SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1996 Commission file number 0-5223
CUTCO INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
New York 11-1771806
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Service Road, Jericho, New York 11753
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 334-8400
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Former name, former address and former fiscal year, if changed
since last report.
* 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 that 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
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Number of common shares outstanding at November 12, 1996 is 780,625
Transitional Small Business Disclosure: Yes No X
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FORM 10-QSB
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets -
September 30, 1996 and June 30, 1996 1-2
Consolidated Condensed Statements of Operations -
Three Months Ended September 30, 1996 and 1995 3
Consolidated Condensed Statement of Shareholders'
Equity - Three Months Ended September 30, 1996 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended September 30, 1996 and 1995 5
Notes to Unaudited Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
1996 1996
------------- -------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $752,629 $1,035,395
Marketable securities 643,793 565,725
Notes and accounts receivable, net 434,542 426,539
Merchandise inventory 496,906 415,236
Prepaid and refundable income taxes 21,588 12,851
Deferred income taxes 105,000 105,000
Prepaid expenses and miscellaneous
receivables 107,720 102,164
------------- -------------
TOTAL CURRENT ASSETS 2,562,178 2,662,910
------------- -------------
PROPERTY AND EQUIPMENT, AT COST
Furniture, fixtures and equipment 2,081,911 2,305,969
Leasehold improvements 133,230 158,230
------------- -------------
2,215,141 2,464,199
Less accumulated depreciation
and amortization 1,065,747 1,373,794
------------- -------------
1,149,394 1,090,405
------------- -------------
OTHER ASSETS
Notes receivable, noncurrent, net 137,417 120,898
Deferred charges and other 391,571 410,914
Deposits 119,052 116,677
------------- -------------
648,040 648,489
------------- -------------
$4,359,612 $4,401,804
============= =============
</TABLE>
See notes to unaudited consolidated condensed financial statements.
-1-
<TABLE>
CONSOLIDATED CONDENSED BALANCE SHEETS - Continued
(UNAUDITED)
September 30, June 30,
1996 1996
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued
expenses $1,021,853 $961,731
Current portion of long-term debt 55,791 54,826
Accrued and withheld taxes,
other than income taxes 60,858 159,303
Income taxes payable 26,614 21,221
------------- -------------
TOTAL CURRENT LIABILITIES 1,165,116 1,197,081
LONG-TERM DEBT 160,103 174,430
DEPOSITS PAYABLE 58,496 55,637
DEFERRED INCOME 32,781 35,714
DEFERRED INCOME TAXES 105,000 105,000
------------- -------------
TOTAL LIABILITIES 1,521,496 1,567,862
------------- -------------
SHAREHOLDERS' EQUITY
Common Stock 188,371 188,371
Additional paid-in capital 4,185,250 4,185,250
Retained earnings 1,946,087 1,941,913
------------- -------------
6,319,708 6,315,534
Less treasury stock - at cost 3,481,592 3,481,592
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 2,838,116 2,833,942
------------- -------------
$4,359,612 $4,401,804
============= =============
</TABLE>
See notes to unaudited consolidated condensed financial statements.
-2-
<TABLE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30,
1996 1995
<S> <C> <C>
----------- -----------
Revenues:
Owned retail stores $2,047,155 $2,541,315
Sales of equipment and products 47,341 58,726
Royalties and service fees 567,844 631,621
Franchise fee income 19,041 61,986
----------- -----------
2,681,381 3,293,648
----------- -----------
Costs and Expenses:
Direct costs of owned retail stores 1,910,983 2,453,109
Costs of equipment and products sold 31,277 50,382
Depreciation and amortization 117,275 146,605
Selling, general and administrative expenses 585,424 711,256
Provision for doubtful accounts and notes receivable 42,000 30,000
----------- -----------
2,686,959 3,391,352
----------- -----------
Other income (loss):
Interest and dividend income 20,705 23,837
Interest expense (5,485) (10,018)
Gain (loss) on sale/abandonment of assets, net 3,717 (45,248)
Other income, net 5,112 17,283
----------- -----------
24,049 (14,146)
----------- -----------
Income (loss) before income taxes 18,471 (111,850)
Income taxes 14,297 7,652
----------- -----------
Net income (loss) $4,174 ($119,502)
=========== ===========
Earnings (loss) per common share $0.01 ($0.15)
=========== ===========
Weighted average number of shares outstanding 780,625 780,625
=========== ===========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
-3-
<TABLE>
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, 1996
Common Stock Additional Treasury Stock
------------ Paid-In Retained --------------
Shares Amount Capital Earnings Shares Amount Total
----------- ----------- ------------ ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 1,883,706 $188,371 $4,185,250 $1,941,913 1,103,081 ($3,481,592) $2,833,942
Net income 4,174 4,174
----------- ----------- ------------ ------------ ---------- ------------ -----------
Balance at September 30,
1996 (Unaudited) 1,883,706 $188,371 $4,185,250 $1,946,087 1,103,081 ($3,481,592) $2,838,116
=========== =========== ============ ============ ========== ============ ===========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
