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 January 31st, 1999 ( ) 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 ) Registrants 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 registrants common stock as of March 5th, 1999 was 4,609,278 Transitional Small Business Disclosure Format Yes No X Initio, Inc. Form 10-QSB For the 9 Months ended January 31st, 1999 Table of Contents Part I. Financial InformationPage Item 1. Financial Statements a) Consolidated Statements of Operations and for the Three and Nine Months Ended January 31st, 1998 and 1999 1 b) Consolidated Balance Sheets as at April 30th, 1998 and January 31st, 19992. c) Consolidated Statement of Stockholders Equity for the Nine Months Ended January 31st, 19994. d) Consolidated Statements of Cash Flows for the Nine Months Ended January 31st, 1998 and 19995. e) Notes to Financial Statements6. Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations8. Part II. Other Information 14. Item 6. Exhibits and Reports on Form 8K a) Exhibit 27 15. Signatures 16. i. Initio, Inc. Consolidated Statement of Operations For the ( Unaudited ) 9 Months Ended 3 Months Ended Jan. 31, 19Jan. 31, 199Jan. 31, 19Jan. 31, 1998 Net Sales $8,683,869 $9,883,520 $5,149,308 $5,715,656 Costs and Expenses Merchandise 3,242,619 3,586,214 2,053,963 2,139,167 Advertising 3,249,644 3,500,860 1,935,385 2,014,755 6,492,263 7,087,074 3,989,348 4,153,922 2,191,606 2,796,446 1,159,960 1,561,734 Fulfillment, General and Administrative 2,658,467 2,845,960 1,265,497 1,420,865 Operating Loss (466,861) (49,514) (105,537) 140,869 Other Income ( Expense ) Interest Income 63,640 43,803 20,610 11,835 Interest Expense (248,195) (204,869) (80,675) (45,706) Gain on the Sale of Marketable Securities 246,061 233,948 46,262 53,570 61,506 72,882 (13,803) 19,699 Net (Loss) Income (405,355) 23,368 (119,340) 160,568 Other Comprehensive Income Unrealized ( Losses) Gains on Marketable Securities Arising During the Per (134,538) 69,152 100,795 (3,310) Reclassification Adjustment of Gains Realized in Other In (349,945) (46,617) (147,795) (125,360) (484,483) 22,535 (47,000) (128,670) Comprehensive ( Loss (889,838) 45,903 (166,340) 31,898 ======= ======= ======= ======= Loss per Common Share Basic (0.09) 0.00 (0.03) 0.03 Diluted (0.09) 0.00 (0.03) 0.03 Weighted Average Shares Basic 4,685,933 4,769,705 4,640,592 4,801,864 Diluted 4,685,933 4,805,107 4,640,592 4,847,863 See accompanying Notes 1 Initio, Inc. Consolidated Balance Sheets As at Jan. 31, 1999 April 30, 1998 ( Unaudited ) ( Audited ) Assets Current Assets Cash $2,203,929 $2,249,992 Marketable Securities 776,097 1,073,308 Inventory 1,757,841 1,790,259 Prepaid Advertising 203,845 228,192 Property Held for Sale 324,953 324,953 Other Current Assets 416,492 460,364 Total Current Assets 5,683,157 6,127,068 Property and Equipment 3,184,618 3,018,171 Less; Accumulated Depreciation 1,365,862 1,266,561 Net Property and Equipment 1,818,756 1,751,610 Customer List 1,462,872 1,462,872 Less; Accumulated Amortization 219,431 192,003 Net Customer List 1,243,441 1,270,869 Other Assets 84,198 95,454 Total Assets $8,829,552 $9,245,001 ========= ========= See accompanying notes. 2 Initio, Inc. Consolidated Balance Sheets As at Jan. 31, 1999 April 30, 1998 ( Unaudited ) ( Audited ) Liabilities and Stockholders' Equity Current Liabilities Accounts Payable $302,867 $171,498 Customers' Unshipped Orders 75,327 34,121 Accrued Expenses and Other Current Liabilities 315,523 224,966 Total Current Liabilities 693,717 430,585 Mortgage Payable 848,062 874,105 Subordinated Convertible Debentures 3,500,000 3,000,000 Commitments ( see accompanying notes ) Stockholders' Equity Common Stock, $ .01 par value, Authorized 10,000,000 shares, issued 5,065,406 and 5,271,935 shares, respectively 50,654 52,719 Additional Paid In Capital 8,616,043 8,876,678 Accumulated Deficit (4,330,892) (3,925,537) Accumulated Other Comprehensive Inco 29,923 514,406 4,365,728 5,518,266 Less; Treasury Stock, 429,398 shares 577,955 577,955 Total Stockholders' Equity 3,787,773 4,940,311 Total Liabilities and Stockholder $8,829,552 $9,245,001 ======= ======= See accompanying notes. 