SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
(Fee Required.)
For the fiscal year ended June 30, 1996 Commission file number: 0-5223
CUTCO INDUSTRIES, INC.
-------------------------------------------------
(Name of Small Business Issuer in its Charter)
New York 11-1771806
- ------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
125 South Service Road, Jericho, New York 11753
- ---------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number, including area code: (516) 334-8400
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Check whether the Issuer (sometimes hereinafter called the "Registrant"): (1)
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 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
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and will not be contained, to the best of
the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X ]
State Issuer's revenues for its most recent fiscal year. $11,692,547
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of a specified
date within 60 days prior to the date of filing: $731,308 as of September 3,
1996.
There were 780,625 shares of Common Stock outstanding as of September 1,
1996.
Transitional Small Business Disclosure Format (check one). Yes No [ X ]
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None.
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
FORM 10-KSB
FOR THE YEAR ENDED JUNE 30, 1996
INFORMATION REQUIRED IN ANNUAL REPORT OF SMALL BUSINESS ISSUERS
PART I
Item 1. Description of Business.
CutCo Industries, Inc. (the "Company") is a New York corporation
organized in 1955. It is engaged primarily in the operation of hair care
salons under the names "Haircrafters" and "Great Expectations Precision
Haircutters" and franchising activities, including the franchising of hair
care salons under such names. The Company also presently owns and operates,
through wholly-owned subsidiaries, two (2) Natisse International full service
hair care and beauty salons, in Tysons Corner, McLean, Virginia, and Fort
Worth, Texas and directly owns and operates three (3) hair care salons in
California under the name "Freestyle." As of September 3, 1996, the Company
owned and operated 42 and franchised 288 hair care salons.
In November 1993 the Company, through its subsidiaries, Four Star
Restaurant Management Corporation ("Management Corp.") and Four Star Pizza
Franchising Corp. ("Franchising Corp."), sold to a third party substantially
all of the assets of the Company's Four Star Pizza business, which involved
the operation and franchising of a take-out and delivery pizza shop chain
under the "Four Star" name, including all existing franchise agreements and
all rights in and to the "Four Star" service mark within the territory of the
United States, the United States Virgin Islands, Puerto Rico and Canada. In
addition, the Company has licensed the rights to use the proprietary
information and know-how used in the franchising and operation of the Four
Star Pizza business in Arizona and all states located east of the Mississippi
River. The licensee has the right to extend the terms of its license to
additional areas and to purchase the property that is the subject of that
license agreement upon expiration of the six year license term, for a nominal
payment. Prior to such transfer of assets, the Company, through its
subsidiaries, had licensed pizza shops under the "Four Star" name principally
in Western Pennsylvania, West Virginia and Ohio.
Narrative Description of Business
The Company's principal business is operating hair care salons
under two of its tradenames and franchising activities, including the
franchising of hair care salons under its proprietary names. Its Haircrafters
("Haircrafters") program caters to economy-minded clientele at salons located
largely in shopping centers. Its Great Expectations Precision Haircutters
("Great Ex") program is designed to appeal to fashion-conscious individuals at
salons located mainly in shopping malls. The Company has existing area
distributor relationships with several of its franchisees under which they are
licensed to grant subfranchises under the Company's proprietary names.
As of September 3, 1996, the Company owned and operated 28
Haircrafters salons, 9 Great Ex salons, 3 Freestyle salons, and 2 Natisse
salons in the United States, including salons in California, Florida, Georgia,
Illinois, New Hampshire, New Jersey, Oklahoma, South Carolina, Texas and
Virginia.
As of September 3, 1996, the Company's franchisees (including
subfranchisees) operated 228 Haircrafters salons, 58 Great Ex salons and one
Natisse salon in the United States and Canada.
The Company's standard franchise agreement grants a franchisee the
right to use the Company's proprietary names and marks in accordance with the
Company's system, which includes standards and specifications related to
products and services sold, maintenance of premises and employee conduct. A
franchisee is required to pay an initial fee, currently $20,000 for the
Haircrafters and Great Ex programs, and a weekly royalty, currently 6% of
gross sales from the franchisee's salon. The Company also presently offers a
variety of discount programs under which a franchisee operating multiple
salons may be entitled to discounts of 25% of the initial franchise fee on any
additional franchises he may purchase. The franchise agreement has an initial
term of 15 years, with three five-year renewal options. The Company shares
the initial franchise fees and royalties received on account of subfranchises
sold by its area distributors, who perform continuing services for such
subfranchisees. In 1996, the Company granted four franchises for a hair care
salon, under the Haircrafters name.
In 1992 the Company introduced a New Area Development program,
under which qualified existing franchisees could acquire an exclusive
territory for the operation of existing and additional salons, in
consideration of an initial fee (which could be financed over four years)
based on a percentage of sales of the franchisee's existing salons and the
franchisee's agreement to open and maintain a minimum number of additional
salons within the exclusive territory. The additional salons would be opened
by the franchisee at a reduced license fee, and the royalties payable by the
franchisee with respect to any salon operated within the exclusive territory
(including existing salons) would be reduced by 50%. At September 3, 1996,
there were 42 licensed salons operating under the New Area Development
Program. The Company no longer offers this program.
The Company provides its franchisees with site-location
assistance, training, and promotional and advertising assistance. In
addition, the Company sells products and equipment (including fixtures, hair
sprays, wave set solutions, shampoos, etc.) primarily for use or resale by its
franchisees. Some of the products and equipment are manufactured according to
the Company's specifications and sold under its proprietary names and marks.
While the Company manufactures none of the products it sells, all are
available in sufficient quantity to satisfy the Company's needs. The Company
promotes its product and equipment sales to franchisees through direct
mailings, but does not actively seek other markets for such products and
equipment, except through the sale of such products from the Company-owned
salons. In certain cases, the Company or one of its subsidiaries will
construct a salon for a new franchisee, on a "cost plus" basis.
The number of the Company's franchised hair care salons has been
steadily decreasing for the last several years.
In addition to the Haircrafters and Great Ex programs, the Company
is engaged in the hair care and beauty salon business through the three
Company-owned and operated Freestyle salons, all of which are located in
California. In addition, the Company, through wholly-owned subsidiaries,
presently owns and operates two Natisse International salons, one in Tysons
Corner, McLean, Virginia and the other in Fort Worth, Texas.
From June 1989 until November 1993, the Company, through Four Star
Pizza Franchising Corp. ("Pizza Franchising"), a wholly-owned subsidiary of
Four Star Restaurant Management Corporation ("Management Corp."), wholly owned
by the Company, was engaged in the business of franchising a take-out and
delivery pizza chain under the "Four Star" name, principally in western
Pennsylvania, West Virginia and Ohio. In November 1993, the Company sold
substantially all of the assets of the Four Star Pizza business.
The Company's franchise activities in the United States are
regulated by the Federal Trade Commission ("FTC") and various states. The FTC
requires that, before offering or selling a franchise, a franchisor provide a
prospective franchisee with an offering circular containing detailed
information about the franchisor (including audited financial statements), its
franchise program and agreements. Thirteen states require that a franchisor
register and provide prospective franchisees with a similar document before
offering or selling franchises to persons connected with those states. The
FTC and the aforementioned states require that a franchisor amend such
document annually, and more frequently, if necessary, upon any material change
in the information disclosed therein. The Company seeks to comply with the
disclosure requirements to which it is subject and the registration
requirements in all states requiring registration and in which the Company
desires to sell franchises. The Company does not plan to sell franchises in
those states requiring registration, but in which the Company's offering
circular is not registered.
The Company's ability to register and protect its proprietary
marks is important to the success of both Company-operated and franchised
salons and to the marketability of its franchises. The Company's principal
proprietary marks in the hair salon and hair care business (and the year of
the first Federal registration of each) include: "Haircrafters International"
(1978); "Great Expectations Precision Haircutters" (registered as a trade name
in 1976 and a logotype in 1978); "Great Ex" (1981); "Haircrafters" (1984); and
"Natisse" (1990). In addition, the Company acquired the mark "Freestyle"
(1975) in 1989 from Freestyle, Inc. In November 1993, the Company, through
Management Corp., transferred all of its right, title and interest in and to
the trade and service mark "Four Star" (registered in 1985 and acquired by the
Company in 1989), which the Company had used in its Four Star Pizza business.
