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, 1998 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.)
6900 Jericho Turnpike, Syosset, New York 11791
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (516) 677-0320
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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 6, 1998 is 806,125
Transitional Small Business Disclosure: Yes No X
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<PAGE>
CUTCO INDUSTRIES, INC.
FORM 10-QSB
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets -
September 30, 1998 and June 30, 1998 1 - 2
Consolidated Condensed Statements of Operations -
Three Months Ended September 30, 1998 and 1997 3
Consolidated Condensed Statement of Shareholders
Equity - Three Months Ended September 30, 1998 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended September 30, 1998 and 1997 5
Notes to Unaudited Consolidated Condensed
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 - 8
PART - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURES 10
<PAGE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
September 30 June 30
1998 1998
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 775,468 $753,658
Marketable securities 157,689 153,376
Notes and accounts receivable, net 309,430 343,267
Merchandise inventory 382,431 364,185
Deferred income taxes 130,000 130,000
Prepaid expenses, taxes and miscellaneous
receivables 30,369 85,259
Assets held for sale - 100,000
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Total Current Assets 1,785,387 1,929,745
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Property and equipment:
Furniture, fixtures and equipment 1,727,425 1,841,077
Leasehold improvements 61,030 70,944
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1,788,455 1,912,021
Less accumulated depreciation and amortization 1,015,421 1,095,843
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773,034 816,178
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Other assets:
Notes receivable, non-current, net 335,251 77,246
Deferred charges and other 60,373 63,570
Deposits 69,072 74,733
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464,696 215,549
$3,023,117 $2,961,472
========= =========
</TABLE>
(Continued)
See notes to unaudited financial statements
<PAGE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED) - (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30 June 30
1998 1998
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 534,824 $ 567,381
Current portion of long-term debt 5,535 6,860
Accrued and withheld taxes, other
than income taxes 120,372 146,667
Income taxes payable 10,397 25,073
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Total current liabilities 671,128 745,983
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Long-term debt - -
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Deposits payable 18,565 31,369
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Deferred income 41,953 43,121
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Deferred income taxes 130,000 130,000
Shareholders' equity:
Common stock, $.10 par value,
authorized 5,000,000 shares, issued
1,909,206 shares 190,921 188,371
Additional paid-in-capital 4,223,575 4,785,250
Retained earnings 1,228,567 1,118,970
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5,643,063 5,492,591
Less common stock held in treasury,
at cost, 1,103,081 shares (3,481,592) (3,481,592)
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2,161,471 2,010,999
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$ 3,023,117 $ 2,961,472
========== ==========
</TABLE>
See notes to unaudited financial statements.
<PAGE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30,
1998 1997
<S> <C> <C>
Revenues:
Owned retail stores $ 1,635,638 $ 1,858,659
Sales of equipment and products 37,298 52,394
Royalties, service fees and
franchise income 445,587 413,778
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2,118,523 2,324,831
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Costs and expenses:
Direct costs of owned retail stores 1,561,065 1,719,748
Costs of equipment and products sold 30,900 34,592
Depreciation and amortization 63,976 114,720
Selling, general and administrative
expenses 441,803 549,846
Provision for doubtful accounts and
notes receivable 15,000 15,000
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2,112,744 2,433,906
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Other income (loss):
Interest and dividend income 31,629 8,591
Interest expense (112) (4,284)
Gain (loss) on sale/abandonment
of assets, net - (105,928)
Other income, net 75,254 18,112
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106,771 ( 83,509)
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Income (loss) before income taxes 112,550 ( 192,584)
Income taxes 2,953 9,051
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Net income (loss) $ 109,597 ($ 201,635)
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Earnings (loss) per common share $0.14 ($0.26)
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Weighted average number of common shares
outstanding 784,782 780,625
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</TABLE>
See notes to unaudited financial statements.
<PAGE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Additional Treasury
Common Stock Paid-in Retained Stock
Shares Amount Capital Earnings Shares Amount Total
<S> <C> <C> <C> <C> <C> <C>
Balance at
July 1, 1998 1,883,706 $188,371 $4,185,250 $1,118,970 $1,103,081 ($3,481,592) $2,010,999
Net Income 109,597 109,597
Exercise of
employee stock
options 25,500 2,550 38,325 40,875
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Balance at
September 30,
1998 unaudited) 1,909,206 $190,921 $4,223,575 $1,228,567 $1,103,081 ($3,481,592) $2,161,471
=======================================================================================================
</TABLE>
See notes to unaudited financial statements.