3 Initio, Inc. Consolidated Statement of Stockholders' Equity For the Nine Months Ended January 31st, 1999 ( unaudited ) Accumulated Additional Other Common Paid In Accumulated Treasury Comprehensive Stock Capital Deficit Stock Income ( Lo Total Balance April 30, 1998 $52,719 $8,876,678 ($3,925,537 ($577,955) $514,406 $4,940,311 Purchase and Retirement of 206,529 Shares (2,065) (260,635) (262,700) Other Comprehensive Loss (484,483) (484,483) Net Loss (405,355) (405,355) ------- ------- ------- ------- - ------- ------- Balance January 31st, 1999 $50,654 $8,616,043 ($4,330,892 ($577,955) $29,923 $3,787,773 ======= ======= ======= ======= ======= ======= See accompanying notes. 4 Initio, Inc. Consolidated Statement of Cash Flows For the Nine Months Ended Jan. 31st, 1999 Jan. 31st, 1998 ( unaudited ) ( unaudited ) Cash Flows from Operating Activities; Comprehensive (Loss) Income ($889,838) $45,903 Depreciation and Amortization 126,729 149,459 Losses (Gains) on Marketable Securit 238,422 (256,483) Decrease in Assets Inventory 32,418 700,378 Prepaid Advertising 24,347 128,801 Other Assets 55,128 94,901 Increase ( Decrease ) in Current Lia 263,132 182,714 Net Cash ( Used In ) Provided by Operating Activities (149,662) 1,045,673 Cash Flows from Investing Activities Purchase of Property and Equipment (166,447) (13,841) Net Procceeds from Marketable Securi 58,789 36,500 Net Cash Provided By Investing Activities (107,658) 22,659 Cash Flows from Financing Activities Net Line of Credit Repayment 0 (850,000) Issuance of Convertible Debt 500,000 0 Repayment of Mortgage (26,043) (29,693) Treasury Stock Repurchased (262,700) (41,213) Common Stock Issued 0 74,000 Net Cash Provided By ( Used In ) Financing Activities 211,257 (846,906) Net ( Decrease ) Increase in Cash (46,063) 221,426 Cash at Start of Period 2,249,992 300,360 Cash at End of Period $2,203,929 $521,786 ======= ======= Cash Paid for Interest $248,195 $204,869 ======= ======= 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 managements 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 Companys ) 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 Managements Discussion and Analysis and the financial statements and notes thereto included in the Initio, Inc. April 30th, 1998 Form 10KSB. ( Loss ) Earnings per Share Basic ( Loss ) Earnings per Common Share has been computed based upon the weighted average number of actually outstanding shares of the Companys common stock. Diluted Earnings per Common Share has been computed based upon the weighted average number of actually outstanding shares adjusted for the estimated dilutive effect of employee stock options. Diluted ( Loss ) per Common Share has been computed based upon the weighted average number of shares of the Companys common stock actually outstanding since inclusion of employee stock options and the Companys convertible debenture would have had an antidilutive effect. Comprehensive Income The Company has begun to apply FASB 130 and report Comprehensive Income. Prior Period Statements have been adjusted accordingly. The changes in the Companys unrealized gains and losses on marketable securities are now reflected as Other Comprehensive Income in the Companys Consolidated Statement of Income. 6. Initio, Inc. Notes to Financial Statements Recent Accounting Standards The Company will begin the disclosure required by SFAS No. 131, Disclosure about segments of an Enterprise and Related Information , with its April 30th, 1999 financial statements. 7. Item 2. Managements Discussion and Analysis of Financial Condition and the Results of Operations This discussion should be read in conjunction with the Companys Financial Statements and accompanying Notes. Managements discussion and analysis contains forward looking statements about the Companys future prospects. These statements are subject to risks and uncertainties which could cause actual results to differ materially from those expected by Management. Investors are therefore cautioned not to rely upon on any such forward looking beliefs or judgments in making investment decisions. Results of Operations Gross Sales Gross Sales declined in both of the current periods; Nine Months Nine Months Ending Ending % Gross Sales January 31, 1999January 31, 1998 Change Change Deerskin Catalog $6,643,257 $6,957,986 ($314,729) (4.5) Joan Cook Catalog 2,696,113 2,797,401 (101,288) (3.6) Media Advertising 261,108 1,031,848 (770,740) (74.7) Retail Closeout 322,905 310,871 12,034 3.9 Total $9,923,383 $11,098,106 ($1,174,72 (10.6) Three