Federal service mark registrations in effect prior to November 1989 remain
effective for twenty years, subject to their remaining in use, and are
renewable for additional ten year terms. Federal service mark registrations
initially registered during or after November 1989 remain effective for an
initial ten year period subject to their remaining in use, and are renewable
for additional successive ten year terms. The Company is of the opinion that
its proprietary marks afford sufficient protection for its purposes.
The Company encounters competition in each of its major business
activities from many firms, some of which are larger and more diversified and
have greater assets and resources. The hair care business is highly
competitive, as is the franchising business generally. The Company sells hair
care products and equipment to franchisees, but the Company's franchisees also
purchase hair care products and equipment from unrelated third parties. Data
upon which the Company reliably can estimate its relative competitive position
is unavailable in the hair salon industry because many of the Company's
competitors are privately held and do not publish financial information.
The Company made no material expenditures on Company-sponsored
research and development or customer-sponsored research activities relating to
products, services or techniques during fiscal 1995 or fiscal 1996.
As of September 3, 1996, the Company employed approximately 400
persons, including employees of its subsidiaries, approximately 270 of whom
are full time employees.
The Company does not expect that compliance with federal, state
and local regulations, enacted or adopted, relating to the discharge of
materials into the environment, will materially affect the Company's capital
expenditures, earnings or competitive position.
Item 2. Description of Property.
The Company's principal executive offices are located in
approximately 20,000 square feet of office and warehouse space at 125 South
Service Road, Jericho, New York, under a lease expiring in June 1999. The
current annual rental payable by the Company is approximately $170,000,
subject to cost-of-living increases, in addition to real estate taxes,
insurance, fuel and utility charges, and cleaning and certain repair costs.
The landlord of these premises caused the elimination of one of the rights-
of-way onto and off of this property, which the Company has asserted
constitutes a violation of its rights under the lease. Presently, this issue
is the subject of an arbitration proceeding between the Company and the
landlord. The Company has withheld, since December 1995, the payment of rent
due under the lease pending the arbitrators determination of the respective
rights and duties of the Company and the landlord.
A wholly-owned subsidiary of the Company is the sublessee of a
2,500 square foot office and warehouse space in Greenville, South Carolina,
under which the subsidiary currently pays a monthly rental of $1,100, plus
taxes. The sublease expires on June 30, 1997. The Company currently sublets
this space to a third party under a lease expiring June 30, 1997.
Wholly-owned subsidiaries of the Company lease the premises for
each of the 42 Company-owned salons in existence at September 3, 1996. These
leases expire at various times up to 2005 and some contain options to renew.
Wholly-owned subsidiaries of the Company also lease the premises
of approximately 46 salons that are subleased to franchisees at the primary
lease rental cost together, in certain cases, with an administrative fee.
Neither the Company nor its subsidiaries have any other liability with respect
to, or interest in, any of the leases on the premises of the Company's other
franchised outlets.
The Company's leases in most cases provide for payment of the
costs of insurance, utilities, real estate tax escalation and related lease
charges, in addition to rent.
Item 3. Legal Proceedings.
As a result of normal and routine business operations, the Company
and its subsidiaries are, from time to time, parties to legal proceedings
incidental to their businesses. In the opinion of management, none of such
presently pending proceedings will have a material effect on the Company's
financial condition.
Item 4. Submission of Matters to a Vote of Security-Holders.
Not applicable.
PART II
Item 5. Market Price for Common Equity
and Other Shareholder Matters
(a) The Company's Common Stock is quoted on the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"). The
prices in the table below represent the range of high and low closing bid
quotations as reported by NASDAQ for each quarterly period during the last two
fiscal years. The quotations represent prices between dealers, do not include
retail markups, markdowns or commissions and may not represent actual
transactions.
Year ended Year ended
June 30, 1996 June 30, 1995
High Low High Low
1st Quarter 1.25 1.25 $1.94 $1.75
2nd Quarter 1.25 .75 $1.75 $1.50
3rd Quarter 1.38 .75 $1.50 $1.38
4th Quarter 1.63 1.38 $1.38 $1.25
(b) As of September 3, 1996, the Company had approximately 280
security holders of record, not including owners whose holdings are in single
accounts of clearing houses or broker nominees.
(c) The Company did not pay any dividends in fiscal 1996 or
fiscal 1995.
Item 6. Management's Discussion and Analysis
of Financial Condition and
Results of Operation.
Liquidity and Capital Resources:
Cash and cash equivalents were $1,035,395 at June 30, 1996, as
compared to $1,096,793 at June 30, 1995. In addition, the Company had
marketable securities of $565,725 at June 30, 1996, as compared to $267,586 at
June 30, 1995. In fiscal 1996, the primary source of the Company's liquidity
and capital resources was net cash provided by operating activities of
$596,000, as compared to $306,000 in fiscal 1995. In fiscal 1996, the Company
had net purchases of marketable securities of $298,000, as compared to net
sales of $606,000 in fiscal 1995. In fiscal 1996, the Company invested
$287,000 to purchase property, plant and equipment, and cash of $15,000 to
acquire a salon business, as compared to total expenditures of $421,000 and
cash of $22,000 for such purposes, respectively, in fiscal 1995.
The Company had a current ratio of 2.22 at June 30, 1996, as
compared to 2.19 at June 30, 1995.
At June 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 fiscal 1996, revenues from Company-owned salon operations
decreased by 12.5%, or $1,331,000, over revenues for fiscal 1995. The
decrease in revenues was mainly attributable to a decrease in the average
number of Company-owned salons operating during fiscal 1996. As of June 30,
1996, there were 41 Company-owned salons, as compared to 53 at June 30, 1995
and 50 at June 30, 1994. Comparable store sales operating throughout the
entire years ended June 30, 1996 and June 30, 1995 declined by 4.9% in 1996
from 1995. In fiscal 1996, direct costs of Company-owned salons decreased by
13.6%, or $1,376,000, over such total costs for fiscal 1995. These variances
are largely attributable to costs that fluctuate in direct relation to sales.
However, the Company incurred increased occupancy, payroll and advertising
costs, as a percent of sales, during fiscal 1996. During fiscal 1996, the
Company opened four salons, sold three salons, closed 14 salons, and acquired
one salon from a licensee.
Management will continue to close existing salons that do not meet
its cash flow criteria.
Sales of equipment and products decreased by 10.9% or $26,000 in
fiscal 1996, as compared to fiscal 1995. Correspondingly, cost of equipment
and products sold decreased by 4.9% or $9,000, reflecting lower margins. The
decrease in sales is due in part to the decreased number of franchised salons.
Royalties and service fees decreased by 7.5% or $160,000, in
fiscal 1996, as compared to 1995. This decrease is due to a decline in the
number of franchised hair salons. The number of franchised hair salons has
been steadily decreasing for several years (332 at June 30, 1994, 303 at June
30, 1995 and 292 at June 30, 1996). The number of new franchises granted by
the Company was 7 in fiscal 1993. The Company granted two new franchises in
fiscal 1994, one in 1995 and four in 1996.
The Company expects the decline in royalties and franchise fees 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 fiscal 1996 by $4,000, as
compared to fiscal 1995. Franchise fees, which are principally related to the
Company's discontinued 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.
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 fiscal 1996 declined by $20,000,
as a result of the decline in the average amount of invested assets and in
interest rates.
In fiscal 1996, selling, general and administrative expenses
decreased by 16.3%, or $493,000, from $3,018,000 in fiscal 1995 to $2,525,000
in fiscal 1996. The decreases in 1996 are due in part to lower general and
administrative payroll costs and other overhead expenses.
There was an increase in the net loss on sale/abandonment of
assets of $119,000 from fiscal 1995 to fiscal 1996, which is primarily
associated with the closing of fourteen (14) salons in fiscal 1996, as
compared to the closing of six (6) salons in fiscal 1995.
There was an income tax charge of $8,000 in fiscal 1996, on a loss
of $369,000, which represents $25,000 of state income taxes, net of a decrease
in the valuation allowance of $17,000. There was an income tax benefit of
$53,000 in fiscal 1995 on a loss of $640,000, which represents the projected
refund from a federal tax loss carryback of $77,000, less state income taxes
of $24,000. In fiscal 1996, the Company was not able to carryback for federal
income tax purposes a net operating loss of approximately $375,000, as
compared to $366,000, in fiscal 1995. 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 fiscal 1996 and 1995. The Company
has not recognized the future tax benefit of its net operating loss
carryforwards, because presently the Company cannot reasonably estimate the
benefits that may be realized upon profitable future operations.