-4-
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) September 30,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $4,174 ($119,502)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 117,275 146,605
Provision for doubtful accounts and notes receivable 42,000 30,000
(Gain) loss on sale/abandonment of assets, net (3,717) 45,248
Changes in operating assets and liabilities, net of effect of
acquisition and sale:
Notes and accounts receivable (46,522) (78,980)
Merchandise inventory (84,854) (74,604)
Prepaid and refundable income taxes (8,737) 22,713
Prepaid expenses and miscellaneous receivables (5,556) 16,597
Deposits and other (3,464) (6,520)
Accounts payable and accrued expenses 60,122 (26,853)
Accrued and withheld taxes, other than income taxes (98,445) (37,010)
Income taxes payable 5,393 (23,242)
Deposits payable 2,859 3
Deferred income (2,933) (41,985)
------------- -------------
Net cash used in operating activities (22,405) (147,530)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (128,931) (138,112)
(Increase) decrease in marketable securities (78,068) 1,175
Proceeds from sale of property and equipment 5,000 1,620
Payment for business acquired (45,000) (15,000)
------------- -------------
Net cash used in investing activities (246,999) (150,317)
------------- -------------
Cash flows from financing activities:
Principal payments on loans (13,362) (20,493)
------------- -------------
Net cash used in financing activities (13,362) (20,493)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (282,766) (318,340)
Cash and cash equivalents at beginning of period 1,035,395 1,096,793
------------- -------------
Cash and cash equivalents at end of period $752,629 $778,453
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $3,649 $5,276
Income taxes $15,209 $4,150
Non cash investing and financing activities:
Notes payable issued in connection with acquisition of salon $20,000
Notes and accounts receivable forgiven in connection
with acquisition of salon $49,960
Notes and accounts receivable received in connection
with sale of salon $20,000
See notes to unaudited consolidated condensed financial statements.
-5-
</TABLE>
Notes to Unaudited Consolidated Condensed Financial Statements
September 30, 1996
Note 1 - Financial Statements
The accompanying unaudited consolidated condensed financial
statements have been prepared without audit in accordance
with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-
QSB of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
three month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected
for the year ending June 30, 1997. For further information,
refer to the consolidated financial statements and footnotes
as of June 30, 1996 included in the Company's Annual Report
on Form 10-KSB for the Company's fiscal year then ended.
-6-
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Three Months Ended September 30, 1996
Liquidity and Capital Resources:
Cash and cash equivalents were $752,629 at
September 30, 1996, as compared to $1,035,395 at
June 30, 1996. In addition, at September 30, 1996,
the Company had $643,793 of marketable securities,
as compared to $565,725 at June 30, 1996. During
the three months ended September 30, 1996, the
primary use of the Company's capital resources was
net cash used in investing activities of $247,000,
as compared to $150,000 in the comparable 1995
period. In the three months ended September 30,
1996, the Company invested $129,000 in property and
equipment and cash of $45,000 to acquire an
accredited cosmetology technical training school.
The Company had net purchases of marketable
securities of $78,000, as compared to net sales of
$1,000 in the three months ended September 30,
1995.
The Company had a current ratio of 2.20 at
September 30, 1996, as compared to 2.07 at
September 30, 1995 and 2.22 at June 30, 1996.
At September 30, 1996, commitments for capital
expenditures and other investments did not exceed
$400,000. Such commitments were for acquisition or
construction of salons, salon refurbishing, and
other investments. The Company believes its cash
resources and liquidity are adequate for its
present short and long-term business requirements.
Results of Operations:
In the three months ended September 30, 1996,
revenues from Company-owned salon operations
decreased by 19.4% or $494,000, over revenues for
the three months ended September 30, 1995. The
decrease in revenues is mainly attributable to a
decrease in the average number of company-owned
salons operating during the three months ending
September 30, 1996. As of September 30, 1996,
there were 43 company-owned salons, as compared to
51 at September 30, 1995. Comparable store sales
for salons operating throughout the entire three
month period ended September 30, 1996 and September
30, 1995 declined by 2.6% in 1996 from 1995. In
the three months ended September 30, 1996, direct
-7-
costs of Company-owned salons decreased by 22.1% or
$542,000, over such total costs for the three
months ended September 30, 1995. These variances
are largely attributable to costs that fluctuate in
direct relation to sales. However, the Company
incurred decreased payroll, occupancy, and
advertising costs, as a percent of sales during
the three months ended September 30, 1996. During
the three months ended September 30, 1996 the
Company opened two salons, sold one salon to a
licensee and acquired one accredited cosmetology
technical training school. Management's policy is
to close existing salons that do not meet its cash
flow criteria.
