UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 25, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-24466
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0945858
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 INDUSTRIAL BOULEVARD NE
MINNEAPOLIS, MINNESOTA 55413
(Address and zip code of principal executive offices)
612-331-8500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 ___.
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for the year ended September 25, 1997: $22,121,800
Aggregate market value of Common Stock held by non-affiliates
as of December 15, 1997: $9,708,094
Number of Shares of Common Stock outstanding as of the close of
business December 15, 1997: 2,594,532
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for Annual Meeting of
Shareholders to be held January 27, 1998, ("Proxy Statement") to be filed with
the Commission, are incorporated by reference in Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format- Yes ___ No _X_.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
A. BUSINESS DEVELOPMENT
GENERAL. The Barbers, Hairstyling for Men & Women, Inc. (the "Company")
is engaged in the business of franchising three different hair care salon
concepts which provide hair care services and products for men, women and
children. The Company also owns and operates 23 salons in the United States. The
Company implements its retail concepts through nationwide franchise systems that
the Company supports with a comprehensive package of centralized services. The
Company primarily earns revenue through its franchise operations from franchise
initial fees, franchise royalties and sales of beauty products, salon equipment
and consumer appliances.
Although the Company currently does business under the names "Cost
Cutters Family Hair Care(R)" ("Cost Cutters"), "City Looks Salons
International(R)" ("City Looks"), "We Care Hair(R)" ("We Care Hair"), "The
Barbers(R)" ("The Barbers"), "The Barbers, Hairstyling for Men & Women(R)", "The
Hair Performers(R)" and "Family Haircut Stores(R)", it sells only Cost Cutters,
City Looks, and We Care Hair franchises. Each type of franchise is specifically
tailored to satisfy a particular market niche. Cost Cutters franchises provide
value-priced hair care services to their customers. Cost Cutters franchises
target price sensitive customers. City Looks franchises provide full service,
high-fashion hair care as well as various personal grooming and spa services,
including facials, manicures, massages and tanning facilities to customers. City
Looks franchises target customers who place a premium on full service. We Care
Hair franchises provide hair care services, tanning, nail care and waxing
services targeted at adults aged 18 to 40.
The Company's principal executive offices are located at 300 Industrial
Boulevard Northeast, Minneapolis, Minnesota 55413. Its telephone number is (612)
331-8500.
HISTORY. After the Company was incorporated under the laws of Minnesota
on October 1, 1968, it quickly established a chain of company-owned, full
service hairstyling businesses throughout the United States under the name "The
Barbers, Hairstyling for Men". In 1970, the Company began selling franchises for
the operation of hairstyling businesses doing business under the names "The
Barbers" and "The Barbers, Hairstyling for Men & Women". Recognizing the need to
update the market focus and decor of the salons, the Company began selling
franchises for the operation of hairstyling businesses under the name "City
Looks(R) By The Barbers" in 1987 and the Company began to convert the existing
"The Barbers" locations to this business format. This trade name was later
revised to "City Looks(R) Salons" in 1991 and to "City Looks Salons
International(R)" in 1993, although some salons continue to operate under the
older names.
The Company began selling franchises for the operation of hairstyling
businesses doing business under the name "Cost Cutters Family Hair Care(R)" in
1982. In 1986, the Company decided to focus principally on doing business as a
franchisor and reduced its number of company-owned stores in the United States
from 69 in 1986 to 3 in 1994. Since then, the Company has capitalized on the
opportunity of developing the Cost Cutters chain within major mass
merchandisers. As part of this business strategy, the Company has built over 20
new company-owned stores since 1995. Most of these new stores are located within
Wal-Mart Supercenters.
On January 25, 1997, the Company, through its subsidiary WCH, Inc.,
acquired substantially all of the franchise assets (trademarks, franchise
agreements and certain other assets) of We Care Hair Development, Inc. ("WCHD").
WCHD originated the "We Care Hair(R)" concept in 1990. The Company began
offering We Care Hair franchises in June 1997.
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The Company currently offers for sale three different franchise
businesses, operates 23 company-owned salons in the United States and sells
beauty products, salon equipment and consumer appliances. In addition, the
Company has acquired two franchise systems which were converted into the
Company's primary franchises. See "Material Acquisitions."
MATERIAL ACQUISITIONS. The Company has made three significant
acquisitions which complement its franchise system.
WE CARE HAIR. On January 25, 1997, the Company acquired the franchise
contract rights of 139 We Care Hair salons in exchange for $2,000,000 cash plus
a contingent earn-out equal to 40% of all initial franchise fees and royalties
collected pursuant to certain specified franchise contracts during the six year
period ending January 24, 2003. Under the terms of the acquisition agreement,
the Company may deduct the purchase price of specific franchise contracts from
future payments if the salons close within one year of the acquisition date. As
of September 25, 1997, seven franchises valued at $271,904 had closed. An
additional 18 salons had either closed or taken down their signs as of September
25, 1997. The Company is presently in litigation with several of these
franchisees. See Item 3. Legal Proceedings.
FAMILY HAIRCUT STORES. On June 1, 1993, the Company acquired the
franchise contract rights of 22 Family Haircut Store salons in exchange for
$120,000 cash and a note in the original principal amount of $479,214, from the
Company to the seller, Rancar Corporation. As of September 25, 1997, 20 Family
Haircut Stores franchises had been converted into Cost Cutters franchises; one
salon closed and one salon chose to remain operating as a Family Haircut Store.
The Company will continue to collect royalties from this salon pursuant to the
Family Haircut Stores royalty fee schedule.
THE HAIR PERFORMERS. On April 1, 1992, the Company acquired the
franchise contract rights of certain The Hair Performers salons in exchange for
conditional future payments equal to a percentage of the royalties collected by
the Company during the five year contract period from the operating salons which
were acquired, whether or not converted to City Looks salons. Payments totaling
$350,751 were paid to the seller under this contract. As of September 25, 1997,
the Company had converted 6 of The Hair Performers franchises into City Looks
franchises. Two salons continue to operate as The Hair Performers. The Company
will continue to collect royalties from these two salons pursuant to The Hair
Performers royalty fee schedule.
B. BUSINESS
RETAIL STORE OPERATIONS. The Company provides franchise services,
including initial and ongoing operational training, financial analysis services,
advertising and marketing services, and sells beauty products, salon equipment
and consumer appliances to a total of 935 salons worldwide. In the revenue
figures below, "system revenue" refers to revenue received at the store level
from retail sales of products and services at all locations, whether franchised
or company-owned, of a particular franchise type (i.e., Cost Cutters or City
Looks). Company revenue refers to all sales of products and services by the
Company directly, including, but not limited to, franchise fees and royalties,
beauty products and equipment as well as revenue generated by the operation of
the company-owned salons. The remaining The Barbers, The Hair Performers, and
the Family Haircut Stores are few in number. As a result, they are treated
substantially similar to City Looks or Cost Cutters franchises. The information
with respect to system revenue and royalty payments to the Company from The
Barbers and The Hair Performers is combined for financial reporting purposes
with that of the City Looks franchise system. The information with respect to
system revenue and royalty payments to the Company from the remaining Family
Haircut Store is combined for financial reporting purposes with that of the Cost
Cutters franchise system.
COST CUTTERS FAMILY HAIR CARE. Cost Cutters franchises provide
value-priced hair care services for men, women and children. In addition, Cost
Cutters franchises sell a complete line of hair care products, merchandise and
appliances. The Company created the Cost Cutters business system to meet the
demand of the general public for high quality, value-priced family hair care
services and products. For
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the fiscal year ended September 28, 1995, the Company had 626 franchised and
company-owned Cost Cutters producing $122,200,000 in system revenue and
$4,926,000 in royalties paid to the Company. For the fiscal year ended September
26, 1996, the Company had 713 franchised and company-owned Cost Cutters
producing $138,100,000 in system revenue and $5,535,000 in royalties paid to the
Company. At the fiscal year ended September 25, 1997, the Company had 765
franchised and company-owned Cost Cutters salons producing $153,500,000 in
system revenue and $6,126,000 in royalties paid to the Company. Cost Cutters
franchises operate throughout the United States.
CITY LOOKS SALONS INTERNATIONAL. City Looks franchises provide men,
women and children with high-fashion, full service hair care including, cutting,
perming, coloring, shampooing, conditioning, hairstyling, and other hair care
services. City Looks franchises also provide spa services and personal grooming
services such as nail care, manicures, makeovers and sell related products. The
Company developed the City Looks business system to meet the demand of the
general public for a complete line of high-fashion hair care services and
products. For the year ended September 28, 1995, the Company had 74 franchised
and company-owned City Looks salons producing $19,900,000 in system revenue and
$566,000 in royalties paid to the Company. For the year ended September 26,
1996, the Company had 73 franchised and company-owned City Looks salons
producing $18,800,000 in system revenue and $500,000 in royalties paid to the
Company. At fiscal year ended September 25, 1997, the Company had 66 franchised
and company-owned City Looks salons producing $20,800,000 in system revenue and
$483,000 in royalties paid to the Company. City Looks, The Barbers, and The Hair
Performers franchises operate primarily in the Midwest. City Looks also has 13
franchised locations in France and one franchised location in Russia.
WE CARE HAIR. We Care Hair franchises target men and women between the
ages of 18 and 40 with hair care services, tanning, nail care, and waxing
services. We Care Hair franchises also sell hair care and nail care products.
The Company purchased the business system during fiscal 1997. At fiscal year
ended September 25, 1997, the Company had 104 We Care Hair franchises producing
$10,500,000 in system revenue and $605,000 in royalties paid to the Company. We
Care Hair franchises operate throughout the United States and one location
operates in Mexico.
COMPANY-OWNED SALONS. The Company currently owns and operates 22 Cost
Cutters and one City Looks salons. All of these salons are located in the United
States. The company-owned salons produced $1,364,000 of revenue in fiscal 1995
with ten salons, $2,940,000 of revenue in fiscal 1996 with 22 salons and
$4,611,000 of revenue in fiscal 1997 with 23 salons. During fiscal 1997, the
Company sold five company-owned salons and built six salons. While recognizing
that the Company is fundamentally a franchising company, the Company intends to
selectively expand its base of company-owned salons, primarily in Wal-Mart
Supercenters and other product outlet locations.
BEAUTY PRODUCT AND EQUIPMENT DISTRIBUTION. The Company distributes
beauty products, salon equipment and consumer appliances primarily to its
franchisees. The beauty products, which include shampoos, conditioners and
finishing products, consist of private label and nationally recognized licensed
brands, both of which the Company purchases from third party suppliers. The
Company does not own or operate any product manufacturing or labeling
operations. Private label products are available under the names of Cost Cutters
Family Hair Care(R), City Looks Salons International(R) and The Barbers(R) and
are designed to be sold by the franchise bearing that particular product's name.
The ingredients of the Company's private label products are widely available
from a number of suppliers, and thus, the Company is not dependent upon any one
supplier. The licensed brands available from the Company include Paul
Mitchell(R), Sebastian(R), KMS(R), Back to Basics(R), American Crew(R), and
Joico(R). Due to the great diversity of licensed products currently offered to
franchisees through the Company, the Company is not dependent upon any one
brand, and continually reviews and adds to its licensed brand product lines. The
Paul Mitchell brand is the largest selling brand, making up 35% of the Company's
beauty product sales volume. Private label products are about 22% of the
Company's beauty products sales volume. The franchisees are required to maintain
a minimum inventory of private label products. Although the franchisees are not
required to purchase any national brand product from the Company, the
franchisees may enjoy significant
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discounts as a result of the Company's purchasing power. The Company carries
$2,000,000 of product liability insurance with an additional $20,000,000
provided as excess coverage.