The Company's salons and franchising activities, including its
sales of franchises, are not materially affected by seasonal fluctuations in
the volume of business.
Item 7. Financial Statements.
(Response begins on next page, numbered F-1.)
Item 8. Changes in and Disagreements with Accountants.
Not applicable.
C O N T E N T S
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statement of Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9 - F-20
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
CutCo Industries, Inc.
We have audited the accompanying consolidated balance sheets of CutCo
Industries, Inc. and Subsidiaries as of June 30, 1996 and 1995 and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CutCo
Industries, Inc. and Subsidiaries as of June 30, 1996 and 1995 and the
consolidated results of their operations and their consolidated cash flows for
the years then ended in conformity with generally accepted accounting
principles.
s/ GRANT THORNTON LLP
GRANT THORNTON LLP
Melville, New York
August 30, 1996
CutCo Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30,
ASSETS 1996 1995
------------ --------------
CURRENT ASSETS
Cash $1,035,395 $1,096,793
Marketable securities 565,725 267,586
Notes and accounts receivable, net 426,539 659,588
Merchandise inventory 415,236 537,896
Prepaid and refundable income taxes 12,851 94,858
Deferred income taxes 105,000 135,000
Prepaid expenses and miscellaneous receivables 102,164 84,358
---------- ----------
Total current assets 2,662,910 2,876,079
PROPERTY AND EQUIPMENT - AT COST
Furniture, fixtures and equipment 2,305,969 2,609,826
Leasehold improvements 158,230 184,976
---------- ----------
2,464,199 2,794,802
Less accumulated depreciation and
amortization 1,373,794 1,338,702
---------- ----------
1,090,405 1,456,100
OTHER ASSETS
Notes receivable, noncurrent, net 120,898 215,763
Deferred charges and other 410,914 520,276
Deposits 116,677 123,567
---------- ----------
648,489 859,606
---------- ----------
$4,401,804 $5,191,785
========== ==========
The accompanying notes are an integral part of these statements.
CutCo Industries, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS (continued)
June 30,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------- ------------
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 961,731 $ 997,170
Current portion of long-term debt 54,826 78,996
Accrued and withheld taxes, other than
income taxes 159,303 204,167
Income taxes payable 21,221 31,276
----------- -----------
Total current liabilities 1,197,081 1,311,609
LONG-TERM DEBT 174,430 219,724
DEPOSITS PAYABLE 55,637 64,860
DEFERRED FRANCHISE FEE REVENUE, NET 35,714 232,462
DEFERRED INCOME TAXES 105,000 152,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.10 par value; authorized
5,000,000 shares; issued, 1,883,706 shares 188,371 188,371
Additional paid-in capital 4,185,250 4,185,250
Retained earnings 1,941,913 2,319,101
----------- -----------
6,315,534 6,692,722
Less common stock held in treasury
- at cost (3,481,592) (3,481,592)
----------- -----------
2,833,942 3,211,130
----------- -----------
$ 4,401,804 $ 5,191,785
=========== ===========
The accompanying notes are an integral part of these statements.
CutCo Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,
1996 1995
-------------- --------------
Revenues
Owned retail stores $ 9,308,571 $10,639,373
Sales of equipment and products 213,371 239,599
Royalties and service fees 1,972,821 2,132,660
Franchise fee income 197,784 202,045
----------- -----------
11,692,547 13,213,677
----------- -----------
Costs and expense
Direct costs of owned retail stores 8,708,585 10,084,701
Cost of equipment and products sold 175,190 184,283
Depreciation and amortization 573,377 592,804
Selling, general and administrative
expenses 2,524,784 3,017,848
Provision for doubtful accounts and
notes receivable 20,000 85,000
----------- -----------
12,001,936 13,964,636
----------- -----------
Loss from operations (309,389) (750,959)
----------- -----------
Other income (loss)
Interest and dividend income 87,953 107,869
Interest expense (32,158) (33,724)
Loss on sale/abandonment of assets (199,274) (80,021)
Other income, net 83,680 117,197
----------- -----------
(59,799) 111,321
----------- -----------
Loss before income taxes (369,188) (639,638)
Income taxes (benefit) 8,000 (53,000)
----------- -----------
NET LOSS $ (377,188) $ (586,638)
=========== ===========
Net loss per common share $(.48) $(.75)
===== =====
Weighted average number of common
shares outstanding 780,625 780,625
=========== ===========
The accompanying notes are an integral part of these statements.
CutCo Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Years ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Additional
Common stock paid-in Retained Treasury stock
Shares Amount capital earnings Shares Amount Total
------ ------ ---------- -------- ------ ------ -----
<S>
Balance at
June 30, <C> <C> <C> <C> <C> <C> <C>
1994 1,883,706 $188,371 $4,185,250 $2,905,739 1,103,081 $(3,481,592) $3,797,768
Net loss (586,638) (586,638)
---- ---- ---- ------- ---- ----- -------
Balance at
June 30,
1995 1,883,706 188,371 4,185,250 2,319,101 1,103,081 (3,481,592) 3,211,130
Net loss (377,188) (377,188)
---- ---- ---- --------- ---- ---- ---------
Balance at
June 30,
1996 1,883,706 $188,371 $4,185,250 $1,941,913 1,103,081 $(3,481,592) $2,833,942
========= ======== ========== ========== ========= =========== ==========
The accompanying notes are an integral part of this statement.
CutCo Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended June 30,
</TABLE>
<TABLE>
<CAPTION>
1996 1995
__________ ___________
<S>
Cash flows from operating activities
<C> <C>
Net loss $ (377,188) $ (586,638)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by operating activities
Depreciation and amortization of property
and equipment 412,681 435,060
Amortization of intangibles 160,696 157,744
Provision for doubtful accounts and notes
receivable 20,000 85,000
Loss on sale and abandonment of
property and equipment, net 199,274 80,021
Deferred income tax benefit (17,000)
Changes in operating assets and liabilities,
net of effect
of acquisitions and disposition
Notes and accounts receivable 317,554 207,115
Merchandise inventory 104,946 88,457
Prepaid and refundable income taxes 82,007 (12,513)
Prepaid expenses and miscellaneous
receivables (17,806) 21,817
Deposits and other 6,890 25,424
Accounts payable and accrued expenses (35,439) 31,402
Accrued and withheld taxes, other than
income taxes (44,864) 2,432
Income taxes payable (10,055) (23,926)
Deposits payable (9,223) (11,028)
Deferred franchise fee revenue, net (196,748) (194,332)
-------- --------
972,913 892,673
-------- -------
Net cash provided by operating activities 595,725 306,035
------- -------
Cash flows from investing activities
Purchases of property, plant and equipment (286,987) (421,484)
Proceeds from sale of property, plant
and equipment 34,956 13,255
(Purchase) sale of marketable securities, net (298,139) 606,321
Expenditures for start-up and other
deferred costs (2,489) (3,324)
Payments for businesses acquired (15,000) (22,000)
Net cash (used in) provided by investing ------- -------
activities (567,659) 172,768
-------- -------
CutCo Industries, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Year ended June 30,
</TABLE>
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from financing activities
Principal payments on loan $ (89,464) $ (73,589)
----------- -----------
Net cash used in financing activities (89,464) (73,589)
----------- -----------
NET (DECREASE) INCREASE IN CASH (61,398) 405,214
Cash at beginning of year 1,096,793 691,579
--------- ---------
Cash at end of year $1,035,395 $1,096,793
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 26,901 $ 33,873
Income taxes 14,171 29,199
Noncash investing and financing activities:
Notes payable issued in connection with
acquisition of salons 20,000 10,000
Notes and accounts receivable forgiven
in connection with acquisition of salons 49,960 75,000
Notes and accounts receivable received in
connection with sale of salons 59,600
</TABLE>
The accompanying notes are an integral part of these statements.
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CutCo Industries, Inc. and Subsidiaries (the "Company") are primarily engaged
in the operation and franchising of hair care salons. A summary of the
significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows:
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
CutCo Industries, Inc. and its subsidiaries, all of which are wholly-owned.
All significant intercompany balances and transactions have been eliminated.
2. Investments in Marketable Securities
Investments in marketable securities at June 30, 1996, consisting of U.S.
