As filed with the Securities & Exchange Commission on September 17, 1998
Registration No. ________________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
(Exact name of issuer as specified in its charter)
Minnesota 41-0945858
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
300 INDUSTRIAL BOULEVARD N.E.
MINNEAPOLIS, MINNESOTA 55413
(612) 331-8500
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
-------------------------
Frederick A. Huggins, Jr.
The Barbers, Hairstyling for Men & Women, Inc.
300 Industrial Boulevard N.E.
Minneapolis, Minnesota 55413
(612) 331-8500
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
Joseph T. Kinning, Esq. Jonathan B. Abram, Esq.
Scott A. Hendrickson, Esq. Claudia I. Saavedra, Esq.
Gray, Plant, Mooty, Mooty & Bennett, P.A. Dorsey & Whitney LLP
33 South Sixth Street 220 South Sixth Street
3400 City Center Pillsbury Center South
Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402
(612) 343-2800 (612) 340-2600
-------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |_|
<PAGE>
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for same offering. |_| ____________________________________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for same offering. |_| ______________________________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of securities Amount to be Proposed maximum Proposed maximum aggregate Amount of
to be registered registered offering price (2) offering price (2) registration fee
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.10
par value 1,150,000 shares (1) $7.75 $8,912,500 $2,629.19
</TABLE>
- --------------------------
(1) Includes 150,000 shares to be sold if the Underwriter's overallotment
option is exercised in full. See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of Regulation C under the Securities Act as of the
close of the market on September 15, 1998.
-------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1998
PROSPECTUS
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
1,000,000 Shares Common Stock
All of the 1,000,000 shares of Common Stock (the "Shares") offered
hereby (the "Offering") are being sold by the Selling Shareholders. See "Selling
Shareholders" and "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of the Shares by the Selling Shareholders.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "BBHF". On September 15, 1998, the last reported sale price of the
Company's common stock, as reported on the Nasdaq National Market, was
$7.75 per share. See "Price Range of Common Stock."
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS FOR
RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Underwriting Discounts and Proceeds to the
Price to Public Commissions (1) Selling Shareholders (2)
- -------------------- ------------------- ------------------------------- --------------------------
<S> <C> <C> <C>
Per Share $ ________ $ __________ $ ___________
- -------------------- ------------------- ------------------------------- --------------------------
Total (3) $ ________ $ __________ $ ___________
</TABLE>
(1) Excludes compensation payable to Dougherty Summit Securities LLC (the
"Underwriter") in the form of a nonaccountable expense allowance in an
amount equal to 1% of the gross proceeds of the Offering. The Company and
the Selling Shareholders have agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$___________ and by the Selling Shareholders estimated at $____________
(including the nonaccountable expense allowance described in Note (1)
above).
(3) The Selling Shareholders have granted the Underwriter an option,
exercisable within 30 days of the date hereof, to purchase up to an
aggregate of 150,000 additional shares of Common Stock at the price to
public, less underwriting discounts and commissions, solely for the purpose
of covering overallotments, if any. If the Underwriter exercises such
option in full, the total price to public, underwriting discounts and
commissions and proceeds to Selling Shareholders will be $_________,
$_________, and $_________, respectively. See "Underwriting."
-----------------------------
<PAGE>
The Shares of Common Stock are offered, subject to prior sale, when, as
and if accepted by the Underwriter named herein. It is expected that delivery of
the Shares offered hereby will be on or about ________, 1998 at the offices of
Dougherty Summit Securities LLC, Minneapolis, Minnesota against payment therefor
in immediately available funds.
DOUGHERTY SUMMIT SECURITIES LLC
The date of this Prospectus is ___________, 1998.
2
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING PURCHASE OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy or information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional
offices located at 500 West Madison, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can also be obtained at prescribed rates from the Public Reference Room
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Information regarding the operation of the Public Reference Room can be
obtained by calling 1-800-SEC-0330 (1-800-732-0330). Copies of such material can
also be obtained through the Web site maintained by the Commission located at
http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on
Form S-3 under the Securities Act of 1933, as amended (the "Act"), with respect
to the securities offered hereby. This Prospectus omits certain information
included in such Registration Statement as permitted by the rules and
regulations of the Commission. For further information about the Company and its
securities, reference is made to such Registration Statement and to the exhibits
filed as part thereof or otherwise incorporated therein. Each summary in this
Prospectus of information included in the Registration Statement or any exhibit
thereto is qualified in its entirety by this reference to such information or
exhibit.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company with the
Commission pursuant to the Exchange Act (File No. 0-24466), are incorporated by
reference in this Prospectus:
(a) The Company's Annual Report on Form 10-KSB for the year
ended September 25, 1997.
(b) The Company's Quarterly Reports on Form 10-QSB for the
quarters ended December 25, 1997, March 26, 1998 and June 25, 1998.
(c) The description of the Company's Common Stock contained in
the Company's Registration Statement on Form 10-SB filed with the
Commission under the Exchange Act (Commission File No. 0-24466).
(d) The Company's Current Report on Form 8-K filed on
December 15, 1997.
All documents subsequently filed by the Company with the Commission
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, prior to
the filing of a post-effective amendment that indicates that all securities
offered have been sold or that deregisters all securities then remaining unsold,
shall be deemed to be incorporated by reference herein and to be a part hereof
from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein, modifies or supersedes such
document. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company undertakes to provide without charge to each person,
including any beneficial owner, to whom a Prospectus is delivered, upon written
or oral request of such person, a copy of any and all of the information that
has been incorporated by reference in this Prospectus. Requests may be directed
to J. Brent Hanson, Chief Financial Officer, The Barbers, Hairstyling for Men &
Women, Inc., 300 Industrial Boulevard N.E., Minneapolis, Minnesota 55413. The
Company's phone number is (612) 331-8500.
4
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Prospectus Summary," " Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and elsewhere in this Prospectus
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements may be identified by the use of the terminology such
as "may," "will," "expect," "anticipate," "intend," "designed," "estimate,"
"should," or "continue" or the negatives thereof or other variations thereon or
comparable terminology. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
following: (1) Increased competition from other hair salon chains in the
consumer marketplace could negatively affect sales volume at both franchised and
Company-owned salons, reducing revenue from franchises and from Company-owned
salons. (2) Increased competition for sites for new salons from hair care salons
and other retail concepts could increase occupancy costs and other operating
expenses. (3) The Company's growth plans could be adversely affected by changes
in its relationship with Wal-Mart, including changes in Wal-Mart's marketing or
business plans. (4) An inability to find qualified franchisees for new locations
or the inability of franchisees to finance the construction of new salons could
limit the Company's ability to grow. (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 thereby causing 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. See "Risk Factors."
5
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITER'S OVERALLOTMENT OPTION. SPECIAL NOTE: CERTAIN
STATEMENTS SET FORTH BELOW CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE REFORM ACT. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" FOR FACTORS RELATING TO SUCH STATEMENTS.
THE COMPANY
The Company develops, franchises, services and operates a system of
hair care salons, which provide hair care services and products for men, women
and children. The Company primarily franchises its salon concepts to third
parties. As of June 25, 1998, the Company's franchise system had 940 salons
located in 45 states and three foreign countries. As of June 25, 1998, the
Company also owned and operated 27 salons in the United States.
The Company markets three salon concepts, which cover a broad spectrum
of the hair care market. Cost Cutters salons provide value-priced hair care
services to price sensitive customers. Cost Cutters is the Company's primary
salon concept with 812 franchised and Company-owned salons and approximately
$128.7 million of salon retail sales for the nine months ended June 25, 1998.
City Looks salons target customers seeking superior, high-fashion hair care
services, as well as personal grooming and spa services, such as facials,
manicures, massages and tanning. As of June 25, 1998, there were 74 franchised
and Company-owned City Looks salons in operation, which generated approximately
$16.9 million of salon retail sales for the nine months ended June 25, 1998. The
Company's We Care Hair salons, which provide hair care, tanning, nail care and
waxing services primarily to younger adults, is positioned between the other two
salon concepts. As of June 25, 1998, there were 81 franchised We Care Hair
salons, which had approximately $9.7 million of salon retail sales for the nine
months ended June 25, 1998.
The Company's franchising program is designed to develop successful
hair salons that can generate long-term revenue growth. To achieve this
objective, the Company selectively grants franchises to prospective franchisees
with sufficient financial resources. The Company believes that it is this
selectivity that results in less than 4% of new salons in the Company's system
failing in the first five years of operation. Expansion of the franchise system
has occurred primarily through awards of franchises to existing franchisees as
well as selective sales to new franchisees. The Company also enters into
long-term, multiple salon development arrangements with franchisees for specific
territories. Franchisees opened 69 new salons during fiscal 1997 and 58 new
salons during the nine months ended June 25, 1998. Under its franchise
agreements, the Company receives initial franchise fees for new salons and
franchise royalties based on a percentage of salon sales. The Company provides
operational training, advertising and marketing services and financial analysis
services to its franchisees. Franchise royalties and fees represented 36.8% of
revenues for fiscal 1997 and 35.3% of revenues for the nine months ended June
25, 1998.
The Company distributes professional hair care and beauty products,
salon equipment and consumer hair care and beauty products to its franchisees.
Hair care and beauty products, such as shampoos, conditioners and finishing
products, include private label and national brands that are manufactured by
third parties. The Company offers promotional programs to franchisees, such as
additional training services, special merchandising kits and product rebates
based on sales volume, to encourage product sales to franchisees and to compete
with third party distributors. Sales of hair care and beauty products and
equipment represented 40.2% of revenues for fiscal 1997 and 39.6% of revenues
for the nine months ended June 25, 1998.
In addition to its primary franchise strategy, the Company is
developing salons under an arrangement with Wal-Mart to place Cost Cutters
salons inside new Wal-Mart Supercenters. The Company is currently one of two
hair care vendors locating its salons within Supercenters. In this arrangement,
the Company is granted rights to new salon locations as Wal-Mart develops new
sites. The Company leases the salon space from Wal-Mart and either develops the
salon directly or arranges for a franchisee to own and operate the salon. As of
June 25, 1998, there were 143 Cost Cutters salons in Wal-Mart Supercenters, 20
of which are Company-owned salons and 123 of which are franchised salons. After
development of a Company-owned Wal-Mart salon, the Company may seek to sell the
salon to a franchisee. The Company is also developing Cost Cutters salons for
outlet malls. These salons have an increased emphasis on sales of hair care and
beauty products as well as hair care services. The Company has opened 14 salons
in outlet malls.
The Company's executive offices are located at 300 Industrial
Boulevard, N.E., Minneapolis, Minnesota 55413. The Company's phone number is
(612) 331-8500.
6
<PAGE>
- --------------------------------------------------------------------------------
SELLING SHAREHOLDERS
The Shares are being sold by Florence F. Francis, Chairman of the Board
of Directors, and Frederick A. Huggins, Jr., Chief Executive Officer (each a
"Selling Shareholder" and together the "Selling Shareholders"). Prior to the
Offering, Ms. Francis and Mr. Huggins beneficially own approximately 62.7% of
the Company's outstanding Common Stock. After the consummation of the Offering,
Ms. Francis and Mr. Huggins will beneficially own approximately 39.4% of the
Company's outstanding Common Stock (assuming no exercise of the Overallotment
Option).
As the widow of the Company's founder, Joe Francis, Sr., Ms. Francis
has been involved in the Company's operations since its inception. Most of the
Common Stock beneficially owned by Ms. Francis has been beneficially owned by
her since the founding of the Company. Mr. Huggins has been the Company's Chief
Executive Officer since April 1990 and his current employment agreement with the
Company expires on September 30, 2000. Pursuant to the terms of this initial
employment agreement with the Company, in April 1990 the Company granted to Mr.
Huggins warrants to purchase 112,500 shares of common stock at a per share
exercise price of $1.05 (adjusted to reflect stock splits occurring since that
time). As of September 15, 1998, these warrants are fully exercisable. In
addition, pursuant to the terms of his amended employment agreement with the
Company, in October 1994 the Company granted Mr. Huggins additional warrants to
purchase 112,500 shares of common stock at a per share exercise price of $1.78
(adjusted to reflect stock splits occurring since that time). As of September
15, 1998, 90,000 of these warrants are exercisable. The remaining 22,500
warrants become exercisable on October 1, 1998.
Prior to the Offering, Ms. Francis and Mr. Huggins could only sell the
securities owned by them pursuant to the requirements of Rule 144 promulgated
under the Securities Act. Rule 144 places significant limitations on the ability
of an "affiliate" of the Company, including Ms. Francis and Mr. Huggins, to sell
his or her shares. Neither Ms. Francis nor Mr. Huggins have any contractual
rights to require the Company to register any of the Common Stock owned by them.
