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 December 31, 1997 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 February 11, 1998 is 780,625
Transitional Small Business Disclosure: Yes No X
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CUTCO INDUSTRIES, INC.
FORM 10-QSB
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Condensed Balance Sheets -
December 31, 1997 and June 30, 1997 1 - 2
Consolidated Condensed Statements of Operations -
Six Months and Three Months Ended December 31,
1997 and 1996 3 - 4
Consolidated Condensed Statement of Shareholders'
Equity - Six Months Ended December 31, 1997 5
Consolidated Condensed Statements of Cash Flows -
Six Months Ended December 31, 1997 and 1996 6
Notes to Unaudited Consolidated Condensed
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8- 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
PART I - FINANCIAL INFORMATION
<TABLE>
Item 1. Financial Statements.
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
December 31, June 30,
1997 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $520,452 $550,840
Marketable securities 351,049 499,383
Notes and accounts receivable, net 347,854 377,514
Merchandise inventory 317,152 376,797
Deferred income taxes 120,000 120,000
Prepaid expenses, taxes and
miscellaneous receivables 53,807 131,211
------------- -------------
TOTAL CURRENT ASSETS 1,710,314 2,055,745
------------- -------------
PROPERTY AND EQUIPMENT, AT COST
Furniture, fixtures and equipment 2,000,067 2,137,829
Leasehold improvements 95,944 95,944
------------- -------------
2,096,011 2,233,773
Less accumulated depreciation
and amortization 1,123,196 1,010,791
------------- -------------
972,815 1,222,982
------------- -------------
OTHER ASSETS
Notes receivable, noncurrent, net 65,971 78,574
Deferred charges and other 202,464 287,639
Deposits 77,714 105,885
------------- -------------
346,149 472,098
------------- -------------
$3,029,278 $3,750,825
============= =============
</TABLE>
See notes to unaudited consolidated condensed financial statements.
-1-
<TABLE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS - Continued
(UNAUDITED)
December 31, June 30,
1997 1997
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable and accrued
expenses $588,502 $823,323
Current portion of long-term debt 141,348 167,558
Accrued and withheld taxes,
other than income taxes 141,791 75,167
Income taxes payable 22,645 31,453
------------- -------------
TOTAL CURRENT LIABILITIES 894,286 1,097,501
LONG-TERM DEBT 4,187 6,860
DEPOSITS PAYABLE 34,446 62,499
DEFERRED INCOME 26,196 45,709
DEFERRED INCOME TAXES 120,000 120,000
SHAREHOLDERS' EQUITY
Common Stock 188,371 188,371
Additional paid-in capital 4,185,250 4,185,250
Retained earnings 1,058,134 1,526,227
------------- -------------
5,431,755 5,899,848
Less treasury stock - at cost 3,481,592 3,481,592
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 1,950,163 2,418,256
------------- -------------
$3,029,278 $3,750,825
============= =============
</TABLE>
See notes to unaudited consolidated condensed financial statements.
-2-
<TABLE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Owned retail stores $3,500,868 $4,223,319
Sales of equipment and products 106,631 79,997
Royalties and service fees 730,081 1,006,243
Franchise fee income 5,837 26,387
----------- -----------
4,343,417 5,335,946
----------- -----------
Costs and Expenses:
Direct costs of owned retail stores 3,304,989 3,927,629
Costs of equipment and products sold 84,976 54,584
Depreciation and amortization 225,781 227,633
Selling, general and administrative expenses 1,121,105 1,158,365
Provision for doubtful accounts and notes receivable 15,000 78,000
----------- -----------
4,751,851 5,446,211
----------- -----------
Other income (loss):
Interest and dividend income 22,284 42,135
Interest expense (7,777) (10,134)
Loss on sale/abandonment of assets, net (120,269) (27,689)
Other income, net 60,400 19,051
----------- -----------
(45,362) 23,363
----------- -----------
Loss before income taxes (453,796) (86,902)
Income taxes 14,297 16,659
----------- -----------
Net loss ($468,093) ($103,561)
=========== ===========
Loss per common share basic and diluted ($0.60) ($0.13)
=========== ===========
Weighted average number of common shares outstanding 780,625 780,625
=========== ===========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
-3-
<TABLE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Owned retail stores $1,642,209 $2,176,164
Sales of equipment and products 54,237 32,656
Royalties and service fees 322,140 438,399
Franchise fee income 7,346
----------- -----------
2,018,586 2,654,565
----------- -----------
Costs and Expenses:
Direct costs of owned retail stores 1,585,241 2,016,646
Costs of equipment and products sold 50,384 23,307
Depreciation and amortization 111,061 110,358
Selling, general and administrative expenses 571,259 572,941
Provision for doubtful accounts and notes receivable 36,000
----------- -----------
2,317,945 2,759,252
----------- -----------
Other income (loss):
Interest and dividend income 13,693 21,430
Interest expense (3,493) (4,649)
Loss on sale/abandonment of assets, net (14,341) (31,406)
Other income, net 42,288 13,939
----------- -----------
38,147 (686)
