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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 thirteen week period ended August 1, 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.
- -------------------------------------------------------------------------------
(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
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(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
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 September 21, 1998
Transitional Small Business Disclosure Format (check one);
Yes No X
----- -----
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INTERNATIONAL CUTLERY, LTD.
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Balance Sheets as of
August 01, 1998 and January 31, 1998 3
Statements of Operations for the
Twenty-Six Weeks Ended August 01, 1998 and July 26, 1997 4
Statements of Operations for the
Thirteen Weeks Ended August 01, 1998 and July 26, 1997 5
Statements of Cash Flows for the
Twenty-Six Weeks Ended August 01, 1998 and July 26, 1997 6
Notes to Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Results 9-11
of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures 11
About Market Risk
PART II OTHER INFORMATION 11
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Item 6. Exhibits and Reports on Form 8-K 11
Signature Page 12
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INTERNATIONAL CUTLERY, LTD.
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS August 1, January 31,
1998 1998
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(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................... $ -- $ 9,181
Inventories .................................................. 970,397 996,626
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Total current assets .................................. 970,397 1,005,807
STORE FIXTURES AND DISPLAYS AND LEASEHOLD IMPROVEMENTS, less ..... 1,092,526 1,271,308
accumulated depreciation and amortization
OTHER ASSETS ..................................................... 181,951 176,258
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$ 2,244,874 $ 2,453,373
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-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other current liabilities ............... $ 1,308,160 $ 1,103,834
Notes payable ................................................ 2,025,000 1,300,000
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Total current liabilities ............................. 3,333,160 2,403,834
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY(DEFICIT):
Preferred stock, $.01 par value - shares authorized 1,000,000; -- --
issued none
Common stock, $.01 par value - shares authorized 40,000,000; . 101,892 101,892
issued and outstanding 10,189,248
Capital in excess of par value ............................... 5,514,186 5,514,186
Accumulated deficit .......................................... (6,695,514) (5,557,689)
Notes receivable arising from stock purchase agreements ...... (8,850) (8,850)
-------------- -------------
Total stockholders' equity(deficit) ................... (1,088,286) 49,539
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$ 2,244,874 $ 2,453,373
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</TABLE>
See accompanying notes to financial statements.
3
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INTERNATIONAL CUTLERY, LTD.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen weeks Thirteen weeks
ended ended
August 1, 1998 July 26, 1997
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<S> <C> <C>
NET SALES ............................................ $ 582,140 $ 510,104
COST OF SALES ........................................ 258,049 212,152
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GROSS PROFIT .............................. 324,091 297,952
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STORE AND WAREHOUSE EXPENSES ......................... 598,632 657,760
GENERAL AND ADMINISTRATIVE EXPENSES .................. 144,377 262,691
STORE CLOSING COSTS .................................. 62,487 --
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805,496 920,451
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LOSS FROM OPERATIONS ................................. (481,405) (622,499)
OTHER EXPENSE:
Interest expense ................................. (22,538) (1,011)
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NET LOSS ............................................. $ (503,943) $ (623,510)
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BASIC LOSS PER SHARE OF COMMON STOCK ................. $ (.05) $ (.16)
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING.. 10,189,248 3,939,248
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</TABLE>
See accompanying notes to financial statements.