The Company has implemented the "Designer Salon Program" for its
franchise systems. The purpose of the Designer Salon Program is to encourage
franchisees to purchase beauty products through the Company. Each salon that
participates in the Designer Salon Program is eligible for additional training,
special merchandising kits, and product rebates. The Company also rewards
franchisees for their loyalty based on each franchisee's historical purchases of
beauty products from the Company in relation to the franchisees retail sales of
merchandise. If the franchisee exceeds a minimum goal, the franchisee receives a
rebate on purchases which is paid in shares of the Company's Common Stock based
on the fair market value of the stock at the fiscal year-end. The Company issued
9,123 shares of Company stock under this program in fiscal 1996, and issued
6,248 shares in fiscal 1997. The Company will issue approximately 7,800 shares
in fiscal 1998 based on the franchisees' fiscal 1997 purchases.
The Company also sells salon equipment and consumer appliances to
franchisees. Salon equipment available for purchase from the Company includes
everything necessary to equip a franchise store, such as chairs, work stations,
shampoo bowls, store displays and point of sale material. In addition to
franchise store equipment, the Company provides consumer appliances such as blow
dryers, styling combs and curling irons. The consumer appliances are sold to
franchisees, who in turn sell them to their retail customers.
Total revenue from beauty products, salon equipment and consumer
appliances was $7,137,000 in fiscal 1995, $8,019,000 in fiscal 1996, and
$8,885,000 in fiscal 1997.
FRANCHISING OVERVIEW. Franchising is a method of distributing goods and
services which has experienced rapid growth in recent years. The franchisor
typically develops the business concept and operations systems for the
franchised business. Franchisees are granted rights to use the franchisor's
service marks and must operate their businesses in accordance with the systems,
specifications, standards and formats developed by the franchisor. Virtually all
types of retail businesses are currently franchised, including clothing,
computers and electronics, sporting goods and various specialty retail
businesses.
Pursuant to their franchise agreement with the Company, each franchisee
pays an initial fee and ongoing royalty and advertising fees to the Company.
These fees vary depending upon the particular franchise and the age of the
franchise agreement, but are generally as follows: initial fees for the first
franchise location are currently $19,500 for Cost Cutters, City Looks and We
Care Hair franchises; initial fees for each additional franchise location are
$12,500. Royalty fees are generally four to six percent of gross revenues for
Cost Cutters franchises; two to four percent of gross revenues for City Looks
franchises; and six to eight percent of gross revenues for We Care Hair
franchises. Advertising fees are generally four to six percent of gross revenues
for Cost Cutters franchises; three to five percent of gross revenues for City
Looks franchises; and four percent of gross revenues for We Care Hair
franchises.
BUSINESS STRATEGY. The Company's business strategy is to develop
value-oriented retail salon concepts based on a mix of the value-priced hair
care market and the full service, high-fashion hair and body care market and to
implement these concepts through a nationwide franchise system that provides
comprehensive support services to its franchisees. The key elements of this
strategy include:
NICHE MARKET MERCHANDISING. The Company, promoting Cost Cutters, City
Looks, and We Care Hair franchises, reaches three distinct market niches.
Cost Cutters provides its customers with high quality services at low, a
la carte prices. Cost Cutters customers may choose from numerous services
and select one or any combination of them. City Looks provides
high-fashion, full service hair and body care and hair and body products
as well as personal grooming services such as nail care, manicures,
facials, massages, tanning facilities and make-overs to customers who
prefer full
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service hair and body care. We Care Hair provides hair care services,
tanning, nail care, and waxing services and targets adults aged 18 to 40.
FRANCHISE SUPPORT. The Company provides, pursuant to each franchise
agreement, initial and ongoing operational training, advertising and
marketing services, and financial analysis services to all of its
franchises. The Company sells all salon equipment necessary to equip a
franchise store as well as supplying franchise stores with retail consumer
goods, such as beauty and hair care products and appliances.
NATIONAL AND LOCAL ADVERTISING. Pursuant to the franchise agreement, each
franchisee, depending upon the particular franchise and the age of the
franchise agreement, pays up to six percent of their gross sales into an
advertising fund managed by the Company. The Company uses a portion of the
fund to provide market research, production materials, ad slicks,
brochures, radio and television commercials to all franchisees. The
balance of the fund is used for advertising and promotion development for
franchisees. In addition, each franchisee is also required to spend one
percent of its gross sales on local advertising.
CONVENIENT LOCATIONS. The Company's franchises are typically located in
grocery anchored strip shopping centers, regional malls, power shopping
centers (shopping centers which include one grocery store and one major
softgoods store) and inside of major mass merchandisers. This location
strategy insures that each franchise will be easily accessible by a large
number of potential customers.
COMPETITION. The hair care business is highly competitive and
fragmented, with limited barriers to entry. The Company's franchised and
company-owned salons compete with traditional, independent hair care stores,
regional and national chains, regional and national franchises and various other
businesses which offer spa services similar to that of the Company's franchises.
The principal bases of competition in the hair care industry are price,
convenience, quality and name recognition. The Company believes that it competes
favorably in these areas.
EMPLOYEES. As of September 25, 1997, the Company employed 262 people.
The Company employed 87 full-time and three part-time employees at its corporate
headquarters and 141 full-time and 31 part-time employees at its company-owned
salons. The Company considers its employee relations to be good. None of the
Company's employees are covered under a collective bargaining agreement.
GOVERNMENTAL REGULATIONS. The Company is subject to various federal,
state and local laws affecting its business as well as a variety of regulatory
provisions relating to zoning of store sites, sanitation, health and safety of
its company-owned salons. The Company must also satisfy various federal and
state franchise laws and regulations. The Company has registered its offering of
franchises with the regulatory authorities of those states in which it offers
franchises and in which such registration is required. Although the Company
believes it is currently in material compliance with existing federal and state
laws, there is a trend toward increased government regulation of franchising.
Twenty states and the Federal Trade Commission impose pre-sale
franchise registration or some level of disclosure or filing requirements on
franchisors. In addition, a number of states and the District of Columbia have
statutes which regulate substantive aspects of the franchisor-franchisee
relationship such as termination, nonrenewal, transfer, discrimination and
competition.
Additional legislation is currently pending both at the federal and
state levels which could expand pre-sale disclosure requirements, further
regulate substantive aspects of the franchise relationship, and impose
additional filing requirements on franchisors. The Company cannot predict the
effect of future franchise legislation, but does not believe that legislation
currently under consideration will have a material adverse impact on its
operations.
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FRANCHISE LOCATIONS AND DEVELOPMENT. As of September 25, 1997, there
were 765 franchised and company-owned Cost Cutters and Family Haircut Store
locations in operation, 66 franchised and company-owned City Looks, The Barbers
and Hair Performers locations in operation, and 104 franchised We Care Hair
locations in operation. Franchised and company-owned salons operate in diverse
locations throughout the United States; in addition, 13 are located in France,
one salon operates in Russia and one salon operates in Mexico.
The Company's growth strategy focuses on development from existing
franchisees. Existing franchisees opened 61 of the 75 new salons opened during
fiscal 1997. The Company signed development agreements with ten new franchisees
in fiscal 1997 As of the date of this report, the Company has a total of 966
salons. The Company expects to open a total of approximately 90 new locations in
the United States during fiscal 1998, of which roughly 30 to 40 will be in
Wal-Mart Supercenters.
TRADEMARKS AND SERVICE MARKS. The Company holds numerous trademarks and
service marks registered on the principal register of the United States Patent
and Trademark Office and registered in several foreign countries. The Company
believes that its trademarks and service marks have significant value and are
important to the marketing of its franchises. There are no agreements currently
in effect which significantly limit the rights of the Company to use or license
the use of its trademarks, service marks, trade names, logotypes or other
commercial symbols in any manner material to the Company. The Company has
expended considerable resources to protect its franchise identity.
ITEM 2. DESCRIPTION OF PROPERTY.
PROPERTIES. The Company does not own any real estate. The Company
creates revenue from franchise related activities and does not anticipate
directing its resources toward investment in real estate nor in equity interests
in those entities which primarily invest in real estate.
The Company's interest in real estate is limited to the lease of its
corporate headquarters, the lease of commercial property for its company-owned
salons and the lease of commercial properties subleased to franchisees.
The Company leases from its Chairman of the Board and major
shareholder, Florence F. Francis, approximately 65,400 square feet of commercial
property for its corporate headquarters. The amount of rent increases each year
and the Company is required to pay real estate taxes and insurance. The lease
expired on October 31, 1997, but the Company is currently negotiating a new
lease which it expects will carry terms similar to previous leases. The rental
payments, including real estate taxes and insurance, for the corporate
headquarters were $399,000 in fiscal 1995, $426,000 in fiscal 1996, and $437,000
in fiscal 1997. The current corporate headquarters space is sufficient to meet
the Company's office space needs for the next few years. The Company subleases
29,100 square feet of its corporate headquarters office space to a third party.
As a result, the Company earned rental income of $84,000 in fiscal 1995,
$101,000 in fiscal 1996, and $109,000 in fiscal 1997. The sublease expires in
December 2000. The Company is in the process of relocating its warehouse
operations to a new 18,000 square foot location. Rent on this new location will
be approximately $57,000 per year plus common area costs and real estate taxes.
See Notes 8 and 9 of the Notes to Consolidated Financial Statements, Part II,
Item 7.
The Company leases property of approximately 21,750 square feet from a
third party for use as a parking lot for its corporate headquarters. The lease
will expire September 1, 2000. Rental payments were $13,800 in each of the
fiscal years 1995, 1996, and 1997.
The Company leases commercial property for its 23 company-owned stores.
The Company paid $210,051 for 10,473 square feet in fiscal 1995, $396,381 for
21,344 square feet in fiscal 1996, and $665,199 for 27,551 square feet in fiscal
1997. The leases expire at various times between 1997 and
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2003. Most of these leases are renewable for an additional term of five years.
See Note 9 of the Notes to Consolidated Financial Statements, Part II, item 7.
The Company also leases commercial property for 134 retail stores,
which it subleases to franchisees. The Company is the primary obligor or
guarantor on leases for these salons. In addition, the Company leases commercial
property for 126 retail stores through its wholly-owned subsidiary, We Care Hair
Realty, Inc., which in turn are subleased to We Care Hair franchisees. We Care
Hair Realty, Inc. is the primary obligor or guarantor on leases for these
salons. Generally, the franchisee personally guarantees the sublease to the
Company or We Care Hair Realty, Inc. The Company subleases the space to the
franchisees with substantially the same terms as the primary lease. However, on
approximately 50% of these subleases, the Company receives an additional charge
from the franchisee over and above the amount of rent paid to the landlord. Most
of these sublease agreements call for the Company to pay the landlord and
invoice the rent to the franchisee, although in some circumstances, the
franchisee may pay the landlord directly. The Company or its subsidiary is
liable for the rent payments on these locations, even if a franchisee defaults
on the payment of rent. The Company incurred losses of approximately $59,000 and
$24,000 in fiscal 1997 and 1996 respectively due to defaults on subleases. In
1995, there were no payments made by the Company for defaults on subleases. The
Company expects that it will be able to renew its leases on satisfactory terms
as they expire. See Note 9 of the Notes to Consolidated Financial Statements,
Part II, item 7.
Total facility lease obligations for the Company and its subsidiary,
including properties subleased to franchisees for which the Company or its
subsidiary is liable if the franchisee defaults, for fiscal years ending
September 1998, 1999, 2000, 2001, and 2002 are approximately $5,083,000,
$3,903,000, $3,125,000, $1,897,000, and $825,000 respectively.
ITEM 3. LEGAL PROCEEDINGS.