Ms. Francis and Mr. Huggins have requested, however, that the Company register a
portion of the Common Stock beneficially owned by them to facilitate
diversification of their personal investment portfolios and to achieve estate
planning goals for each of them.
The Company is undertaking the registration of the Shares to increase
the public float of the Common Stock held by non-affiliated shareholders and to
improve the liquidity of the public trading market for the Common Stock
through an increase in the number of shareholders and the initiation of
analyst coverage of the Company by the Underwriter. See "Limited Historical
Trading; Potential Volatility of Stock Price."
THE OFFERING
Common Stock offered by
the Selling Shareholders..... 1,000,000 shares (1)
Common Stock Outstanding..... 3,957,802 shares (2)
Use of Proceeds.............. The Company will not receive any proceeds from
the sale of the Shares offered hereby. See "Use
of Proceeds."
Nasdaq National Market
Symbol....................... BBHF
(1) Does not include 150,000 shares to be sold if the Underwriter's
overallotment option is exercised in full. See "Underwriting."
(2) Does not include 285,250 shares of Common Stock issuable upon exercise of
stock options and 292,500 shares of Common Stock issuable upon exercise of
warrants outstanding as of September 24, 1998. In connection with the
Offering (assuming no exercise of the Overallotment Option), Mr. Huggins
will exercise warrants for the purchase of 75,000 shares of Common Stock.
7
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
----------------------------------------------------------------------------- ----------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 25, JUNE 26, JUNE 25,
1993 1994 1995 1996 1997 1997 1998
---------------- -------------- --------------- -------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
[IN THOUSANDS, EXCEPT
PER SHARE DATA]
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Total revenues $ 11,262 $ 12,465 $ 14,916 $ 18,566 $ 22,122 $16,025 $19,383
Operating income 688 933 1,346 1,672 2,393 1,529 1,951
Net income $ 438 $ 612 $ 840 $1,057 $1,406 $890 $1,194
Diluted earnings per
share (1) $ 0.11 $ 0.16 $ 0.21 $ 0.26 $ 0.33 $ 0.21 $ 0.28
Number of shares used in
calculation of diluted
earnings per share (1) 3,774 3,851 3,965 4,113 4,210 4,217 4,337
<CAPTION>
AS OF AS OF
----------------------------------------------------------------------------- ----------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 25, JUNE 26, JUNE 25,
1993 1994 1995 1996 1997 1997 1998
---------------- -------------- --------------- -------------- -------------- ----------- ----------
[IN THOUSANDS]
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equivalents $1,036 $1,674 $2,121 $1,317 $2,790 $2,070 $2,904
Working capital 1,097 1,764 2,238 2,963 5,027 4,174 5,829
Total assets 6,137 6,901 7,582 8,248 12,909 12,050 14,002
Long-term debt and capital
lease obligations 652 634 143 56 2,112 2,197 1,849
Total shareholders' equity 2,777 3,394 4,287 5,446 6,937 6,368 8,199
</TABLE>
(1) Adjusted to reflect (i) 3-for-2 stock split effective October 31, 1996 and
(ii) 3-for-2 stock split effective April 17, 1998.
- --------------------------------------------------------------------------------
8
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY
THE FOLLOWING FACTORS WHEN EVALUATING AN INVESTMENT IN THE SHARES OFFERED BY
THIS PROSPECTUS. SPECIAL NOTE: CERTAIN STATEMENTS SET FORTH BELOW CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE REFORM ACT. SEE "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS" FOR FACTORS RELATING TO SUCH
STATEMENTS.
COMPETITION. The haircare industry, in which the Company operates, is
highly competitive, with limited barriers to entry. In every locality in which
the Company operates, there are competitors offering similar services and
products. These competitors include single salon operators and national chains
such as Regis and Great Clips. In many cases, the Company faces one or more
competitors within malls in which it operates, including companies operating
salons as departments within department stores, salon chains, independently
owned salons, and salons operating under franchises from other franchising
companies. Any increased competition from these competitors could negatively
impact sales volume at both franchised and Company-owned salons. In turn, this
would reduce royalty revenue from franchised locations and reduce Company-owned
salons' revenue and profits.
COMPETITION FOR SITES. The Company's ability to grow depends upon its
ability to obtain attractive retail sites for new Company-owned salons and the
ability of its franchisees to obtain attractive retail sites for new franchised
salons. A salon's success depends significantly on the quality of the site
selected for a new salon. The Company and its franchisees face intense
competition for retail sites from other companies operating in the haircare
industry, including Regis and Great Clips, and from retailers operating in other
industries. Competition for retail sites could result in higher rents and other
occupancy costs for new salons and a failure of the Company or its franchisees
to obtain adequate retail sites could have a material adverse effect on the
business, results of operation and financial condition of the Company.
WAL-MART GROWTH. The Company's growth plans anticipate opening a
substantial number of new Cost Cutters salons within Wal-Mart Supercenters. The
Company has not entered into any written agreements with respect to new salon
openings in Wal-Mart Supercenters. Typically, Wal-Mart will specify the
locations available for new salons. In order to maintain its relationship with
Wal-Mart, the Company's policy has been to open salons in the locations
specified by Wal-mart. If no franchisee is available or willing to open a salon
in the location specified by Wal-Mart, the Company's policy has been to open a
Company-owned salon in the specified location. The Company's relationship with
Wal-Mart is not exclusive. Wal-mart also grants new salon opportunities in its
Supercenters to Regis pursuant to an arrangement which the Company believes is
similar to its arrangement with Wal-Mart. The Company's business, results of
operations and financial condition could be adversely effected if Wal-mart
discontinues offering salon opportunities to the Company, increases the
allocation of new salon opportunities to Regis or changes its business or
marketing plans.
DEPENDENCE ON FRANCHISEES. The continued growth of the Company is, in
part, dependent upon its ability to retain qualified franchisees and to attract
new franchisees. Although the Company has established criteria to evaluate
prospective franchisees, there can be no assurance that the Company's existing
or future franchisees will have the business abilities or access to financial
resources necessary to open new locations or that they will successfully develop
and operate these salons in a manner consistent with the Company's standards.
The Company's largest franchisee owns 61 salons, and seven other franchisees
each own more than 20 salons. Together, these eight franchisees own an aggregate
total of 272 salons, representing approximately 29% of the total number of
franchised salons. Although the Company presently has no reason to believe that
it will occur, if any one or more of these franchisee's business fails or
declines substantially, the Company's business, results of operations and
financial conditions could be materially adversely effected.
The ability of the Company to meet its growth objectives depends not
only on the Company's ability to find qualified franchisees for new locations
but also on the ability of these franchisees to obtain financing or investment
capital adequate to meet their market development obligations. In addition, the
development of a franchised location depends on a number of factors, some of
which are beyond the control of both the Company and the franchisee, including
the ability to obtain various government permits and licenses necessary to
operate a franchised location. The Company is subject to various federal and
state laws relating to the franchisor-franchisee relationship. The failure by
the Company to comply with these laws could subject the Company to liability to
franchisees and to fines or other penalties imposed by governmental authorities.
9
<PAGE>
ACCOUNTS RECEIVABLE. At June 25, 1998, the Company's accounts and notes
receivable were approximately $4,100,000 (net of reserves). The Company has
reserved for accounts and notes receivable in accordance with historical losses
experienced by the Company, however, there can be no assurance that these
amounts will be adequate.
DEPENDENCE ON SUPPLIERS. The Company is dependent upon its relationship
with its suppliers to sell the Company's beauty products, salon equipment, and
consumer appliances which the Company, in turn, sells to its customers through
Company-owned salons and sells to franchisees. Although the Company presently
has no reason to believe that it will occur, if major beauty product suppliers
cancel their distribution agreements with the Company, this would cause a
reduction in the sale of beauty products and the loss of those corresponding
margins.
LIMITED HISTORICAL TRADING; POTENTIAL VOLATILITY OF STOCK PRICE. Prior
to this Offering, only approximately 34.6% of the issued and outstanding Common
Stock is beneficially owned by non-affiliates of the Company. As a result, the
market price of the Common Stock has been established through only limited
trading on the Nasdaq National Market. Because of this limited trading, the
market price of the Common Stock has been highly volatile, changing
significantly in response to limited trading volumes. Although this Offering is
expected to add liquidity to the market for the Common Stock, there can be no
assurance that a significant trading market for the Common Stock will develop or
be sustained after the Offering. The Underwriter has told the Company that it
intends to make a market in the Common Stock after the Offering, but it has no
obligation to continue making a market and can unilaterally cease making a
market without advising the Company or its shareholders. The market price of the
Common Stock is also likely to be highly volatile and could fluctuate widely in
response to factors such as actual or anticipated variations in quarterly
results, new products or services by the Company or its competitors, changes in
financial estimates by securities analysts, developments for significant
franchisees of the Company, conditions or trends in the hair care or beauty
industry, changes in market valuations of other hair care companies,
announcements by the Company of significant acquisitions, strategic
partnerships, joint ventures or capital commitments, additions or departures of
key personnel and other events or factors, many of which are beyond the
Company's control. In addition, the stock market in general, and the Nasdaq
National Market in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of the listed companies. These broad market fluctuations may
adversely affect the market price of the Common Stock, regardless of the
Company's operating performance.
COST OF PROTECTION OF TRADEMARKS AND FRANCHISE AGREEMENT ENFORCEMENT.
The Company holds numerous trademarks and service marks registered on the
principal register of the United States Patent & 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. The Company enters into a franchise agreement with each franchisee,
which sets forth the terms of the Company's business relationship with the
franchisee. Pursuant to the franchise agreement, franchisees are granted rights
to use the Company's service marks and agree to operate their businesses in
accordance with the systems, specifications, standards and format developed by
the Company. Historically, the Company has expended considerable resources to
protect its trademarks and service marks and to enforce its franchise
agreements. Litigation to protect trademarks and service marks or to enforce
franchise agreements could result in significant expense to the Company and may
have a material adverse affect on the Company's results of operations in any
particular period, even if such litigation results in a favorable determination
for the Company.
DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent on the
management skills of its key employees including, Florence F. Francis, Frederick
A. Huggins, Jr., John A. Fox, Connie Boltinghouse, John W. Francis, James W.
George, J. Brent Hanson and Kathryn L. Waycaster (see "Management"). The loss of
the services of any one of these persons would be disruptive and could have a
material adverse effect on the business, results of operation and financial
condition of the Company. Mr. Huggins' employment agreement provides for a term
of employment until September 30, 2000. Mr. Fox's employment agreement provides
for a term of employment until September 30, 2002. The Company has not entered
into any employment agreement with Ms. Boltinghouse, Mr. Francis, Mr. George,
Mr. Hanson or Ms. Waycaster. The Company is the beneficiary of key-person life
insurance policies on all of its executives, including policies in the amount of
$1,000,000 each on Florence F. Francis and Frederick A. Huggins, Jr. The
Company's future success also depends in part on its ability to identify, hire
and
10
<PAGE>
retain additional personnel. The inability of the Company to attract or retain
qualified management employees could have a material adverse effect on the
business, results of operation and financial condition of the Company.
CONTROL BY PRINCIPAL OWNER. Florence F. Francis, the Company's
principal shareholder, beneficially owns approximately 60.5% of the outstanding
common stock prior to the Offering and will own approximately 37.1% of the
outstanding Common Stock upon completion of the Offering (33.9% if the
Overallotment Option is exercised in full). As a result of such ownership, prior
to the Offering, Ms. Francis has the ability to elect the Company's entire Board
of Directors and control the affairs of the Company, including all fundamental
corporate transactions such as mergers, consolidations and sale of substantially
all the Company's assets. After the completion of the Offering, Ms. Francis will
continue to have the ability to significantly influence the outcome of elections
of the Company's directors and other matters presented to a vote of
shareholders. In addition, prior to the completion of the Offering, the current
officers and directors of the Company beneficially own approximately 69.2% of
the Company's outstanding Common Stock (including amounts beneficially owned by
Ms. Francis and Mr. Huggins) and will own approximately 47.3% of the outstanding
Common Stock upon completion of the Offering (44.0% if the Overallotment Option
is exercised in full). Accordingly, it should be anticipated that the officers
and directors of the Company will continue to have the ability to significantly
influence the outcome of elections of the Company's directors and other matters
presented to a vote of shareholders.