Treasury Notes and mutual funds, have been classified as "available for sale
securities" and are reported at fair value which approximates cost. Changes
in the fair value of "available for sale securities" are classified as a
separate component of shareholders' equity, net of any related tax effects.
As of June 30, 1996 and 1995, fair value approximates cost.
3. Merchandise Inventory
Inventory, consisting primarily of merchandise held for resale, is stated
at the lower of cost or market. Cost is determined using the first-in,
first-out method.
4. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided for in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated service lives (generally 5 to 10
years on a straight-line basis). Leasehold improvements and leasehold costs
are amortized over the term of the lease or service lives of the
improvements, whichever is shorter. osts of additions and improvements
which substantially extend the useful life of a particular asset are
capitalized. Repair and maintenance costs are charged to expense.
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE A (continued)
5. Intangible and Other Assets
The excess of cost over the fair value of net assets acquired (goodwill) is
amortized on a straight-line basis over 10 or 15 years. On an ongoing basis,
management reviews the valuation and amortization of goodwill to determine
possible impairment by comparing the carrying value to the undiscounted
future cash flows of the related assets.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121") that establishes
accounting standards for the impairment of long-lived assets, certain
intangibles and goodwill related to those assets to be held and used, and
for long-lived assets and certain identifiable intangibles to be disposed of.
SFAS No. 121 is required to be adopted for fiscal years beginning after
December 15, 1995. In accordance with SFAS No. 121, it is the Company's
policy to periodically review and evaluate whether there has been a permanent
impairment in the value of intangibles. Factors considered in the valuation
include current operating results, trends and anticipated undiscounted future
cash flows. Accordingly, the adoption of SFAS No. 121 is not expected to
have a significant effect on the consolidated financial statements of the
Company.
6. Revenues
Income from sales of franchises is recognized when the Company has
substantially fulfilled its related obligations under the franchise
agreement. Until such time, fees are deferred net of related direct costs.
Certain area franchise fees have been deferred and will be recognized upon
the collection of the related notes receivable (see Note C). Royalties from
franchisees are reported as revenue as the fees are earned and become
receivable from the franchisee.
7. Income Taxes
Deferred income taxes are recognized for temporary differences between
financial statement and income tax bases of assets and liabilities, net
operating loss carryforwards and tax credit carryforwards, for which income
tax expenses or benefits are expected to be realized in future years. A
valuation allowance has been established to reduce the deferred tax assets
as it is more likely than not that such portion of the deferred tax assets
will not be realized. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE A (continued)
8. Net Loss Per Common Share
Net loss per common share is based upon the weighted average number of
common shares outstanding during the year. The effect of stock options on
the calculation of net income per common share was antidilutive in 1996 and
1995.
9. Statement of Cash Flows
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
10. Business Concentrations and Financial Instruments
Financial instruments which subject the Company to concentration of credit
risk consist principally of accounts and notes receivables relating to the
Company's franchising operations. Concentrations consist of multiple
location franchisees who are located in specific geographic areas. The
Company routinely addresses the financial strength of its franchisees and
provides for an allowance for estimated uncollectible amounts.
The Company's principal financial instruments consist of investments in
marketable securities, accounts and notes receivable and long-term debt.
The Company believes that the carrying amount of such instruments
approximates fair value.
11. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The significant estimates include, but are not limited to, the allowance for
doubtful accounts, inventory valuation and the valuation of deferred
charges.
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE A (continued)
12. Accounting Pronouncements Not Yet Adopted
Adoption of Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock-Based Compensation," is required for fiscal
years beginning after December 15, 1995 and allows for a choice of the
method of accounting used for stock-based compensation. Entities may elect
the "intrinsic value" method currently based on APB No. 25, "Accounting for
Stock Issued to Employees," or the new "fair value" method contained in SFAS
No. 123. The Company intends to implement SFAS No. 123 in 1997 by
accounting for stock-based compensation, if applicable, under APB No. 25.
As required by SFAS No. 123, the pro forma effects on net income and
earnings per share will be determined as if the fair value based method had
been applied and disclosed in the notes to the consolidated financial
statements.
13. Reclassifications
Certain reclassifications have been made to the prior year amounts to
conform to the fiscal 1996 presentation.
NOTE B - ACQUISITIONS
During fiscal 1996, the Company acquired one salon from a licensee in
exchange for $15,000 in cash, the cancellation of $49,960 of accounts and
notes receivable and the issuance of a $20,000, four-year, 7% promissory
note payable. The excess cost over the fair value of assets acquired of
$48,845 was recorded in connection with this acquisition (see Note D).
During fiscal 1995, the Company acquired four salons from various licensees,
in three separate transactions at various dates, in exchange for $22,000 in
cash, the cancellation of $75,000 of accounts and notes receivable and the
issuance of a $10,000, one-year, 7% promissory note payable.
In addition, the Company is obligated, on certain prior acquisitions, to
make contingent payments based upon profits, as defined, expiring through
2004.
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE B (continued)
These acquisitions have been accounted for as purchases, and, accordingly,
the operating results of the acquired salons are included in the Company's
consolidated results of operations from the date of acquisition. The
Company allocated the total consideration to the assets acquired based on
their estimated fair value. Consolidated pro forma operating results as
though the salons were acquired at the beginning of the respective fiscal
years are not presented as the pro forma results are not materially
different from those of the Company. The excess cost over the fair value of
assets acquired of approximately $49,000 was recorded during fiscal 1996
in connection with these acquisitions.
NOTE C - NOTES AND ACCOUNTS RECEIVABLE
Notes and accounts receivable consist of the following:
June 30,
----------------------------
1996 1995
------------ ------------
Notes receivable $394,735 $713,047
Less noncurrent portion 244,898 329,763
-------- --------
Notes receivable, current portion 149,837 383,284
Accounts receivable 488,606 455,499
-------- --------
638,443 838,783
Less allowance for doubtful accounts
and notes 211,904 179,195
-------- --------
$426,539 $659,588
======== ========
Notes receivable, noncurrent $244,898 $329,763
Less allowance for doubtful notes 124,000 114,000
-------- --------
Notes receivable, noncurrent, net $120,898 $215,763
======== ========
Through fiscal 1994, the Company received notes aggregating $895,119 in
connection with the sale of area franchise rights. The notes are receivable in
48 equal installments with interest, and the related franchise fee income will
be recognized as the notes are collected. During fiscal 1996 and
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE C (continued)
1995, the Company recognized $170,034 and $184,795, respectively, of franchise
fee income relating to the collection of such notes. At June 30, 1996 and
1995, the franchise fee income relating to the outstanding balances of $31,714
and $232,462, respectively, included in notes receivable has been deferred.
NOTE D - DEFERRED CHARGES AND OTHER
Deferred charges and other consist of the following:
Amortization
period
June 30, (straight-
1996 1995 line method)
-------- -------- ------------
Deferred costs relating to area
distributorships $ 11,357 $ 11,357 10 years
Goodwill 85,950 37,066 10 -15 years
Intangible assets - licensing rights (a) 451,841 451,841 6 years
Noncompetition covenants 190,000 190,000 5 years
Other 133,493 143,392 Various
-------- --------
872,641 833,656
Less accumulated amortization 461,727 313,380
-------- --------
$410,914 $520,276
======== ========
(a) The Company sold its Four Star Pizza business as of November 8, 1993 for
the initial consideration of $50,000 in cash and $150,000 in 8% promissory
notes payable monthly over six years. In addition, the Company is
entitled to future monthly royalties equal to 25% of initial franchise
fees collected and 1.25% of gross sales generated by Four Star Pizza
licensees (excluding certain existing licensees) over a period of six
years.
The Company believes that the initial proceeds from the sale, including
the estimated future royalties, will be sufficient to recover the value of
the Four Star Pizza net assets sold and licensed. The initial
consideration of $200,000 has been first applied to reduce tangible
assets sold and then to reduce other intangible assets. The remaining
asset, principally the master license agreement in the amount of $451,841,
will be amortized on a straight-line basis over its remaining useful life
through June 1999. No gain or loss was recognized for this transaction.