Other than as set forth below, the Company is not currently a party to
any material pending legal proceedings. From time to time the Company may become
involved in routine litigation incidental to its business.
LELA BISHOP, ET AL. V. DOCTOR'S ASSOCIATES, INC., FREDERICK DELUCA,
PETER H. BUCK, FRANCHISE WORLD HEADQUARTERS, INC., WE CARE HAIR
DEVELOPMENT, INC., JOHN AMICO, SR., FRED FLORIO, THE BARBERS,
HAIRSTYLING FOR MEN & WOMEN, INC., WE CARE HAIR REALTY, INC., FRANCHISE
REAL ESTATE LEASING CORP., JOHN F. AMICO & COMPANY, WCH, INC. AND JAMI
INTERNATIONAL, INC. (Circuit Court, Third Judicial Circuit, Madison
County, Illinois, Cause No. 97-L-231, filed February 4, 1997).
Approximately 58 present or former We Care Hair(R) franchisees have
joined in this lawsuit and requested certification of the lawsuit as a
class action pursuant to 735 ILCS Section 5/2-801 et seq. on behalf of
all past and present We Care Hair(R) franchisees. This lawsuit has been
brought against the above defendants for alleged breaches of fiduciary
duty. The plaintiffs further allege that We Care Hair Development, Inc.
and all other defendants in this lawsuit have violated the Illinois
Anti-trust Statute, 740 ILCS Section 10/3 (2) or (3), by requiring We
Care Hair(R) franchisees to purchase alleged unusable hair care
products. The plaintiffs further allege that We Care Development, Inc.
and all other defendants in this lawsuit have violated the Illinois
Franchise Disclosure Act by using a standard franchise agreement for We
Care Hair(R) franchises that violated the anti-waiver provisions of 815
ILCS Section 705/41, and by engaging in fraudulent practices and
selling franchises at certain times during which We Care Development,
Inc.'s registration with the Illinois Attorney General's Office had
lapsed. The Company and its subsidiary, WCH, Inc., have been named as
defendants in this lawsuit under the theory that they acted with all
other defendants pursuant to a civil conspiracy and/or mutual scheme
with concerted action for the purpose of constructively terminating the
We Care Hair(R) franchises throughout the country by convincing We Care
Hair(R) franchisees to execute new franchise
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agreements with the Company to operate as Cost Cutters franchisees and
decrease and/or eliminate all services and advertising for the
remaining We Care Hair(R) franchisees in violation of the Illinois
Franchise Disclosure Act. We Care Hair Realty, Inc., a wholly-owned
subsidiary of WCH, Inc., has been named as a defendant in this lawsuit
under the theory that it also participated in the conspiracy or scheme
by attempting to transfer the We Care Hair(R) subleases to the Company
and WCH, Inc. The plaintiffs seek to recover an award of actual
damages, punitive damages, treble damages and attorneys fees in an
amount not to exceed, in the aggregate, under all counts of the
complaint, against all defendants, the sum of $74,950 for each
franchisee, and for court costs.
This case is in the early pretrial stage. The Company, WCH, Inc. and We
Care Hair Realty, Inc. have initiated an action in Illinois Federal
District Court seeking to compel arbitration of the claims of the
plaintiffs. Although this Federal Court action was dismissed for lack
of jurisdiction, the dismissal has been appealed. The co-defendants
have initiated a separate action in Illinois Federal District Court
also seeking to compel arbitration of the claims of the plaintiffs. By
order dated September 25, 1997, the Federal District Court compelled
all non-Illinois plaintiffs to arbitrate their disputes with the
co-defendants, and enjoined all non-Illinois plaintiffs from continuing
the lawsuit against all defendants, including the Company, WCH, Inc.
and We Care Hair Realty, Inc. The plaintiffs have appealed this ruling.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security-holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE COMMON STOCK EQUITY AND RELATED STOCKHOLDERS
MATTERS.
MARKET INFORMATION. The Common Stock of the company is listed on The
Nasdaq National Market(R) and traded under the symbol BBHF. As of December 5,
1997, there were 2,594,532 outstanding shares with 566 shareholders of record.
Based upon quotes obtained from Nasdaq (which reflect inter-dealer prices,
without retail mark-up, mark-down, or commissions and may not represent actual
transactions), the following table sets forth for the periods indicated the high
and low bid prices for the Company's Common Stock, prior year prices have been
adjusted to reflect the 3-for-2 stock split which was effective October 31,
1996:
High Low
Fiscal Year Ended September 26, 1996
First Quarter $6.00 $5.00
Second Quarter $6.83 $4.83
Third Quarter $8.67 $5.50
Fourth Quarter $8.33 $5.83
Fiscal Year Ended September 25, 1997
First Quarter $8.00 $5.25
Second Quarter $8.25 $6.50
Third Quarter $9.00 $6.50
Fourth Quarter $8.63 $6.88
SALES OF UNREGISTERED SECURITIES. In December, 1996, the Company issued
3,150 shares of unregistered common stock to its outside directors for
compensation for their services. Also in December 1996, the Company issued 30
shares of unregistered common stock to its "employee of the year". In September
1997, the Company issued 6,248 shares of unregistered common stock pursuant to
its
<PAGE>
Designer Salon Program to qualifying franchisees. The Company received no cash
proceeds from these offerings. The Company issued these securities pursuant to
section 4(2) of the Securities Act of 1933.
DIVIDENDS. On September 19, 1996, The Company declared a 3-for-2 stock
split effected in the form of a stock dividend to holders of record as of
October 15, 1996 and distributed October 31, 1996. The Company does not pay cash
dividends on its Common Stock. The Company presently intends to retain earnings
for working capital and general corporate purposes and does not have any present
plans to pay cash dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL. The Company is engaged in the business of franchising three
different hair care salon concepts which provide hair care services and products
for men, women, and children. Most franchises do business under the names "Cost
Cutters Family Hair Care(R)" ("Cost Cutters"), "City Looks Salons
International(R)" ("City Looks"), and "We Care Hair(R)" ("We Care Hair"),
although the Company also has a limited number of franchises operating under the
names "The Barbers, Hairstyling for Men & Women(R)", "The Hair Performers(R)"
and "Family Haircut Stores(R)". The Company currently only sells franchises in
Cost Cutters, City Looks and We Care Hair. Each franchise is specifically
tailored to satisfy a particular market niche. Cost Cutters franchises provide
value-priced hair care services to their customers. Cost Cutters franchises
target price sensitive customers. City Looks franchises provide full service,
high-fashion hair care to their customers as well as various personal grooming
and spa services, including facials, manicures, massages, and tanning
facilities. City Looks franchises target customers who place a premium on full
service. We Care Hair franchises provide hair care services, tanning, nail care,
and waxing targeted at adults aged 18 to 40.
The Company had a total of 935 salons as of September 25, 1997. This
consisted of 912 franchised locations and 23 company-owned locations. The
Company primarily earns revenue through its franchise operations from franchise
initial fees, franchise royalties, and sales of beauty products and equipment to
the franchisees.
The Company uses a 52-53 week reporting period. The years ended
September 25, 1997, September 26, 1996, and September 28, 1995, each included 52
weeks of operations.
RESULTS OF OPERATIONS. The following table sets forth the percentage
relationship to total revenues of certain items included in the Company's
Consolidated Statements of Income:
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 25, September 26, September 28,
Year Ended 1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Franchise royalties 32.6% 32.5% 36.8%
Franchise fees 4.2% 6.4% 5.1%
Company-owned salons 20.8% 15.8% 9.1%
Beauty products & equipment 40.2% 43.2% 47.9%
Other 2.2% 2.1% 1.1%
------------------------------------------------
Total revenues 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Franchise operations 13.8% 14.7% 15.4%
Company-owned salons 20.1% 16.8% 10.0%
Distribution & general administration 55.3% 59.5% 65.6%
------------------------------------------------
OPERATING INCOME 10.8% 9.0% 9.0%
OTHER INCOME (EXPENSE):
Interest income 0.8% 0.7% 0.7%
Interest expense -0.6% -0.2% -0.2%
Net gain (loss) on disposal of assets 0.0% 0.3% 0.0%
------------------------------------------------
NET INCOME BEFORE INCOME TAXES 11.0% 9.8% 9.5%
INCOME TAXES 4.6% 4.1% 3.9%
------------------------------------------------
NET INCOME 6.4% 5.7% 5.6%
================================================
</TABLE>
YEAR ENDED SEPTEMBER 25, 1997 COMPARED TO YEAR ENDED SEPTEMBER 26, 1996:
SYSTEM-WIDE REVENUES. System-wide revenues of all salons, franchised and
company-owned, were $184.8 million for fiscal 1997, an increase of $27.9 million
or 17.8% over fiscal 1996. This increase was attributable to the addition of new
stores, notably the We Care Hair salons which contributed $10.5 million. New
promotional programs and service price increases also favorably impacted the
increase in revenue. During fiscal year 1997, the Company opened 75 new salons,
including six company-owned locations. This compares to 115 new salon openings
in fiscal 1996. System-wide there were 935 salons as of September 25, 1997; this
compares to 786 salons as of the end of the prior year.
REVENUES. The Company's total revenues were $22,121,800 for fiscal 1997, an
increase of $3,556,049 or 19.2% over fiscal 1996. Franchise royalties increased
$1,178,873, or 19.5% which was due to new salon openings, increases in same
store sales, and the addition of the We Care Hair salon chain. Franchise fees
decreased by $253,221, or 21.4%, due to the decrease in the number of new salons
opened in fiscal 1997 versus fiscal 1996. Revenue from company-owned salons
increased $1,670,897, or 56.8% due to the maturing of salons built in the
previous years and the net addition of one new company-owned salon during fiscal
1997. Revenue from beauty products and equipment increased $866,418 or 10.8%
from fiscal 1996. The increases in beauty products and equipment revenue were
attributable to the addition of new salons and volume increases in sales to
existing salons.
COSTS AND EXPENSES - FRANCHISE OPERATIONS. Total expenses of franchise
operations were $3,058,836, an increase of $333,648, or 12.2% over fiscal 1996.
Salaries and benefits for fiscal 1997
<PAGE>
were $1,976,045, an increase of $194,258 or 10.9% over fiscal 1996. This
increase was due to the growth in field staff to service the new salons and
general salary increases which averaged about 4.0%. General and administrative
expenses for fiscal 1997 were $1,082,791, an increase of $139,390 or 14.8% over
fiscal 1996. More than half of these increased expenses were due to the addition
of the We Care Hair franchises.
COSTS AND EXPENSES - COMPANY-OWNED SALONS. The Company owned and operated 23
salons as of the end of fiscal 1997, including six new salons opened during
fiscal 1997. Three of these new salons are located in product outlet centers and
three are located in Wal-Mart Supercenters. The Company also sold five salons
during fiscal 1997. The total cost of operations for the company-owned salons in
fiscal 1997 was $4,447,380, an increase of $1,322,639, or 42.3%. Salaries and
benefits for fiscal 1997 were $2,467,173, an increase of $764,224, or 44.9% from
fiscal 1996. Most salon employees are paid on a commission basis against the
services they perform and the retail products they sell. The increase in
salaries and benefits in fiscal 1997 reflects the increase in the number of
salons owned as well as sales increases at the salons built in prior years.
General and administrative expenses in fiscal 1997 were $1,222,045, an increase
of $290,411 or 31.2% from fiscal 1996. This was due to the increase in the
number of salons owned and annualization of the operating costs of salons built
in the previous year. Costs of products sold in fiscal 1997 were $758,162, an
increase of $268,004, or 54.7% over fiscal 1996.