LIMITATION OF DIRECTORS' LIABILITY. The Company's Articles of
Incorporation provide, as permitted by Minnesota law, that its directors shall
have no personal liability for certain breaches of their fiduciary duties to the
Company. This provision may reduce the likelihood of derivative litigation
against directors and may discourage shareholders from bringing a lawsuit
against directors for a breach of their duty. In addition, the Company's Amended
and Restated Bylaws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Minnesota law.
SHARES ELIGIBLE FOR FUTURE SALE. Approximately 41,000 of the currently
outstanding shares of the Company's Common Stock are "restricted securities," as
defined under the Securities Act of 1933, as amended (the "Securities Act") and
the rules and regulations thereunder. Restricted shares and shares of the
Company's common stock owned by "affiliates" may be publicly sold only by
complying with Rule 144 under the Securities Act unless further registered under
the Securities Act, or some other exemption from further registration thereunder
is available. Sales of substantial amounts of these shares, or even the
potential for such sales, could have an adverse effect on the market price for
shares of the Company's common stock, and could impair the ability of purchasers
of the Shares offered by this Prospectus to resell them to recoup their
investment or make a profit, and the Company's ability to raise capital through
the sale of its equity securities.
RIGHTS TO ACQUIRE SHARES. As of August 27, 1998, the Company had
outstanding options and warrants to purchase 710,750 shares of Common Stock at
exercise prices ranging from $1.05 to $9.00 per share, with a weighted average
exercise price of approximately $2.36 per share. During the terms of the
outstanding options and warrants, the holders thereof will have the opportunity
to profit from an increase in the market price of the Company's Common Stock
with resulting dilution to the holders of Common Stock who purchased shares for
a price higher than the respective exercise price. The existence of such stock
options and warrants may adversely affect the terms on which the Company can
obtain additional financing, and the holders of such options or warrants can be
expected to exercise or convert those securities at a time when the Company, in
all likelihood, would be able to obtain additional capital by offering shares of
its Common Stock on terms more favorable to the Company than those provided by
the exercise or conversion of such options or warrants.
ABILITY TO ISSUE COMMON STOCK AND PREFERRED STOCK; ANTI-TAKEOVER
DEVICES. The Company is authorized to issue up to 7,500,000 shares of capital
stock in one or more series, the terms of which may be determined at the time of
issuance by the Board of Directors, without further action by the Company's
shareholders, and may include voting rights, preferences as to dividends and
liquidation, conversion and redemptive rights and sinking fund provisions. As of
August 31, 1998, 3,957,802 shares of the Company's Common Stock, $.10 par value,
are outstanding. As of August 31, 1998, the Board of Directors has not
authorized the issuance of any shares of preferred stock. Although the Company
has no present plans to issue any shares of preferred stock, the issuance of
preferred stock in the future could affect the rights of the holders of Common
Stock and thereby reduce the value of common stock. In particular, specific
rights granted to future holders of preferred stock could be used to restrict
the
11
<PAGE>
Company's ability to merge with or sell its assets to a third party, or
otherwise delay, discourage, or prevent a change in control of the Company.
NO DIVIDENDS. No cash dividends have been paid on the common stock of
the Company. It is anticipated that profits, if any, received from operations
will be devoted to the Company's future operations. The Company does not
anticipate the payment of cash dividends on its common stock in the foreseeable
future, and any decision to pay dividends will depend upon the Company's
profitability at the time, cash available therefor, and other factors.
COMPUTER SYSTEMS AND YEAR 2000. Many installed computer systems and
software products are coded to accept only two digit entries in the date code
field. As the year 2000 approaches, these code fields will need to accept four
digit entries to distinguish years beginning with "19" from those beginning with
"20." This inability to recognize or properly treat years beginning with "20"
may cause systems to process financial and operational information incorrectly.
As a result, in less than two years, computer systems and/or software products
used by many companies may need to be upgraded to comply with such year 2000
requirements. The Company is in the process of conducting an assessment of its
computer hardware and software for year 2000 compliance. The Company believes
that the results of this assessment will necessitate an upgrade of its computer
hardware and software to replace obsolete equipment and to ensure that such
hardware and software is year 2000 compliant. The Company does not have a
scheduled completion date for this assessment, but it anticipates that all
necessary upgrades and corrections will be completed before January 1, 2000. The
Company anticipates that the aggregate costs of this upgrade will be $300,000 to
$500,000 and that such costs will be incurred during the next two fiscal years.
The Company is also in the process of replacing its phone system in order to
insure that it is year 2000 compliant. The estimated cost of this phone system
replacement is $60,000. If the Company encounters any unanticipated delays in,
or costs associated with the upgrading of these systems, the Company may incur
additional costs. There also can be no assurance that computer systems operated
by third parties, such as vendors and financial institutions, with which the
Company does business will achieve year 2000 compliance in a timely fashion or
that any delays or problems on their part will not have a material adverse
effect on the Company's business. The Company is also working with its
franchisees to assist them in identifying year 2000 issues. Although the
Company's point of sale software is year 2000 compliant, the Company believes
that many of its franchisee's hardware systems are not year 2000 compliant. The
Company is in the process of developing test procedures to assist its
franchisees in testing the hardware systems for year 2000 compliance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
SELLING SHAREHOLDERS
The Shares are being sold by Florence F. Francis, Chairman of the Board
of Directors, and Frederick A. Huggins, Jr., Chief Executive Officer (each a
"Selling Shareholder" and together the "Selling Shareholders"). Prior to the
Offering, Ms. Francis and Mr. Huggins beneficially own approximately 62.7% of
the Company's outstanding Common Stock. After the consummation of the Offering,
Ms. Francis and Mr. Huggins will beneficially own approximately 39.4% of the
Company's outstanding Common Stock (assuming no exercise of the Overallotment
Option).
As the widow of the Company's founder, Joe Francis, Sr., Ms. Francis
has been involved in the Company's operations since its inception. Most of the
Common Stock beneficially owned by Ms. Francis has been beneficially owned by
her since the founding of the Company. Mr. Huggins has been the Company's Chief
Executive Officer since April 1990 and his current employment agreement with the
Company expires on September 30, 2000. Pursuant to the terms of his initial
employment agreement with the Company, in April 1990 the Company granted to Mr.
Huggins warrants to purchase 112,500 shares of common stock at a per share
exercise price of $1.05 (adjusted to reflect stock splits occurring since that
time). As of September 15, 1998, these warrants are fully exercisable. In
addition, pursuant to the terms of his amended employment agreement with the
Company, in October 1994 the Company granted Mr. Huggins additional warrants to
purchase 112,500 shares of common stock at a per share exercise price of $1.78
(adjusted to reflect stock splits occurring since that time). As of September
15, 1998, 90,000 of these warrants are exercisable. The remaining 22,500
warrants become exercisable on October 1, 1998.
Prior to the Offering, Ms. Francis and Mr. Huggins could only sell the
securities owned by them pursuant to the requirements of Rule 144 promulgated
under the Securities Act. Rule 144 places significant limitations on the ability
of an "affiliate" of the Company, including Ms. Francis and Mr. Huggins, to sell
his or her shares. Neither Ms. Francis nor Mr. Huggins have any contractual
rights to require the Company to register any of the Common Stock owned by them.
Ms. Francis and Mr. Huggins have requested, however, that the Company register a
portion of the Common Stock beneficially owned by them to facilitate
diversification of their personal investment portfolios and to achieve estate
planning goals for each of them.
The Company is undertaking the registration of the Shares to increase
the public float of the Common Stock held by non-affiliated shareholders and to
improve the liquidity of the public trading market for the Common Stock through
an increase in the number of shareholders and the initiation of analyst coverage
of the Company by the Underwriter. See "Limited Historical Trading; Potential
Volatility of Stock Price."
12
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Shares
offered hereby.
PRICE RANGE OF COMMON STOCK
The Common Stock commenced trading on Nasdaq National Market under the
symbol "BBHF" on August 14, 1996. As of September 15, 1998, there were
approximately 576 holders of record of the Common Stock. The table below sets
forth the high and low bid prices for the Common Stock as reported by Nasdaq
during the periods indicated (which reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions and may not represent actual transactions).
All prior year prices have been adjusted to reflect the 3-for-2 stock split
effective October 31, 1996 and the 3-for-2 stock split effective April 17, 1998:
QUARTER HIGH LOW
------- ---- ---
1996
----
Quarter Ended December 28, 1995 $ 4.00 $3.33
Quarter Ended March 28, 1996 $ 4.55 $3.22
Quarter Ended June 27, 1996 $ 5.78 $3.67
Quarter Ended September 26, 1996 $ 5.55 $3.87
1997
----
Quarter Ended December 26, 1996 $ 5.33 $3.50
Quarter Ended March 27, 1997 $ 5.50 $4.33
Quarter Ended June 26, 1997 $ 6.00 $4.33
Quarter Ended September 25, 1997 $ 5.75 $4.59
1998
----
Quarter Ended December 25, 1997 $ 6.33 $4.17
Quarter Ended March 26, 1998 $ 9.00 $5.17
Quarter Ended June 25, 1998 $11.00 $7.17
June 26, 1998 through September 15, 1998 $10.00 $7.25
13
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data and other
operating data of the company. The selected consolidated financial data set
forth below for the fiscal years ended September 28, 1995, September 26, 1996
and September 25, 1997 have been derived from the financial statements of the
Company which have been audited by Ernst & Young LLP, independent auditors,
whose report thereon is included elsewhere in this Prospectus. The consolidated
financial data for the years ended September 30, 1993 and September 29, 1994
have been derived from audited financial statements not included in this
Prospectus. The selected consolidated financial data for the nine months ended
June 26, 1997 and June 25, 1998 has been derived from the unaudited financial
statements of the Company included elsewhere in this Prospectus. In the opinion
of management, the unaudited financial statements include all adjustments,
consisting of normal occurring accruals, considered necessary for a fair
presentation of the financial position and results of operations for these
periods. These historical results are not necessarily indicative of the results
to be expected in the future. The following table is qualified by reference to
and should be read in conjunction with the consolidated financial statements,
related notes thereto and other financial data included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
----------------------------------------------------------------------------- ----------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 25, JUNE 26, JUNE 25,
1993 1994 1995 1996 1997 1997 1998
---------------- -------------- --------------- -------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
[IN THOUSANDS, EXCEPT
PER SHARE DATA]
CONSOLIDATED
STATEMENTS OF
OPERATIONS DATA:
Revenues:
Franchise royalties $4,528 $4,845 $5,492 $6,035 $7,214 $5,175 $6,157
Franchise fees 368 450 756 1,181 928 647 677
Company-owned salons 912 1,025 1,364 2,940 4,611 3,326 4,366
Beauty products and
equipment 5,252 5,940 7,137 8,019 8,885 6,461 7,674
Other 202 205 167 391 484 416 508
------ ------ ------ ------ ------ ------ ------
Total Revenues 11,262 12,465 14,916 18,566 22,122 16,025 19,383
Operating income 688 933 1,346 1,672 2,393 1,529 1,951
Net income $438 $612 $840 $1,057 $1,406 $890 $1,194
Diluted earnings per
share (1) $ 0.11 $ 0.16 $ 0.21 $ 0.26 $ 0.33 $ 0.21 $ 0.28
Number of shares used in
calculation of diluted
earnings per share (1) 3,774 3,851 3,965 4,113 4,210 4,217 4,337
<CAPTION>
AS OF AS OF
----------------------------------------------------------------------------- ----------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 25, JUNE 26, JUNE 25,
1993 1994 1995 1996 1997 1997 1998
---------------- -------------- --------------- -------------- -------------- ----------- ----------
[IN THOUSANDS]
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash equivalents $1,036 $1,674 $2,121 $1,317 $2,790 $2,070 $2,904
Working capital 1,097 1,764 2,238 2,963 5,027 4,174 5,829
Total assets 6,137 6,901 7,582 8,248 12,909 12,050 14,002
Long-term debt and capital
lease obligations 652 634 143 56 2,112 2,197 1,849
Total shareholders' equity 2,777 3,394 4,287 5,446 6,937 6,368 8,199
</TABLE>
(1) Adjusted to reflect (i) 3-for-2 stock split effective October 31, 1996 and
(ii) 3-for-2 stock split effective April 17, 1998.
<TABLE>
<CAPTION>
AS OF AS OF
----------------------------------------------------------------------------- ----------------------
SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 25, JUNE 26, JUNE 25,
1993 1994 1995 1996 1997 1997 1998
---------------- -------------- --------------- -------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Number of Salons 597 641 700 786 935 947 967
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's financial statements for the nine months ended June 26, 1997 and June
25, 1998 (unaudited) and for the years ended September 26, 1996 and September
25, 1997 which are incorporated herein by reference and attached hereto. Certain
statements set forth below constitute "forward-looking statements" within the
meaning of the Reform Act. See "Special Note Regarding Forward-Looking
Statements" for factors relating to such statements.
