United States Securities and Exchange Commission Washington, D.C. 20549 - ------------------------------ Form 10 QSB ( X ) Quarterly Report pursuant to Section 13 or 15 ( d ) of the Securities Exchange Act of 1934 For the Quarterly Period Ended October 31st, 1998 ( ) Transition Report pursuant to Section 13 or 15 ( d ) of the Securities Exchange Act of 1934 - -------------------------------- Commission File Number 0-9848 Initio, Inc. ( Exact name of small business registrant as specified in its charter ) Nevada 22-1906744 ( State or other jurisdiction of ( IRS Employer incorporation or organization ) Identification No. ) 2500 Arrowhead, Drive, Carson City, Nevada 89706 ( Address of principal executive office ) ( Zip Code ) Registrant's telephone number, including area code: ( 775 ) 883 - 2711 Indicate by check mark whether the registrant ( 1 ) has filed all reports required to be filed by Section 13 or 15 ( d ) of the Securities Exchange Act of 1934 during the preceding 12 months ( or for such shorter period the registrant was required to file such reports ), and ( 2 ) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the registrant's common stock as of December 16, 1998 was 4,636,078 Transitional Small Business Disclosure Format Yes No X Initio, Inc. Form 10-QSB For the 6 Months ended October 31st, 1998 Table of Contents Part I. Financial Information Page Item 1. Financial Statements a) Consolidated Statements of Operations and for the Three and Six Months Ended October 31st, 1997 and 1998 1. b) Consolidated Balance Sheets as at April 30th, 1998 and October 31st, 1998 2. c) Consolidated Statement of Stockholders' Equity for the Six Months Ended October 31st, 1998 4. d) Consolidated Statements of Cash Flows for the Six Months Ended October 31st, 1997 and 1998 5. e) Notes to Financial Statements 6. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8. Part II. Other Information 13. Item 6. Exhibits and Reports on Form 8K a) Exhibit 27 14. Signatures 15. i. Initio, Inc. Consolidated Statement of Operations For the ( Unaudited ) 6 Months Ended 3 Months Ended Oct. 31, 19Oct. 31, 199Oct. 31, 19Oct. 31, 1997 Net Sales $3,534,561 $4,167,864 $2,651,002 $3,057,510 Costs and Expenses Merchandise 1,188,656 1,447,047 919,851 1,160,973 Advertising 1,314,259 1,486,105 948,519 1,075,485 2,502,915 2,933,152 1,868,370 2,236,458 1,031,646 1,234,712 782,632 821,052 Fulfillment, General and Administrative 1,392,970 1,425,095 881,589 895,285 Operating Loss (361,324) (190,383) (98,957) (74,233) Other Income ( Expense ) Interest Income 43,030 31,968 12,819 16,155 Interest Expense (167,520) (159,163) (87,571) (85,798) Gain on the Sale of Marketable Securities 199,799 180,378 89,720 125,322 75,309 53,183 14,968 55,679 Net Loss (286,015) (137,200) (83,989) (18,554) Other Comprehensive Income Unrealized Gains ( Losses) on Marketable Securities Arising During the Per (235,333) 72,462 (216,807) 23,708 Reclassification of Gains Realized in Net Loss (202,150) 78,743 (120,796) 116,915 (437,483) 151,205 (337,603) 140,623 Comprehensive Income ($723,498) $14,005 ($421,592) $122,069 ======= ======= ======= ======= Loss per Common Share Basic (0.06) (0.03) (0.02) 0.00 Diluted (0.06) (0.03) (0.02) 0.00 Weighted Average Shares Basic 4,708,055 4,727,735 4,662,808 4,778,849 Diluted 4,708,055 4,727,735 4,662,808 4,778,849 See accompanying Notes 1 Initio, Inc. Consolidated Balance Sheets As at Oct. 31, 1998 April 30, 1998 ( Unaudited ) ( Audited ) Assets Current Assets Cash $699,775 $2,249,992 Marketable Securities 780,338 1,073,308 Inventory 2,571,666 1,790,259 Prepaid Advertising 927,756 228,192 Property Held for Sale 324,953 324,953 Other Current Assets 466,583 460,364 Total Current Assets 5,771,071 6,127,068 Property and Equipment 3,130,009 3,018,171 Less; Accumulated Depreciation 1,331,462 1,266,561 Net Property and Equipment 1,798,547 1,751,610 Customer List 1,462,872 1,462,872 Less; Accumulated Amortization 210,288 192,003 Net Customer List 1,252,584 1,270,869 Other Assets 31,545 95,454 Total Assets $8,853,747 $9,245,001 ========= ========= See accompanying notes. 