COSTS AND EXPENSES - DISTRIBUTION AND GENERAL ADMINISTRATION. The total
operating expenses for distribution and general administration for fiscal 1997
were $12,223,061, an increase of $1,179,779, or 10.7% from fiscal 1996. The cost
of products and equipment sold was $6,727,361 in fiscal 1997. This was an
increase of $564,831, or 9.2% from fiscal 1996. Gross margins on the sale of
products and equipment were 24.3% in fiscal 1997 compared to 23.1% in fiscal
1996. Salaries and benefits were $3,026,139, an increase of $425,331, or 16.4%
versus fiscal 1996. This increase was due to the addition of staff in
distribution; staff additions in administrative departments to handle the
increases in workload created by the We Care Hair acquisition; increases in
incentive compensation for employees and general salary increases which averaged
4.0%. General and administrative expenses for fiscal 1997 were $2,469,561, an
increase of $189,617, or 8.3% versus fiscal 1996. Increases in general and
administrative expenses were primarily legal and professional fees associated
with the newly acquired We Care Hair salons and additions in the Company's bad
debt reserves.
OPERATING INCOME. Operating income for fiscal 1997 was $2,392,523, a 43.0%
increase over fiscal 1996. Operating income as a percent of sales was 10.8% for
fiscal 1997 as compared to 9.0% for fiscal 1996.
INTEREST INCOME AND EXPENSE. Interest income increased $50,842, or 37.9% over
fiscal 1996 due to increases in notes receivable from franchisees and increases
in daily cash investment balances. Interest expense for fiscal 1997 was
$151,134, an increase of $111,766 versus fiscal 1996. The large increase in
interest expense was due to loans taken by the Company to purchase the We Care
Hair salon chain.
NET GAIN ON DISPOSAL OF ASSETS. The Company recorded a loss on disposal of
assets in fiscal 1997 of $1,831, which compares to a gain in the previous year
of $55,169. The loss recorded in fiscal 1997 was due to the sale of five
company-owned salons and miscellaneous assets. The gains recorded in fiscal 1996
were due to the sale of one company-owned salon, one piece of real estate, and
miscellaneous assets.
INCOME TAXES. The Company's effective income tax rate for fiscal 1997 and 1996
was 42.0%.
NET INCOME. The Company's net income for fiscal 1997 was $1,406,413, or $.50 per
share. This is an increase of $349,059 or 33.0% over fiscal 1996 net income and
an increase per share of $.11.
<PAGE>
YEAR ENDED SEPTEMBER 26, 1996 COMPARED TO YEAR ENDED SEPTEMBER 28, 1995:
SYSTEM-WIDE REVENUES. System-wide revenues of all salons, franchised and
company-owned, were $156.9 million for fiscal 1996, an increase of $14.8 million
or 10.4% over fiscal 1995. This increase was attributable to the addition of new
stores as well as new promotional programs and service price increases. Same
store sales increased approximately 2.5%. During fiscal year 1996, the Company
opened 115 new salons, including 12 company-owned salons. This compares to 79
new salon openings in fiscal 1995. System-wide there were 786 salons as of
September 26, 1996; this compares to 700 salons as of the end of the prior year.
REVENUES. The Company's total revenues were $18,565,751 for fiscal 1996, an
increase of $3,649,438 or 24.5% over fiscal 1995. Franchise royalties increased
$542,460, or 9.9% which was due to new salon openings and increases in same
store sales. Franchise fees increased by $425,539, or 56.3%, due to the increase
in the number of new salons opened in fiscal 1996 versus fiscal 1995. Revenue
from company-owned salons increased $1,575,592, or 115.5% due to the maturing of
salons built in the previous year and the addition of 12 new company-owned
salons during fiscal 1996. Revenue from beauty products and equipment increased
$881,365 or 12.3% from fiscal 1995. The increases in beauty products and
equipment revenue were attributable to the addition of new salons and volume
increases at existing salons.
COSTS AND EXPENSES - FRANCHISE OPERATIONS. Total expenses of franchise
operations were $2,725,188, an increase of $430,500, or 18.8% over fiscal 1995.
Salaries and benefits for fiscal 1996 were $1,781,787, an increase of $283,974
or 19.0% over fiscal 1995. This increase was due to the growth in field staff to
service the new salons, increased sales commissions on the opening of new salons
and general salary increases which averaged about 4.0%. General and
administrative expenses for fiscal 1996 were $943,401, an increase of $146,526
or 18.4% over fiscal 1995.
COSTS AND EXPENSES - COMPANY-OWNED SALONS. The Company owned and operated 22
salons as of the end of fiscal 1996, including 12 new salons opened during
fiscal 1996. All but one of these new salons are located in Wal-Mart
Supercenters. The Company also bought back one salon from a franchisee and sold
one salon. The total cost of operations for the company-owned salons in fiscal
1996 was $3,124,741, an increase of $1,635,188, or 109.8%. Salaries and benefits
for fiscal 1996 were $1,702,949, an increase of $935,467, or 121.9% from fiscal
1995. The increase in salaries and benefits in fiscal 1996 reflects the increase
in the number of salons owned as well as sales increases at the salons built in
prior years. General and administrative expenses in fiscal 1996 were $931,634,
an increase of $471,648 or 102.5% from fiscal 1995. This was due to the increase
in the number of salons owned. Costs of products sold in fiscal 1996 were
$490,158, an increase of $228,073, or 87.0% over fiscal 1995. Margins on product
sales increased about 3% due to an increased emphasis on the sale of private
label products.
COSTS AND EXPENSES - DISTRIBUTION AND GENERAL ADMINISTRATION. The total
operating expenses for distribution and general administration for fiscal 1996
were $11,043,282, an increase of $1,257,353, or 12.8% from fiscal 1995. Most of
this increase was in the cost of products and equipment sold which was
$6,162,530 in fiscal 1996. This increased $621,952, or 11.2% from fiscal 1995.
Gross margins on the sale of products and equipment were 23.1% in fiscal 1996
compared to 22.4% in fiscal 1995. Salaries and benefits were $2,600,808, an
increase of $280,726, or 12.1% versus fiscal 1995. This increase was due to the
addition of staff in the distribution operation, increases in incentive
compensation for employees and general salary increases which averaged 4.0%.
General and administrative expenses for fiscal 1996 were $2,279,944, an increase
of $354,675, or 18.4% versus fiscal 1995. Included in this amount is a $170,000
increase in bad debt reserves which relates to the increase in notes and
accounts receivable. Also included is a charitable donation of excess inventory
of approximately $82,000.
OPERATING INCOME. Operating income for fiscal 1996 was $1,672,540, a 24.2%
increase over fiscal 1995. Operating income as a percent of sales was 9.0% for
both fiscal 1996 and fiscal 1995.
<PAGE>
INTEREST INCOME AND EXPENSE. Interest income for fiscal 1996 was $134,013, an
increase of $32,929, or 32.6% over fiscal 1995. Interest expense for fiscal 1996
was $39,368, an increase of $6,555, or 20.0% from fiscal 1995.
NET GAIN ON DISPOSAL OF ASSETS. The Company recorded a gain on disposal of
assets in fiscal 1996 of $55,169, which was a increase of $45,673 from the
previous year. The gains recorded in fiscal 1996 were due to the sale of one
company-owned salon, one piece of real estate, and miscellaneous assets. The
gains recorded in fiscal 1995 were from the sales of miscellaneous assets.
INCOME TAXES. The Company's effective income tax rate for fiscal 1996 was 42.0%,
this compares to 41.0% for the previous year.
NET INCOME. The Company's net income for fiscal 1996 was $1,057,354, or $.39 per
share. This is an increase of $217,444 or 25.9% over fiscal 1995 net income and
an increase per share of $.07. Earnings per share have been adjusted to reflect
the 3-for-2 stock split which was approved by the Board of Directors on
September 19, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been able to generate adequate amounts of cash from
operations to support the routine expansion of the business. Cash generated from
operating activities, net of interest expense, totaled $1,473,361 in fiscal year
1997. During fiscal 1996, the Company invested a portion of its capital to fund
accounts receivable and promissory notes to franchisees who were developing new
salons. This resulted in a net use of cash by operations of $169,684 for that
fiscal year. Cash generated from operations in fiscal 1995 was $1,056,468.
Capital expenditures were $387,826, $576,813, and $361,434 in fiscal
years 1997, 1996, and 1995 respectively. Capital expenditures for fiscal 1998
are anticipated to be about $500,000 to $600,000.
The Company has a bank credit agreement which provides for a maximum
line of credit of $1,500,000. The line bears interest at the prime lending rate
(8.50% at September 25, 1997), expires June 30, 1998, is secured by accounts
receivable, inventories, general intangibles, and property and equipment, and
requires the Company to maintain certain financial ratios. There are no
compensating balance requirements. As of September 25, 1997, there are no
borrowings against this line of credit. Management believes that the lender will
renew this line of credit for another full year at generally the same terms.
During fiscal year 1997, the Company acquired the We Care Hair salon
chain. The Company paid $2,000,000 for the franchise agreements, trademarks, and
other assets. This purchase was funded by increases in bank debt. The Company
secured two bank loans totaling $2,500,000 to finance the purchase of the We
Care Hair salon chain and to fund additional working capital, such as inventory
and accounts receivable, necessary to support the new chain. The first loan was
in the amount of $1,500,000 and bears a fixed interest rate of 8.82% and is
payable over seven years. The second loan was in the amount of $1,000,000 with a
floating interest rate equal to the bank's prime rate and is also payable over
seven years. The balances of these loans as of September 25, 1997, were
$1,394,589 and $1,000,000, respectively. Both loans are secured by all assets of
the Company.
The Company secured a $300,000 four-year term loan with the same lender
in fiscal 1994. The interest rate on the loan is at the bank's prime lending
rate. The loan is payable in monthly installments of $6,250 plus interest, and
is secured by all personal property assets of the Company. The balance remaining
on this loan as of September 25, 1997, was $56,250.
<PAGE>
Management believes that cash generated from operating activities,
together with available funds from its operating line of credit or replacement
financing will be sufficient to fund its anticipated operations, capital
expenditures and required debt repayments for the foreseeable future.
FORWARD LOOKING STATEMENTS
The Company anticipates opening 90 new Cost Cutters salons in fiscal
1998, including six company-owned salons. Approximately 30 to 40 of these salons
will be located within Wal-Mart Supercenters. Additionally, the Company expects
to open eight franchised salons in France under the City Looks Salons
International name. The Company continues to seek and evaluate opportunities to
acquire other operating stores or franchise operations. The anticipated growth
in number of salons coupled with increased sales in existing salons will
increase system-wide sales to $200 million. This in turn should provide for
increases in royalty revenue and company-salon revenues. Beauty products and
equipment sales are expected to increase due to the growth in number of salons,
increased sales at existing salons, and the addition of new product lines. These
increases in revenue should allow the Company to continue to increase its
profits in the range of 20% in fiscal 1998.
The preceding statement and any other statements in this annual report
not based on historical information are forward-looking statements that are
based on management's goals, estimates, assumptions and projections. Important
factors could cause results to differ materially from those expected by
management. Some of these factors are: 1) Increased competition from other hair
salon chains in the consumer marketplace could negatively impact sales volume at
both franchised and company-owned salons. This would reduce royalty revenue from
franchised locations and reduce company-owned salons' revenue and profits. 2)
Increased competition for sites for new salons from other retail concepts,
including other hair salons, could impede the Company's ability to meet its
growth objectives. 3) The Company's near-term growth plans in Wal-Mart
Supercenters could be affected by changes in Wal-Mart's marketing or business
plans. 4) The inability to find qualified franchisees for new locations or the
inability of franchisees to finance the construction of new salons could also
prevent the Company from meeting its growth objectives. 5) Although the Company
presently has no reason to believe it will occur, major beauty product vendors
could cancel their distribution agreements with the Company. This would cause
reductions in the sale of beauty products and the loss of those corresponding
margins. 6) Litigation to protect trademarks or enforce franchise agreements is
extremely expensive, even if the Company is victorious, and may have a material
adverse effect on the Company's results of operations in any particular period.