GENERAL
The Company is in the business of franchising three different hair care
salon concepts that 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")
or "We Care Hair(R)". The Company also has a limited number of franchises
operating under the names "The Barbers, Hairstyling for Men & Women(R)", "Family
Haircut Stores" and "The Hair Performers". The Company currently sells only
franchises in Cost Cutters, City Looks and We Care Hair.
Each franchise concept is specifically tailored to satisfy a particular
market niche. Cost Cutters franchises provide value-priced hair care services
targeted to 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 967 franchised and Company-owned salons in
operation as of June 25, 1998, compared to 947 at June 26, 1997. The Company
primarily earns revenue through its franchise operations from initial franchise
fees, franchise royalties, and sales of beauty products and equipment to the
franchisees.
The Company operates on a 52/53 week year basis. The fiscal year ending
September 24, 1998 will include 52 weeks of operations. The fiscal years ended
September 25, 1997, September 26, 1996, and September 28, 1995 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:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
---------------------------------------------- --------------------
SEPTEMBER 28, SEPTEMBER 26, SEPTEMBER 25, JUNE 26, JUNE 25,
1995 1996 1997 1997 1998
--------------- -------------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Franchise royalties 36.8% 32.5% 32.6% 32.3% 31.8%
Franchise fees 5.1% 6.4% 4.2% 4.0% 3.5%
Company-owned salons 9.1% 15.8% 20.8% 20.8% 22.5%
Beauty products & equipment 47.9% 43.2% 40.2% 40.3% 39.6%
Other 1.1% 2.1% 2.2% 2.6% 2.6%
----- ----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Franchise operations 15.4% 14.7% 13.8% 14.1% 13.0%
Company-owned salons 10.0% 16.8% 20.1% 20.0% 21.8%
Distribution & general
administration 65.6% 59.5% 55.3% 56.3% 55.2%
----- ----- ----- ----- -----
OPERATING INCOME 9.0% 9.0% 10.8% 9.6% 10.0%
OTHER INCOME (EXPENSE):
Interest income 0.7% 0.7% 0.8% 0.6% 0.8%
Interest expense -0.2% -0.2% -0.6% -0.6% -0.8%
Net gain (loss) on disposal
of assets 0.0% 0.3% 0.0% 0.0% 0.6%
----- ----- ----- ----- -----
NET INCOME BEFORE INCOME TAXES 9.5% 9.8% 11.0% 9.6% 10.6%
INCOME TAXES 3.9% 4.1% 4.6% 4.0% 4.5%
----- ----- ----- ----- -----
NET INCOME 5.6% 5.7% 6.4% 5.6% 6.1%
===== ===== ===== ===== =====
</TABLE>
15
<PAGE>
NINE MONTHS ENDED JUNE 25, 1998 COMPARED TO NINE MONTHS ENDED JUNE 26, 1997
REVENUES. The Company's total revenues were $19,383,481 for the first
nine months of fiscal 1998, an increase of 21.0% over the comparable period of
fiscal 1997. Franchise royalties for the first nine months of fiscal 1998 were
$6,157,388, an increase of 19.0% over the comparable period of fiscal 1997. The
increase in franchise royalties was due to an increase in the number of salons
in operation in the first nine months of fiscal 1998 as compared to the same
period of fiscal 1997 and an increase in average per store sales by franchised
salons. For the nine months ended June 25, 1998, franchise fee revenue increased
$30,058 to 677,126, or 4.6%, over the comparable period of fiscal 1997. This
represents openings of 58 franchised locations and four Company-owned salons
versus 51 franchised locations and four Company-owned salons for the first nine
months of fiscal 1997. Revenue from Company-owned salons was $4,366,445 for the
first nine months of fiscal 1998, an increase of 31.3% over the comparable
period of fiscal 1997. The increase in revenue from Company-owned salons is due
primarily to the addition of new Company-owned salons and sales growth at salons
opened in fiscal 1997. For the nine months ended June 25, 1998, revenue from
beauty products and equipment was $7,674,415, an increase of 18.8% over the
first nine months of fiscal 1997. The increase in beauty product and equipment
sales was attributable to the addition of new product lines, merchandising
programs and an increase in the total number of new salons opened during the
first nine months of fiscal 1998 compared to the same period of fiscal 1997.
COSTS & EXPENSES - FRANCHISE OPERATIONS. Total franchise operations
expenses were $2,513,383 for the first nine months of fiscal 1998. This was an
increase of 11.2% over the first nine months of fiscal 1997. The nine month
increase was due to growth in field staff and related travel to service new
salons including the new We Care Hair salons, and general salary increases
averaging about 4.0%. In addition, the operating expenses of the first quarter
of fiscal 1998 include travel and meeting costs for a franchisee convention held
at a remote location. The franchisee convention was held locally in the first
quarter of fiscal 1997.
COSTS & EXPENSES - COMPANY-OWNED SALONS. The Company presently owns and
operates 27 salons: 26 operate as Cost Cutters salons and one operates as a City
Looks salon. Twenty of the Cost Cutters salons operate inside Wal-Mart
Supercenters. Operating costs for the first nine months of fiscal 1998 were
$4,220,867 versus $3,210,315 for the comparable period of fiscal 1997. The
increase was primarily due to the costs associated with increased sales of
services and beauty products in the salons.
COSTS & EXPENSES - DISTRIBUTION AND GENERAL ADMINISTRATION. Total
operating expenses for distribution and general administration for the first
nine months of fiscal 1998 were $10,698,636 as compared to $9,025,314 for the
first nine months of fiscal 1997, an increase of 18.5%. Most of this increase
was due to increased cost of products and equipment sold, which corresponds to
the increase in sales of products and equipment. For the nine months ended June
25, 1998, cost of products and equipment sold was $5,937,042 versus $4,911,714
during the comparable period of fiscal 1997, an increase of 20.9%. Margins on
the sale of products and equipment were 22.6% for the first nine months of
fiscal 1998. This compares with 24.0% for the same period of fiscal 1997. The
decrease in margins is primarily to due to changes in product mix. Salaries and
benefits were $2,546,859 for the first nine months of fiscal 1998. This compares
with $2,185,036 for the comparable period of fiscal 1997 and represents an
increase of 16.6%. The increase was due to increases in staff size, as well as
an average increase in salaries of 4.0%. General and administrative expenses for
the nine months ended June 25, 1998 increased by $286,171 to $2,214,735, or
14.8%, over the comparable period of fiscal 1997. A large portion of the
increase is due to additional professional fees associated with the acquisition
of We Care Hair salons, amortization of the We Care Hair investment and
increases in reserves for bad debts.
OPERATING INCOME. Operating income was $1,950,595 for the first nine
months of fiscal 1998. This compares to $1,528,788 for the comparable period of
fiscal 1997, an increase of 27.6%. Operating income as a percent of revenue was
10.1% for the first nine months of fiscal 1998. This compares to 9.5% for the
comparable period of fiscal 1997.
INTEREST INCOME AND EXPENSE. Interest income was $156,557 for the first
nine months of fiscal 1998, an increase over the comparable period of fiscal
1997 of 51.9%. Interest expense was $156,107 for the first nine months of fiscal
1998. This compares to $95,577 for the comparable period of fiscal 1997. The
increase in interest expense for the first nine months of fiscal 1998 was due to
the debt incurred by the Company to acquire the We Care Hair chain.
16
<PAGE>
NET GAIN(LOSS) ON DISPOSAL OF ASSETS. During the nine months ended June
25, 1998, the Company sold five Company-owned salons and miscellaneous assets
for a net gain of $108,302. In fiscal 1997, the Company sold five Company-owned
salons for a net loss of $3,105.
INCOME TAXES. The Company's effective tax rate for the first nine
months of fiscal 1998 was 42.0%, versus a rate of 41.9% for the first nine
months of fiscal 1997.
NET INCOME. The Company's net income for the first nine months of
fiscal 1998 was up 34.2% to $1,194,347. Earnings per share for the first nine
months were $.28 per diluted share as compared to $.21 for the comparable period
of fiscal 1997. Earnings per share have been adjusted to reflect the April 17,
1998 3-for-2 stock split.
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 & 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 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 & 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 the 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 & 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
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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
$.33 per share. This is an increase of $349,059, or 33.0%, over fiscal 1996 net
income and an increase per share of $.07. Earnings per share have been adjusted
to reflect the April 17, 1998 3-for-2 stock split.
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 & 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 & 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.
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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
3.0% due to an increased emphasis on the sale of private label products.
COSTS & 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.
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%, compared to 41.0% for fiscal 1995.
NET INCOME. The Company's net income for fiscal 1996 was $1,057,354, or
$.26 per share. This is an increase of $217,444, or 25.9%, over fiscal 1995 net
income and an increase per share of $.05. Earnings per share have been adjusted
to reflect the April 17, 1998 3-for-2 stock split.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generally been able to finance the routine expansion of
its business from current cash on hand, cash generated from operations, and the
Company's line of credit. The Company has financed acquisitions by obtaining
additional bank debt. The Company expects capital expenditures during fiscal
1998 to be approximately $900,000 to $1,000,000, primarily due to the addition
of several new Company-owned salons, routine replacement of office equipment and
the addition of a new warehouse.
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.
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 June 25, 1998, were
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$1,268,619 and $930,560, respectively. Both loans are secured by all assets of
the Company. On August 28, 1998, the Company paid approximately $900,000 as
payment in full on the second loan. The Company currently has a line of credit
from the same lender in the amount of $1,500,000 which carries an interest rate
at the bank's prime rate which expires June 30, 1999.
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.
YEAR 2000
The Year 2000 issue focuses on whether computer systems will properly
recognize date-sensitive information in the year 2000 and beyond. Many
installed computer systems and software products are coded to accept only two
digit entries in the date code field. As the year 2000 approaches, these code
fields will need to accept four digit entries to distinguish years beginning
with "19" from those beginning with "20." This inability to recognize or
properly treat the Year 2000 may cause systems to process financial and
operational information incorrectly. As a result, in less than two years,
computer systems and/or software products used by many companies may need to be
upgraded to comply with such year 2000 requirements. The Company is dependent on
computer processing in its business activities and the year 2000 issue creates
risk for the Company from unforeseen problems in the Company's computer system
and from third parties with whom the Company does business. The failure of the
Company's computer system and/or third parties computer systems from unforeseen
problems could have a material adverse effect on the Company's ability to
conduct its business.
The Company is in the process of conducting an assessment of its computer
hardware and software for year 2000 compliance. The Company believes that the
results of this assessment will necessitate an upgrade of its computer hardware
and software to replace obsolete equipment and to ensure that such hardware and
software is year 2000 compliant. The Company does not have a scheduled
completion date for this assessment, but it anticipates that all necessary
upgrades and corrections will be completed before January 1, 2000. The Company
anticipates that the aggregate costs of this upgrade will be $300,000 to
$500,000 and that such costs will be incurred during the next two fiscal years.
The Company is also in the process of replacing its phone system in order to
insure that it is year 2000 compliant. The estimated cost of this phone system
replacement is $60,000. If the Company encounters any unanticipated delays in,
or costs associated with the upgrading or replacement of these systems, the
Company may incur additional costs. The Company has also contacted each of its
vendors and suppliers who provide computer hardware and software products to the
Company on a regular basis with regard to year 2000 compliance. The Company has
received assurances from these vendors and suppliers that the hardware and
software currently being purchased by the Company from these vendors and
suppliers is year 2000 compliant. The Company is in the process of developing
procedures to test hardware and software products previously purchased from
these vendors and suppliers to determine if those products are year 2000
compliant.
The Company is also working with its franchisees to assist them in
identifying year 2000 issues. Although the Company's point of sale software is
year 2000 compliant, the Company believes that many of its franchisee's hardware
systems are not year 2000 compliant. The Company is in the process of developing
test procedures to assist its franchisees in testing the hardware systems for
year 2000 compliance. The Company does not anticipate incurring significant
costs to assist its franchisees.
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BUSINESS
BUSINESS DEVELOPMENT
GENERAL. The Company develops, franchises, services and operates a
system of hair care salons, which provide hair care services and products for
men, women and children. The Company primarily franchises its salon concepts to
third parties. As of June 25, 1998, the Company's franchise system had 940
salons located in 45 states and three foreign countries. As of June 25, 1998,
the Company also owned and operated 27 salons in the United States.