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE E - LONG-TERM DEBT
Long-term debt consists of the following
June 30,
-----------------------
1996 1995
---------- ----------
Promissory notes $229,256 $298,720
Less current portion 54,826 78,996
-------- --------
$174,430 $219,724
======== ========
On April 12, 1993, the Company issued two unsecured promissory notes of
$190,000 and $160,000 in connection with an acquisition of eight salons. These
notes are payable in 59 equal monthly installments consisting of principal and
interest (8.25%) in the amounts of $2,985 and $2,513, respectively, which
commenced on May 12, 1993 and mature on April 12, 1998, with final payments of
$66,500 and $56,000, respectively, as adjusted in 1996. Annually, in the
event the prime rate exceeds 7%, such notes shall bear interest at the prime
rate, and the remaining balance of the note shall be amortized in equal monthly
payments as if the original maturity date was April 12, 2000.
On September 23, 1995, the Company issued a $20,000 promissory note in
connection with the acquisition of one salon. This note is payable in 48
monthly installments consisting of principal and interest (7%) of $479, with
final payment in September 1999.
Maturities of long-term debt are as follows:
Year ended June 30,
1997 $ 54,826
1998 167,570
1999 5,439
2000 1,421
--------
$229,256
========
NOTE F - STOCK OPTION PLANS
The Company has incentive stock option plans, as amended, which became
effective in 1984, 1987 and 1990. The exercise price of options granted under
the plans shall not be at less than the fair value at date of grant. Subject
termination of employment, options granted expire up to ten years from date of
grant, and are nontransferable other than on death. Options become exercisable
at the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE F (continued)
rate of twenty-five percent per year, commencing with the date of grant.
Options for persons who attain fifteen years of service with the Company are
fully exercisable on the date granted.
The following summarizes the changes in options outstanding under the Company's
stock option plans for the two years ended June 30, 1996:
Number Option price
of shares per share
----------- --------------
Outstanding at June 30, 1994 70,000 $1.75 - 3.03
Cancelled (39,000) 2.44 - 2.75
-------
Outstanding at June 30, 1995 31,000 1.75 - 3.03
Cancelled (5,000) 1.25 - 2.75
Granted 106,000 1.25 - 1.38
-------
Outstanding at June 30, 1996 132,000 $1.25 - 3.03
=======
Exercisable at June 30, 1996 and 1995 were options for 86,000 and 22,000
shares, respectively. At June 30, 1996 and 1995, the Company had 52,000 and
156,000 shares, respectively, available for grant.
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE G - INCOME TAXES
The Company and its subsidiaries file a consolidated Federal income tax return
and separate state and local returns.
The components of the provision (benefit) for income taxes are as follows:
Year ended June 30,
--------------------------
1996 1995
----------- -----------
Current
Federal $(77,000)
State $ 25,000 24,000
-------- --------
25,000 (53,000)
-------- --------
Deferred
Federal (17,000)
-------- --------
$ 8,000 $(53,000)
========= ========
The reasons for the difference between the total tax provision (benefit) and
the amount computed by applying the statutory Federal income tax rate to the
loss before income taxes are as follows:
Year ended June 30,
--------------------------
1996 1995
---------- ------------
Expected tax benefit $(126,000) $(217,000)
State and local income taxes, net of
Federal income tax benefit 17,000 15,800
Increase in valuation allowance 136,000 130,000
Sale/abandonment of fixed assets 7,000
Other (19,000) 11,200
--------- ---------
Income tax provision (benefit) $ 8,000 $ (53,000)
========= =========
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE G (continued)
Deferred tax assets (liabilities) are comprised of the following:
1996 1995
------------- --------------
Gross deferred tax liability
Depreciation $(105,000) $(152,000)
--------- ---------
Gross deferred tax assets
Deferred compensation expense 23,000 43,000
Bad debt reserves 104,000 100,000
Net operating loss carryforward 247,000 124,000
Tax credits 23,000 23,000
Other 7,000 8,000
--------- ---------
404,000 298,000
Valuation allowance (299,000) (163,000)
Net deferred tax assets 105,000 135,000
Net deferred tax liability $ - $ (17,000)
========= ==========
The Company has net operating loss and tax credit carryforwards of $727,000 and
$23,000, respectively, expiring through 2011.
NOTE H - FRANCHISING INFORMATION
The Company operates a chain of its own hair care salons and has granted
franchises for hair care salons throughout the United States. As of June 30,
1996, there were 41 Company-owned salons in operation, compared to 53 at June
30, 1995. The number of franchised salons at June 30, 1996 was 292, compared
to 303 at June 30, 1995. During the year ended June 30, 1996, the Company
closed 14 salons, sold 3 salons and acquired 1 salon from a licensee and opened
4 new salons. The Company also recorded the initial franchise fees relating to
two hair care salons during each of the years ended June 30, 1996 and 1995.
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE I - COMMITMENTS AND CONTINGENCIES
1. The Company leases office and salon facilities and also leases certain
equipment under operating leases that expire through 2005. The leases
provide for minimum annual rentals and, in most cases, for percentage
rentals based on sales in excess of specified minimum amounts, real estate
taxes and other expenses. Certain of the leased premises are sublet to
licensees at rentals equal to those paid by the Company. Certain of the
leases contain options to renew.
The following is a schedule of approximate minimum rentals and subrental
income under noncancellable operating leases having an initial or remaining
term of more than one year as of June 30, 1996:
Minimum
amounts to
be received Net
Minimum from minimum
rentals subleases rentals
------------- --------------- ---------------
Year ending June 30,
1997 $2,581,000 $1,248,000 $1,333,000
1998 2,044,000 953,000 1,091,000
1999 1,732,000 828,000 904,000
2000 1,187,000 641,000 546,000
2001 919,000 543,000 376,000
Thereafter 1,124,000 738,000 386,000
---------- ---------- ----------
$9,587,000 $4,951,000 $4,636,000
========== ========== ==========
The following is a schedule of approximate rental expense (net of sublease
rental income) for the years ended June 30, 1996 and 1995:
1996 1995
------------ -------------
Minimum rentals $1,265,000 $1,362,000
Percentage rentals, real estate taxes
and other expenses 353,000 380,000
---------- ----------
$1,618,000 $1,742,000
CutCo Industries, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1995
NOTE I (continued)
2. At June 30, 1996, the Company is contingently liable as the guarantor
on notes payable for equipment purchased by franchisees in the amount
of approximately $4,000.
3. The Company has been named as a defendant in various lawsuits.
Management believes,after consultation with counsel, that the
disposition of such litigation will not have a material effect on the
Company's financial position or results of operations.
4. During the year ended June 30, 1990, the Company entered into various
consulting and noncompetition agreements expiring in 1999, with the
former principals of two businesses acquired. The agreements
provide for monthly payments and various fees as defined in the
agreements. During fiscal 1996 and 1995, approximately $31,000 and
$42,000, respectively, has been charged to expense for these
agreements.
5. At June 30, 1996, the Company has letters of credit in the amount of
approximately $12,000 outstanding.
6. The Company has employment agreements with its Chairman, President and
Treasurer, which expire at July 31, 1997.
NOTE J - RETIREMENT PLAN
During the fiscal year ended June 30, 1996, the Company implemented a
401(k) Plan that is available to substantially all employees, to which the
Company may elect to contribute to the Plan as determined by the Board of
Directors. For the year ended June 30, 1996, the Company contributed
approximately $14,000.
Item 9. Directors, Executive Officers,
Promoters and Control Persons;
Compliance with Section 16(a).
The following list sets forth information as of September 1, 1996,
as to all directors and executive officers of the Company during its
1996 fiscal year:
MARVIN W. MARCUS, age 71, has been Chairman of the Board of
Directors of the Company since October 1, 1986 and Vice
President-Financial Planning since May 1984. Mr. Marcus has also been
a director of the Company since 1970. From 1970 until April 1984, he
served as Secretary/Treasurer and Chief Financial Officer of the
Company. He is a certified public accountant and for more than twenty
years has been a principal in the accounting firm of Gettry, Marcus,
Stern & Lehrer, CPA, P.C., formerly known as Gettry, Marcus & Co.,
located in New York, New York.
DON VONLIEBERMANN, age 58, has been President of the Company since
October 1, 1986, and a director since 1975. Mr. vonLiebermann had been
Vice President, and thereafter Executive Vice President, of the Company
from 1970 until he became President of the Company.
MICHAEL P. KRAMER, age 51, has served as Vice President-Finance and
Treasurer of the Company since May 1984 and as a director of the
Company since November 1984.
JOHN H. DANIELS, age 68, has been a partner in the Mineola, New York
law firm of John H. Daniels since 1958. Mr. Daniels is a director and
past president of the Nassau Lawyers Association and owns and manages
commercial real estate in New York State. Mr. Daniels is the
brother-in-law of Marvin W. Marcus.