Due to factors noted above and elsewhere in this annual report, the
Company's future earnings and Common Stock price may be subject to volatility.
Any shortfall in revenue or earnings from the levels anticipated could have a
significant effect on the trading price of the Company's Common Stock in any
given period.
ITEM 7. FINANCIAL STATEMENTS.
<PAGE>
Notes to Consolidated Financial Statements
September 25, 1997
CONSOLIDATED FINANCIAL STATEMENTS
THE BARBERS, HAIRSTYLING FOR
MEN & WOMEN, INC.
YEARS ENDED SEPTEMBER 25, 1997,
SEPTEMBER 26, 1996 AND SEPTEMBER 28, 1995
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Consolidated Financial Statements
Years ended September 25, 1997,
September 26, 1996 and September 28, 1995
CONTENTS
Report of Independent Auditors................................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets...................................................2
Consolidated Statements of Income.............................................4
Consolidated Statement of Shareholders' Equity................................5
Consolidated Statements of Cash Flows.........................................6
Notes to Consolidated Financial Statements....................................7
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
The Barbers, Hairstyling for Men & Women, Inc.
We have audited the accompanying consolidated balance sheets of The Barbers,
Hairstyling for Men & Women, Inc. at September 25, 1997, September 26, 1996 and
September 28, 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Barbers,
Hairstyling for Men & Women, Inc. at September 25, 1997, September 26, 1996 and
September 28, 1995, and the consolidated results of its operations and its cash
flows for each of the years then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
October 31, 1997
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 28,
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,789,933 $1,317,448 $ 2,121,310
Trade receivables, less allowance for doubtful
accounts of $450,000 in 1997, $315,000 in 1996
and $210,000 in 1995 2,846,083 2,163,968 1,483,065
Notes receivable 596,635 235,206 113,699
Inventories held for resale 1,684,312 1,199,939 1,052,984
Prepaid expenses 120,744 74,372 36,837
Deferred income taxes 360,000 287,000 194,000
-----------------------------------------------------------
Total current assets 8,397,707 5,277,933 5,001,895
Notes receivable, less current portion and allowance
for doubtful notes of $125,000 in 1997, $100,000 in
1996 and $35,000 in 1995 621,877 733,924 481,583
Equipment and leasehold improvements, at cost:
Equipment 2,044,204 1,918,682 1,602,181
Leasehold improvements 945,150 852,109 903,822
-----------------------------------------------------------
2,989,354 2,770,791 2,506,003
Less accumulated depreciation 2,094,285 1,816,151 1,764,896
-----------------------------------------------------------
Net equipment and leasehold improvements 895,069 954,640 741,107
Investment in franchise contracts, less accumulated
amortization of $419,260 in 1997, $221,805 in 1996
and $159,038 in 1995 2,321,618 733,419 753,688
Deferred income taxes 386,000 338,000 316,000
Other assets 286,271 210,287 287,454
-----------------------------------------------------------
Total assets $12,908,542 $8,248,203 $7,581,727
===========================================================
</TABLE>
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Consolidated Balance Sheets (continued)
<TABLE>
<CAPTION>
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 28,
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital
lease obligations $ 339,150 $ 86,675 $ 96,965
Accounts payable 573,088 481,897 838,109
Deferred franchise fees 90,000 113,750 212,977
Committed advertising 933,502 521,208 751,795
Accrued compensation and related payroll taxes
935,653 741,704 635,323
Other accrued expenses 296,548 287,011 185,456
Income taxes payable 202,934 82,943 42,836
-----------------------------------------------------------
Total current liabilities 3,370,875 2,315,188 2,763,461
Long-term debt and capital lease obligations 2,111,689 56,250 142,924
Deferred franchise fees 201,000 226,000 269,000
Deferred compensation 287,786 204,278 119,022
Commitments and contingencies
Shareholders' equity:
Common stock, $.10 par value:
Authorized shares - 7,500,000
Issued and outstanding shares -
2,591,952 in 1997, 2,568,274 in 1996
and 2,538,826 in 1995 259,195 256,827 253,883
Additional paid-in capital 457,657 375,733 276,864
Retained earnings 6,220,340 4,813,927 3,756,573
-----------------------------------------------------------
Total shareholders' equity 6,937,192 5,446,487 4,287,320
-----------------------------------------------------------
Total liabilities and shareholders' equity $12,908,542 $8,248,203 $7,581,727
===========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 28,
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Franchise royalties $ 7,213,735 $ 6,034,862 $ 5,492,402
Franchise fees 928,018 1,181,239 755,700
Company-owned salons 4,610,653 2,939,756 1,364,164
Beauty products and equipment 8,885,278 8,018,860 7,137,495
Other 484,116 391,034 166,552
----------------------------------------------------------
Total revenues 22,121,800 18,565,751 14,916,313
Costs and expenses:
Franchise operations:
Salaries and benefits 1,976,045 1,781,787 1,497,813
General and administrative 1,082,791 943,401 796,875
----------------------------------------------------------
3,058,836 2,725,188 2,294,688
Company-owned salons:
Salaries and benefits 2,467,173 1,702,949 767,482
General and administrative 1,222,045 931,634 459,986
Cost of products sold 758,162 490,158 262,085
----------------------------------------------------------
4,447,380 3,124,741 1,489,553
Distribution and general administration:
Salaries and benefits 3,026,139 2,600,808 2,320,082
General and administrative 2,469,561 2,279,944 1,925,269
Cost of products and equipment sold 6,727,361 6,162,530 5,540,578
----------------------------------------------------------
12,223,061 11,043,282 9,785,929
----------------------------------------------------------
Operating income 2,392,523 1,672,540 1,346,143
Other income (expense):
Interest income 184,855 134,013 101,084
Interest expense (151,134) (39,368) (32,813)
Net gain (loss) on disposal of assets (1,831) 55,169 9,496
----------------------------------------------------------
Income before income taxes 2,424,413 1,822,354 1,423,910
Income tax expense 1,018,000 765,000 584,000
----------------------------------------------------------
Net income $ 1,406,413 $ 1,057,354 $ 839,910
==========================================================
Net income per common share $ .50 $ .39 $ .32
==========================================================
Weighted average number of common and
common equivalent shares 2,806,939 2,742,134 2,643,438
==========================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
ADDITIONAL
NUMBER OF COMMON PAID-IN RETAINED
SHARES STOCK CAPITAL EARNINGS TOTAL
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 29, 1994 2,520,859 $252,087 $224,763 $2,916,663 $3,393,513
Net income for 1995 - - - 839,910 839,910
Issuance of common stock to outside directors 3,000 300 8,700 - 9,000
Issuance of common stock to employee 45 4 131 - 135
Issuance of common stock under Designer Salon
Program 9,102 910 26,396 - 27,306
Issuance of common stock to participants of
the 401(k) plan 5,820 582 16,874 - 17,456
--------------------------------------------------------------------------------
Balance at September 28, 1995 2,538,826 253,883 276,864 3,756,573 4,287,320
Net income for 1996 - - - 1,057,354 1,057,354
Issuance of common stock to outside directors 2,400 240 11,760 - 12,000
Issuance of common stock to employees 2,925 292 15,781 - 16,073
Issuance of common stock under Designer Salon
Program 9,123 912 44,703 - 45,615
Issuance of common stock under stock option
plan 15,000 1,500 26,625 - 28,125
--------------------------------------------------------------------------------
Balance at September 26, 1996 2,568,274 256,827 375,733 4,813,927 5,446,487
Net income for 1997 - - - 1,406,413 1,406,413
Issuance of common stock to outside directors 3,150 315 18,585 - 18,900
Issuance of common stock to employees 30 3 177 - 180
Issuance of common stock under Designer Salon
Program 6,248 625 39,987 - 40,612
Issuance of common stock under stock option
plan 14,250 1,425 23,175 - 24,600
--------------------------------------------------------------------------------
Balance at September 25, 1997 2,591,952 $259,195 $457,657 $6,220,340 $6,937,192
================================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 28,
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $1,406,413 $1,057,354 $ 839,910
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 531,027 384,158 362,115
Provision for losses on accounts and notes receivable 217,009 232,578 158,157
Gain on disposal of assets 1,831 (35,883) (9,496)
Deferred income taxes (121,000) (115,000) (17,000)
Stock compensation 19,080 28,073 9,135
Stock awarded to franchisees under the Designer Salon
Program 40,612 45,615 27,306
Changes in operating assets and liabilities:
Accounts and notes receivable (876,602) (1,168,529) (610,361)
Inventories held for resale (484,373) (146,955) (186,246)
Prepaid expenses (46,372) (37,535) (9,389)
Other assets (75,984) (17,833) (22,030)
Payables and accrued expenses 790,479 (293,607) 541,074
Deferred franchise fees (48,750) (142,227) 61,909
Income taxes payable 119,991 40,107 (88,616)
-----------------------------------------------------
Net cash provided by (used in) operating activities 1,473,361 (169,684) 1,056,468
INVESTING ACTIVITIES
Proceeds from disposal of assets 111,994 53,975 7,206
Capital expenditures (387,826) (576,813) (361,434)
Investment in franchise contracts (2,057,558) (42,501) (54,894)
Payments received on notes receivable from related parties - - 397,856
-----------------------------------------------------
Net cash used in investing activities (2,333,390) (565,339) (11,266)
FINANCING ACTIVITIES
Principal payments on long-term debt (180,411) (75,000) (472,325)
Principal payments on capital lease obligations (11,675) (21,964) (143,003)
Proceeds from issuance of stock options 24,600 28,125 -
Proceeds from issuance of long-term debt 2,500,000 - -
Net issuance of Company stock - - 17,456
-----------------------------------------------------
Net cash provided by (used in) financing activities 2,332,514 (68,839) (597,872)
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,472,485 (803,862) 447,330
Cash and cash equivalents at beginning of year 1,317,448 2,121,310 1,673,980
-----------------------------------------------------
Cash and cash equivalents at end of year $2,789,933 $1,317,448 $2,121,310
=====================================================
Cash paid during the year for:
Interest $ 151,134 $ 39,368 $ 36,725
Income taxes 1,019,009 839,893 689,148
</TABLE>
SEE ACCOMPANYING NOTES.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements
September 25, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
The Barbers, Hairstyling for Men & Women, Inc. (the Company) operates and sells
franchises to operate Cost Cutters Family Hair Care salons, City Looks salons,
Hair Performers salons, Family Haircut Store salons and We Care Hair salons. The
Company operates primarily in the United States with a limited number of
franchisees in France and Russia.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Barbers,
Hairstyling for Men & Women, Inc. and its wholly-owned subsidiaries, WCH, Inc.,
CLS International, Inc., Hair Performers International, Inc. and The Barbers
Export, Inc.
The Company uses a 52-53 week reporting period. Under this method, certain years
will include 53 weeks of operations as opposed to 52 weeks. The years ended
September 25, 1997, September 26, 1996 and September 28, 1995 each include 52
weeks of operations.
BUSINESS SEGMENT INFORMATION
The Company is engaged in principally one business segment: developing,
licensing, franchising, and servicing several systems of retail hair salons.
As of September 25, 1997, the Company owned and operated 23 salons and
franchised 912 salons.
CASH AND CASH EQUIVALENTS
All investments with a maturity of three months or less at the time of purchase
are considered cash equivalents. Cash equivalents are carried at cost which
approximates market value.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of accounts and notes receivable.