----------- -----------
Loss before income taxes (261,212) (105,373)
Income taxes 5,246 2,362
----------- -----------
Net loss ($266,458) ($107,735)
=========== ===========
Loss per common share basic and diluted ($0.34) ($0.14)
=========== ===========
Weighted average number of common shares outstanding 780,625 780,625
=========== ===========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
-4-
<TABLE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED DECEMBER 31, 1997
Common Stock Additional Treasury Stock
------------ Paid-In Retained --------------
Shares Amount Capital Earnings Shares Amount Total
----------- ----------- ------------ ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 1,883,706 $188,371 $4,185,250 $1,526,227 1,103,081 ($3,481,592) $2,418,256
Net loss (468,093) (468,093)
----------- ----------- ------------ ------------ ---------- ------------ -----------
Balance at Decemnber 31,
1997 (Unaudited) 1,883,706 $188,371 $4,185,250 $1,058,134 1,103,081 ($3,481,592) $1,950,163
=========== =========== ============ ============ ========== ============ ===========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
-5-
<TABLE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) Six Months Ended
December 31,
-----------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss ($468,093) ($103,561)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 225,781 227,633
Provision for doubtful accounts and notes receivable 15,000 78,000
Loss on sale/abandonment of assets, net 120,269 27,689
Changes in operating assets and liabilities, net of effect of
acquisition and sale:
Notes and accounts receivable 27,263 (44,076)
Merchandise inventory 59,645 7,399
Prepaid expenses, taxes and miscellaneous receivables 77,404 38,132
Deposits and other 28,171 922
Accounts payable and accrued expenses (234,821) (140,969)
Accrued and withheld taxes, other than income taxes 66,624 (109,223)
Income taxes payable (8,808) 2,293
Deposits payable (28,053) (3,138)
Deferred income (19,513) 1,712
------------- -------------
Net cash used in operating activities (139,131) (17,187)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (11,667) (219,953)
Decrease (increase) in marketable securities 148,334 (76,927)
Proceeds from sale of property and equipment 959 5,000
Payment for business acquired (45,000)
------------- -------------
Net cash provided by (used in) investing activities 137,626 (336,880)
------------- -------------
Cash flows from financing activities:
Principal payments on loans (28,883) (26,947)
------------- -------------
Net cash used in financing activities (28,883) (26,947)
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (30,388) (381,014)
Cash and cash equivalents at beginning of period 550,840 1,035,395
------------- -------------
Cash and cash equivalents at end of period $520,452 $654,381
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $5,688 $7,633
Income taxes $14,474 $18,594
Non cash investing and financing activities:
Notes and accounts receivable received in connection
with sale of salon $20,000
See notes to unaudited consolidated condensed financial statements.
</TABLE>
-6-
CutCo Industries, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
December 31, 1997
Note 1 - Financial Statements
The accompanying unaudited consolidated condensed finan-
cial statements have been prepared without audit in accor-
dance 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 six and three month periods ended December 31, 1997
are not necessarily indicative of the results that may be
expected for the year ending June 30, 1998. For further
information, refer to the consolidated financial state-
ments and footnotes as of June 30, 1997 included in the
Company's Annual Report on Form 10-KSB for the Company's
fiscal year then ended.
Note 2 - Loss Per Common Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
(SFAS 128), Earnings Per Share (EPS). SFAS 128 requires dual
presentation of basic EPS and diluted EPS on the face of all
income statements issued after December 15, 1997 for all entities
with complex capital structures. Basic EPS is computed as net
income (loss) divided by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities.
At December 31, 1997, the dilutive effects of stock options has
been excluded because the calculation was anti-dilutive. EPS data
for the periods ended December 31, 1997 and all prior periods have
been restated to conform with the provisions of this Statement.
-7-
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Six Months Ended December 31, 1997
Liquidity and Capital Resources:
Cash and cash equivalents were $520,452 at December 31,
1997, as compared to $550,840 at June 30, 1997. In addi-
tion, at December 31, 1997, the Company had $351,049 of
marketable securities, as compared to $499,383 at June 30,
1997. During the six months ended December 31, 1997, the
primary use of the Company's capital resources was net
cash used in operating activities of $139,131, as compared
to the primary use of the Company's capital resources in
the six months ended December 31, 1996 which was net cash
used in investing activities of $336,880.
The Company had a current ratio of 1.91 at December 31,
1997, as compared to 2.43 at December 31, 1996 and 1.87 at
June 30, 1997.