RICHARD C. ANTHONY, age 58, is currently a private investor and real
estate consultant. He has served as Executive Vice President of The
Peregrine White Company, Inc., engaged in the real estate business,
from 1987 to 1993.
VINCENT K. DEPIERRO, age 59, has been an independent publisher sales
representative since April 1995. From February 1987 through April
1995, he served as the Associate Publisher of Parents Magazine,
Division of Gruner Plus Jahr.
IRA H. GOLDBERG, age 59, is a certified public accountant and for
more than twenty years has been a principal in the accounting firm of
Gettry, Marcus, Stern & Lehrer, CPA, P.C., formerly known as Gettry,
Marcus & Co., located in New York, New York. Marvin W. Marcus is also
a principal of such firm.
LOUISE BATES, age 47, has been Secretary of the Company since
November 1995. She also has been Executive Assistant to the President
of the Company since 1988. Previously, from 1984 through 1988, Ms.
Bates was CutCo's Director of Administrative Services.
ELISSA ROSEMAN, age 29, was the Secretary/Controller of the Company
from January 1992 until she resigned as an officer and employee of the
Company in November 1995. Previously, she was an audit senior with the
firms of Laventhol & Horwath from August 1988 to November 1990 and with
Grant Thornton from December 1990 to October 1991. She joined the
Company in November 1991.
Compliance with Section 16(a) of the Exchange Act.
Based solely upon a review of any Forms 3 and 4 and amendments
thereto furnished to the Registrant under Rule 16a-3(d) during its most
recent fiscal year and any Form 5 and amendments thereto furnished to
the Registrant with respect to its most recent fiscal year, and any
written representations that no such Forms 3, 4, 5 or amendments to any
of them, was required during the most recent fiscal year, the
Registrant believes that no person who at any time during the fiscal
year was a director, officer, or beneficial owner of more than 10% of
any class of equity securities of the Registrant, failed to file on a
timely basis reports required by Section 16(a) during the most recent
fiscal year or prior years.
Item 10. Executive Compensation.
The following table shows information regarding compensation for
services rendered in all capacities to the Company and its subsidiaries
during the fiscal years ended June 30, 1994, 1995 and 1996, to the
three (3) highest paid persons who are officers or directors of the
Company (being the only such persons whose aggregate annual
compensation exceeds $100,000). A fee of $500 per meeting is paid to
non-employee members of the Board for attendance in person at Board
meetings.
Summary Compensation Table
Securities
Name and Salary ($) Underlying Other Compen-
Principal Position Year (2)(3) Option Grants sation
Don vonLiebermann, 1996 202,000 20,000 (1)
President 1995 240,796 -- (1)
1994 246,582 6,000 (1)
Marvin W. Marcus, 1996 184,500 20,000 (1)
Chairman of the Board 1995 240,796 -- (1)
and Vice President - 1994 246,582 6,000 (1)
Financial Planning
Michael P. Kramer 1996 143,573 20,000 (1)
Vice President - 1995 155,756 -- (1)
Finance 1994 155,868 6,000 (1)
(1) The Company provided and maintained automobiles for use by Marvin
W. Marcus, Don vonLiebermann and Michael P. Kramer in connection
with Company business during each of fiscal years 1994, 1995 and
1996. The aggregate annual cost to the Company for these
automobiles in each year was approximately $48,000. To the extent
these automobiles were used for other than Company business, the
cost of rental and maintenance may be considered compensation to
the above-named individuals. No value for personal use of
automobiles by such individuals has been included in the aggregate
remuneration table set forth above.
(2) The current annual salary for each of Messrs. Marcus,
vonLiebermann, and Kramer is $184,500, $202,000 and $143,573,
respectively. (See Employment Agreements, below, for information
concerning deferrals by Messrs. Marcus and vonLiebermann with
respect to salary increases.)
(3) Does not include $32,400, $32,400 or $32,400 paid to the
accounting firm of Gettry, Marcus, Stern & Lehrer, CPA, P.C.
(formerly known as Gettry, Marcus & Co.), in which Mr. Marcus is a
principal, for services rendered by the firm during the fiscal
years ended June 30, 1996, 1995 and 1994, respectively in the
preparation of federal, state and local tax returns and
performance of other accounting services for the Company and its
subsidiaries, inclusive of disbursements.
Employment Agreements
Each of Messrs. Marcus, vonLiebermann and Kramer has entered into
an Employment Agreement with the Company dated April 24, 1991, each of
which has been amended from time to time, as most recently amended on
August 14, 1996 by written agreement. Each of the Employment
Agreements is now scheduled to expire on July 31, 1997. Those
Employment Agreements provided for initial annual salaries of $246,582,
$246,582, and $129,162, for Messrs. Marcus, vonLiebermann and Kramer,
respectively (subject to cost of living increases during certain years
of the terms thereof). Effective January 1, 1996, pursuant to an oral
modification to each of the Employment Agreements that was made on
November 16, 1995 (and subsequently memorialized in the August 14, 1996
amendments), each of Messrs. Marcus, vonLiebermann and Kramer agreed to
reduce the amount of their annual salary, prospectively, by $75,000,
$40,000 and $25,000, respectively. Prior to such reductions, the
adjusted annual salaries of Messrs. Marcus, vonLiebermann and Kramer
were $222,000, $222,000 and $156,073, respectively (which, in the case
of Messrs. Marcus and vonLiebermann, reflected a prior agreed-upon
salary reduction). Pursuant to the August 14, 1996 amendments to the
Employment Agreements, Mr. Kramer's salary was increased, effective
August 1, 1996, by increasing the monthly installments of salary
payable to Mr. Kramer by $1,041.67, which, on an annualized basis,
represents fifty (50%) percent of the $25,000 annual reduction to which
Mr. Kramer previously had agreed. Similarly, the monthly installments
of salary payable to Marcus and vonLiebermann were increased, effective
August 1, 1996, under those August 14, 1996 amendments by $3,125 and
$1,666.67, respectively, which, on an annualized basis, represents
fifty (50%) percent of the annual reductions to which each of Messrs.
Marcus and vonLiebermann previously had agreed.
Each of Messrs. Marcus and vonLiebermann had deferred receipt of
$55,435 of annual salary, which amount represents the aggregate of the
cost of living adjustments to which they are entitled for the period
from August 1991 through October 31, 1994. Under prior understandings
between the Company and its executive officers, such deferred salary
had accrued interest at a rate equal to the prime rate offered from
time to time by the Company's primary bank lender. Such deferred salary
with interest would have been payable upon the termination of the
deferring party's employment with the Company. The Company and Messrs.
Marcus and vonLiebermann agreed that, effective January 1, 1996, all
interest would cease to accrue on such deferred compensation, and each
of Messrs. Marcus and vonLiebermann shall receive such deferred
compensation, together with previously accrued interest, in twelve (12)
consecutive equal monthly installments of $5,469 each, the first of
which was paid by the Company on January 31, 1996. The aggregate of
deferred compensation and accrued interest payable to each of Messrs.
Marcus and vonLiebermann prior to payment of that first installment was
$65,628.
The Employment Agreements contain customary provisions for
benefits, reimbursement of expenses, disability, non-disclosure and
non-competition (except for Mr. Kramer's agreement, which has no
non-competition provision). Under the January 1, 1996 amendments to the
Employment Agreements, each of Messrs. Marcus, VonLiebermann and Kramer
agreed to terminate, effective January 1, 1996, his rights, under his
respective Employment Agreement, to (i) terminate the Employment
Agreement in the event of a change in control of the Company (as
defined in the Employment Agreement), unless he is offered continued
employment pursuant to a written employment agreement on terms and at a
compensation level at least as favorable to him as those set forth in
Employment Agreement, (ii) receive, in the event of such a termination
by reason of a change in control of the Company, a lump sum severance
payment from the Company in an amount equal to 2.99 times the
employee's average annual compensation over the five taxable years
preceding the year in which the change of control occurs, and (iii)
continued medical insurance coverage under the Company's existing
policies (to the extent that the value thereof is not deemed income to
the employee under the Internal Revenue Code of 1986, as amended), for
a period of three years after termination of employment. Those waivers
of rights, effective January 1, 1996, were memorialized in the August
14, 1996 amendments to the Employment Agreements.