Accounts receivable are generally unsecured but are personally guaranteed by the
respective franchisees. Concentrations of credit risk with respect to these
receivables are limited due to the large numbers of customers and their
dispersion across many geographic areas. Notes receivable are generally secured
by equipment or the existing franchise agreements. (See Notes 2 and 8.)
INVENTORIES
Inventories, principally goods held for resale, are carried at the lower of cost
(weighted average) or market.
INVESTMENT IN FRANCHISE CONTRACTS
On January 24, 1997, the Company acquired the franchise contracts of 139 We Care
Hair salons in exchange for $2,000,000 in cash plus a contingent earn-out equal
to 40% of all initial franchise fees and royalties collected pursuant to certain
specified franchise contracts during the six year period ending January 24,
2003. The total purchase price, including acquisition expenses, was allocated to
Investment in Franchise Contracts at the acquisition date and is amortized on a
straight-line basis over 15 years, which represents the estimated average
remaining life at the time of the acquisition of the franchise contracts
assumed. Under the terms of the contract, the Company may deduct the purchase
price of specific franchise contracts from future payments if the salons close
within one year of the acquisition date. As of September 25, 1997, seven salons
with a value of $271,904 had closed.
During 1993, the Company acquired the franchise contract rights of 22 Family
Haircut Store salons in exchange for $120,000 cash and a note payable of
$479,214. The total investment balance of $599,214 is amortized on a
straight-line basis over 15 years, which represents the estimated average
remaining life at the time of acquisition of the franchise agreements assumed.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During 1992, the Company acquired the franchise contract rights of certain Hair
Performers salons in exchange for conditional future payments based upon
royalties collected by the Company. All payments to the seller ceased as of
April 1, 1997. An investment in franchise contracts of $350,751 was recorded
based upon the amount of actual payments to the seller. The investment balance
is amortized on a straight-line basis over 15 years.
The investment balance in franchise contract rights is individually allocated to
specific contracts. On a monthly basis, individual valuations are reviewed and
at any time the value of a contract is deemed permanently impaired, a write-down
is recorded to the extent the contract value exceeds the future revenues
expected to be realized related to the contract.
DEPRECIATION
Equipment and leasehold improvements are stated at cost. Depreciation of
equipment is provided on the straight-line method over estimated useful lives of
3 to 7 years. Leasehold improvements are being depreciated over the related
lease terms or estimated useful life, whichever is shorter.
REVENUE RECOGNITION OF FRANCHISE, DEVELOPMENT AND ROYALTY FEES
All fees from franchised operations are included in revenue as earned. The
Company enters into area development agreements with franchisees which require
fees based upon the number of salons to be opened within the specified
development area. Development and initial franchise fees are earned when the
related salon opens, with the development fees being recognized ratably as the
salons within the development area open. Development and initial franchise fees
paid prior to salon openings are recorded as deferred franchise fees. Royalty
fees are based on the franchised salons' revenues and are recorded by the
Company in the period the related franchised salons' revenues are earned.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the Statement of Financial
Accounting Standards No. 109. Accordingly, deferred tax assets and liabilities
are recorded based on the "temporary differences" between the assets and
liabilities recorded for financial reporting purposes and such amounts as
measured by tax laws and regulations.
COMMITTED ADVERTISING
Committed advertising represents unexpended amounts received from franchisees to
finance national and regional advertising programs.
STOCK-BASED COMPENSATION
The Company applies APB 25, "Accounting for Stock Issued to Employees" in
accounting for stock options and presents in Note 5 pro forma net earnings as if
the accounting prescribed by SFAS 123 "Accounting for Stock-Based Compensation"
had been applied.
EARNINGS PER SHARE
Net income per common share is based on the weighted average number of common
and common equivalent shares outstanding during the period. Common stock
equivalents include dilutive stock options and warrants using the treasury stock
method. All share and per share amounts have been restated to reflect the
3-for-2 stock split that was approved by the Board of Directors on September 19,
1996 for holders of record October 15, 1996.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements, basic earnings per share (which excludes the dilutive effect of
stock options and warrants) and diluted earnings per share will replace primary
and fully diluted earnings per share. Had Statement No. 128 been in effect for
fiscal 1997, basic and diluted earnings per share would have been $.54 and $.50,
respectively.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from the estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company will record impairment losses of long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
2. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
10% franchise development notes, secured by franchise
development licenses, due upon salon opening $ 7,500 $ 17,000 $ 19,000
8%to 15% notes, due in varying monthly installments,
secured by salon equipment, leasehold improvements
and inventory 1,028,836 556,621 462,978
Non-interest bearing notes, due in varying monthly
installments, secured by salon equipment, leasehold
improvements and inventory 71,220 - -
8.5% to 14% notes, unsecured 230,550 480,823 146,750
Unsecured, non-interest bearing note - 12,500 -
Accrued interest 5,406 2,186 1,554
-----------------------------------------------
1,343,512 1,069,130 630,282
Less allowance for doubtful notes 125,000 100,000 35,000
-----------------------------------------------
1,218,512 969,130 595,282
Less current portion 596,635 235,206 113,699
-----------------------------------------------
$ 621,877 $ 733,924 $ 481,583
===============================================
</TABLE>
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
3. LINE OF CREDIT
The Company has a credit agreement which provides for a maximum line of credit
of $1.5 million. The line bears interest at the prime lending rate (8.50% at
September 25, 1997), expires June 30, 1998, is secured by accounts receivable,
inventories, general intangibles, and property and equipment and requires the
Company to maintain certain financial ratios. There are no compensating balance
requirements for this credit facility. As of September 25, 1997, there were no
outstanding borrowings under this line of credit.
4. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Note payable, due in monthly installments
of $23,997, plus interest at 8.82%,
with remaining balance due in January 2004,
secured by all assets of the Company $1,394,589 $ - $ -
Note payable, due in monthly installments of
$13,888, plus interest at prime,
with remaining balance due in January 2004,
secured by all assets of the Company 1,000,000 - -
Note payable due in monthly installments of
$6,250, plus interest at prime,
with the remaining balance due in June 1998,
secured by all personal property assets 56,250 131,250 206,250
Obligations under capitalized leases (NOTE 9)
- 11,675 33,639
------------------------------------------------------
2,450,839 142,925 239,889
Less current maturities 339,150 86,675 96,965
------------------------------------------------------
$2,111,689 $ 56,250 $ 142,924
======================================================
</TABLE>
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
Approximate maturities of long-term debt are as follows:
1998 $339,150
1999 354,232
2000 371,462
2001 390,274
2002 410,814
Thereafter 584,907
The carrying amount of the Company's debt instruments in the balance sheet at
September 25, 1997 approximates fair value.
5. STOCK OPTIONS AND WARRANTS
The Company's 1991 Stock Option Plan has reserved 450,000 shares of common stock
for key employees and 150,000 shares of common stock for non-employee directors.
The Plan requires the option price to be the average of the bid and ask prices
of the common stock on the date of grant. The employee options vest and become
exercisable at the rate of 25% on each anniversary from the date of grant.
Non-employee directors' options vest and become exercisable on the six month
anniversary of the date of grant. The options expire ten years from date of
grant.
The Company continues to account for employee stock-based compensation under APB
25. Accordingly, no compensation expense has been recorded for the stock option
plans. Had compensation expense for the stock option plans been determined based
on the fair value at the date of grant for awards in fiscal 1997 and 1996,
consistent with the provisions of SFAS No. 123, the Company's net earnings and
earnings per share for the fiscal years shown below would have been reported as
follows:
1997 1996
-----------------------------------
Net earnings - as reported $1,406,000 $1,057,000
Net earnings - pro forma 1,370,000 1,037,000
Earnings per share - as reported $.50 $.39
Earnings per share - pro forma .49 .38
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
The pro forma effect on net income and earnings per share is not representative
of the pro forma net earnings in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1996.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
1997 1996
-----------------------------------
Expected dividend yield 0% 0%
Expected stock price volatility 31% 29%
Risk-free interest rate 6.0% 6.0%
Expected life of options 5.0 YEARS 5.0 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The weighted average fair value for options granted during fiscal 1997 and
fiscal 1996 is $2.71 and $1.95 per share, respectively.
As of September 25, 1997 there were 102,000 options outstanding with exercise
prices between $1.58 and $1.96, 87,000 options outstanding with exercise prices
between $2.00 and $3.25 and 75,000 options outstanding with exercise prices
between $5.25 and $7.75. At September 25, 1997 outstanding options had a
weighted-average remaining contractual life of 7 years.
The number of options exercisable at September 25, 1997 and September 26, 1996
were 192,750 and 169,500, respectively, at weighted average exercise prices of
$2.78 and $2.26 per share, respectively.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
OPTIONS WEIGHTED AVERAGE
AVAILABLE PRICE
FOR GRANT NUMBER PER SHARE
------------------------------------------------------
<S> <C> <C> <C>
Balance September 29, 1994 450,000 150,000 $1.75
Granted (72,000) 72,000 3.04
------------------------------------
Balance September 28, 1995 378,000 222,000 2.17
Granted (30,000) 30,000 5.25
Exercised - (15,000) 1.88
------------------------------------
Balance September 26, 1996 348,000 237,000 2.58
Granted (45,000) 45,000 7.06
Exercised - (14,250) 1.62
Canceled 3,750 (3,750) 2.00
------------------------------------
Balance September 25, 1997 306,750 264,000 $3.40
====================================
</TABLE>
In July 1991, the Company granted warrants to the President to purchase 75,000
shares of the Company's common stock at an exercise price of $1.58 per share. On
October 13, 1994, the Company granted warrants to the Chairman and President to
purchase 75,000 shares, respectively, of the Company's common stock at an
exercise price of $2.67 per share. The warrants would expire one year after
termination of employment with the Company. 165,000 warrants were exercisable at
September 25, 1997.
The Company issued 3,150, 2,400 and 3,000 shares of stock to outside directors
as part of their compensation plan in 1997, 1996 and 1995, respectively.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
Income tax expense is summarized as follows:
1997 1996 1995
------------------------------------------------------
Current $1,139,000 $880,000 $601,000
Deferred (121,000) (115,000) (17,000)
------------------------------------------------------
$1,018,000 $765,000 $584,000
======================================================
The Company's provision for income taxes differs from the federal rate of 34%
for the following reasons:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate $ 824,000 $620,000 $484,000
State income tax, net 145,000 107,000 81,000
Expenses not deductible for tax purposes 49,000 38,000 19,000
------------------------------------------------------
$1,018,000 $765,000 $584,000
======================================================
</TABLE>
Components of deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Deferred franchise deposits $ 99,000 $116,000 $164,000
Bad debt reserves 195,000 141,000 83,000
Depreciation 109,000 86,000 84,000
Inventory capitalization adjustment 44,000 35,000 37,000
Payroll related 202,000 163,000 87,000
Other reserves 97,000 89,000 55,000
Deferred tax liabilities:
Installment sales gains - (5,000) -
------------------------------------------------------
Net deferred tax assets $746,000 $625,000 $510,000
======================================================
</TABLE>
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
7. DEFERRED COMPENSATION
The Company has entered into employment agreements with the Chairman of the
Board and President which include deferred compensation equal to 10% of their
base salaries. Additionally, certain key executives may voluntarily elect to
defer up to $25,000 of their annual compensation.
8. TRANSACTIONS WITH RELATED PARTIES
The Company leases space for its headquarters from its Chairman, the majority
shareholder. Rental payments, including real estate taxes and insurance, were
$437,000, $426,000 and $399,000 in 1997, 1996 and 1995, respectively.