The Company markets three salon concepts, which cover a broad spectrum
of the hair care market. Cost Cutters salons provide value-priced hair care
services to price sensitive customers. Cost Cutters is the Company's primary
salon concept with 812 franchised and Company-owned salons and approximately
$128.7 million of salon retail sales for the nine months ended June 25, 1998.
City Looks salons target customers seeking superior, high-fashion hair care
services, as well as personal grooming and spa services, such as facials,
manicures, massages and tanning. As of June 25, 1998, there were 74 franchised
and Company-owned City Looks salons in operation, which generated approximately
$16.9 million of salon retail sales for the nine months ended June 25, 1998. The
Company's We Care Hair salons, which provide hair care, tanning, nail care and
waxing services primarily to younger adults, is positioned between the other two
salon concepts. As of June 25, 1998, there were 81 franchised We Care Hair
salons, which had approximately $9.7 million of salon retail sales for the nine
months ended June 25, 1998.
The Company's franchising program is designed to develop successful
hair salons that can generate long-term revenue growth. To achieve this
objective, the Company selectively grants franchises to prospective franchisees
with sufficient financial resources. The Company believes that it is this
selectivity that results in less than 4% of new salons in the Company's system
failing in the first five years of operation. Expansion of the franchise system
has occurred primarily through awards of franchises to existing franchisees as
well as selective sales to new franchisees. The Company also enters into
long-term, multiple salon development arrangements with franchisees for specific
territories. Franchisees opened 69 new salons during fiscal 1997 and 58 new
salons during the nine months ended June 25, 1998. Under its franchise
agreements, the Company receives initial franchise fees for new salons and
franchise royalties based on a percentage of salon sales. The Company provides
operational training, advertising and marketing services and financial analysis
services to its franchisees. Franchise royalties and fees represented 36.8% of
revenues for fiscal 1997 and 35.3% of revenues for the nine months ended June
25, 1998.
The Company distributes professional hair care and beauty products,
salon equipment and consumer hair care and beauty products to its franchisees.
Hair care and beauty products, such as shampoos, conditioners and finishing
products, include private label and national brands that are manufactured by
third parties. The Company offers promotional programs to franchisees, such as
additional training services, special merchandising kits and product rebates
based on sales volume, to encourage product sales to franchisees and to compete
with third party distributors. Sales of hair care and beauty products and
equipment represented 40.2% of revenues for fiscal 1997 and 39.6% of revenues
for the nine months ended June 25, 1998.
In addition to its primary franchise strategy, the Company is
developing salons under an arrangement with Wal-Mart to place Cost Cutters
salons inside new Wal-Mart Supercenters. The Company is currently one of two
hair care vendors locating its salons within Supercenters. In this arrangement,
the Company is granted rights to new salon locations as Wal-Mart develops new
sites. The Company leases the salon space from Wal-Mart and either develops the
salon directly or arranges for a franchisee to own and operate the salon. As of
June 25, 1998 there were 143 Cost Cutters salons in Wal-Mart Supercenters, 20 of
which are Company-owned salons and 123 of which are franchised salons. After
development of a Company-owned Wal-Mart salon, the Company may seek to sell the
salon to a franchisee. The Company is also developing Cost Cutters salons for
outlet malls. These salons have an increased emphasis on sales of hair care and
beauty products as well as hair care services. The Company has opened 14 salons
in outlet malls.
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
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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 salons 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 salons since 1995. Most of these new salons 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 139 "We Care Hair(R)" salons from We
Care Hair Development, Inc. 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. The Company began offering We Care Hair franchises in June 1997.
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 965 salons (as of September 2, 1998)
worldwide. In the revenue figures set forth in this Prospectus, "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. Salons
operating under The Barbers, The Hair Performers, and the Family Haircut Stores
names are few in number. As a result, they are treated substantially similar to
City Looks or Cost Cutters franchises. The information with respect to number of
stores, 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 number of
stores, 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 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,
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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 provide hair care services,
tanning, nail care, and waxing services targeted to men and women between the
ages of 18 and 40. 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 26 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 discounts as a result of the Company's
purchasing power. In connection with the product distribution aspects of its
business, 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.
23
<PAGE>
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 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. In addition, the Company has begun locating
salons at product outlet centers or "outlet malls" and will continue to
pursue opportunities in those areas.
EXPANSION TO NEW MARKETS. Although the Company intends to expand and build
upon its existing markets in an effort to increase its market share in
those areas, the Company is also committed to introducing its franchise
concepts into new markets. Expansion may come from the granting of
franchises in geographic areas where the Company currently has only a
limited number of salons, the continued development of Wal-Mart
Supercenter salons, or acquisitions of suitable candidates.
24
<PAGE>
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 salons,
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 12, 1998, the Company had 325 employees. The
Company employed 96 full-time and 3 part-time employees at its corporate
headquarters and 124 full-time and 102 part-time employees at its Company-owned
salons. The Company considers its employee relations to be good. None of the
Company's employees is 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 salon 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.
FRANCHISE LOCATIONS AND DEVELOPMENT. As of June 25, 1998, there were
812 franchised and Company-owned Cost Cutters and Family Haircut Store locations
in operation, 74 franchised and Company-owned City Looks, The Barbers and Hair
Performers locations in operation, and 81 franchised We Care Hair locations in
operation. Franchised and Company-owned salons operate in diverse locations
throughout the United States; in addition, 23 salons operate in France, two
salons operate 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 September 2, 1998, the Company has a total of 965
franchised and Company-owned salons.
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.
25
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information concerning the directors and
executive officers of the Company, including information provided by them as to
their principal occupations for the past five years and, with respect to the
directors of the Company, certain other directorships held by them:
<TABLE>
<CAPTION>
NAME POSITION WITH COMPANY AGE DIRECTOR SINCE
- ---- --------------------- --- --------------
<S> <C> <C> <C>
Florence F. Francis Chairman of the Board 62 1989
Frederick A. Huggins, Jr. President, Chief Executive Officer, and Director 63 1988
Connie Boltinghouse Vice President of National Distribution 55 ----
John A. Fox Vice President of Development 60 ----
James W. George Vice President of Franchise Services 40 ----
J. Brent Hanson Vice President and Chief Financial Officer 44 ----
Donna R. Hazelton Vice President of Human Resources 42 ----
Patricia D. Kessler Vice President of Franchise Compliance & Corporate 47 ----
Secretary
Kathryn L. Waycaster Vice President of Corporate Salon Operations 46 ----
John W. Francis Vice President of Credit and Strategy 31 ----
Marcia J. Bystrom Director 53 1995
David E. Emerson Director 63 1988
Richard H. King Director 73 1986
James L. Reissner Director 58 1991
Susan F. Goldstein Director 40 1995
James R. Fyffe Director 65 1998
</TABLE>
Ms. Francis has been Chairman of the Board of Directors of the Company
since April 1994, and previously served as Vice-Chairman of the Board of
Directors from August 1993. She has been a director of the Company since January
1989. She is a major shareholder of the Company and has directed public
relations and franchisee relations for the Company since February 1988. In
addition, Ms. Francis has also been involved in public relations and franchisee
relations since the inception of the Company. See "Selling Shareholders" and
"Principal and Selling Shareholders."
Mr. Huggins joined the Company as a member of its Board of Directors in
January 1988 and became President and Chief Executive Officer in April 1990. Mr.
Huggins has over twenty-five years of franchising experience. He was the Vice
President of the Fast Food and Restaurant Division of International Multifoods
Corporation from June 1982 to March 1990, and was the President of Mister Donut
of America, Inc., a subsidiary of International Multifoods Corporation, from
January 1985 to March 1990. Prior to that, Mr. Huggins worked in various
franchise-related capacities for Dunkin' Donuts, Inc., Dutch Pantry Restaurants
and Pizza Hut, Inc. See "Selling Shareholders" and "Principal and Selling
Shareholders."
Ms. Boltinghouse rejoined the Company to become Vice President of
National Distribution in October 1996. Ms. Boltinghouse was previously employed
by the Company from 1990 to 1993 in the position of Director of Franchise
Operations and Education. From 1993 to 1996, Ms. Boltinghouse was employed by
Brookfield Assemblies of God in the position of Executive Pastor of Ministries.
Ms. Boltinghouse was employed by Mister Donut of America, a division of
International Multifoods Corporation, from 1984 to 1990 in the position of
Director of Training School and Product Development.
Mr. Fox has been Vice President of Development of the Company since
January 1993, and was Vice President of Franchise Sales of the Company from
December 1991 to January 1993. He was National Sales Manager for the Cost
Cutters division of the Company from April 1990 to December 1991. Mr. Fox
previously worked as Director of Development for Mister Donut of America from
August 1984 to March 1990.
Mr. George has been Vice President of Franchise Services for the
Company since June 1992. He was Vice President of Franchise Services - Cost
Cutters from January 1989 to June 1992. He was Vice President of Marketing -
Cost Cutters from October 1985 to January 1989. He was Regional Marketing
Manager for USA Cafes
26
<PAGE>
from June 1984 to September 1985. Mr. George was employed by International Dairy
Queen, Inc. as Regional Marketing Manager from July 1982 to May 1984 and as a
Store Opening Specialist from March 1981 to June 1982.
Mr. Hanson has been Vice President and Chief Financial Officer of the
Company since January 1989. He was Vice President and Chief Financial Officer of
Determan Marketing Corporation from August 1987 until November 1988. Mr. Hanson
was employed by the Haagen-Dazs Company, Inc. from January 1985 until August
1987, first as General Accounting Manager, then as Sales and Distribution
Accounting Manager. He was employed by The Pillsbury Company from January 1976
until December 1984 in various accounting management positions, the most recent
being Warehousing Accounting Manager - US Foods Division.
Ms. Hazelton has been the Vice President of Human Resources since April
1997. She has held various human resource positions for The Barbers since
February 1990, most recently that of the Director of Human Resources.
Ms. Kessler has been associated with the Company since November 1971.
She has been the Vice President of Franchise Compliance since April 1997. She
was the Corporate Secretary of the Company from August 1988 to August 1991. Ms.
Kessler was Assistant to the President from July 1983 to September 1989, was
Franchise Compliance Officer from February 1988 to April 1997, and was
reappointed Corporate Secretary in December 1992.
Ms. Waycaster has been Vice President of Corporate Salon Operations
since April 1997. She was Director of Corporate Salons from October 1994 to
April 1997. From February 1991 to May 1994 Ms. Waycaster was employed by The
Hair Cuttery, Falls Church, Virginia, most recently as the Director of
Education.
Mr. Francis has been Vice President of Strategy and Credit since April
1998. Prior to that time, Mr. Francis held various positions with the Company.
He was We Care Hair, Inc. Liaison from January 1997 to April 1998. From October
1995 to January 1997 Mr. Francis served as Marketing Manager for the Company.
From April 1994 to October 1995 and from May 1991 to October 1992, Mr. Francis
worked as an International Division Representative for the Company. From October
1992 to April 1994, Mr. Francis was a Franchise Sales Representative.
Ms. Bystrom has been a director of the Company since January 1995. Ms.
Bystrom has been an Associate Vice President of Dean Witter Reynolds, Inc. since
1997. From 1985 to 1997 she was an Assistant Vice President of Piper Jaffray,
Inc. From 1982 to 1985, she was Owner and Manufacturer's Representative of
Bystrom Sales Company. She sits on the Board of Directors of Minnesota
Cooperation Office for Job Creation, Inc., Noah's Ark Senior Housing, Inc.,
Minnesota Special Olympics, and the James J. Hill Library.
Mr. Emerson became a director of the Company in January 1988. He is
currently Director, Graduate Program in Organizational Leadership and has been a
Professor of Accounting and Finance at the College of St. Catherine, St. Paul,
Minnesota, since 1980. Mr. Emerson is a certified public accountant.
Mr. King has been a director of the Company since April 1986 and a
self-employed business and financial consultant since January 1988. He was the
Vice President of Corporate Development for the Company from April 1986 until
December 1987. Prior to joining the Company, he was associated with
International Multifoods Corporation, Minneapolis, Minnesota, initially as its
Controller for approximately two years, and then as its Vice President-Finance
for approximately 15 years. Mr. King also acts as an advisor to the Company's
401(k) Plan.
Mr. Reissner has been a director of the Company since December 1991. He
is currently President and Chief Operating Officer of Activar, Inc. Mr. Reissner
was the Chief Financial Officer of Activar, Inc. from January 1993 through June
1996. He has also been a director of Toro Credit Company since March 1991; a
director of Vermillion State Bank since January 1993; and a director of Intek,
Inc. since January 1995. From January 1991 to December 1992 he was a
self-employed banking and financial consultant. He was the Managing Director of
the Minnesota Region for First Bank Systems from 1985 until December 1990. From
1980 to 1985, he was the Managing Director of the Metro Region for First Bank
Systems.
