employees non-qualified options to
purchase 32,000 shares of its common stock at $1.00 per share. All of these
options became exercisable at April 30, 1992 and they expire March 1, 1998.
A total of 671,400 of the Company's common shares (either authorized and
unissued or treasury stock) are reserved for possible issuance upon exercise
of the warrants issued in connection with the sale of the subordinated
debenture (75,000 shares), for the Stock Option Plans (346,400 shares), and
for the options granted to the officers/directors (250,000 shares).
As described in Note 7, Deerskin Trading Post, Inc., signed an agreement with
its bank for a line of credit (the "Agreement"). The Agreement limits the
ability of Deerskin to declare and pay any dividends without the bank's prior
consent.
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 31,1996 are as follows:
Year Ending April 30,
1997 $ 63,753
1998 $124,832
1999 $ 70,270
2000 $ 13,650
2001 $ 1,050
Thereafter $ 44,800
________
$318,355
Rent expense for the six months ended October 31, 1996 and the fiscal year
ended April 30, 1996 was $59,264 and $117,764 respectively.
(b) LETTERS OF CREDIT
Outstanding letters of credit, issued primarily for imported merchandise,
approximated $212,000 and $586,000 at October 31 and April 30,1996,
respectively.
NOTE 7 - SHORT TERM BORROWINGS
On September 7, 1994, Deerskin Trading Post, Inc., signed an agreement with
United Jersey Bank, now Summit Bank, ("the Bank") for a line of credit of
$6,000,000 less amounts subject to letters of credit issued by the Bank on
its behalf, secured by its assets, guaranteed by the Company, maturing August
31, 1995, and bearing interest at the Bank's base rate plus 1/2% with interest
payable monthly. This loan required a 30 consecutive day "clean up"
requirement which the Company met in the quarter ended January 31, 1995.
This loan was extended until August 31, 1996 with no change in the terms and
conditions. The Company failed in the period ended January 31, 1996 to meet
the clean up requirement;
Page 9 of 15
the Bank waived the default in consideration of a reduction in the line from
$6,000,000 to $4,000,000 and an increase in the interest rate by 1/4%. This
agreement matured August 31, 1996. The Bank has further extended this loan,
first until November 30, 1996 and then until January 31, 1997 with no change
in terms and conditions. The Company anticipates this will be sufficient to
meet its capital requirements through the maturity date of the loan.
In the event that the Company should fail to reach an agreement with the
Bank to extend the Company's existing line of credit beyond January 31, 1997,
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.
Direct borrowings under this line of credit amounted to $3,650,000 and
$2,600,000 at October 31, 1996 and April 30, 1996, respectively. The
Company's interest rate at both October 31, and April 30,1996 was 8.75%.
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, $35,659, of the mortgage is included in "Accrued Expenses and Other
Liabilities."
NOTE 9 - RELATED PARTY TRANSACTIONS
As of October 31, 1996, the Company held a 6% $80,000 demand note from an
officer/director. This amount is included in "Prepaid and Other Current
Assets."
Page 10 of 15
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,
1996, the end of the preceding fiscal year, to October 31, 1996 are as
follows:
- Cash increased $226,000 to $688,000 at October 31, 1996 from
$462,000 at April 30, 1996, mainly attributable to increases in
borrowing under the line of credit.
- Marketable securities are considered available for sale and are
carried at fair market value. The unrealized holding gains of $46,000
and $6,000 at October 31, and April 30, 1996, 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 $407,000 to $4,148,000 from $3,741,000. 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 $1,008,000 to $1,246,000 at October
31, 1996 from $238,000 at April 30, 1996. This increase is primarily
attributable to changes in mailing dates and the normal amortization
of costs associated with the production and mailing of catalogs through
the fiscal year.
- Prepaid and Other Current Assets increased $270,000 to $907,000 at
October 31, 1996 from $637,000 at April 30, 1996 resulting primarily
from increases in other current assets.
- Borrowings under the Line of Credit increased $1,050,000 to
$3,650,000 at October 31, 1996 from $2,600,000 at April 30, 1996 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 due August 31, 1996 was
extended by the Bank until November 30, 1996 and again until
Page 11 of 15
January 31, 1997 with no change in terms and conditions. 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, 1997, 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 is
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.
- Accounts Payable and Accrued Expenses and Other Current Liabilities
increased $1,045,000 from $601,000 at April 30, 1995 to $1,646,000 at
October 31, 1996. 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 reflected
in the net sales.
- Sierra Bank of Nevada financed the construction of the 34,800 square
feet addition to the Carson City warehouse, built to allow the Company
to process orders more efficiently. In January 1996, when the addition
was placed in service, the construction loan converted to a $1,000,000
five year adjustable rate (with the first rate adjustment possible in
January 2000) fifteen year mortgage with monthly principal and interest
payments due to fully amortize the loan by August 31, 2010. The
mortgage is secured by the Carson City real property and bears interest
at 9 1/4% per annum.
At October 31, 1996, the mortgage balance is $968,000, of which $36,000,
the current portion, is included in "Accrued Expenses and Other
Liabilities".