The Company recognized revenue from franchises owned by the majority shareholder
as follows:
1997 1996 1995
------------------------------------------------------
Product sales $187,000 $210,000 $272,000
Equipment sales 45,000 25,000 77,000
Royalty fees 126,000 168,000 240,000
Franchise fees 25,000 3,000 26,000
------------------------------------------------------
$383,000 $406,000 $615,000
======================================================
Trade receivables for 1997, 1996 and 1995 include approximately $106,000,
$48,000 and $120,000, respectively, from franchises owned by the majority
shareholder.
The majority shareholder continues to be a minority investor in a company which
operates 20 franchised salons.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company conducts its operations in leased facilities. The initial lease
periods are generally five to ten years. Some of the lease agreements contain
renewal options for additional periods up to five years. The Company also has
entered into operating leases for equipment over various periods. Minimum annual
commitments under these operating leases are approximately as follows:
COMPANY- COMPANY
OWNED HEADQUARTERS
SALONS (SEE NOTE 8) EQUIPMENT
-------------------------------------------------------
Years ending:
1998 $ 629,529 $24,859 $292,162
1999 634,859 - 216,880
2000 579,708 - 108,108
2001 341,931 - 50,218
2002 122,465 - -
Thereafter 166,656 - -
-------------------------------------------------------
$2,475,148 $24,859 $667,368
=======================================================
Certain of the salon leases provide for payment of additional rentals based on a
percentage of sales over a fixed amount and for the payment of taxes, insurance
and other charges.
Total rent expense is as follows:
MINIMUM
RENTALS LESS
AND OTHER SUBLEASE TOTAL
CHARGES RENTALS EXPENSE
------------------------------------------------------
1997 $1,074,059 $(109,271) $964,788
1996 881,525 (111,901) 769,624
1995 615,550 (108,751) 506,799
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company also is the primary obligor on leases for the salons operated by
certain franchisees. The Company subleases the space to the franchisees, and
generally the franchisees personally guarantee the subleases. On 90% of these
subleases, the Company receives an upcharge from the franchisee over and above
the amount of rent paid to the landlord. The Company incurred losses due to
defaults on subleases of approximately $59,000, $24,000 and $0 during 1997, 1996
and 1995, respectively. The Company's remaining commitments, should the
franchisees fail to make the scheduled rental payments, are approximately as
follows:
Years ending:
1998 $ 5,083,357
1999 3,902,617
2000 3,125,074
2001 1,897,428
2002 825,147
Thereafter 309,891
------------------
$15,143,514
==================
Included above is approximately $535,112 of leases held by the majority
shareholder and guaranteed by the Company. These leases were originally
guaranteed by the Company for Company-owned salons which were sold to the
majority shareholder in 1986. Generally, as renewals of leases occur, the
guarantees are withdrawn.
RENTAL INCOME
The Company is subleasing office space to another party through December 2000.
As a result, the Company earned rental income of approximately $109,000,
$101,000 and $84,000 during 1997, 1996 and 1995, respectively.
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL PROCEEDINGS
The Company is engaged in certain legal proceedings and claims arising in the
ordinary course of its business. The ultimate liabilities, if any, which may
result from these or other pending or threatened legal actions against the
Company cannot be determined at this time. However, it is the opinion of
management that facts known at the present time do not indicate that there is a
probability that such litigation will have a material effect on the financial
position of the Company.
10. 401(k) PROFIT SHARING PLAN
During fiscal 1991, the Company established The Barbers, Hairstyling for Men &
Women, Inc. 401(k) Plan (the Plan), a profit sharing plan. All employees who
meet certain eligibility requirements may join the Plan. Plan participants elect
to have a percentage of their salary contributed to the Plan. The Company makes
a matching contribution to the Plan of 100% of the first one percent and 25% of
the next four percent of salary contributed by employees. In addition, the
Company may elect to make a discretionary contribution to the Plan. The
Company's contributions vest based on the employee's length of service with the
Company and are 100% vested after three years of service if hired before March
1, 1996 and 100% vested after five years of service if hired on or after March
1, 1996. In 1997, 1996 and 1995, the Company made matching contributions of
$66,205, $51,057 and $42,982, respectively, and no discretionary contributions.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FISCAL YEAR 1995
Revenue $3,407 $3,792 $3,826 $3,891 $14,916
Operating income 227 274 408 437 1,346
Net income 142 181 248 269 840
Net income per share .05 .07 .09 .10 .32
</TABLE>
<PAGE>
The Barbers, Hairstyling for Men & Women, Inc.
Notes to Consolidated Financial Statements (continued)
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FISCAL YEAR 1996
Revenue $4,488 $4,363 $4,913 $4,802 $18,566
Operating income 295 382 478 517 1,672
Net income 204 234 286 333 1,057
Net income per share $ .07 $ .09 $ .10 $ .12 $ .39
FISCAL YEAR 1997
Revenue $4,843 $5,584 $5,598 $6,097 $22,122
Operating income 353 567 609 864 2,393
Net income 219 331 340 516 1,406
Net income per share $ .08 $ .12 $ .12 $ .18 $ .50
</TABLE>
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information called for in this item is incorporated by reference to
the Sections of the Proxy Statement entitled "Information Concerning Directors
and Nominees," "Information Regarding Executive Officers Who Are Not Directors"
and "Compliance with Section 16(a) of the Exchange Act."
ITEM 10. EXECUTIVE COMPENSATION.
The information required in this item is incorporated by reference to
the Section of the Proxy Statement entitled "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for in this item is incorporated by reference to
the Section of the Proxy Statement entitled "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for in this item is incorporated by reference to
the Section of the Proxy Statement entitled "Certain Relationships and Related
Transactions."
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) EXHIBIT LIST.
Exhibit
Number Description
- ------ -----------
3.1 Articles of Incorporation, dated September 30, 1968 (incorporated
by reference to the registrant's registration statement on Form
10-SB dated June 28, 1994)
3.2 Amended and Restated By-laws, dated January 21, 1993 (incorporated
by reference to the registrant's registration statement on Form
10-SB dated June 28, 1994)
4.1 Specimen of Common Stock (incorporated by reference to the
registrant's registration statement on Form 10-SB dated June 28,
1994)
10.1 Form of Cost Cutters Family Hair Care Franchise Agreement
(incorporated by reference to the registrant's quarterly report on
Form 10-QSB for the quarter ended December 28, 1995)
10.2 Form of Cost Cutters Family Hair Care Development Agreement
(incorporated by reference to the registrant's quarterly report on
Form 10-QSB for the quarter ended December 28, 1995)
10.3 Form of City Looks Salons International Franchise Agreement
(incorporated by reference to the registrant's quarterly report on
Form 10-QSB for the quarter ended December 28, 1995)
<PAGE>
* 10.4 1990 Stock Option Plan For Directors, as Amended and Restated on
June 23, 1994 (incorporated by reference to the registrant's
registration statement on Form 10-SB dated June 28, 1994)
* 10.5 Resolutions amending the 1990 Stock Option Plan For Directors
adopted December 1, 1994 (incorporated by reference to the
registrant's Annual Report on Form 10-KSB for the year ended
September 29, 1994)
* 10.6 Amendment to 1990 Stock Option Plan for Directors adopted
September 21, 1995 (incorporated by reference to the registrant's
registration statement on Form S-8 dated October 13, 1995)
* 10.7 1990 Stock Option Plan For Key Employees, as Amended and Restated
on June 23, 1994 (incorporated by reference to the registrant's
registration statement on Form 10-SB dated June 28, 1994)
* 10.8 Resolutions amending the 1990 Stock Option Plan For Key Employees
adopted December 1, 1994 (incorporated by reference to the
registrant's Annual Report on Form 10-KSB for the year ended
September 29, 1994)
* 10.9 Amendment to 1990 Stock Option Plan for Key Employees adopted
September 21, 1995 (incorporated by reference to the registrant's
registration statement on Form S-8 dated October 13, 1995)
* 10.10 Employment Agreement between Frederick A. Huggins, Jr. and The
Barbers, Hairstyling for Men & Women, Inc., dated effective April
2, 1990 (incorporated by reference to the registrant's
registration statement on Form 10-SB dated June 28, 1994)
* 10.11 Addendum to Employment Agreement between Frederick A. Huggins, Jr.
and The Barbers, Hairstyling for Men & Women, Inc., dated
effective January 1993 (incorporated by reference to the
registrant's registration statement on Form 10-SB dated June 28,
1994)
* 10.12 Employment Agreement between Frederick A. Huggins, Jr. and The
Barbers, Hairstyling for Men and Women, Inc., effective October 1,
1994 (incorporated by reference to the registrant's Annual Report
on Form 10-KSB for the year ended September 29, 1994)
* 10.13 Amendment to Employment Agreement between Frederick A. Huggins,
Jr. and The Barbers, Hairstyling for Men & Women, Inc., effective
February 6, 1996 (incorporated by reference to the registrant's
quarterly report on Form 10-QSB for the quarter ended December 28,
1995)
* 10.14 Common Stock Purchase Warrant of Frederick A. Huggins, Jr. dated
April 2, 1990 (incorporated by reference to the registrant's
registration statement on Form 10-SB dated June 28, 1994)
* 10.15 Common Stock Purchase Warrant of Frederick A. Huggins, Jr. dated
October 13, 1994 (incorporated by reference to the registrant's
Annual Report on Form 10-KSB for the year ended September 29,
1994)
* 10.16 Amendment to Common Stock Purchase Warrants of Frederick A.
Huggins, Jr. dated September 21, 1995 (incorporated by reference
to the registrant's registration statement on Form S-8 dated
October 13, 1995)
* 10.17 Employment Agreement between Florence F. Francis and The Barbers,
Hairstyling for Men & Women, Inc. effective October 1, 1994
(incorporated by reference to the registrant's Annual Report on
Form 10-KSB for the year ended September 29, 1994)
* 10.18 Common Stock Purchase Warrant of Florence F. Francis dated October
13, 1994 (incorporated by reference to the registrant's Annual
Report on Form 10-KSB for the year ended September 29, 1994)
* 10.19 Amendment to Common Stock Purchase Warrant of Florence F. Francis
dated September 21, 1995 (incorporated by reference to the
registrant's registration statement on Form S-8 dated October 13,
1995)
* 10.20 Salary Continuation Agreement between Patricia D. Kessler and The
Barbers, Hairstyling for Men & Women, Inc., dated effective
February 9, 1988 (incorporated by reference to the registrant's
registration statement on Form 10-SB dated June 28, 1994)
<PAGE>
*+10.21 Employment Agreement between John A. Fox and The Barbers,
Hairstyling for Men & Women, Inc. effective October 1, 1997
* 10.22 The Barbers, Hairstyling for Men & Women, Inc. Incentive
Compensation Plan (incorporated by reference to the registrant's
Annual Report on Form 10-KSB for the year ended September 29,
1994)
* 10.23 The Barbers Hairstyling for Men & Women, Inc. Deferred
Compensation Plan as adopted August 17, 1995 (incorporated by
reference to the registrant's Annual Report on Form 10-KSB for the
year ended September 28, 1995.)
* 10.24 Special Termination Allowance dated September 21, 1995
(incorporated by reference to the registrant's quarterly report on
Form 10-QSB for the quarter ended December 28, 1995)
10.25 Term Loan and Credit Agreement between The Barbers, Hairstyling
for Men & Women, Inc. and Norwest Bank Minnesota, N.A.
(incorporated by reference to Amendment No 1 to the registrant's
registration statement on Form 10-SB dated August 5, 1994)
10.26 Amendments to Term Loan and Credit Agreement between The Barbers,
Hairstyling for Men & Women, Inc. and Norwest Bank Minnesota, N.A.
(incorporated by reference to the registrant's quarterly report on
Form 10-QSB for the quarter ended March 30, 1995)
10.27 Amendments to Term Loan and Credit Agreement between The Barbers,
Hairstyling for Men & Women, Inc. and Norwest Bank Minnesota, N.A.