2 Initio, Inc. Consolidated Balance Sheets As at Oct 31, 1998 April 30, 1998 ( Unaudited ) ( Audited ) Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $671,466 $171,498 Customers' Unshipped Orders 104,290 34,121 Accrued Expenses and Other Current Liabilities 240,756 224,966 Total Current Liabilities 1,016,512 430,585 Mortgage Payable 854,847 874,105 Subordinated Convertible Debenture 3,000,000 3,000,000 Commitments ( see accompanying notes ) Stockholders' Equity Common Stock, $ .01 par value, Authorized 10,000,000 shares, issued 5,092,206 and 5,271,935 shares, respectively 50,922 52,719 Additional Paid In Capital 8,644,050 8,876,678 Accumulated Deficit (4,211,552) (3,925,537) Accumulated Other Comprehensive Inco 76,923 514,406 4,560,343 5,518,266 Less; Treasury Stock, 429,398 shares 577,955 577,955 Total Stockholders' Equity 3,982,388 4,940,311 Total Liabilities and Stockholder $8,853,747 $9,245,001 ======= ======= See accompanying notes. 3 Initio, Inc. Consolidated Statement of Stockholders' Equity For the Six Months Ended October 31st, 1998 ( unaudited ) Accumulated Additional Other Common Paid In Accumulated Treasury Comprehensive Stock Capital Deficit Stock Income Total Balance April 30, 1998 $52,719 $8,876,678 ($3,925,537 ($577,955) $514,406 $4,940,311 Purchase and Retirement of 179,729 Shares (1,797) (232,628) (234,425) Other Comprehensive Loss (437,483) (437,483) Net Loss (286,015) (286,015) ------- ------- ------- ------- - ------- ------- Balance October 31, 1998 $50,922 $8,644,050 ($4,211,552 ($577,955) $76,923 $3,982,388 ======= ======= ======= ======= ======= ======= See accompanying notes. 4 Initio, Inc. Consolidated Statement of Cash Flows For the Six Months Ended Oct. 31st, 1998 Oct. 31st, 1997 ( unaudited ) ( unaudited ) Cash Flows from Operating Activities; Comprehensive Profit (Loss) ($723,498) $14,005 Depreciation and Amortization 83,186 100,833 Gains on Marketable Securities 237,684 (331,583) Decrease ( Increase ) in Assets Inventory (781,407) (521,064) Prepaid Advertising (699,564) (643,341) Other Assets 57,690 (100,821) Increase ( Decrease ) in Current Lia 585,927 883,853 Net Cash Provided By ( Used In ) Operating Activities (1,239,982) (598,118) Cash Flows from Investing Activities Purchase of Property and Equipment (111,838) (9,126) Net Investment in Marketable Securit 55,286 40,772 Net Cash Provided By Investing Activities (56,552) 31,646 Cash Flows from Financing Activities Net Short Term Borrowings 0 500,000 Repayment of Mortgage (19,258) (19,642) Treasury Stock Repurchased (234,425) (41,213) Common Stock Issued 0 74,000 Net Cash Provided By ( Used In ) Financing Activities (253,683) 513,145 Net Increase ( Decrease ) in Cash (1,550,217) (53,327) Cash at Start of Period 2,249,992 300,360 Cash at End of Period 699,775 247,033 ======= ======= Cash Paid for Interest $167,520 $159,163 ======= ======= See accompanying notes. 5 Initio, Inc. Notes to Financial Statements Basis of Presentation In the opinion of management, the accompanying consolidated financial statements include all adjustments ( consisting only of normal recurring items ) necessary for their fair presentation in conformity with generally accepted accounting principles. Preparing financial statements requires management's to make estimates and assumptions that effect the reported amounts of assets, liabilities, revenue and expenses and consequently stockholders' equity. Examples include estimates of future revenues and returns. Actual results may differ from these estimates. Initio, Inc.'s ( the " Company's " ) business cycle is seasonal in nature, therefore, interim results are not indicative of results to be expected for a full year. The information included in this Form 10QSB should be read in conjunction with Management's Discussion and Analysis and the financial statements and notes thereto included in the Initio, Inc. April 30th, 1998 Form 10KSB. Loss per Share Basic Loss per Common Share, as well as Diluted Loss per Common Share has been computed based upon the weighted average number of actually outstanding shares of the Company's common stock. Inclusion of outstanding employee stock options and the Company's convertible debenture would have had an antidilutive effect in both periods presented and therefore have been excluded from the calculations. Comprehensive Income The Company has begun to apply FASB 130 and report Comprehensive Income. Prior Period Statements have been adjusted accordingly. Recent Accounting Standards The Company will began the disclosure required by SFAS No. 131, Disclosure about segments of an Enterprise and Related Information ", with its April 30th, 1999 financial statements. 