Months Three Months Ending Ending % Gross Sales January 31, 1999January 31, 1998 Change Change Deerskin Catalog $4,681,832 $4,782,203 ($100,371) (2.1) Joan Cook Catalog 1,034,634 1,123,634 (89,000) (7.9) Media Advertising 108,043 451,474 (343,431) (76.1) Retail Closeout 219,723 193,971 25,752 13.3 Total $6,044,232 $6,551,282 ($507,050) (7.7) 8. Managements Discussion and Analysis of Financial Condition and the Results of Operations Deerskin catalog circulation was increased 8.5 % and 2.0 % in the current three month and nine month periods, respectively. However, this years response rates were lower, particularly in November, December, and January resulting in the current years reduced shipments. Management believes that the reduced response rate was attributable to unseasonably warm weather in November and December. Joan Cook catalog circulation decreased 8.8 % and 12.5 % in the current three month and nine month periods, respectively. Conversely, this years response rates consistently higher, with responses from internal mailings increasing 14.9 % and responses from external mailings increasing 8.7 %. Media circulation has been drastically reduced as results were little better than breakeven, as anticipated. Internet operations commenced in September, 1998. Retail closeout sales increased in January, 1999 as the Company began promotional activity in anticipation of the closing of its Danvers store. Returns Customer return rates increased in each of the current periods. Nine Months Nine Months Ending Ending Returns as a % of Sales January 31, 1999January 31, 1998 Deerskin Catalog 15.7 14.7 Joan Cook Catalog 6.0 4.1 Media and Other 6.2 5.4 Three Months Three Months Ending Ending Returns as a % of Sales January 31, 1999January 31, 1998 Deerskin Catalog 16.4 15.3 Joan Cook Catalog 9.4 4.5 Media and Other 9.5 8.5 9. Managements Discussion and Analysis of Financial Condition and the Results of Operations During November, 1998 the Company relocated its administrative and purchasing offices causing a disruption of operations. As a result increased back orders during the peak holiday sales season, both in quantity and duration adversely affected customer satisfaction, and hence increased return rates. As a consequence of the foregoing, the Companys Net Sales declined $ 1,199,651 or 12.1 % for the nine month period and $ 566,348 or 9.9 % for the three month period. Costs and Expenses Merchandise cost declined $ 343,595 and $ 85,204 in the more recent nine and three month periods. However, merchandise costs increased comparatively as a percentage of Net Sales to 37.3 % from 36.3 % during the current nine months and to 39.9 % from 37.4 % during the current three month period primarily reflecting the dramatic reduction in media revenue, with the lowest merchandise costs, offset by the sale of previously written down inventory at the retail clearance center. Advertising Costs declined in the current nine and three month periods, but in both periods increased as a percentage of gross sales for reasons previously discussed; Nine Months Nine Months Ending Ending January 31, 1999January 31, 1998 Change Deerskin Catalog $1,946,107 $1,796,401 $149,706 Joan Cook Catalog 1,026,619 1,186,954 (160,335) Media Advertising 184,097 486,900 (302,803) Retail Closeout 92,821 30,611 62,210 Total $3,249,644 $3,500,866 ($251,222) 10. Managements Discussion and Analysis of Financial Condition and the Results of Operations Three Months Three Months Ending Ending January 31, 1999January 31, 1998 Change Deerskin Catalog $1,405,957 $1,288,863 $117,094 Joan Cook Catalog 371,446 514,512 (143,066) Media Advertising 93,015 190,594 (97,579) Retail Closeout 64,967 20,786 44,181 Total $1,935,385 $2,014,755 ($79,370) Nine Months Nine Months Ending Ending Advertising as a % January 31, 1999January 31, 1998 of Shipments Deerskin Catalog 29.2 25.8 Joan Cook Catalog 38.1 43.1 Media and Other 47.4 37.1 Overall 32.7 31.5 Three Months Three Months Ending Ending Advertising as a % January 31, 1999January 31, 1998 of Shipments Deerskin Catalog 30.0 27.0 Joan Cook Catalog 35.9 45.8 Media and Other 48.2 32.7 Overall 32.0 30.7 Fulfillment costs decreased in both current periods reflecting lower activity levels, as well savings effected by the consolidation of fulfillment operations in May, 1998. General and Administrative costs decreased