<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
INTERNATIONAL CUTLERY LTD.
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 0-26874
INTERNATIONAL CUTLERY, LTD.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3796781
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
127 WEST 25TH STREET, NEW YORK, NEW YORK 10001
- -------------------------------------------------------
(Address of principal executive offices)
(212) 924-7300
- ---------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
APPLICABLE ONLY TO CORPORATE ISSUERS
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State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
10,189,248 as of June 22, 1998
Transitional Small Business Disclosure Format (check one);
Yes No X
- ----- -----
2
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INTERNATIONAL CUTLERY, LTD.
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets as of
May 2, 1998 and January 31, 1998 4
Statements of Operations for the
Thirteen Weeks Ended May 2, 1998 and April 26, 1997 5
Statements of Cash Flows for the
Thirteen Weeks Ended May 2, 1998 and April 26, 1997 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II OTHER INFORMATION 12
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 12
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INTERNATIONAL CUTLERY LTD.
BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS May 2, January 31,
1998 1998
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ - $ 9,181
Inventories 957,407 996,626
--------- ----------
Total current assets 957,407 1,005,807
STORE FIXTURES AND DISPLAYS AND
LEASEHOLD IMPROVEMENTS, less
accumulated depreciation
and amortization 1,180,287 1,271,308
OTHER ASSETS 173,953 176,258
$2,311,647 $2,453,373
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other
current liabilities $1,295,985 $1,103,834
NOTES PAYABLE 1,600,000 1,300,000
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Total current liabilities 2,895,985 2,403,834
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value
- shares authorized 1,000,000;
issued none - -
Common stock, $.01 par value
- shares authorized 40,000,000;
issued and outstanding 10,189,248 101,892 101,892
Capital in excess of par value 5,514,186 5,514,186
Accumulated deficit (6,191,566) (5,557,689)
Notes receivable arising from
stock purchase agreements (8,850) (8,850)
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Total stockholders' equity (584,338) 49,539
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$2,311,647 $2,453,373
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</TABLE>
See accompanying notes to financial statements.
4
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INTERNATIONAL CUTLERY
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen weeks ended Thirteen weeks ended
May 2, 1998 April 26, 1997
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<S> <C> <C>
NET SALES $500,612 $505,589
COST OF SALES 185,849 356,374
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GROSS PROFIT 314,763 149,215
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STORE AND WAREHOUSE EXPENSES 650,947 1,097,185
GENERAL AND ADMINISTRATIVE EXPENSES 274,231 32,587
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925,678 1,129,772
LOSS FROM OPERATIONS (610,915) (980,557)
OTHER INCOME (EXPENSE):
Interest expense (22,962) (19,503)
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NET LOSS $(633,877) $(1,000,060)
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BASIC LOSS PER SHARE OF COMMON STOCK $(.06) $(.26)
--------- ---------
--------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10,189,248 3,939,248
--------- ---------
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</TABLE>
See accompanying notes to financial statements.
5
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INTERNATIONAL CUTLERY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen weeks ended Thirteen weeks ended
May 2, 1998 April 26, 1997
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss $(633,877) $(1,000,060)
Adjustments to reconcile net
loss to net cash used in operating
activities:
Depreciation and amortization 92,658 80,969
Changes in operating assets
and liabilities:
Decrease in inventories 39,219 277,999
Increase in accounts payable
and other current liabilities 192,151 344,701
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NET CASH USED IN OPERATING
ACTIVITIES (309,849) (296,391)
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CASH FLOWS FROM INVESTING
ACTIVITIES:
Acquisition of store fixtures
and displays and leasehold
improvements (1,637) (94,601)
Other assets 2,305 92,662
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NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES 668 (1,939)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable 300,000 -
--------- ---------
Repayments of notes payable,
related parties - (50,000)
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NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES 300,000 (50,000)
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NET DECREASE IN CASH AND
CASH EQUIVALENTS (9,181) (348,330)
CASH AND CASH EQUIVALENTS,
beginning of period 9,181 394,594
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CASH AND CASH EQUIVALENTS,
end of period $ - $ 46,264
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</TABLE>
See accompanying notes to financial statements.
6
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INTERNATIONAL CUTLERY, LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial statements included herein have been prepared by
International Cutlery, Ltd. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission and reflect all
adjustments, consisting only of normal recurring adjustments, which are, in the
opinion of management, necessary to present a fair statement of the results for
interim periods. Certain information and footnote disclosures have been omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's January 31,
1998 Form 10-K-SB.
NOTE 2 - BUSINESS AND ORGANIZATION
International Cutlery, Ltd. was incorporated in September 1994 to
operate retail cutlery stores and kiosks (mini-stores) in malls and
transportation centers. The Company commenced operations on December 12, 1994
and currently operates five cutlery retail stores and fourteen kiosks located in
New York, New Jersey, Connecticut, Maryland and Florida.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reporting Period
The Company employs a 52-53 week accounting period ending the Saturday
closest to January 31.