Ms. Goldstein has been a director of the Company since December 1995.
Ms. Goldstein is President of the Joe Francis Haircare Scholarship Foundation.
Ms. Goldstein was employed by CC Pittsburgh, Inc., which operated
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<PAGE>
Cost Cutters franchises, as Operations Manager from March 1995 to March 1996.
From 1985 to 1995, Ms. Goldstein was a homemaker. From 1983 to 1985, she was a
Sales Representative for Control Data Business Corporation in Chicago, Illinois.
From 1980 to 1983, she was a Systems Analyst for the Commodity Marketing
Division of Cargill, Inc.
Mr. Fyffe has been a director of the Company since March 1998. From
1994 to 1997, Mr. Fyffe worked as an independent management consultant. Mr.
Fyffe was employed by Thomas Group Inc., a management consulting firm, as an
associate management consultant from 1993 to 1994.
FAMILY RELATIONSHIPS
Florence F. Francis, Chairman of the Board of Directors and major
shareholder, is the widow of Joseph Francis, Sr., who was the founder, former
Chairman of the Board of Directors and a major Shareholder in the Company.
Susan F. Goldstein is the daughter of Florence F. Francis, the Chairman
of the Board and major shareholder.
John W. Francis is the son of Florence F. Francis, the Chairman of the
Board and major shareholder.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of August 28, 1998, the name of the
Selling Shareholders, certain relationships between the Selling Shareholders and
the Company, certain beneficial ownership information with respect to the
Selling Shareholders, and the number and percentage of securities offered hereby
that may be sold from time to time by the Selling Shareholders pursuant to this
Prospectus. There can be no assurance that the securities offered hereby will be
sold.
<TABLE>
<CAPTION>
- ----------------------------- ------------------- --------------------- -------------------- -------------------------
Percentage of
Shares of Common Shares of Common Common Stock
Stock Owned Shares of Common Stock Owned Owned Beneficially
Name of Selling Beneficially Stock Offered Beneficially After Before Offering/After
Shareholder Before Offering Hereby (1) Offering Offering (2)
- ----------------------------- ------------------- --------------------- -------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Florence F. Francis, 2,467,392.14 (3) 925,000 (4) 1,542,392.14 (5) 60.5% 37.1% (6)
Chairman of the Board of
Directors
Frederick A. Huggins, Jr., 229,672 (7) 75,000 (8) 154,672 (9) 5.5% 3.7% (10)
President and Chief
Executive Officer
</TABLE>
- ---------------
(1) The Selling Shareholders have agreed that, with respect to the 1,000,000
Shares offered hereby (other than Shares which may be sold pursuant to the
Overallotment Option), Ms. Francis will sell 925,000 shares and Mr. Huggins
will sell 75,000 shares. In addition, the Selling Shareholders have agreed
that, with respect to the 150,000 Shares which may be sold pursuant to the
Overallotment Option, the first 25,000 of such shares will be sold by Mr.
Huggins and the remaining 125,000 of such shares will be sold by Ms.
Francis.
(2) In calculating percentage ownership, all shares of common stock which each
of the Selling Shareholders has the right to acquire within 60 days from
the date of this Prospectus upon the exercise of options, warrants, or
convertible securities are deemed to be outstanding for the purpose of
calculating the percentage of common stock owned by such Selling
Shareholder, but are not deemed to be outstanding for the purpose of
computing the percentage of common stock owned by the other Selling
Shareholder.
(3) Includes 1,528,986 shares individually owned, 208,590 shares held by the
Florence F. Francis 1995 Irrevocable Annuity Trust (the "1995 Trust"),
324,469 shares held in Flo Francis' Merrill Lynch IRA Account, 7,418.14
shares held in Flo Francis' 401(k) account (as of June 30, 1998), 126,429
shares held by the Florence F. Francis Credit Trust, 150,000 shares held by
the Florence F. Francis 1998 Charitable Remainder Unified Trust, and
121,500 shares issuable upon the exercise of outstanding stock options and
warrants which are exercisable within the next 60 days, but does not
include 2,272 shares held by the Florence F. Francis Grandchildren
Education Trust. The 1995 Trust was created by Ms. Francis for the benefit
of Ms. Francis, as grantor, and her children. The trustee of the 1995 Trust
has the sole power to dispose of the shares held by the 1995 Trust and to
vote such shares. Ms. Francis has the right to receive approximately 25% of
the fair market value of the assets of the 1995 Trust annually, which
distribution may be made to her either in cash or shares of common stock.
(4) Does not include 125,000 shares purchasable upon exercise of the
Overallotment Option.
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<PAGE>
(5) Assumes no exercise of the Overallotment Option and includes 1,078,455
shares individually owned, 208,590 shares held by the Florence F. Francis
1995 Irrevocable Annuity Trust (the "1995 Trust"), 7,418.14 shares held in
Flo Francis' 401(k) account (as of June 30, 1998), 126,429 shares held by
the Florence F. Francis Credit Trust, and 121,500 shares issuable upon the
exercise of outstanding stock options and warrants which are exercisable
within the next 60 days, but does not include 2,272 shares held by the
Florence F. Francis Grandchildren Education Trust. If the Overallotment
Option is exercised in full, the 125,000 shares to be sold by Ms. Francis
will reduce the number of shares individually owned by Ms. Francis to
953,455 shares and the total number of shares of Common Stock beneficially
owned by Ms. Francis after the Offering will be 1,417,392.14 shares.
(6) Assumes no exercise of the Overallotment Option. If the Overallotment
Option is exercised in full, the percentage of Common Stock beneficially
owned by Ms. Francis after the Offering will be 33.9%.
(7) Includes 4,672 shares individually owned and 225,000 shares issuable upon
the exercise of outstanding warrants which are exercisable within the next
60 days.
(8) Does not include 25,000 shares purchasable upon exercise of the
Overallotment Option.
(9) Assumes no exercise of the Overallotment Option and includes 4,672 share
individually owned and 150,000 shares issuable upon the exercise of
outstanding warrants which are exercisable within the next 60 days. If the
`Overallotment Option is exercised in full, the total number of shares of
Common Stock beneficially owned by Mr. Huggins after the Offering will be
129,672 shares.
(10) Assumes no exercise of the Overallotment Option. If the Overallotment
Option is exercised in full, the percentage of Common Stock beneficially
owned by Mr. Huggins after the Offering will be 3.1%.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASE OF THE COMPANY HEADQUARTERS. The Company leases from the Francis
Family Limited Partnership, of which Florence F. Francis, Susan Goldstein and
John W. Francis are limited partners, approximately 65,400 square feet for its
Company headquarters. This lease expires on October 31, 2002. The rental
payments for the Company headquarters were $399,000 in 1995, $426,000 in 1996,
and $437,000 in 1997.
LEASE OF PARKING LOT. The Company uses a parking lot located next to the
Company headquarters which is leased by the Francis Family Limited Partnership,
of which Florence F. Francis, Susan Goldstein and John W. Francis are limited
partners, from Sears Logistical Services, Inc. This lease expires September 30,
2002. The monthly rent for the parking lot is $1,500 which is paid by the
Company.
FRANCHISES OWNED BY AN OFFICER AND DIRECTOR. Florence F. Francis owns
49% equity interest in CC Harrisburg, Inc., a Minnesota corporation. CC
Harrisburg, Inc. owns and operates 20 franchised salons.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 7,500,000
shares of capital stock, $.10 par value per share. As of August 31, 1998, a
total of 3,957,802 shares of common stock are issued and outstanding. In
addition, the Board of Directors is authorized to divide the shares of the
Company's authorized capital stock into classes and series, with such
designations, voting rights, and other rights and preferences, and subject to
the restrictions, that the Board of Directors of the Company may from time to
time establish. As of August 31, 1998, the Board of Directors has not authorized
or established any such class or series of capital stock. Such shares of capital
stock could be issued to deter or prevent a hostile takeover of the Company even
though such a transaction was favored by the holders of a requisite number of
then outstanding Common Stock. The Board of Directors has no present intention
to authorize or issue any shares of such capital stock to deter or prevent such
a transaction and is not currently aware of any attempt to takeover the Company.
COMMON STOCK
All outstanding shares of common stock are duly authorized, validly
issued, fully paid and nonassessable. Holders of common stock are entitled to
receive dividends, when, as and if declared by the Board of Directors, out of
funds legally available therefor and to share ratably in the net assets of the
Company upon liquidation. Holders of common stock do not have preemptive or
other rights to subscribe for additional shares, nor are there any redemption or
sinking fund provisions associated with the common stock. Upon liquidation or
dissolution of the Company, the holder of each outstanding share of common stock
will be entitled to share equally in the assets of the Company legally available
for distribution to such shareholder after payment of all liabilities and after
distributions to holders of preferred stock legally entitled to such
distributions.
Holders of common stock are entitled to one vote per share on all
matters requiring a vote of shareholders. The holders of more than 50% of the
common stock issued and outstanding and entitled to vote, present in person or
by proxy, constitute a quorum at all meetings of shareholders. The vote of the
holders of a majority of common stock present at such a meeting (together with
any preferred stock present and entitled to vote at such meeting) will decide
any question brought before such meeting, except when a greater vote is required
by law, the Company's Articles of Incorporation, or the Company's Bylaws and
except when a vote of any preferred stock issued and
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<PAGE>
outstanding, voting as a separate class, is required by law to approve a
question brought before such meeting. The common stock does not have cumulative
voting rights in electing directors.
MINNESOTA BUSINESS CORPORATION ACT
Section 302A.671 of the Minnesota Business Corporation Act applies,
with certain exceptions, to any acquisition of voting stock of the Company (from
a person other than the Company, and other than in connection with certain
mergers and exchanges to which the Company is a party) resulting in the
beneficial ownership of 20 percent or more of the voting stock then outstanding.
Section 302A.671 of the Minnesota Business Corporation Act requires approval of
any such acquisitions by a majority vote of the shareholders of the Company
prior to its consummation. In general, shares acquired in the absence of such
approval are denied voting rights and are redeemable at their then fair market
value by the Company within 30 days after the acquiring person has failed to
give a timely information statement to the Company or the date the shareholders
voted not to grant voting rights to the acquiring person's shares.
Section 302A.673 of the Minnesota Business Corporation Act generally
prohibits any business combination by the Company, or any subsidiary of the
Company, with any shareholder which purchases ten percent or more of the
Company's voting shares (an "interested shareholder") within four years
following such interested shareholder's share acquisition date, unless the
business combination is approved by a committee of all of the disinterested
members of the Board of Directors of the Company before the interested
shareholder's share acquisition date.
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is
Norwest Bank Minnesota, N.A., 161 North Concord Exchange, South St. Paul,
Minnesota 55075-0738 and its telephone number is (651) 450-4000.
UNDERWRITING
The Company and the Selling Shareholders have entered into an
Underwriting Agreement (the "Underwriting Agreement") with Dougherty Summit
Securities LLC (the "Underwriter"). Subject to the terms and conditions set
forth in the Underwriting Agreement, the Selling Shareholders have agreed to
sell to the Underwriter, and the Underwriter has agreed to purchase, on a firm
commitment basis, 1,000,000 shares of the Company's Common Stock.
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriter has agreed to purchase all the Shares offered hereby (which does not
include the shares of Common Stock covered by the overallotment option described
below), if any of such shares are purchased The Underwriting Agreement provides
that the obligations of the Underwriter are subject to the conditions precedent
specified therein.
The Company and the Selling Shareholders have been advised by the
Underwriter that the Underwriter initially proposes to offer the Shares to the
public at the public offering price set forth on the cover page of this
Prospectus. After the initial distribution of the Shares offered hereby has been
completed, the public offering price, concession and reallowance may be changed
by the Underwriter. No such change, however, will change the amount of proceeds
to be received by the Selling Shareholders as set forth on the cover page of
this Prospectus.
The Selling Shareholders have granted the Underwriter an option
exercisable within 30 days of the date of this Prospectus, to purchase up to an
aggregate of 150,000 additional shares of Common Stock at the public offering
price per share of Common Stock offered hereby, less underwriting discounts and
commissions and the non-
30
<PAGE>
accountable expense allowance (the "Overallotment Option"). Such option may be
exercised solely for the purpose of covering overallotments, if any, incurred in
the sale of the Shares offered hereby.