in both current periods as a result of the cost savings achieved by the outsourcing of accounting functions and the closing of the Peabody, Massachusetts facility, but 11. Managements Discussion and Analysis of Financial Condition and the Results of Operations increased as a percentage of net sales because of the costs incurred in establishing the Companys Internet site and the costs incurred moving the administrative and purchasing functions to a different location in New Jersey and the call center and computer operations to Carson City, Nevada. Other Income, Expense Interest income increased in the current periods as the Company had more funds available for short term investment. Interest expense increase in the current periods as a result of the Companys issuance of $ 3,0000,000 of convertible debt in February, 1998, which replaced a lower level of bank debt in the prior periods. The Companys realization of gains on marketable securities, mostly realizing prior appreciation, was approximately the same in each of the reported comparative periods. Net Loss As a result of all the foregoing, the Company incurred a net loss of $ 405,355 ( $.09 per share ) and $ 119,340 ( $ .03 per share ) in the current nine and three month periods respectively. 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 Companys common stock at $ 3.00 per share. During December, 1998, the Company issued an additional $ 500,000 principal amount of the 8 % debenture this time convertible into the Companys common stock, based upon a calculation reflecting the then price of the Companys common stock, at $ 1.54 per share. The Company also has a commitment for an additional $ 1,500,000, expiring in February, 2000, to be used for specified purposes. The Company used a portion of the proceeds from the first issuance of the subordinated debenture to retire its then existing bank borrowings. The Company has obtained a new bank facility to permit the issuance of letters of credit for import purposes. At January 31st, 1999, the Company s current assets remained materially unchanged from the prior year end while current liabilities increased $ 263,000. During that time the Company repurchased and retired 12. Managements Discussion and Analysis of Financial Condition and the Results of Operations 206,000 shares of its common stock, at a aggregate cost of $ 263,000 and invested $ 166,000 in furniture and equipment, primarily associated with the expansion of the Carson City facility. At January 31st, 1999, the Companys cash balances were $ 2,204,000 and marketable securities, valued at current market value were $ 776,000. It is Managements belief that the Company has available adequate resources, to conduct its operations, for the balance of its current fiscal year. Year 2000 Compliance The Company has completed its internal evaluation of information technology for the Year 2000 Compliance and 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. Failure to make all internal business systems Year 2000 compliant could result in a material interruption in, or a failure of some or all of the Companys business activities or operations. The Company has not made 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. 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 Nine Months Year End Nine Months Period End January 31, 199 April 30, 1998January 31, 1998 Cash 2,203,929 2249992 Securities 776,097 1,073,308 Receivables 0 0 Allowances 0 0 Inventory 1,757,841 1,790,259 Current Assets 5,683,157 6,127,068 Property, Plant and Equipment 3,184,618 3,018,171 Accumulated Depreciation 1,365,862 1,266,561 Total Assets 8,829,552 9,245,001 Current Liabilities 693,717 430,585 Bonds 3,500,000 3,000,000 Preferred 0 0 Common 50,654 52,719 Other Stockholders Equity 3,737,119 4,887,592 Total Liabilities & Stockholders' 8,829,552 9,245,001 Net Sales 8,683,869 9,883,520 Cost of Goods Sold 3,242,619 3,586,214 Other Expenses 5,908,111 6,346,820 Interest Expense 248,195 204,869 Net Loss (405,355) 23,368 Basis Loss Per Share (0.09) 0.00 Diluted Loss Per Share (0.09) 0.00 13. 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 January 31st, 1999. Items 1, 2, 3, 4 and 5 are not applicable and have been omitted. 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; March 15th , 1999By: /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 16.