Loss Per Common Share
Loss per share of common stock is based upon the weighted average
number of shares outstanding. The weighted average includes shares issued within
one year prior to the filing of the Company's registration statement at a price
less than the offering price.
7
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following management's discussion and analysis of results of operations and
financial condition include forward-looking statements with respect to the
Company's future financial performance. These forward-looking statements are
subject to various risks and uncertainties which could cause actual results to
differ materially from historical results of those currently anticipated. The
Company employs a 52 or 53 week fiscal year ending on the Saturday closest to
January 31.
Results of Operations
For the Thirteen Weeks Ended May 2, 1998 and April 27, 1997
During the thirteen week period from February 01, 1998 to May 02, 1998 (the
"Current Period"), the Company's revenues decreased 1.0% to $500,612 from
$505,589 for the period ended April 27,1997 (the "Prior Period"). The decrease
in revenues is principally attributable to a decrease in the number of retail
outlets operated by the Company during the Current Period. Revenues in the
Current Period were derived from the operation of twenty-six retail outlets,
including four which closed in February 1998 and three which closed in April
1998. On a comparative basis, Current Period same store sales increased 1.6%
from the Prior Period.
Gross profits increased to $314,763 in the Current Period from $149,215 in the
Prior Period. The increase was due to the decrease in the cost of sales as a
percentage of revenues. Cost of sales decreased to $185,849 in the Current
Period from $356,374 in the Prior Period. Cost of sales as a percentage of
revenues decreased to 37.1% in the Current Period from 70.5% in the Prior
Period. This decrease was principally due to a change in the product mix of
merchandise sold.
During the Current Period, store operating and warehousing expenses were
$650,947 compared to $1,097,185 in the Prior Period. The decrease in expenses
resulted primarily from cost cutting measures employed by the Company and a
reduction in the number of stores operated in the Current Period. As a
percentage of revenues, store operating and warehousing expenses decreased to
130.0% of sales in the Current Period from 217.0% in the Prior Period.
General and administrative expenses increased to $274,231 in the Current
Period from $32,587 in the Prior Period. The increase was primarily due to
$101,118 of expenses included in the Current Period associated with closing
of seven retail outlets during February 1998 and April 1998.
The Company's interest expense for the Current Period increased to $22,962 from
$19,503 in the Prior Period. This increase stemmed from a
8
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line of credit the Company received from Sharp of Florida, Inc. ("Sharp") which
bear interest at 7% per annum.
The Current Period's net loss was $633,877, or $.06 per share as compared to the
Prior Period's net loss of $1,000,060, or $.26 per share.
Year ended January 31, 1998 compared to the year ended April 26, 1997
On October 23, 1997, the Board of Directors of the Company approved the change
of the Company's fiscal year end to a 52 or 53 week accounting period ending on
the Saturday closest to January 31. The year ended January 31, 1998 (the
"Current Year"), consisted of a nine month period, from April 27, 1997 to
January 31, 1998. The "Prior Year" consisted of a twelve month period, from
April 28, 1996 to April 26, 1997. Note that comparative information of the
Current Year to the Prior Year is a nine month period compare to a twelve month
period.
During this transition period the Company's revenues increased 3% to $2,545,514
for the Current Year from $2,469,958 for the Prior Year. The increase in
revenues is attributable to an increase in the number of retail outlets operated
by the Company during the Current Year and an increase in same store sales.
Revenues in the Current Year were derived from the operation of twenty-six
retail outlets, of which two were closed in July and November 1997, respectively
and four that opened in the current year. In the Prior Year, the Company
operated twenty-five retail outlets, of which one was closed in September 1996.
Gross profit increased to $1,488,354 in the Current Year from $1,437,051 in the
Prior Year. The increase was due to the increase in revenues and by a slight
decrease in the cost of sales as a percentage of revenues. Cost of sales
increased to $1,057,160 in the Current Year from $1,032,907 in the Prior Year
due to the increased sales. Cost of sales as a percentage of revenues decreased
to 41.5% in the Current Year from 41.8% in the Prior Year.
During the Current Year, store operating and warehousing expenses were
$2,123,471 compared to $2,395,418 in the Prior Year. The decrease in expenses is
attributed primarily to cost cutting measures employed by the Company. As a
percentage of revenues, store operating and warehousing expenses decreased to
83.4% of sales in the Current Year from 97.0% in the Prior Year. The decreased
in expense is also attributed primarily by the nine month transition period as
compared to twelve months in the Prior Year.
