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 March 31, 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
----- -----
Number of common shares outstanding at May 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 -
March 31, 1998 and June 30, 1997 1 - 2
Consolidated Condensed Statements of Operations -
Nine Months and Three Months Ended March 31,
1998 and 1997 3 - 4
Consolidated Condensed Statement of Shareholders'
Equity - Nine Months Ended March 31, 1998 5
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended March 31, 1998 and 1997 6
Notes to Unaudited Consolidated Condensed
Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $591,033 $550,840
Marketable securities 354,016 499,383
Notes and accounts receivable, net 279,828 377,514
Merchandise inventory 350,471 376,797
Deferred income taxes 120,000 120,000
Prepaid expenses, taxes and
miscellaneous receivables 83,097 131,211
------------- -------------
TOTAL CURRENT ASSETS 1,778,445 2,055,745
------------- -------------
PROPERTY AND EQUIPMENT, AT COST
Furniture, fixtures and equipment 2,005,689 2,137,829
Leasehold improvements 95,944 95,944
------------- -------------
2,101,633 2,233,773
Less accumulated depreciation
and amortization 1,197,413 1,010,791
------------- -------------
904,220 1,222,982
------------- -------------
OTHER ASSETS
Notes receivable, noncurrent, net 80,927 78,574
Deferred charges and other 169,494 287,639
Deposits 77,814 105,885
------------- -------------
328,235 472,098
------------- -------------
$3,010,900 $3,750,825
============= =============
</TABLE>
See notes to unaudited consolidated condensed financial statements.
<PAGE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS - Continued
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
expenses $748,022 $823,323
Current portion of long-term debt 127,896 167,558
Accrued and withheld taxes,
other than income taxes 140,979 75,167
Income taxes payable 25,645 31,453
------------- -------------
TOTAL CURRENT LIABILITIES 1,042,542 1,097,501
LONG-TERM DEBT 2,816 6,860
DEPOSITS PAYABLE 34,446 62,499
DEFERRED INCOME 46,578 45,709
DEFERRED INCOME TAXES 120,000 120,000
------------- -------------
1,246,382 1,332,569
------------- -------------
SHAREHOLDERS' EQUITY
Common Stock 188,371 188,371
Additional paid-in capital 4,185,250 4,185,250
Retained earnings 872,489 1,526,227
------------- -------------
5,246,110 5,899,848
Less treasury stock - at cost 3,481,592 3,481,592
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 1,764,518 2,418,256
------------- -------------
$3,010,900 $3,750,825
============= =============
</TABLE>
See notes to unaudited consolidated condensed financial statements.
<PAGE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Owned retail stores $5,206,069 $5,859,681
Sales of equipment and products 150,471 115,086
Royalties and service fees 1,062,849 1,369,862
Franchise fee income 5,837 29,911
----------- -----------
6,425,226 7,374,540
----------- -----------
Costs and Expenses:
Direct costs of owned retail stores 4,906,370 5,513,771
Costs of equipment and products sold 118,813 81,390
Depreciation and amortization 333,134 338,232
Selling, general and administrative expenses 1,693,389 1,760,776
Provision for doubtful accounts and notes receivable 0 17,000
----------- -----------
7,051,706 7,711,169
----------- -----------
Other income (loss):
Interest and dividend income 36,041 59,532
Interest expense (10,682) (14,301)
Loss on sale/abandonment of assets, net (120,104) (24,535)
Other income, net 84,784 37,968
----------- -----------
(9,961) 58,664
----------- -----------
Loss before income taxes (636,441) (277,965)
Income taxes 17,297 18,982
----------- -----------
Net loss ($653,738) ($296,947)
=========== ===========
Loss per common share basic and diluted ($0.84) ($0.38)
=========== ===========
Weighted average number of common shares outstanding 780,625 780,625
=========== ===========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
<PAGE>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Revenues:
Owned retail stores $1,705,201 $1,636,362
Sales of equipment and products 43,840 35,089
Royalties and service fees 332,768 363,619
Franchise fee income 3,524
----------- -----------
2,081,809 2,038,594
----------- -----------
Costs and Expenses:
Direct costs of owned retail stores 1,601,381 1,586,142
Costs of equipment and products sold 33,837 26,806
Depreciation and amortization 107,353 110,599
Selling, general and administrative expenses 572,284 602,411
Provision for doubtful accounts and notes receivable (15,000) (61,000)
----------- -----------
2,299,855 2,264,958
----------- -----------
Other income (loss):
Interest and dividend income 13,757 17,397
Interest expense (2,905) (4,167)
Gain(Loss)on sale/abandonment of assets, net 0 3,154
Other income, net 24,549 18,917
----------- -----------
35,401 35,301
----------- -----------
Loss before income taxes (182,645) (191,063)
Income taxes 3,000 2,323
----------- -----------
Net loss ($185,645) ($193,386)
=========== ===========
Loss per common share basic and diluted ($0.24) ($0.25)
=========== ===========
Weighted average number of common shares outstanding 780,625 780,625
=========== ===========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
------------ Paid-In Retained --------------
Shares Amount Capital Earnings Shares Amount Total
----------- ----------- ------------ ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1997 1,883,706 $188,371 $4,185,250 $1,526,227 1,103,081 ($3,481,592) $2,418,256
Net loss (653,738) (653,738)
----------- ----------- ------------ ------------ ---------- ------------ -----------
Balance at March 31,
1998 (Unaudited) 1,883,706 $188,371 $4,185,250 $872,489 1,103,081 ($3,481,592) $1,764,518
=========== =========== ============ ============ ========== ============ ===========
</TABLE>
See notes to unaudited consolidated condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
CUTCO INDUSTRIES, INC. AND SUBSIDIARIES Nine Months Ended
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) March 31,
-----------------------------
1998 1997
<S>
CASH FLOWS FROM OPERATING ACTIVITIES: <C> <C>
Net loss ($653,738) ($296,947)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 333,134 338,232
Provision for doubtful accounts and notes receivable 0 17,000
Loss on sale/abandonment of assets, net 120,104 24,535
Changes in operating assets and liabilities, net of effect of
acquisition and sale:
Notes and accounts receivable 97,686 70,114
Merchandise inventory 26,326 (48,067)
Prepaid expenses, taxes and miscellaneous receivables 48,114 35,831
Deposits and other 25,718 (1,917)
Accounts payable and accrued expenses (75,301) (131,241)
Accrued and withheld taxes, other than income taxes 65,812 (101,525)
Income taxes payable (5,806) 2,293
Deposits payable (28,053) (2,663)
Deferred income 869 8,020
------------- -------------
Net cash used in operating activities (45,135) (86,335)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (17,292) (379,925)
(Purchase)Sale of marketable securities.net 145,367 (77,047)
Proceeds from sale of property and equipment 959 9,100
Payment for business acquired (45,000)
------------- -------------
Net cash provided by (used in) investing activities 129,034 (492,872)
------------- -------------
Cash flows from financing activities:
Principal payments on loans (43,706) (40,771)
------------- -------------
Net cash used in financing activities (43,706) (40,771)
------------- -------------
NET INCREASE(DECREASE) IN CASH AND CASH EQUIVALENTS 40,193 (619,978)
Cash and cash equivalents at beginning of period 550,840 1,035,395
------------- -------------
Cash and cash equivalents at end of period $591,033 $415,417
============= =============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $8,593 $11,093
Income taxes $17,474 $22,064
Non cash investing and financing activities:
Notes and accounts receivable received in connection
with sale of salon $20,000
</TABLE>
See notes to unaudited consolidated condensed financial statements.