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriter. It is expected that delivery of the shares of Common Stock will
be on or about _________, 1998 at the offices of Dougherty Summit Securities
LLC, Minneapolis, Minnesota against payment therefor in immediately available
funds.
In connection with this Offering, the Underwriter may engage in passive
market making transactions in the Common Stock in accordance with Rule 103 of
Regulation M promulgated by the Commission. In general, a passive market maker
may not bid for, or purchase, the Common Stock at a market price that exceeds
the highest independent bid. In addition, the net daily purchases made by any
passive market maker generally may not exceed the greater of 30% of its average
daily trading volume in the Common Stock during a specified two month prior
period, or 200 shares. A passive market maker must identify passive market
making bids as such on the Nasdaq electronic inter-dealer reporting system.
Passive market making may stabilize or maintain the market price of the Common
Stock above independent market levels. The Underwriter is not required to engage
in passive market making and may end passive market making activities at any
time.
In connection with the Offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M. The Underwriter also may
create a short position for the account of the Underwriter by selling more
Common Stock in connection with the Offering than it is committed to purchase
from the Selling Shareholders, and in such case may purchase Common Stock in the
open market following completion of the Offering to cover all or a portion of
such short position. The Underwriter may also cover all or a portion of such
short position, up to 150,000 shares of Common Stock by exercising the
Overallotment Option. Any of the transactions described in this paragraph may
result in the maintenance of the price of the Common Stock at a level above that
which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and, if they are undertaken, they may
be discontinued at any time.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriter may be
required to make in connection with the Offering. The Company has also agreed to
pay the Underwriter a nonaccountable expense allowance equal to one percent of
the gross proceeds of the Offering, no portion of which has been paid to date.
The foregoing is a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
such agreement which is filed as an exhibit to the Registration Statement. See
"Additional Information."
LEGAL MATTERS
The legality of the Shares will be passed upon for the Company by the
firm of Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota.
Certain legal matters will be passed upon for the Placement Agent by Dorsey &
Whitney LLP, Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of the Company at September 25,
1997, September 26, 1996 and September 28, 1995 and for each of the years then
ended appearing in this Registration Statement and Prospectus have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of said firm as experts in accounting and auditing.
31
<PAGE>
INDEMNIFICATION
The Company's Amended and Restated Bylaws, dated January 21, 1993,
require the Company to indemnify and hold harmless the officers and directors of
the Company who are made a party to any suit or proceeding or who are threatened
to be made party to any suit or proceeding to the full extent permitted by
Minnesota law. The right includes the right to be paid all expenses incurred in
defending an action in advance of its final disposition if an officer or
director (a) delivers a written affirmation that the criteria for
indemnification set forth in the Minnesota Business Corporation Act has been
satisfied, (b) is determined to be eligible for indemnification pursuant to the
Minnesota Business Corporation Act or the Company's bylaws and (c) delivers to
the Company a promise to repay all amounts so advanced if it is determined in
the future that the officer or director was not entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
32
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CONTENTS
Audited Consolidated Financial Statements
Report of Independent Auditors...............................................F-2
Consolidated Balance Sheets at September 25, 1997,
September 26, 1996 and September 28, 1995..................................F-3
Consolidated Statements of Income as of September 25, 1997
September 26, 1996 and September 28, 1995..................................F-5
Consolidated Statement of Shareholders' Equity as of September 25, 1997
September 26, 1996 and September 28, 1995..................................F-6
Consolidated Statements of Cash Flows as of September 25, 1997
September 26, 1996 and September 28, 1995..................................F-7
Notes to Consolidated Financial Statements...................................F-8
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet at June 25, 1998 ......................F-23
Condensed Consolidated Statements of Income for the nine months in the
periods ended June 25, 1998 and June 26, 1997 ............................F-24
Condensed Consolidated Statements of Cash Flows for the nine months
in the periods ended June 25, 1998 and June 26, 1997 .....................F-25
Notes to Unaudited Condensed Consolidated
Financial Statements .....................................................F-26
F-1
<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
F-2
<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>
F-3
<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 -
3,887,928 in 1997, 3,852,411 in 1996
and 3,808,239 in 1995 388,793 385,241 380,824
Additional paid-in capital 328,059 247,319 149,923
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.
F-4
<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
=======================================================
Earnings per share:
Basic .36 .28 .22
Diluted .33 .26 .21
=======================================================
Average shares outstanding:
Basic 3,857,775 3,817,394 3,795,993
Diluted 4,210,409 4,113,201 3,965,157
=======================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<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 3,781,288 $378,129 $ 98,721 $2,916,663 $3,393,513
Net income for 1995 - - - 839,910 839,910
Issuance of common stock to outside directors 4,500 450 8,550 - 9,000
Issuance of common stock to employee 68 7 128 - 135
Issuance of common stock under Designer
Salon Program 13,653 1,365 25,941 - 27,306
Issuance of common stock to participants of the
401(k) plan 8,730 873 16,583 - 17,456
-----------------------------------------------------------------------
Balance at September 28, 1995 3,808,239 380,824 149,923 3,756,573 4,287,320
Net income for 1996 - - - 1,057,354 1,057,354
Issuance of common stock to outside directors 3,600 360 11,640 - 12,000
Issuance of common stock to employees 4,388 439 15,634 - 16,073
Issuance of common stock under Designer Salon
Program 13,684 1,368 44,247 - 45,615
Issuance of common stock under stock option plan 22,500 2,250 25,875 - 28,125
-----------------------------------------------------------------------
Balance at September 26, 1996 3,852,411 385,241 247,319 4,813,927 5,446,487
Net income for 1997 - - - 1,406,413 1,406,413
Issuance of common stock to outside directors 4,725 473 18,427 - 18,900
Issuance of common stock to employees 45 4 176 - 180
Issuance of common stock under Designer
Salon Program 9,372 937 39,675 - 40,612
Issuance of common stock under stock option plan 21,375 2,138 22,462 - 24,600
-----------------------------------------------------------------------
Balance at September 25, 1997 3,887,928 $388,793 $328,059 $6,220,340 $6,937,192
=======================================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<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.
F-7
<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.
F-8
<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.
F-9
<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.
F-10
<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 adjusted to reflect the
3-for-2 stock splits that were approved by the Board of Directors on September
19, 1996 and April 17, 1998.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE. Statement No. 128 replaced the
previously reported primary and fully diluted earnings per share. Unlike
preliminary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where necessary, restated to conform to the Statement 128 requirements.
F-11
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 28,
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Numerator:
Net income $1,406,413 $1,057,354 $ 839,910
==================================================
Denominator:
Denominator for basic earnings per share -
weighted average shares $3,857,775 $3,817,394 $3,795,993
Effect of dilutive stock options and warrants 352,634 295,807 169,164
--------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares $4,210,409 $4,113,201 $3,965,157
==================================================
Basic earnings per share $.36 $.28 $.22
==================================================
Diluted earnings per share $.33 $.26 $.21
==================================================
</TABLE>
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 loss
es 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.
F-12
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-13
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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.
F-14
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND WARRANTS
The Company's 1991 Stock Option Plan has reserved 675,000 shares of common stock
for key employees and 250,000 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 $.33 $.26
Earnings per share - pro forma .32 .25
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
F-15
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
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 $1.81 and $1.30 per share, respectively.
As of September 25, 1997 there were 153,000 options outstanding with exercise
prices between $1.05 and $1.31, 130,500 options outstanding with exercise prices
between $1.33 and $2.17 and 112,500 options outstanding with exercise prices
between $3.50 and $5.17. 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 289,125 and 254,250, respectively, at weighted average exercise prices of
$1.85 and $1.51 per share, respectively.
Stock option activity is summarized as follows:
OPTIONS OUTSTANDING
----------------------------
OPTIONS WEIGHTED
AVAILABLE AVERAGE PRICE
FOR GRANT NUMBER PER SHARE
---------------------------------------------
Balance September 29, 1994 675,000 225,000 $1.17
Granted (108,000) 108,000 2.03
----------------------------
Balance September 28, 1995 567,000 333,000 1.45
Granted (45,000) 45,000 3.50
Exercised - (22,500) 1.25
----------------------------
Balance September 26, 1996 522,000 355,500 1.72
Granted (67,500) 67,500 4.71
Exercised - (21,375) 1.08
Canceled 5,625 (5,625) 1.33
----------------------------
Balance September 25, 1997 460,125 396,000 $2.27
============================
F-16
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND WARRANTS (CONTINUED)
In July 1991, the Company granted warrants to the President to purchase 112,500
shares of the Company's common stock at an exercise price of $1.05 per share. On
October 13, 1994, the Company granted warrants to the Chairman and President to
purchase 112,500 shares, respectively, of the Company's common stock at an
exercise price of $1.78 per share. The warrants would expire one year after
termination of employment with the Company. 247,500 warrants were exercisable at
September 25, 1997.
The Company issued 4,725, 3,600 and 4,500 shares of stock to outside directors
as part of their compensation plan in 1997, 1996 and 1995, respectively.
6. INCOME TAXES
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Current $1,139,000 $880,000 $601,000
Deferred (121,000) (115,000) (17,000)
----------------------------------------------
$1,018,000 $765,000 $584,000
==============================================
</TABLE>
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>
F-17
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
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>
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:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
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
=================================================
</TABLE>
F-18
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
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.
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.
F-19
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
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.
F-20
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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.
F-21
<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 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 .03 .05 .06 .07 .21
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 $.05 $.06 $.07 $.08 $.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 $.05 $.08 $.08 $.12 $.33
</TABLE>
F-22
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 25, September 25,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS (Unaudited) (Note 1)
Current assets:
Cash $ 2,903,893 $ 2,789,933
Trade receivable, less allowance for doubtful
accounts of $600,000 in June 1998 and
$450,000 in September 1997 3,194,580 2,846,083
Notes receivable 615,704 596,635
Inventories held for resale 2,010,049 1,684,312
Prepaid expenses 87,687 120,744
Deferred income taxes 360,000 360,000
------------ ------------
Total current assets 9,171,913 8,397,707
Notes receivable, less current portion and allowance for
doubtful notes of $135,000 in June 1998 and
$125,000 in September 1997 276,901 621,877
Property, equipment and leasehold improvements, at cost:
Equipment 2,698,583 2,044,204
Leasehold improvements 945,150 945,150
------------ ------------
3,643,733 2,989,354
Less accumulated depreciation 2,283,828 2,094,285
------------ ------------
Net property, equipment and leasehold improvements 1,359,905 895,069
Investment in franchise contracts, less accumulated
amortization of $535,142 in June 1998 and
$419,260 in September 1997 2,463,441 2,321,618
Deferred income taxes 386,000 386,000
Other assets 343,731 286,271
------------ ------------
Total assets $ 14,001,891 $ 12,908,542
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital
lease obligations $ 350,156 $ 339,150
Accounts payable 280,923 573,088
Deferred franchise fees 85,000 90,000
Committed advertising 1,073,267 933,502
Accrued compensation and related payroll taxes 994,245 935,653
Other accrued expenses 583,982 296,548
Income taxes payable (24,283) 202,934
------------ ------------
Total current liabilities 3,343,290 3,370,875
Long term debt and capital lease obligations 1,849,023 2,111,689
Deferred franchise fees 267,000 201,000
Deferred compensation 343,279 287,786
Shareholders' equity:
Common stock 394,530 259,195
Additional paid in capital 390,082 457,657
Retained earnings 7,414,687 6,220,340
------------ ------------
Total shareholder's equity 8,199,299 6,937,192
------------ ------------
Total liabilities and shareholders' equity $ 14,001,891 $ 12,908,542
============ ============
</TABLE>
Note 1: The balance sheet at September 25, 1997 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. Certain fiscal 1997 items have been
reclassified to conform with the fiscal 1998 presentation.
See notes to condensed consolidated financial statements.