Sales of equipment and products decreased by 19.4%
or $11,000 in the three months ended September 30,
1996, as compared to the three months ended
September 30, 1995. Correspondingly, cost of
equipment and products sold decreased by 37.9% or
$19,000 reflecting higher margins. The decrease in
sales is due in part to the decreased number of
franchised salons.
Royalties and service fees decreased by 10.1% or
$64,000 in the three months ended September 30,
1996 as compared to the three months ended
September 30, 1995. This decrease is due in part
to a decline in the number of franchised hair
salons. The number of franchised hair salons has
been steadily decreasing for several years (319 at
September 30, 1994, 299 at September 30, 1995 and
287 at September 30, 1996).
The Company expects the decline in royalties to
continue as a result of attrition of existing
licensees without replacements with new licensees.
The Company does not anticipate significant hair
care franchise sales from new locations for fiscal
1997, due to increased competition for new
locations, coupled with a longer period from a
salon's opening until it achieves profitable
operations.
Franchise fee income decreased in the three months
ended September 30, 1996 by $43,000, as compared to
the three months ended September 30, 1995.
Franchise fees, which are principally related to
the New Area Development Program, will continue to
decline as payments to the Company under notes
obtained in connection with that Program, cease at
the varying maturities of such notes.
-8-
The number of franchised salons has been steadily
decreasing for several years and management
believes that such decreases will continue for the
foreseeable future. It is likely that the downward
trend in franchise related revenues will continue
for as long as the downward trend in the number of
franchised salons continues.
Inflation has not materially affected the Company's
revenues and income during the past two fiscal
years.
Interest and dividend income in the three months
ended September 30, 1996 declined by $3,000 as a
result of the decline in the amount of interest
bearing notes receivable.
In the three months ended September 30, 1996
selling, general, and administrative expenses
decreased by 17.7% or $126,000 from $711,000 in the
three months ended September 30, 1995. The
decreases are due in part to lower general and
administrative payroll costs and other overhead
expenses.
During the three months ended September 30, 1996
the Company had a gain of $4,000 from the
abandonment/sale of assets as compared to a loss of
$45,000 in the three months ended September 30,
1995. In the three months ended September 30,
1995, the Company closed five (5) salons. No
salons were closed in the three months ended
September 30, 1996.
There was an income tax charge of $14,000 in the
three months ended September 30, 1996 on income of
$18,000 compared to an income tax charge of $8,000
in the three months ended September 30, 1995 on a
loss of $112,000. In the three months ended
September 30, 1995 the Company was not able to
carryback for federal income tax purposes its net
operating loss. Additionally, since the Company
files separate subsidiary state income tax returns,
rather than consolidated state income tax returns,
the Company was not able to offset certain
subsidiary losses against other subsidiary income
in the three months ended September 30, 1996 and
1995.
The Company's salons and franchising activities,
including its sales of franchises, are not
materially affected by seasonal fluctuations, in
the volume of business.
-9-
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Not Applicable.
b) None.
-10-
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CUTCO INDUSTRIES, INC.
(Registrant)
s/DON vonLIEBERMANN
____________________________________
DON vonLIEBERMANN
President
s/MICHAEL KRAMER
____________________________________
MICHAEL KRAMER
Principal Financial &
Chief Accounting Officer
DATE: November 13, 1996
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 752629
<SECURITIES> 643793
<RECEIVABLES> 434542
<ALLOWANCES> 0
<INVENTORY> 496906
<CURRENT-ASSETS> 2562178
<PP&E> 2215141
<DEPRECIATION> 1065747
<TOTAL-ASSETS> 4359612
<CURRENT-LIABILITIES> 1165116
<BONDS> 160103
<COMMON> 188371
0
0
<OTHER-SE> 2649745
<TOTAL-LIABILITY-AND-EQUITY> 4359612
<SALES> 47341
<TOTAL-REVENUES> 2681381
<CGS> 31277
<TOTAL-COSTS> 31277
<OTHER-EXPENSES> 2655682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5485
<INCOME-PRETAX> 18471
<INCOME-TAX> 14297
<INCOME-CONTINUING> 4174
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4174
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