<PAGE>
CutCo Industries, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements
March 31, 1998
Note 1 - Financial Statements
The accompanying unaudited consolidated condensed financial statements have
been prepared without audit in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine and three month periods ended March 31, 1998 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
statements 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 March 31, 1998, the dilutive effects of stock options has been
excluded because the calculation was anti-dilutive. EPS data for the periods
ended March 31, 1998 and all prior periods have been restated to conform with
the provisions of this Statement.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Nine Months Ended March 31, 1998
Liquidity and Capital Resources:
Cash and cash equivalents were $591,033 at March 31, 1998, as compared to
$550,840 at June 30, 1997. In addition, at March 31, 1998, the Company had
$354,016 of marketable securities, as compared to $499,383 at June 30, 1997.
During the nine months ended March 31, 1998, the primary use of the Company's
capital resources was net cash used in operating activities of $45,135, as
compared to the primary use of the Company's capital resources in the nine
months ended March 31, 1997 which was net cash used in investing activities of
$492,872.
The Company had a current ratio of 1.70 at March 31, 1998, as compared to 2.13
at March 31, 1997 and 1.87 at June 30, 1997.
At March 31, 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 nine month period ended March 31, 1998 revenues from Company-owned
salon operations decreased by 11.1% ($653,000) as compared to March 31, 1997.
In the quarter ended March 31, 1998 revenues from Company-owned salons
increased 4.2% ($69,000) as compared to the quarter ended March 31, 1997. The
number of Company salons for each period remained at forty-one. Direct costs
of Company-owned salons declined 11% for the nine month period and increased
1% for the quarter. The decrease for the nine months were in direct relation
to sales whereas the small decrease in direct costs for the quarter reflected
improved margins because of lower fixed costs.
In the nine and three month periods ended March 31, 1998, royalties and
service fees decreased by 22.4% ($307,000) and 8.5%, ($31,000), respectively,
as compared to the nine and three month periods ended March 31, 1997. 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 decreasing for
the past several years (301 at March 31, 1996, 281 at March 31, 1997 and 233
at March 31, 1998).
<PAGE>
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.
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 nine month period ended March 31, 1998 selling, general, and
administrative expenses decreased by 3.8% ($67,000) as compared to the same
period ended March 31, 1997. The decrease is due to decreased corporate
occupancy costs offset by an increase in legal costs and the costs associated
with operating the cosmetology technical training school which was closed in
January, 1998.
The provision for doubtful accounts and notes receivable declined by
$17,000 and $15,000, respectively, for the nine and three month periods
ended March 31, 1998 as compared to the same periods ended March 31, 1997.
The allowance at March 31, 1998 was $395,263 as compared to $353,041 at
June 30, 1997.
The income tax charges in the nine and three month periods ended March 31,
1998 and 1997 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 fluctuation, 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.
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Not Applicable.
b) Form 8-K dated April 2, 1998, reporting an event of March 31,
1998.
<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
------------------------------------
DON vonLIEBERMANN
President
s/MARVIN MARCUS
------------------------------------
MARVIN MARCUS
Chairman and Chief Financial Officer
DATE: May 13, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Mar-31-1998
<CASH> 591033
<SECURITIES> 354016
<RECEIVABLES> 279828
<ALLOWANCES> 0
<INVENTORY> 350471
<CURRENT-ASSETS> 1778445
<PP&E> 2101633
<DEPRECIATION> 1197413
<TOTAL-ASSETS> 3010900
<CURRENT-LIABILITIES> 1042542
<BONDS> 2816
<COMMON> 188371
0
0
<OTHER-SE> 1576187
<TOTAL-LIABILITY-AND-EQUITY> 3010900
<SALES> 150471
<TOTAL-REVENUES> 6425226
<CGS> 118813
<TOTAL-COSTS> 118813
<OTHER-EXPENSES> 6892893
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10682
<INCOME-PRETAX> (636441)
<INCOME-TAX> 17297
<INCOME-CONTINUING> (653738)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (653738)
<EPS-PRIMARY> (.84)
<EPS-DILUTED> (.84)
</TABLE>