At December 31, 1997, commitments for capital expenditures
and other investments did not exceed $30,000. Such com-
mitments were for salon refurbishing, and other invest-
ments. The Company believes its cash resources and liq-
uidity are adequate for its present short and long-term
business requirements.
Results of Operations:
In the six and three month periods ended December 31,
1997, revenues from Company-owned salon operations de-
creased by 17.1% ($722,000) and 24.5% ($534,000), respec-
tively, as compared to the six and three month periods
ended December 31, 1996. The decrease in revenues is
attributable to a decrease in comparable salon store sales
of 9.6%, and 10.9% in the respective six and three month
periods ended December 31, 1997. As of December 31, 1997
there were 41 company-owned salons, as compared to 41
at December 31, 1996. In the six and three month periods
ended December 31, 1997, direct costs of Company-owned
salons decreased by 15.9% ($623,000) and 21.4% ($431,000),
respectively, as compared to such costs for the six and
three months ended December 31, 1996.
-8-
These variances are largely attributable to costs that
fluctuate in direct relation to sales. During the six
months ended December 31, 1997 the Company closed three
salons and wrote-off $19,000 of goodwill related to its
cosmetology technical training school which was closed in
January, 1998 due to low student enrollment. The losses
associated with these closings are reflected in the Loss
on sale/abandonment of assets, net, of $120,000. Manage-
ment's policy is to close existing salons that do not meet
its cash flow criteria.
In the six and three month periods ended December 31,
1997, royalties and service fees decreased by 27.4%
($276,000) and 26.5%, ($116,000), respectively, as com-
pared to the six and three month periods ended December
31, 1996. The overall decrease is due in part to a
decline in the number of franchised hair salons. The
number of franchised hair salons has been steadily de-
creasing for the past several years (305 at December 31,
1995, 284 at December 31, 1996 and 254 at December 31,
1997).
The Company expects the decline in royalties to continue
as a result of attrition of existing licensees without
replacements with new licensees. The Company does not
anticipate significant hair care franchise sales from new
locations for fiscal 1998, 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.
Franchise fee income decreased in the six and three month
periods ended December 31, 1997 by $21,000 and $7,000,
respectively, as compared to the six and three month
periods ended December 31, 1996. Franchise fees, which
were principally related to the New Area Development
Program, have ceased as the remaining payments due to the
Company under notes obtained in connection with that
Program have been paid.
The number of franchised salons has been steadily decreas-
ing 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 reve-
nues 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.
-9-
Inflation has not materially affected the Company's reve-
nues and income during the past two fiscal years.
In the six month period ended December 31, 1997 selling,
general, and administrative expenses decreased by 3.2%
($37,000) as compared to the same period ended December
31, 1996. The decrease is due to decreased corporate
occupancy costs offset by an increase in legal costs and
the costs associated with operating the cosmetology tech-
nical training school which was closed in January, 1998.
The provision for doubtful accounts and notes receivable
declined by $63,000 and $36,000, respectively, for the six
and three month periods ended December 31, 1997 as com-
pared to the same periods ended December 31, 1996. The
allowance at December 31, 1997 was $369,794 as compared to
$353,041 at June 30, 1997.
The income tax charges in the six and three month periods
ended December 31, 1997 and 1996 reflect that the Company
files separate subsidiary state income tax returns, rather
than consolidated state income tax returns, and thus the
Company was not able to offset certain subsidiary losses
against other subsidiary income.
The Company's salons and franchising activities, including
its sales of franchises, are not materially affected by
seasonal fluctuations, in the volume of business.
The Company does not expect to incur significant expenses
related to the year 2,000 computer programming changes,
nor does it expect any material disruption in its business
or that of its suppliers and licensees.
-10-
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Not Applicable.
b) None.
-11-
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
____________________________________
DON vonLIEBERMANN
President
s/MICHAEL KRAMER
____________________________________
MICHAEL KRAMER
Principal Financial &
Chief Accounting Officer
DATE: February 13, 1998
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 520452
<SECURITIES> 351049
<RECEIVABLES> 347854
<ALLOWANCES> 0
<INVENTORY> 317152
<CURRENT-ASSETS> 1710314
<PP&E> 2096011
<DEPRECIATION> 1123196
<TOTAL-ASSETS> 3029278
<CURRENT-LIABILITIES> 894286
<BONDS> 4187
<COMMON> 188371
0
0
<OTHER-SE> 1761792
<TOTAL-LIABILITY-AND-EQUITY> 3029278
<SALES> 106631
<TOTAL-REVENUES> 4343417
<CGS> 84976
<TOTAL-COSTS> 84976
<OTHER-EXPENSES> 4666875
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7777
<INCOME-PRETAX> (453796)
<INCOME-TAX> 14297
<INCOME-CONTINUING> (468093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (468093)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