4
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INTERNATIONAL CUTLERY, LTD.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-six weeks Twenty-six weeks
ended ended
August 1, 1998 July 26, 1997
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<S> <C> <C>
NET SALES ............................................ $ 1,082,752 $ 1,015,693
COST OF SALES ........................................ 443,898 568,526
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GROSS PROFIT .............................. 638,854 447,167
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STORE AND WAREHOUSE EXPENSES ......................... 1,249,579 1,754,945
GENERAL AND ADMINISTRATIVE EXPENSES .................. 317,990 295,278
STORE CLOSING COSTS .................................. 163,605 --
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1,731,174 2,050,223
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LOSS FROM OPERATIONS ................................. (1,092,320) (1,603,056)
OTHER EXPENSE:
Interest expense ................................. (45,500) (20,514)
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NET LOSS ............................................. $ (1,137,820) $ (1,623,570)
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BASIC LOSS PER SHARE OF COMMON STOCK ................. $ (.11) $ (.41)
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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, LTD.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-six weeks Twenty-six weeks
ended ended
August 1, 1998 July 26, 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $(1,137,820) $(1,623,570)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ................... 185,315 119,820
Changes in operating assets and liabilities:
Inventories .................................. 26,229 426,109
Other current assets ......................... -- 124,482
Accounts payable and other current liabilities 204,326 652,860
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NET CASH USED IN OPERATING ACTIVITIES ..... (721,950) (300,299)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of store fixtures and displays and
leasehold improvements ............................. (6,538) (101,727)
Other assets ........................................... (5,693) (45,207)
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NET CASH USED IN INVESTING ACTIVITIES ..... (12,231) (146,934)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable ............................. 725,000 100,000
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NET CASH PROVIDED BY FINANCING ACTIVITIES.. 725,000 100,000
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NET DECREASE IN CASH AND CASH EQUIVALENTS .................. (9,181) (347,233)
CASH AND CASH EQUIVALENTS, beginning of period ............. 9,181 394,594
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CASH AND CASH EQUIVALENTS, end of period ................... $ -- $ 47,361
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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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INTERNATIONAL CUTLERY, LTD.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. The pronouncement requires all costs related to the development of
internal use software other than those incurred during the application
development stage to be expensed as incurred. Costs incurred during the
application development stage are required to be capitalized and amortized over
the estimated useful life of the software. In accordance with SOP 98-1, the
Company will adopt its provisions effective for the fiscal year ending January
29,2000. Adoption is not expected to have a material effect on the Company's
financial statements as the Company's policies are substantially in compliance
with SOP 98-1.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 requires an entity to expense all start-up activities (as
defined) as incurred. In accordance with SOP 98-5, the Company will adopt its
provisions effective for the fiscal year ending January 29, 2000. The impact of
the adoption of SOP 98-5 on the Company's financial statements is not currently
known or considered estimable. The Company has historically amortized costs
associated with the opening of new stores over the respective store's first 60
months of operations. SOP 98-5 requires that, on a prospective basis, such costs
be expensed as incurred, and any such costs capitalized at the time of adoption,
be written off and reported as the cumulative effect of a change in accounting
principle in the first quarter of fiscal 1999.
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). Under SFAS 128, the
presentation of primary and fully diluted earnings per share is replaced by
basic and diluted earnings per share. Basic earnings per common share includes
no dilutive effect of common stock equivalents and is computed by dividing
income available to common shareholders by the weighted average number of common
shares outstanding. Diluted earnings per common share reflects, in periods in
which they have a dilutive effect, the impact of common shares issuable upon
exercise of stock options. For the second quarter of 1998 and 1997, incremental
shares attributed to outstanding stock options were not included because the
result would be anti-dilutive. All historical data weighted average share and
per share amounts have been restated to reflect the adoption of SFAS 128.
8
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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 Twenty-Six Weeks Ended August 1, 1998 and July 26, 1997.
The Company employed 52 or 53 weeks fiscal year ending on the Saturday
closest to January 31. During the twenty-six week period ended August 1, 1998
(the "Current Period"), the Company's revenues increase 6.6% to $1,082,752 from
$1,015,693 for the period from January 26, 1997 to July 26, 1997 (the "Prior
Period"). The increase in revenues is partially attributable to a change in the
product mix of merchandise sold 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. In the Prior Period, the Company operated twenty-four retail outlets, one
of which was closed in July 1997.
On a comparative basis, Current Period same store sales increased 12.2%
from the Prior Period Gross Profit increased to $638,854 in the Current Period
from $447167 in the Prior Period. The increase was due to the increase in
revenues and a decreased in the cost of goods sold. Cost of goods sold decreased
to $443,898 in the Current Period from $568,526 in the Prior Period due to the
increased sales. Cost of goods sold as a percentage of revenues decreased to
41.0% in the Current Period from 56.0% in the Prior Period. This increase was
principally due to a change in the product mix of merchandise sold.
During the Current Period, store operating and warehousing expenses
were $1,249,579 compared to $1,754,945 in the Prior Period. The decrease in
expenses is attributed primarily from cost cutting measures employed by the
Company and decrease in the number of retail outlets. As a percentage of
revenues, store operating and warehousing expenses decreased to 115.4% of sales
in the Current Period from 172.8% in the Prior Period.