General and administrative expenses decreased to $795,479 in the Current Year
from $1,329,291 in the Prior Year. The decrease in general and administrative
expenses results from cost cutting measures employed by the Company and by only
nine months of operations during the Current Year.
9
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The Company's interest expense for the Current Year decreased to $33,541 from
$83,254 in the Prior Year. The decrease is attributable to the short transition
period and the repayment of certain indebtedness outstanding during the Prior
Year.
There is no interest income for the current year as compared to $104,167 in the
Prior Year. In the Prior Year, interest income resulted from the interest earned
on the proceeds of the Company's initial public offering in December 1995. These
proceeds were invested primarily in U.S. government securities pending their
use.
The Current Year's net loss was $1,464,137 or $.22 per share as compared to the
Prior Year's net loss of $2,266,745 or $.58 per share. The net loss during the
current year reflected only nine months of operations versus twelve months in
the Prior Year.
Liquidity and Capital Resources
In April 1997, the Company received a convertible line of credit for a maximum
amount of $250,000, from the Company's president. In October 1997, under the
provisions of the line of credit agreement, the advances of $250,000 was
converted into 6,250,000 shares of the Company's common stock.
In the Current Period, the Company closed seven retail outlets, incurring
closing costs of $101,118 which were charged to general and administrative
expenses. The Company intends, when funding is available, to open new retail
outlets in the future at locations that the Company's management deems more
suitable. Opening a retail outlet requires the Company to incur expenses to
equip and stock a retail outlet while having to wait for the benefits of such
retail outlet until sales reach a significant level. The Company believes
that costs related to the opening of a store, exclusive of inventory, should
average approximately $75,000 per store and $50,000 per kiosk. These opening
costs are contained by the Company's practice of finding store locations that
have previously been used as a retail store. If the Company is unable to find
such locations, the cost of opening stores could be significantly higher,
hindering the expansion of the Company.
In October 1997, the Company received a line of credit from Sharp whereby the
Company may receive advances up to $1,300,000. Advances under the line bear
interest at 7% per annum. Interest is due quarterly and the principal amount is
due on July 31, 2001. The principal amount due on the note can be converted into
a maximum of 60% of the outstanding shares of the Company's common stock,
excluding the Class A and Class B Common Stock Purchase Warrants. During the
Current Period, Sharp advanced the Company an additional $300,000. Subsequent to
the Current Period, Sharp advanced the Company an additional $300,000. The notes
bear interest at prime and are due April 13, 1999. The Company is not in
compliance with the covenants under the notes.
10
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Cash requirements for the foreseeable future will include funds needed to
sustain the cash used in operations and additional capital to open new stores to
achieve a level of profitability. The Company believes that cash from operations
in addition to amounts available with the line of credit available from Sharp of
Florida, Inc. will be adequate to meet the Company's anticipated requirements
for working capital, and capital expenditures for the next 12 months. However,
the Company has experienced workin capital shortages in the past and there can
be no assurance that it will not experience such shortages in the future.
Seasonality
Due to the importance of the Christmas selling season, the Company anticipates
that revenue in that period will constitute a disproportionate amount of net
sales for the period. The Company's annual earnings are expected to be
substantially dependent on results of operations in the Christmas selling
season. Unfavorable economic conditions affecting retailers generally during the
Christmas selling season in any period could materially adversely affect the
Company's results of operations for the period. The Company must also make
decisions regarding how much inventory to buy well in advance of the season in
which it will be sold, especially for the Christmas selling season. Significant
deviations from projected demand for products may have a material adverse effect
on the Company's sales and profitability.
Inflation
There was no significant impact on the Company's operations as a result of
inflation during the Current Period, or the Prior Period.
11
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K:
(a) Exhibits
None
(b) Reports on Form 8-K
Form 8K-A dated February 11, 1998
12
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INTERNATIONAL CUTLERY, LTD.
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.
INTERNATIONAL CUTLERY, LTD.
(Registrant)
/s/ Joel J. Silver
-----------------------------------
Date: June 22, 1998 By: Joel J. Silver
Title: President, Chief Executive
officer and Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1998
<PERIOD-END> MAY-02-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 957,407
<CURRENT-ASSETS> 957,407
<PP&E> 1,640,193
<DEPRECIATION> 459,906
<TOTAL-ASSETS> 2,311,647
<CURRENT-LIABILITIES> 2,895,985
<BONDS> 0
0
0
<COMMON> 101,892
<OTHER-SE> (686,230)
<TOTAL-LIABILITY-AND-EQUITY> 2,311,647
<SALES> 500,612
<TOTAL-REVENUES> 500,612
<CGS> 185,849
<TOTAL-COSTS> 185,849
<OTHER-EXPENSES> 925,178
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,962
<INCOME-PRETAX> (633,877)
<INCOME-TAX> 0
<INCOME-CONTINUING> (633,877)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (633,877)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