Stock Option Plans
The Company has a stock option plan for officers, directors and
employees of the Company and its subsidiaries that was adopted on
October 16, 1987 (the "1987 Plan") and a stock option plan for
officers, directors and employees of the Company and its subsidiaries
that was adopted on November 15, 1990 (the "1990 Plan").
Options granted under each Plan to employees may be either
incentive stock options or non-qualified stock options at the
discretion of the Board. Options granted under each Plan to
non-employee directors must be non-qualified stock options.
Non-qualified stock options are not intended to qualify for incentive
stock option plan treatment.
Each such Plan gives sole discretion to the Board to grant options
to purchase the Company's Common Shares at not less than the market
value of the shares on the date of grant. Options granted under each
Plan must expire no later than ten years (five years, if the grant is
on or after January 1, 1987 and the grantee is a director or holder of
10% of the voting stock of the Company), after the date of grant.
During fiscal 1996, no options were exercised under any of the
Plans. During fiscal 1996, options to acquire 5,000 shares of the
Company's Stock previously granted under the Plans expired.
Furthermore, during fiscal 1996, options to purchase 96,000 shares were
granted under the 1987 Plan, and options to purchase 10,000 shares were
granted under the 1990 Plan, including options granted to Messrs.
Marcus, vonLiebermann and Kramer, each to acquire 20,000 shares, and
options granted to the outside directors, each to acquire 2,500 shares.
As of June 30, 1996, there were 2,000 shares available for option
grants under the 1987 Plan, and 50,000 shares were available as the
subject of options to purchase under the 1990 Plan.
Item 11. Security Ownership of Management and Certain Security
Holders.
Voting Securities.
The following table sets forth information at September 1, 1996,
concerning ownership of the Company's Common Shares by (i) the three
(3) highest paid persons who are officers and directors of the Company,
(ii) all officers and directors of the Company, as a group, and (iii)
each person who owns of record, or is known to the Company to own
beneficially, more than 10% of the Company's Common Shares.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership(1) of Class
Sole Voting and Shared Voting and
Investment Power Investment Power
Marvin W. Marcus - 0 - 349,513(2) 42.0%
P.O. Box 265
Jericho, New York
Don vonLiebermann - 0 - 349,513(2) 42.0%
P.O. Box 265
Jericho, New York
Michael P. Kramer 20,146(3) - 0 - 2.5%
P.O. Box 265
Jericho, New York
All officers and
directors as a group
(8 persons) 26,146(4) 351,713(5) 44.6%
(1) Each named person or group is deemed to be the beneficial owner of
securities that may be acquired within sixty days through the
exercise of options, warrants and rights, if any, and such securi-
ties are deemed to be outstanding for the purpose of computing the
percentage of the class beneficially owned by such person or
group. Such securities are not deemed to be outstanding for the
purpose of computing the percentage of the class beneficially
owned by any other person or group. Accordingly, the indicated
number of shares includes shares issuable upon exercise of options
(including employee stock options) held by such person or group.
(2) Messrs. Marcus and vonLiebermann entered into an agreement
pursuant to which they agreed to vote all of the shares owned by
either of them upon mutual agreement with respect to matters
relating to an acquisition of the Company. Accordingly, this
number includes 166,866 shares owned by Mr. vonLiebermann
individually and 117,241 shares owned by Mr. Marcus individually.
Also includes 26,000 Common Shares and 26,000 Common Shares
issuable upon exercise of currently exercisable options held by
Messrs. vonLiebermann and Marcus, respectively. Also
includes 1,000 shares, representing Mr. Marcus' pro rata portion
of shares owned by a partnership in which Mr. Marcus is a partner.
Also includes an aggregate of 606 shares held by Mr. vonLiebermann
as custodian for his children in which he has voting and
investment power, but no present economic interest. Mr.
vonLiebermann disclaims beneficial ownership of these shares.
Includes 11,800 shares owned directly or indirectly by Mr. Marcus'
wife but does not include 3,400 shares owned by Mr. Marcus' adult
children or 20,234 shares owned by other relatives of Mr. Marcus,
in all of which shares Mr. Marcus has no present economic interest
or voting power and as to which he disclaims beneficial ownership.
(3) Includes 9,500 Common Shares underlying presently exercisable
options, and options exercisable within sixty (60) days, owned by
Mr. Kramer.
(4) Includes 1,375, 1,375, 1,375 and 1,375 Common Shares underlying
presently exercisable options, and options exercisable within
sixty (60) days, owned by each of Directors Anthony, Daniels,
DePierro and Goldberg, respectively.
(5) Includes 2,200 Common Shares owned by Mr. Goldberg's wife and
father-in-law as joint tenants with right of survivorship. Mr.
Goldberg holds a power-of-attorney to vote those Common Shares,
but disclaims beneficial ownership thereof.
Fiscal Year End Option Values
The following table sets forth information at the 1996 fiscal year
end, concerning the number of securities underlying unexercised options
held by the executive officers and directors of the Company identified
in the Summary Compensation Table:
Number of Securities
Underlying Unexercised
Name of Holder Options/SARs at Fiscal Year End (#)
-------------- -----------------------------------
Exercisable Unexercisable
___________ _____________
Marvin W. Marcus 26,000 0
Don vonLiebermann 26,000 0
Michael P. Kramer 9,500 16,500
Item 12. Certain Relationships and Related Transactions
______________________________________________
See footnote (3) of the aggregate annual remuneration table under
"Aggregate Annual Remuneration," for a discussion of amounts paid by
the Company during fiscal 1996 to Gettry, Marcus, Stern & Lehrer, CPA,
P.C., a New York City accounting firm in which Mr. Marcus, a
shareholder, director and executive officer of the Company, and Mr.
Goldberg, a director of the Company, are partners.
With respect to the fees paid by the Company for services, as
described in the preceding paragraph, Management believes that such
fees are substantially comparable to the fees that would have been paid
to unaffiliated parties providing such services to the Company.
[Balance of page left blank intentionally]
Item 13. Exhibits, List and Reports on Form 8-K.
_______________________________________
(a) Index to Exhibits.