6. Other Developments The Company anticipates minimal impact from the January 1, 1999 euro currency conversion. 7. Item 2. Management's Discussion and Analysis of Financial Condition and the Results of Operations This discussion should be read in conjunction with the Company's Financial Statements and accompanying Notes. Management's discussion and analysis contains " forward looking statements " about the Company's future prospects. These statements are subject to risks and uncertainties which could cause actual results to differ materially from those expected by Management. Reader's are therefore cautioned not to rely upon on any such forward looking beliefs or judgments in making investment decisions. Results of Operation Gross Shipments, declined in each of the areas of the Company's business. Six Months Six Months Ending Ending % Gross Shipments October 31, 199October 31, 199 Change Change Deerskin Catalog $1,970,298 $2,175,783 ($205,485) (9.4) Joan Cook Catalog 1,661,479 1,673,767 (12,288) (0.7) Media Advertising 144,192 580,374 (436,182) (75.2) Retail Closeout 103,182 116,900 (13,718) (11.7) Total $3,879,151 $4,546,824 ($667,673) (14.7) Three Months Three Months Ending Ending % Gross Shipments October 31, 199October 31, 199 Change Change Deerskin Catalog $1,642,435 $1,746,235 ($103,800) (5.9) Joan Cook Catalog 1,043,637 940,816 102,821 10.9 Media Advertising 126,479 528,073 (401,594) (76.0) Retail Closeout 81,254 84,774 (3,520) (4.2) Total $2,893,805 $3,299,898 ($406,093) (12.3) 8. Management's Discussion and Analysis of Financial Condition and the Results of Operations The Company's management believes that the decline in current year Deerskin catalog shipments reflects unusually warm weather in many parts of the country as well as decrease in catalog circulation in the current year's second quarter. Joan Cook catalog circulation was decreased in the current period and mailed later, while internal response rates have improved. Media circulation has been drastically reduced as results are no better than breakeven. The decline in retail closeout gross sales reflects the continuation of a long term decline in the Danvers store's results. The current periods' provisions for customer returns decreased as shipments to customers declined. At this stage in the Company's business cycle return rates are largely estimates, and can vary significantly as the Company's fiscal year progresses. Six Months Six Months Ending Ending % Returns October 31, 199October 31, 199 Change Change Deerskin Catalog $273,424 $295,652 ($22,228) (7.5) Joan Cook Catalog 66,258 65,289 969 1.5 Other 4,908 18,019 (13,111) (72.8) Total $344,590 $378,960 ($34,370) (9.1) Three Months Three Months Ending Ending % Returns October 31, 199October 31, 199 Change Change Deerskin Catalog $221,314 $214,298 $7,016 3.3 Joan Cook Catalog 17,998 14,509 3,489 24.0 Other 3,491 13,581 (10,090) (74.3) Total $242,803 $242,388 $415 0.2 9. Management's Discussion and Analysis of Financial Condition and the Results of Operations Returns as a % of Shipments 6 Months 6 Months October 31st, 1998 October 31st, 1997 Deerskin Catalog 13.9 13.6 Joan Cook Catalog 4.0 3.9 As a consequence of the foregoing, the Company's Net Sales declined $ 633,303 or 15.2 % for the six month period and $ 406,508 or 13.3 % for the three month period. Merchandise cost declined $ 258,391 and $ 241,122 for the six and three months, and decreased as a percentage of Net Sales to 33.6 % and 34.7 % respectively reflecting declining wholesale prices for the Company's products, sale of previously written down inventory at the closeout center and a change in sales mix toward the higher margined Joan Cook catalog. Advertising Costs declined $ 171, 846 and $ 126,966 for the six and three months but increased as a percentage of Net Sales to 37.2 % and 35.8 respectively reflecting additional costs of a promotional program and startup costs incurred in connection with the Company's Internet site. Fulfillment, General and Administrative decreased in both current periods reflecting lower activity levels and the out placing of accounting functions, but