(incorporated by reference to the registrant's quarterly report on
Form 10-QSB for the quarter ended March 28, 1996)
10.28 Term Loan and Credit Agreement between The Barbers, Hairstyling
for Men & Women, Inc. and Norwest Bank Minnesota, N.A. dated
January 22, 1997 (incorporated by reference to the registrant's
quarterly report on Form 10-QSB for the quarter ended December 26,
1996)
10.29 Revolving Note between The Barbers, Hairstyling for Men & Women,
Inc. and Norwest Bank Minnesota, N.A. dated January 22, 1997
(incorporated by reference to the registrant's quarterly report on
Form 10-QSB for the quarter ended December 26, 1996)
10.30 Term Note A between The Barbers, Hairstyling for Men & Women, Inc.
and Norwest Bank Minnesota, N.A. dated January 22, 1997
(incorporated by reference to the registrant's quarterly report on
Form 10-QSB for the quarter ended December 26, 1996)
10.31 Term Note B between The Barbers, Hairstyling for Men & Women, Inc.
and Norwest Bank Minnesota, N.A. dated January 22, 1997
(incorporated by reference to the registrant's quarterly report on
Form 10-QSB for the quarter ended December 26, 1996)
10.32 Arbitration Agreement between The Barbers, Hairstyling for Men &
Women, Inc. and Norwest Bank Minnesota, N.A. dated January 22,
1997 (incorporated by reference to the registrant's quarterly
report on Form 10-QSB for the quarter ended December 26, 1996)
+ 11 Statement regarding Computation of Per Share Earnings
+ 21 Subsidiaries
+ 23.1 Consent of Ernst & Young LLP
+ 27 Financial Data Schedule - For SEC use only
- ----------------
* Management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-KSB pursuant to Item
13(a).
+ Filed herewith
(b) REPORTS ON FORM 8-K.
The registrant did not file any reports on Form 8-K during the
fourth quarter of fiscal 1997.
<PAGE>
SIGNATURES
In accordance with the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
Date: December 23, 1997 By: /s/ Frederick A. Huggins, Jr.
------------------------------
Frederick A. Huggins, Jr.
President, Chief Executive Officer and Director
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant in the
capacities indicated on December 23, 1997.
/s/ Florence F. Francis Chairman of the Board of Directors
- ---------------------------------
Florence F. Francis
/s/ Frederick A. Huggins, Jr. Chief Executive Officer and Director
- ---------------------------------
Frederick A. Huggins, Jr.
/s/ J. Brent Hanson Vice President and Chief Financial Officer
- --------------------------------- Principal Financial & Accounting Officer
J. Brent Hanson
/s/ Marcia J. Bystrom Director
- ---------------------------------
Marcia J. Bystrom
/s/ David E. Emerson Director
- ---------------------------------
David E. Emerson
/s/ Susan F. Goldstein Director
- ---------------------------------
Susan F. Goldstein
/s/ Richard H. King Director
- ---------------------------------
Richard H. King
/s/ James L. Reissner Director
- ---------------------------------
James L. Reissner
EXHIBIT 10.21
To: John Fox
From: The Board of Directors
The Barbers, Hairstyling for Men & Women, Inc.
SUBJECT: COMPENSATION PROGRAM
The Barbers, Hairstyling for Men & Women, Inc. (company) will employ John Fox
(employee) in the position of Vice President of Development.
1) Term of Agreement: October 1, 1997 through September 30, 2002 without any
options for renewal.
2) Annual Base Salary: Increased annually on January lst, based upon review of
performance.
3) Incentive Compensation: Eligible to participate in the Annual Executive
Incentive Plan while employed, plus maintain existing incentive plan for
franchise sales which will be paid whether employed or not.
4) Health Insurance: Participation in the company's group health plan.
5) Company Car: The company shall provide you with the use of a company car, the
value of which shall not exceed $25,000 (value is as of 10/01/97 which shall be
indexed for inflation in future years). The company shall pay all normal
operating expenses, maintenance, license and sales taxes for the car.
6) Paid Vacation: The employee is eligible to take three weeks of vacation per
calendar year, subject to the company's normal vacation policies.
7) Life Insurance: The company shall provide the employee with life insurance
coverage payable to the employee's designated beneficiary.
The company may, at its option, secure a "key person" policy with the company
named as beneficiary.
8) Deferred Compensation: The company will establish a deferred compensation
account on its books. Each year the account will be credited with an amount
designated by the employee from earned sales commissions. In addition, the
deferred compensation shall earn interest credited annually based on the
"reference rate" then charged by the Norwest Bank National Association.
The company shall have full ownership over the account with the employee in the
position of general, unsecured creditor. The employee may not assign or pledge
the rights to this account to anyone else.
Upon termination of employment, the company shall pay the deferred compensation
account to the employee in installments based on the following schedule:
Fund Balance Number of Installments
------------ ----------------------
$10,000 or less one installment
$10,000.01 - $30,000 two installments
$30,000.01 - $60,000 three installments
$60,000.01 - $100,000 four installments
More than $100,000 five installments
In the event of the employee's death, the company shall make payments to the
employee's estate or the employee's designated beneficiary.
<PAGE>
Termination: employment for cause. Cause shall mean termination upon:
(A) the willful and continued failure by the employee to substantially
perform the employee's duties with the company (other than any such failure
resulting from the employee's incapacity due to physical or mental illness or
any such actual or anticipated failure resulting from termination by the
employee for good reason) after a written demand for substantial performance is
delivered to the employee by the officer in charge, which demand specifically
identifies the manner in which the officer in charge believes that the employee
has not substantially performed the employee's duties; or (B) willful engaging
by the employee in conduct which is demonstrably and materially injurious to the
company, monetarily or otherwise. For purposes of the Subparagraph, no act, or
failure to act, on the employee's part shall be deemed "willful" unless done, or
omitted to be done, by the employee not in good faith and without reasonable
belief that the employee's action or omission was in the best interest of the
company. Notwithstanding the foregoing, the employee shall not be deemed to have
been terminated for cause unless and until there shall have been delivered to
the employee a copy of an explanatory letter (after reasonable notice to the
counsel, to be heard), finding that in the good faith opinion of the officer in
charge the employee was guilty of conduct set forth above in clauses (A) or (B)
of the first sentence of this subparagraph and specifying the particulars
thereof in detail. If terminated for other than cause, full compensation and
benefits payable as outlined below.
The company may terminate the employee on sixty days prior written notice. The
company shall continue to pay the employee's base salary, health insurance and
company car for a period of fifteen months after date of termination. All other
benefits shall cease as of the date of termination.
The employee may terminate employment with the company on sixty days
notice. Except in case of change in control of the company, should the employee
terminate employment, the employee shall receive the full benefits as described
above up to the date of the employee's termination.
In the event that the employee's employment is terminated by the
employer for any reason within one (1) year following a "change in control" of
the employer, a change in control will mean (i) the acquisition by a person or
group (other than any children, member or members of the Florence Francis
family) of beneficial ownership of thirty percent (30%) or more of the total
issued and outstanding voting common stock of the company; and (ii) a merger or
consolidation to which the company is a party, if, following such merger or
consolidation the stockholders of the company and all members of the Florence
Francis family have a combined beneficial ownership of less than twenty percent
(20%) of the total voting stock of the surviving corporation, or a sale of the
business of the employer to a person, persons or entity other than members of
the Florence Francis family or an entity controlled by the Florence Francis
family or any member of the Florence Francis family, then the employer will make
a lump sump payment within thirty (30) days of termination to the employee equal
to twenty (20) months' base salary. In the event this agreement is terminated by
the employee for any reason within one (1) year following a "change in control"
of the employer, or the sale of the business of the employer as described
herein, then, within thirty (30) days of termination, the employer will make a
lump sum payment to the employee equal to eighteen (18) months base salary.
10) Confidentiality & Conflicting Employment: The employee shall execute a
standard employee confidentiality agreement. In addition, the employee agrees
not to be employed or otherwise assist any competitor of the company for a
period of two years after the end of employment with the company.
11) Other Employee Benefits: The employee shall be entitled to all other
employee benefits generally available to salaried employees, unless modified by
any of the above terms.
<PAGE>
This Vice President of Development and Chief Executive Officer's compensation
program is approved and authorized by The Board of Directors of The Barbers,
Hairstyling for Men & Women, Inc. this 28th day of August, 1997.
Reaffirmed by the Board of Directors on the 16th day of October, 1997.
Frederick A. Huggins, Jr., Director /s/ Frederick A. Huggins, Jr.
----------------------------------
Witnessed by:
Patricia Kessler, Vice President of Franchise Compliance and Corporate Secretary
/s/ Patricia Kessler
- -----------------------------
Accepted by John Fox:
/s/ John Fox
- --------------------
EXHIBIT 11
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 28,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Primary and fully diluted earnings per share:
Weighted average number of issued shares
outstanding.............................................. 2,571,850 2,544,929 2,530,662
Dilution................................................. 235,089 197,205 112,776
Shares outstanding used to compute fully
diluted earnings per share............................... 2,806,939 2,742,134 2,643,438
=========== =========== ===========
Net Income................................................... $ 1,406,413 $ 1,057,354 $ 839,910
=========== =========== ===========
Earnings per share -- primary and fully
diluted.................................................. $ .0.50 $ 0.39 $ 0.32
=========== =========== ===========
</TABLE>
EXHIBIT 21
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation Trade Name, if any
- ------------------ ---------------------- ------------------
<S> <C> <C>
WCH, Inc. Minnesota We Care Hair
We Care Hair Realty, Inc. Delaware none
Hair Performers International, Inc. Minnesota The Hair Performers
CLS International, Inc. Minnesota City Looks Salons International
The Barbers Export, Inc. Minnesota The Barbers
CL Moscow Partners, LLP* Minnesota* none
</TABLE>
*The Barbers, Hairstyling for Men & Women, Inc. owns 70% of this Limited
Liability Partnership.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-98126) pertaining to the 1990 Stock Option Plan for Directors; and
Employment Agreement; and the President's Compensation Program and Employment
Agreement of our report dated October 31, 1997, with respect to the consolidated
financial statements of The Barbers, Hairstyling for Men & Women, Inc. included
in the Annual Report (Form 10-KSB) for the year ended September 25, 1997.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
December 22, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE FOURTH QUARTER OF FISCAL 1997 CONTAINED
IN THE COMPANY'S REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-25-1997
<PERIOD-START> SEP-27-1996
<PERIOD-END> SEP-25-1997
<CASH> 2,789,933
<SECURITIES> 0
<RECEIVABLES> 3,892,718
<ALLOWANCES> 450,000
<INVENTORY> 1,684,312
<CURRENT-ASSETS> 8,397,707
<PP&E> 2,989,354
<DEPRECIATION> 2,094,285
<TOTAL-ASSETS> 12,908,542
<CURRENT-LIABILITIES> 3,370,875
<BONDS> 0
0
0
<COMMON> 259,195
<OTHER-SE> 6,677,997
<TOTAL-LIABILITY-AND-EQUITY> 12,908,542
<SALES> 8,885,278
<TOTAL-REVENUES> 22,121,800
<CGS> 6,727,361
<TOTAL-COSTS> 11,174,741
<OTHER-EXPENSES> 8,554,536
<LOSS-PROVISION> 217,009
<INTEREST-EXPENSE> 151,134
<INCOME-PRETAX> 2,424,413
<INCOME-TAX> 1,018,000
<INCOME-CONTINUING> 1,406,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,406,413
<EPS-PRIMARY> .50
<EPS-DILUTED> .50
</TABLE>