General and administrative expenses increased to $317,990 in the
Current Period from $295,278 in the Prior Period. The increase in general and
administrative expenses results from cost associated with closing of seven
retail outlets during February 1998 and April 1998. The Company's interest
expense for the Current Period increased to $45,500 from $20,514 in the Prior
Period. This increase resulted from a line of credit the Company received from
Sharp of Florida, Inc. ("Sharp") which bears interest at 7% per annum. The
Company did not have
9
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interest income in the Current Period. The Current Period's net loss was
$1,137,820 or $(.11) per share as compared to the Prior Period's net loss of
$1,623,570 or $(.41) per share.
For the Thirteen Weeks Ended August 1, 1998 and July 26, 1997.
During the thirteen week period from May 3, 1998 to August 1, 1998 (the
"Current Period"), the Company's revenues increased 14.1% to $582,140 from
$510,104 for the period ended July 26, 1997 (the "Prior Period"). The increase
in revenues is principally attributable to a change in the product mix of
merchandise sold. Revenues in the Current Period were derived from the operation
of nineteen retail outlets, versus twenty-four retail outlets, one of which was
closed in July 1997 in the Prior Period. On a comparative basis, Current Period
same store sales increased 24.8% from the Prior Period.
Gross profits increased to $324,091 in the Current Period from $297,592
in the Prior Period. The increase was due to the increase in Revenues and offset
by an increase in the cost of goods sold as a percentage of Revenues. Cost of
goods sold increased to $258,049 in the Current Period from $212,152 in the
Prior Period due to the increased sales. Cost of Goods sold as a percentage of
Revenues increased to 44.3% in the current period from 41.6% in the Prior
Period. The increase was principally due to a change in the product mix of
merchandise sold.
During the Current Period, store operating and warehousing expenses
were $598,632 compared to $657,760 in the Prior Period. The Decrease in expenses
resulted primarily from cost cutting measures employed by the Company. As a
percentage of revenues, store operating and warehousing expenses decreased to
102.8% of sales in the Current Period from 129.0% in the Prior Period.
General and administrative expenses decreased to $144,377 in the
Current Period from $262,691 in the Prior Period due to cost cutting measure and
reduction in administrative expenses. The Current Period included $62,487
expenses associated with closing of seven retail outlets during February 1998
and April 1998.
The Company's interest expense for the Current Period increased to
$22,538 from $1,011 in the Prior Period. This increase stemmed from a line of
credit the Company received from Sharp of Florida, Inc. ("Sharp") which bear
interest at 7% per annum. There is no interest income for the Current Period.
The Current Period's net loss was $503,943 or $(.05) per share as
compared to the Prior Period's net loss of $623,510 or $(.16) per share.
Liquidity and Capital Resources
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
10
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Purchase Warrants. Sharp has since advanced the Company an additional
$1,275,000, of which $550,000 was advanced since August 1, 1998. The notes bear
interest at prime and are due April 13, 1999. The Company is not in compliance
with the covenants under the notes.
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 has been, and will likely
continue to be in the foreseeable future, dependent on Sharp to meet the
Company's working capital requirements.
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 its fiscal year. 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 for the twenty-six weeks and thirteen weeks ended August 1, 1998.
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 - None
11
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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: September 23, 1998 By: Joel J. Silver
Title: President, Chief Executive
Officer and Chief Financial Officer
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENTS OF OPERATIONS INCLUDED IN
THE REGISTRANT'S FORM 10-QSB FOR THE QUARTER ENDED AUGUST 1, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> APR-25-1998
<PERIOD-END> AUG-01-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 970,397
<CURRENT-ASSETS> 970,397
<PP&E> 1,092,526
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,244,874
<CURRENT-LIABILITIES> 3,333,164
<BONDS> 0
0
0
<COMMON> 10,892
<OTHER-SE> (1,190,178)
<TOTAL-LIABILITY-AND-EQUITY> 2,244,874
<SALES> 582,140
<TOTAL-REVENUES> 582,140
<CGS> 258,049
<TOTAL-COSTS> 805,496
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,538
<INCOME-PRETAX> (503,943)
<INCOME-TAX> 0
<INCOME-CONTINUING> (503,943)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (503,943)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0.02
</TABLE>