increased as a percentage of net sales because of the costs incurred establishing the Company's Internet site ( which.did not have any significant sales in the current period ) and the costs incurred relocating fulfillment operations to Carson City, Nevada. Increased Other Income was caused by the increased realization of prior period appreciation of marketable securities. However, the Company's remaining portfolio decreased in value, and that decline is reflected as an item of Other Comprehensive Loss. 10. Management's Discussion and Analysis of Financial Condition and the Results of Operation Liquidity and Financial Resources In February, 1998, the Company issued $ 3,000,000 principal amount of a five year, 8 % debenture which is convertible into the Company's common stock at $ 3.00 per share. The Company also obtained a commitment for an additional $ 2,000,000 to be used for specified purposes including Internet activities. In February, 1998, the Company completed repayment of its short term borrowings with a portion of the proceeds from the issuance of the subordinated debenture. The Company has obtained a new bank facility to permit the issuance of letters of credit for import purposes. During the period ended October 31st, 1998, the Company increased its inventories $ 781,000, in preparation for its prime marketing season, repurchased and retired 179,000 shares of its own stock, at a aggregate cost of $ 234,000 and invested $ 112,000 in furniture and equipment, primarily associated with the expansion of the Carson City facility. Prepaid Advertising increased $ 700,000 reflecting the increased activity at this stage of the Company's business cycle. At October 31st, 1998, the Company's cash balances were $ 649,000 and marketable securities, valued at current market value were $ 780,000. It is Management's belief that the Company now has available adequate resources, to conduct its operations, in the current fiscal year. Year 2000 Compliance The Company has completed its internal evaluation of information technology for the Year 2000 Compliance. The Company does not expect it will require any significant modification of its computer systems, incur a disruption in its operations nor expend a material sum relating to Year 2000 Compliance. 11. The Company has yet to make inquiry of its significant suppliers or financial institutions relating to Year 2000 Compliance. Should one or more of these parties experience a material disruption of their operations, the Company could in turn experience a material disruption of its normal business operations, and a material adverse impact on its results of operations, liquidity and / or financial position. 12. Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ( A ) Exhibits 27. Financial Data Schedule ( B ) Reports on Form 8-K Initio, Inc. filed no reports on Form 8-K during the quarter ended October 31st, 1998. Items 1,2,3, 4 and 5 are not applicable and have been omitted. 13. Exhibit 27 This schedule contains summary information extracted from the Company's accompanying audited financial statements and is qualified in its entirety by reference to such financial statements. Period Three Months Year End Three Months Period End October 31,98 April 30,98 October 31,97 Cash 699,775 2,249,992 Securities 780,338 1,073,308 Receivables 0 0 Allowances 0 0 Inventory 2,571,666 1,790,259 Current Assets 5,771,071 6,127,068 Property, Plant and Equipm 3,130,009 3,018,171 Accumulated Depreciation 1,331,462 1,266,561 Total Assets 8,853,747 9,245,001 Current Liabilities 1,016,512 430,585 Bonds 3,000,000 3,000,000 Preferred 0 0 Common 50,922 52,719 Other Stockholders Equity 3,931,466 4,887,592 Total Liabilities & Stockh 8,853,747 9,245,001 Net Sales 3,534,561 4,167,864 Cost of Merchandise 1,188,656 1,447,047 Other Expenses 2,707,229 2,911,200 Interest Expense 167,520 159,163 Net Loss 286,015 137,200 Basis Loss Per Share 0.06 0.03 Diluted Loss Per Share 0.06 0.03 14. Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Initio, Inc. Date; December 21st , 1998 By: /s/ Martin Fox Martin Fox President and Office of the Chief Executive By; /s/ Daniel DeStefano Daniel Destefano Chairman of the Board and Office of the Chief Executive By; /s/ Michael Bandler Michael Bandler . Secretary, Treasurer; Chief Financial Officer 15.