F-23
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THIRD QUARTER F1998
(UNAUDITED)
Nine Months Ended
June 25, June 26,
1998 1997
------------ -------------
REVENUES
Franchise Royalties $ 6,157,388 $ 5,175,194
Franchise Fees 677,126 647,068
Company-Owned Salons 4,366,445 3,325,719
Beauty Products & Equipment 7,674,415 6,461,455
Other 508,107 416,030
------------ ------------
Total Revenues 19,383,481 16,025,466
COSTS & EXPENSES
Franchise Operations
Salaries & Benefits 1,656,550 1,464,034
General & Administrative 856,833 797,015
------------ ------------
Total 2,513,383 2,261,049
------------ ------------
Company-Owned Salons
Salaries & Benefits 2,328,383 1,803,862
General & Administrative 1,110,003 907,701
Cost of Products & Services 782,481 498,752
------------ ------------
Total 4,220,867 3,210,315
------------ ------------
Distribution & General Administration
Salaries & Benefits 2,546,859 2,185,036
General & Administrative 2,214,735 1,928,564
Cost of Products & Equipment 5,937,042 4,911,714
------------ ------------
Total 10,698,636 9,025,314
------------ ------------
OPERATING INCOME 1,950,595 1,528,788
OTHER INCOME (EXPENSE)
Interest Income 156,557 103,063
Interest Expense (156,107) (95,577)
Net Gain on Disposal of Assets 108,302 (3,105)
------------ ------------
INCOME BEFORE INCOME TAXES 2,059,347 1,533,169
INCOME TAX EXPENSE 865,000 643,000
------------ ------------
NET INCOME $ 1,194,347 $ 890,169
============ ============
AVERAGE SHARES OUTSTANDING 3,915,323 3,857,775
============ ============
BASIC EARNINGS PER SHARE $ 0.31 $ 0.23
============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 4,337,293 4,216,875
============ ============
DILUTED EARNINGS PER SHARE $ 0.28 $ 0.21
============ ============
See notes to condensed consolidated financial statements.
F-24
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 25, June 26,
1998 1997
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,194,347 $ 890,169
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 361,795 367,483
Provision for losses on accounts and notes receivable 242,594 191,286
(Gain)/Loss on sales of property and equipment (108,302) 3,105
Stock compensation 20,640 19,080
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts and notes receivable (265,184) (1,119,806)
Inventories held for resale (325,737) (217,639)
Prepaid expenses 33,057 (1,797)
Other assets (57,460) (42,425)
(Decrease) increase in:
Payables and accrued expenses 249,119 619,655
Deferred franchise fees 61,000 (6,000)
Income taxes payable (227,217) (100,407)
----------- -----------
Net cash provided by operating activities 1,178,652 602,704
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 192,600 111,786
Capital expenditures (780,848) (283,329)
Investment in franchise contracts (271,904) (2,057,558)
----------- -----------
Net cash used in investing activities (860,152) (2,229,101)
FINANCING ACTIVITIES
Additions to long-term debt -- 2,500,000
Principal payments on long-term debt (251,660) (121,700)
Principal payments on capital lease obligations -- (11,675)
Proceeds from exercise of stock options 47,120 12,750
----------- -----------
Net cash provided by (used in) financing activities (204,540) 2,379,375
----------- -----------
Net increase (decrease) in cash and cash equivalents 113,960 752,978
Cash and cash equivalents at beginning of period 2,789,933 1,317,448
----------- -----------
Cash and cash equivalents at end of period $ 2,903,893 $ 2,070,426
=========== ===========
CASH PAID DURING PERIOD FOR:
Interest $ 156,107 $ 95,577
Taxes $ 1,092,217 $ 743,407
</TABLE>
See notes to condensed consolidated financial statements.
F-25
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring accruals) considered necessary for a fair
presentation of results have been included. Operating results for the three
months ended June 25, 1998, are not necessarily indicative of the results that
may be expected for the year ended September 24, 1998. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report for the fiscal year ended September 25, 1997.
NOTE B - EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE. Statement 128
replaced the previously reported primary and fully diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented and, where necessary, restated to conform to the Statement 128
requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Nine months ended
-----------------
June 25, June 26,
1998 1997
---------- ----------
<S> <C> <C>
Numerator:
Net Income $1,194,347 $ 890,169
========== ==========
Denominator:
Denominator for basic earnings
per share - weighted average
shares 3,915,323 3,857,775
Effect of dilutive stock options and
warrants 421,970 359,100
---------- ----------
Denominator for diluted earnings
per share - adjusted weighted
average shares 4,337,293 4,216,875
========== ==========
Basic earnings per share $ 0.31 $ 0.23
========== ==========
Diluted earnings per share $ 0.28 $ 0.21
========== ==========
</TABLE>
F-26
<PAGE>
========================================= =====================================
No dealer, sales repre1entative
or any other person has been authorized
to give any information or to make any
representations other than those 1,000,000 SHARES
contained in this Prospectus in
connection with the offer made by this
Prospectus and, if given or made, such [INSERT LOGO]
information or representations must not
be relied upon as having been authorized
by the Company or any of the
Underwriter. This Prospectus does not THE BARBERS,
constitute an offer to sell, or the HAIRSTYLING FOR MEN &
solicitation of any offer to buy, any WOMEN, INC.
security other than the securities
offered by this Prospectus, nor does it
constitute an offer to sell or a COMMON STOCK
solicitation of any offer to buy the
securities offered hereby by anyone in
any jurisdiction in which such offer or
solicitation is not authorized, or in
which the person making such offer or ------------
solicitation is not qualified to do so,
or to any person to whom it is unlawful PROSPECTUS
to make such offer or solicitation.
Neither the delivery of this Prospectus ------------
nor any sale made hereunder shall, under
any circumstances, create any
implication that information contained
herein is correct as of any time
subsequent to the date hereof. DOUGHERTY SUMMIT SECURITIES LLC
TABLE OF CONTENTS
Page
----
Available Information.................. 4
Incorporation of Certain Documents by
Reference........................... 5
Special Note Regarding Forward-Looking
Statements.......................... 6
Prospectus Summary..................... 7
Risk Factors........................... 9
Selling Shareholders................... 12 SEPTEMBER ___, 1998
Use of Proceeds........................ 13
Price Range of Common Stock............ 13
Selected Financial Data................ 14
Management's Discussion and Analysis or
Plan of Operation................... 15
Business............................... 21
Management............................. 26
Principal and Selling Shareholders..... 28
Certain Relationships and Related
Transactions........................ 29
Description of Capital Stock........... 29
Underwriting........................... 30
Legal Matters.......................... 31
Experts................................ 31
Indemnification........................ 32
Index to Financial Statements..........F-1
========================================= =====================================
========================================= =====================================
<PAGE>
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses of the Company and
the Selling Shareholders in connection with the offer and sale of the Shares
being registered pursuant to this Form S-3 Registration Statement. All of the
amounts shown are estimates, except for the Securities and Exchange Commission
registration fee and the Nasdaq listing fee. Unless otherwise indicated, all of
such expenses will be paid by the Company.
Securities and Exchange Commission fee $2,629.19
Accounting fees and expenses $________
Legal fees and expenses $________
Printing, Mailing $5,000.00
Miscellaneous $________
TOTAL $________
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
LIMITATION OF LIABILITY AND INDEMNIFICATION. The Company's Articles of
Incorporation, as amended, limit the liability of directors in their capacity as
directors of the Company and officers to the full extent permitted by Minnesota
law. They provide that a director will not be liable to the Company or its
shareholders for monetary damages for breach of fiduciary duty as a director,
except for liability (a) for any breach of the director's duty of loyalty to the
corporation or its shareholders, (b) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (c) for
dividends, stock repurchases and other distributions made in violation of
Minnesota law or for violations of the Minnesota securities laws, (d) for any
transaction from which the director derived an improper personal benefit, or (e)
for any act or omission occurring prior to the effective date of the provision
in the Company's Articles of Incorporation, as amended. These provisions do not
affect the availability of equitable remedies, such as an action to enjoin or
rescind a transaction involving a breach of fiduciary duty, although, as a
practical matter, equitable relief may not be available. The above provisions
also do not limit liability of the directors for violations of, or relieve them
from the necessity of complying with, the federal securities laws.
The Company's Amended and Restated Bylaws, dated January 21, 1993,
require the Company to indemnify and hold harmless the officers and directors of
the Company who are made a party to any suit or proceeding or who are threatened
to be made party to any suit or proceeding to the full extent permitted by
Minnesota law. The right includes the right to be paid all expenses incurred in
defending an action in advance of its final disposition if an officer or
director (a) delivers a written affirmation that the criteria for
indemnification set forth in the Minnesota Business Corporation Act has been
satisfied, (b) is determined to be eligible for indemnification pursuant to the
Minnesota Business Corporation Act or the Company's bylaws and (c) delivers to
the Company a promise to repay all amounts so advanced if it is determined in
the future that the officer or director was not entitled to indemnification.
ITEM 16. EXHIBITS
Exhibit
Number Description
1.1 Underwriting Agreement**
3.1 Articles of Incorporation, dated September 30, 1968 (1)
3.2 Amended and Restated By-laws, dated January 21, 1993 (1)
4.1 Specimen of Common Stock (1)
II-1
<PAGE>
5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, as to the
validity of the securities being registered hereby*
23.1 Consent of Independent Auditors*
23.2 Consent of Gray, Plant, Mooty, Mooty & Bennett (included in the
opinion filed as exhibit 5.1)
24.1 Power of Attorney (included on signature page)
- ------------------
* Filed herewith.
** To be filed by amendment
(1) Incorporated by reference to the registrant's registration statement on
Form 10-SB dated June 28, 1994.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(b) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(d) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on this 15th day of
September, 1998.
THE BARBERS, HAIRSTYLING FOR
MEN & WOMEN, INC.
By /s/ Frederick A. Huggins, Jr.
----------------------------------------
Frederick A. Huggins, Jr.
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Frederick A. Huggins, Jr. and J. Brent
Hanson and each of them signing singly, his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him and in his
name place and stead, in any and all capacities, to sign any and all amendments
to this Registration Statement, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite or necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and Power of Attorney have been signed by the following
persons in the capacities and on September 15, 1998.
Signature Title
- --------- -----
/s/ Florence F. Francis Chairman of the Board
- -----------------------
Florence F. Francis
/s/ Frederick A. Huggins, Jr. President, Chief Executive Officer and a
- ----------------------------- Director
Frederick A. Huggins, Jr.
/s/ J. Brent Hanson Chief Financial Officer and Chief 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
/s/ James R. Fyffe Director
- ------------------
James R. Fyffe
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
FORM S-3 REGISTRATION STATEMENT
INDEX TO EXHIBITS
Exhibit
Number Description
1.1 Underwriting Agreement**
3.1 Articles of Incorporation, dated September 30, 1968 (1)
3.2 Amended and Restated By-laws, dated January 21, 1993 (1)
4.1 Specimen of Common Stock (1)
5.1 Opinion of Gray, Plant, Mooty, Mooty & Bennett, as to the
validity of the securities being registered hereby*
23.1 Consent of Independent Auditors*
23.2 Consent of Gray, Plant, Mooty, Mooty & Bennett (included in the
opinion filed as exhibit 5.1)
24.1 Power of Attorney (included on signature page)
______________
* Filed herewith.
** To be filed by amendment
(1) Incorporated by reference to the registrant's registration statement on
Form 10-SB dated June 28, 1994.
[Letterhead of Gray, Plant, Mooty, Mooty & Bennett, P.A.]
EXHIBIT 5.1
JOSEPH T. KINNING
612 343-2896
September 17, 1998
The Barbers, Hairstyling for Men & Women, Inc.
300 Industrial Boulevard N.E.
Minneapolis, MN 55413
RE: FORM S-3 REGISTRATION STATEMENT
Ladies/Gentlemen:
This opinion is furnished in connection with the registration, pursuant
to the Securities Act of 1933, as amended, of (i) 1,000,000 issued and
outstanding shares of common stock, $.10 par value (the "Shares"), of The
Barbers, Hairstyling for Men & Women, Inc. (the "Company") to be sold by
Florence F. Francis and Frederick A. Huggins, Jr. and (ii) 150,000 issued and
outstanding shares of common stock, $.10 par value, of the Company to be sold by
Florence F. Francis and Frederick A. Huggins, Jr. upon exercise of the
underwriter's overallotment option (collectively, the "Shares").
We have acted as counsel to the Company in connection with the
preparation of the Form S-3 Registration Statement (the "Registration
Statement"). We have examined the Articles of Incorporation, as amended, the
Bylaws of the Company, such records of proceedings of the Company as we deemed
material and such other certificates, records and documents as we considered
necessary for the purposes of this opinion.
Based on the foregoing, we are of the opinion that the Shares are
legally issued, fully paid and non-assessable securities of the Company. We
understand that this opinion is to be issued in connection with the Registration
Statement. We consent to a filing of a copy of this opinion with the
Registration Statement.
Very truly yours,
GRAY, PLANT, MOOTY,
MOOTY & BENNETT, P.A.
By /s/ Joseph T. Kinning
Joseph T. Kinning
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts", and to the use of our report dated October 31, 1997 in the
Registration Statement (Form S-3) and related Prospectus of The Barbers,
Hairstyling for Men & Women, Inc. for the registration of 1,150,000 shares of
its common stock.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
September 11, 1998