- Customer's Unshipped Orders for which checks have been received
increased $37,000 to $102,000 at October 31, 1996 from $65,000 at April
30, 1996. The increase is a result of the normal seasonal increase in
customer orders during the period.
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RESULTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED OCTOBER 31, 1996 VS. October 31, 1995.
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, 1996, increased
10.4% or $294,245 to $3,110,604 from $2,816,359 for the three months
ended October 31, 1995. Net Sales for the six months ended October 31,
1996 decreased to $4,269,519 from $4,693,370 for the six months ended
October 31, 1995, a decrease of $423,851 or 9.0%.
Deerskin catalog Net Sales for the six months ended October 31, 1996
increased to $1,940,452 from $1,772,833 for the six months ended October
31, 1995, an increase of $167,619 or 9.5%; for the three months ended
October 31, 1996 net sales increased 11.5% or $159,661 to $1,551,105
from $1,391,444 for the three months ended October 31, 1995.
Joan Cook catalog Net Sales for the six months ended October 31, 1996
decreased to $1,502,719 from $2,248,322 for the six months ended October
31, 1995, an decrease of $745,603 or 33.2%. For the three month period
ended October 31, 1996 sales were $937,682 compared to $913,128 for the
comparable period ended October 31, 1995, an increase of $24,554 or
2.7%. The decline in Joan Cook Net Sales resulted from a reduction in
the number of catalogs mailed.
Space advertising Net Sales for the six months ended October 31, 1996
increased to $681,260 from $553,216 for the six months ended October 31,
1995, an increase of $128,044 or 23.1%; for the three month periods the
increase was $82,467 or 19.6%, to $503,551 from $421,084.
- Cost of merchandise increased as a percentage of Net Sales to
38.1% and 39.5% for the six months and three months ended October 31,
1996, respectively, from 33.1% and 34.1% for the comparable periods
ended October 31, 1995. The actual cost of merchandise for the nine
months ended October 31, 1996 was $1,628,543 and $1,552,575 for the
comparable period ended October 31, 1995. Cost of merchandise for
the three months ended October 31, 1996 was $1,230,076 and $960,999
for the three months ended October 31, 1995. These results reflect
the overall sales mix during the periods; the Joan Cook catalog and
space advertising generally have lower costs of merchandise.
The Company has adopted a more aggressive policy in regard to
merchandise in its retail catalog outlet store which resulted in an
increase in the cost of goods sold in that operation from 55% to 65%.
More significantly in the three months ended October 31, 1996, the
Company has chosen to significantly reduce its offering in both the
catalog and in the store of its men's and women's shoes and closed out
virtually all its remaining shoe inventory at a loss of approximately
$85,000.
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- Advertising cost was $1,544,135 or 36.1% of Net Sales, for the six
months ended October 31, 1996, compared to $1,992,433 or 42.5% of Net
Sales for the six months ended October 31, 1995. For the three months
ended October 31, 1996, advertising cost was 38.0% of Net Sales or
$1,182,433 compared to 38.7% of Net Sales or $1,090,591 for the three
months ended October 31, 1995. 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, 1996.
- 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 decreased
as a percentage of Net Sales to 34.0% from 41.6% for the six months
nded October 31, 1996. Costs for the six months ended October 31, 1996
were $1,451,313 compared to $1,951,112 for the six months ended October
31, 1995. For the three months ended October 31, 1996 General and
administrative costs were $898,765 or 28,9% of Net Sales, compared
to $990,307 or 35.2%.
The reduction in the six months ended October 31, 1996 is primarily
attributable to the benefits of the restructuring which took place in
the prior fiscal year and $112,000 is attributable to a pay reduction
(in the current period) taken by the Co-Chief Executive Officers,
Messrs. Fox and DeStefano.
- As a result of all the foregoing, and in particular as a result of
the inventory liquidation resulting in the charge of approximately
$85,000, Operating Loss for the three months ended October 31, 1996
was $200,670 compared to $222,538 for the three months ended October
31, 1995. Operating Loss for the six months ended October 31, 1996
decreased to $354,472 from $802,750 for the comparable period in the
prior year.
- Realized Gains on Marketable Securities was $183,706 for the six
months ended October 31, 1996 up from $106,892 for the six months
ended October 31, 1995. For the three months ended October 31, 1996,
the Realized Gains on Marketable Securities was $100,825, compared to
gains of $94,401 for the three months ended October 31, 1995. 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 increase of $4,606 in
Net Interest Expense for the six months ended October 31, 1996
compared to October 31, 1995, Net Loss is $342,826 for the six months
ended October 31, 1996, compared to $863,312 for the six months ended
October 31, 1995, a decrease of $520,486. Net Loss for the three
months ended October 31, 1996 was $133,001 compared to $321,168 for
the three months ended October 31, 1995. This represents a decrease
of $188,167.
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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 20, 1996 /s/ Martin Fox
______________________________________
President and Office of the
Chief Executive
Date: December 20, 1996 /s/ Daniel DeStefano
______________________________________
Chairman of the Board and Office
of the Chief Executive
Date: December 20, 1996 /s/ Audrey C. Remes
______________________________________
Treasurer and Chief Financial Officer
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