Page
----
(3) The Registrant's Restated Certificate of
Incorporation is incorporated by reference to
Exhibit 3(a) to the Registrant's Registration
Statement on Form S-1 filed on October 25, 1968
(File No. 2-30569). N/A
(3.1) A Certificate of Amendment to the Registrant's
Certificate of Incorporation, dated October 26, 1981,
is incorporated by reference to Exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for its 1982
fiscal year. N/A
(3.1.1) A Certificate of Amendment to the Registrant's
Certificate of Incorporation, dated December 6, 1983,
is incorporated by reference to Exhibit 3 to the
Registrant's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1983. N/A
(3.1.2) A Certificate of Amendment to the Registrant's
Certificate of Incorporation, dated December 21, 1987
is incorporated by reference to Exhibit 3.1.2 to the
Registrant's Annual Report on Form 10-K for its 1988
fiscal year. N/A
(3.1.3) A Certificate of Change to the Registrant's
Certificate of Incorporation, dated November 10, 1993,
is incorporated by reference to Exhibit 3(i) to the
Registrant's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1994. N/A
(3.1.4) Certificate of Merger of CutCo Holdings Corp. into the
Registrant dated June 11, 1987 is incorporated by
reference to Exhibit 3.1.3 to the Registrant's Annual
Report on Form 10-K for its 1987 fiscal year. N/A
(3.1.5) Agreement and Plan of Merger dated December 30, 1986
by and among the Registrant, CutCo Holdings Corp. and
CutCo Merger Corp. is incorporated by reference to
Exhibit 3.1.4 to the Registrant's Annual Report on
Form 10-K for its 1987 fiscal year. N/A
(3.2) The Registrant's By-laws, as amended to date are
incorporated by reference to Exhibit 3.1.3 to the
Registrant's Annual Report on Form 10-K for its 1990
fiscal year. N/A
Exhibits (Continued) Page
- -------------------- ----
(10.1) [Don Florman to confirm no material changes.] The
Registrant's form of franchise agreement for use in
the United States is incorporated by reference to
Exhibit 10.1 to the Registrant's Annual Report on Form
10-KSB for the 1995 fiscal year. N/A
(10.2.1)* The Registrant's 1987 Stock Option Plan is
incorporated by reference to Exhibit B to the
Registrant's Proxy Statement dated October 23, 1987,
and mailed to shareholders on or about that date in
connection with the Registrant's annual meeting of
shareholders held on December 3, 1987. N/A
(10.2.2)* The Registrant's 1990 Stock Option Plan is
incorporated by reference to Exhibit A to the
Registrant's Proxy Statement dated December 3, 1990,
and mailed to shareholders on or about that date in
connection with the Registrant's annual meeting of
shareholders held on January 11, 1991. N/A
(10.3) Asset Purchase Agreement between Four Star Pizza
Franchising Corporation ("Franchising") and Rolling
Winds Corporation, dated November 11, 1993, is
incorporated by reference to Exhibit 10.1 to the
Registrant's current Report on Form 8-K for an Event
of November 11, 1993 ("November 1993 Form 8-K"). N/A
(10.3.1) Management's Master License Agreement with Rolling
Winds Corporation, dated as of November 11, 1993, is
incorporated by reference to Exhibit 10.3 to the
Registrant's November 1993 Form 8-K. N/A
(10.4)* Employment Agreement dated as of April 24, 1991
between the Registrant and Marvin W. Marcus, as
amended by letter dated May 15, 1992 is incorporated
by reference to Exhibit 10.9 to the Registrant's
Annual Report on Form 10-K for the 1992 fiscal year. N/A
(10.4.1)* Employment Agreement dated as of April 24, 1991
between the Registrant and Don vonLiebermann, as
amended by letter dated May 15, 1992 is incorporated
by reference to Exhibit 10.9.1 to the Registrant's
Annual Report on Form 10-K for the 1992 fiscal year. N/A
(10.4.2)* Employment Agreement dated as of April 24, 1991,
between the Registrant and Michael Kramer, as amended
by letter dated May 15, 1992, is incorporated by
reference to Exhibit 10.9.2 to the Registrant's Annual
Report on Form 10-K for the 1992 fiscal year. N/A
Exhibits (Continued) Page
- -------------------- ----
(10.5)* Letter agreement dated June 22, 1994, amending
Employment Agreement dated as of April 24, 1991
between the Registrant and Marvin W. Marcus, is
incorporated by reference to Exhibit 10.6 to the
Registrant's Annual Report on Form 10-K for the 1994
fiscal year. N/A
(10.5.1)* Letter agreement dated June 22, 1994, amending
Employment Agreement dated as of April 24, 1991
between the Registrant and Don vonLiebermann, is
incorporated by reference to Exhibit 10.6.1 to the
Registrant's Annual Report on Form 10-K for the 1994
fiscal year. N/A
(10.5.2)* Letter Agreement dated June 22, 1994, amending
Employment Agreement as of April 24, 1991 between the
Registrant and Michael Kramer, is incorporated by
reference to Exhibit 10.6.2 to the Registrant's Annual
Report on Form 10-KSB for the 1994 fiscal year. N/A
(10.6)* Letter agreement dated as of August 14, 1996, amending
Employment Agreement dated as of April 24, 1991
between the Registrant and Marvin W. Marcus. E-1
(10.6.1)* Letter agreement dated as of August 14, 1996, amending
Employment Agreement dated as of April 24, 1991
between the Registrant and Don vonLiebermann. E-3
(10.6.2)* Letter agreement dated as of August 14, 1996, amending
Employment Agreement dated as of April 24, 1991
between the Registrant and Michael Kramer. E-5
(21) Subsidiaries of the Registrant. E-7
(23) Consent of Independent Auditors. E-8
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during its fiscal quarter
ended June 30, 1996.
____________________________________________
* Denotes management contract or compensatory plan or arrangement.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
CUTCO INDUSTRIES, INC.
By: /s/ Don vonLiebermann
-----------------------------------
Don vonLiebermann,
President and Director
Dated: September 26, 1996
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
Title Name and Signature Date
----- ------------------ ----
Chairman of the Board,
Vice President-Financial
Planning /s/ Marvin W. Marcus September 26, 1996
----------------------
(Marvin W. Marcus)
President, Chief
Executive Officer,
Director /s/ Don vonLiebermann September 26, 1996
-----------------------
(Don vonLiebermann)
Vice President-Finance
and Treasurer, Director,
Principal Financial
Officer and Principal
Accounting Officer /s/ Michael Kramer September 26, 1996
-----------------------
(Michael Kramer)
Director /s/ Richard Anthony September 26, 1996
-----------------------
(Richard Anthony)
Director September 26, 1996
-----------------------
(John Daniels)
Director /s/ Ira H. Goldberg September 26, 1996
-----------------------
(Ira H. Goldberg)
Director September 26, 1996
-----------------------
(Vincent K. DePierro)
Exhibit 10.6
CutCo Industries, Inc. Office of the president
August 14, 1996
Mr. Marvin W. Marcus
45 Cardinal Drive
East Hills, New York 11576
Re: Amendment of Employment Agreement
Dear Mr. Marcus:
On August 14, 1996, the Board of Directors approved the amendment to
your present Employment Agreement to provide that the Agreement be extended for
a one year period ending July 31, 1997. Your present salary will be increased
by $3,125 per month which restores 50% of the voluntary reduction effective for
the period January 1, 1996 to July 31, 1996.
Kindly indicate your agreement to the above by signing below.
Sincerely,
CUTCO INDUSTRIES, INC.
s/ Don vonLiebermann
---------------------------
Don vonLiebermann
President
AGREED TO:
s/ Marvin W. Marcus
------------------------
MARVIN W. MARCUS
E-1
Exhibit 10.6.1
CutCo Industries, Inc. Office of the Chairman of the Board
August 14, 1996
Mr. Don vonLiebermann
54 Kellogg Hill Road
Weston, CT 06883
Re: Amendment of Employment Agreement
Dear Mr. vonLiebermann:
On August 14, 1996, the Board of Directors approved the amendment to
your present Employment Agreement to provide that the Agreement be extended for
a one year period ending July 31, 1997. Your present salary will be increased
by $1,666.67 per month which restores 50% of the voluntary reduction
effective for the period January 1, 1996 to July 31, 1996.
Kindly indicate your agreement to the above by signing below.
Sincerely,
CUTCO INDUSTRIES, INC.
s/ Marvin W. Marcus
_____________________________
Marvin W. Marcus
Chairman
AGREED TO:
s/ Don vonLiebermann
-----------------------
DON VON LIEBERMANN
E-2
Exhibit 10.6.2
CutCo Industries, Inc. Office of the chairman of the board
August 14, 1996
Mr. Michael Kramer
9 Ryder Court
Dix Hills, NY 11746
Re: Amendment of Employment Agreement
Dear Mr. Kramer:
On August 14, 1996, the Board of Directors approved the amendment to
your present Employment Agreement to provide that the Agreement be extended for
a one year period ending July 31, 1997. Your present salary will be increased
by $1,041.67 per month which restores 50% of the voluntary reduction effective
for the period January 1, 1996 to July 31, 1996.
Kindly indicate your agreement to the above by signing below.
Sincerely,
CUTCO INDUSTRIES, INC.
s/ Marvin W. Marcus
_____________________________
Marvin W. Marcus
Chairman
AGREED TO:
s/ Michael Kramer
____________________________
MICHAEL KRAMER
E-3
EXHIBIT 21
CUTCO INDUSTRIES, INC.
AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
(At June 30, 1996)
% of Voting
Subsidiary State Securities
(and name under Where Owned As of
which it does business) Organized September 1, 1995
- ----------------------- --------- ------------------
Four Star Restaurant Delaware 100%
Management Corporation
Four Star Pizza Pennsylvania 100%
Franchising Corp.
The names of 89 consolidated wholly-owned subsidiaries of the Company which
either hold leases on premises subleased to licensees (46 subsidiaries, all
operating in the United States) or operate Company-owned hair care salons (42
subsidiaries, all operating in the United States), and one wholly-owned
subsidiary of the Company which holds a sublease on warehouse and office
space, have been omitted. Other unnamed subsidiaries (including inactive
subsidiaries) considered in the aggregate do not constitute a significant
subsidiary.
E-7
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in (1) the Registration Statement
Number 33-25066 on Form S-8, dated October 21, 1988 and (2) we agree to the
incorporation by reference in the Resale Prospectus of our report, dated August
30, 1996, on the consolidated financial statements of Cutco Industries, Inc. and
Subsidiaries appearing in the Annual Report on Form 10-KSB for the year ended
June 30, 1996.
GRANT THORNTON LLP
Melville, New York
August 30, 1996
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