<PAGE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 109,597 ($ 201,635)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 63,976 114,720
Provision for doubtful accounts and notes
receivable - 15,000
Loss on sale/abandonment of assets, net - 105,928
Changes in operating assets and liabilities,
net of effect of acquisition and sale:
Notes and accounts receivable 33,837 (24,039)
Merchandise inventory (18,256) (16,417)
Prepaid expenses, taxes and miscellaneous
receivables 54,890 44,559
Deposits and assets held for sale 105,661 28,171
Accounts payable and accrued expenses (32,557) (85,155)
Accrued and withheld taxes, other than
income taxes (26,297) (10,808)
Income taxes payable (14,676) (14,227)
Deposits payable (12,804) (28,053)
Deferred income (1,168) 10,590
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Net cash provided by operating activities 262,203 (61,366)
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Cash flows from investing activities:
Purchases of property and equipment (17,625) (2,926)
Increase in marketable securities (4,313) (1,690)
Proceeds from sale of property and
equipment - 100
Increase in long-term notes receivable (258,005) -
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Net cash used in investing activities (279,943) (4,516)
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Cash flows from financing activities:
Principal payments on loans (1,325) (14,316)
Proceed from exercise of stock options 40,875 -
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Net cash provided by financing activities 39,550 (14,316)
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Increase (decrease) in cash and cash
equivalents 21,810 (80,198)
Cash and cash equivalents at beginning
of period 753,658 550,840
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Cash and cash equivalents at end of period $ 775,468 $ 470,642
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 112 $ 3,545
Income taxes $ 14,676 $ 4,215
</TABLE>
See notes to unaudited financial statements.
<PAGE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
NOTE 1 - FINANCIAL STATEMENTS
The accompanying unaudited 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,
1998 are not necessarily indicative of the results that may be expected for the
year ending June 30, 1999. For further information, refer to the consolidated
financial statements and footnotes as of June 30, 1998 included in the Company's
Annual Report on Form 10-KSB for the Company's fiscal year then ended.
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Three Months Ended September 30, 1998
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents were $775,000 at September 30, 1998, as compared to
$753,00 at June 30, 1998. In addition, at September 30, 1998, the Company had
$158,000 of marketable securities, as compared to $153,000 at June 30, 1998.
Capital expenditures for the quarter were $17,000 as compared to $3,000 for the
prior year.
The Company had a current ratio of 2.66 at September 30, 1998, as compared to
2.02 at September 30, 1997 and 2.59 at June 30, 1998.
At September 30, 1998, commitments for capital expenditures and other
investments did not exceed $30,000. Such commitments were for 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, 1998, revenues from Company-owned salon
operations decreased by 12% ($222,000) as compared to the three months ended
September 30, 1997. The decrease in revenues is attributable to a decrease in
comparable salon store sales of 8.7% in the three months ending September 30,
1998. As of September 30, 1998 there were 43 company-owned salons, as compared
to 41 at September 30, 1997. In the three months ended September 30, 1998,
direct costs of Company-owned salons decreased by 9.2% ($158,000) compared to
such costs for the three months ended September 30, 1997.
In the three month period ended September 30, 1998 franchise income increased by
7.8% ($32,000) as compared to the three months ended September 30, 1997. The
increases resulted from collection of disputed royalties of $120,000. Recurring
royalties from existing licensees continued to decline. The number of franchised
hair salons declined from 271 at September 30, 1997 to 196 at June 30, 1998 and
191 at September 30, 1998.
The Company expects the decline in recurring royalties to continue as a result
of attrition of existing licensees without replacements with new licensees. The
Company does not anticipate any significant hair care franchise sales from new
locations for fiscal 1999, due to increased competition for obtaining new
locations and recruiting licensed hair stylists, coupled with a longer period
from a salon's opening until it achieves profitable operations.
<PAGE>
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.The lack of an adequate number of licensed hair stylists has become a
major industry-wide problem and makes it difficult to recruit the required
number of qualified personnel. The Company believes that the scarcity of hair
stylists will continue to have a detrimental effect on salon operations and
expansion by the Company and its licensees for as long as the situation
continues.
Inflation has not materially affected the Company's revenues and income during
the past two fiscal years.
In the three month period ended September 30, 1998 selling, general, and
administrative expenses decreased by 9.1% ($158,000) as compared to the same
period ended September 30, 1997. The decrease is due to lower corporate
occupancy costs and decreased personnel costs.
For the quarter ended September 30, 1998 interest income increased from $8,000
to $32,000 as a result of realization of past due interest from licensees. In
addition other income for the quarter ended September 30, 1998 increased by
$57,000 as a result of a settlement of certain contract obligations.
The Company has not provided for federal income taxes for the quarter ended
September 30, 1998 as the Company has net operating loss and tax credit
carryforwards of approximately $1,640,000 and $49,000, respectively, expiring
through 2013.
The Company's salons and franchising activities, including its sales of
franchises, are not materially affected by seasonal fluctuations, in the volume
of business.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Not Applicable.
b) None.
<PAGE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
SIGNATURES
In accordance with 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
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Don vonLiebermann
President
s/ Marvin W. Marcus
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Marvin W. Marcus
Chairman and Chief Financial Officer
Date: November 6, 1998
