UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 25, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____.
Commission file number: 0-24466
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0945858
(State or other Jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
300 Industrial Boulevard NE
Minneapolis, MN 55413
(Address of principal executive offices)
(612) 331-8500
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days
Yes _x_ No ___
On August 7, 1998, the registrant had 3,950,302 outstanding shares of
common stock, $. 10 par value.
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings for the Quarter
Ended June 25, 1998 and June 26, 1997
Condensed Consolidated Statements of Financial Position at
June 25, 1998 and September 25, 1997
Condensed Consolidated Statements of Cash Flows for the
Quarter Ended June 25, 1998 and June 26, 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit 10.1 First Amendment to Term Loan and Credit Agreement between The
Barbers, Hairstyling for Men & Women, Inc. and Norwest Bank
Minnesota, N.A. dated May 20, 1998
Exhibit 10.2 Revolving Note between The Barbers, Hairstyling for Men &
Women, Inc. and Norwest Bank Minnesota, N.A. dated May 20,
1998
Exhibit 27.1 Financial Data Schedule: Restatement of Annual Financial
Statements for Fiscal Years 1995, 1996, and 1997
Exhibit 27.2 Financial Data Schedule: Restatement of Quarterly Financial
Statements for Fiscal Year 1997
Exhibit 27.3 Financial Data Schedule: Restatement of Quarterly Financial
Statements for Fiscal Year 1998
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
THIRD QUARTER F1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 25, June 26, June 25, June 26,
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
REVENUES
Franchise Royalties $ 2,189,380 $ 1,923,927 $ 6,157,388 $ 5,175,194
Franchise Fees 135,126 222,750 677,126 647,068
Company-Owned Salons 1,559,641 1,200,842 4,366,445 3,325,719
Beauty Products & Equipment 2,465,922 2,169,520 7,674,415 6,461,455
Other 153,486 81,136 508,107 416,030
------------ ------------ ------------ ------------
Total Revenues 6,503,555 5,598,175 19,383,481 16,025,466
COSTS & EXPENSES
Franchise Operations
Salaries & Benefits 547,376 511,948 1,656,550 1,464,034
General & Administrative 221,857 259,078 856,833 797,015
------------ ------------ ------------ ------------
Total 769,233 771,026 2,513,383 2,261,049
------------ ------------ ------------ ------------
Company-Owned Salons
Salaries & Benefits 844,197 643,027 2,328,383 1,803,862
General & Administrative 390,782 293,086 1,110,003 907,701
Cost of Products & Services 289,280 195,711 782,481 498,752
------------ ------------ ------------ ------------
Total 1,524,259 1,131,824 4,220,867 3,210,315
------------ ------------ ------------ ------------
Distribution & General Administration
Salaries & Benefits 898,347 751,705 2,546,859 2,185,036
General & Administrative 747,986 695,280 2,214,735 1,928,564
Cost of Products & Equipment 1,900,920 1,638,994 5,937,042 4,911,714
------------ ------------ ------------ ------------
Total 3,547,253 3,085,979 10,698,636 9,025,314
------------ ------------ ------------ ------------
OPERATING INCOME 662,810 609,346 1,950,595 1,528,788
OTHER INCOME (EXPENSE)
Interest Income 50,254 35,596 156,557 103,063
Interest Expense (50,479) (54,512) (156,107) (95,577)
Net Gain on Disposal of Assets 88,232 (6,171) 108,302 (3,105)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 750,817 584,259 2,059,347 1,533,169
INCOME TAX EXPENSE 315,000 244,000 865,000 643,000
------------ ------------ ------------ ------------
NET INCOME $ 435,817 $ 340,259 $ 1,194,347 $ 890,169
============ ============ ============ ============
AVERAGE SHARES OUTSTANDING 3,939,282 3,862,244 3,915,323 3,857,775
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.11 $ 0.09 $ 0.31 $ 0.23
============ ============ ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 4,391,004 4,230,133 4,337,293 4,216,875
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.10 $ 0.08 $ 0.28 $ 0.21
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<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.
<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.
<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>
Quarter ended Nine months ended
------------- -----------------
June 25, June 26, June 25, June 26,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 435,817 $ 340,259 $1,194,347 $ 890,169
========== ========== ========== ==========
Denominator:
Denominator for basic earnings
per share - weighted average
shares 3,939,282 3,862,244 3,915,323 3,857,775
Effect of dilutive stock options and
warrants 451,722 367,889 421,970 359,100
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - adjusted weighted
average shares 4,391,004 4,230,133 4,337,293 4,216,875
========== ========== ========== ==========
Basic earnings per share $ 0.11 $ 0.09 $ 0.31 $ 0.23
========== ========== ========== ==========
Diluted earnings per share $ 0.10 $ 0.08 $ 0.28 $ 0.21
========== ========== ========== ==========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is in the business of franchising three different hair care
salon concepts that provide hair care products for men, women, and children.
Most franchises do business under the names "Cost Cutters Family Hair Care(R)"
("Cost Cutters") and "City Looks Salons International(R)" ("City Looks") and "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.
The Company had 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 years 1998
and 1997 include 52 weeks of operations.
RESULTS OF OPERATIONS
REVENUES: The Company's total revenues were $6,503,555 for the third quarter of
fiscal 1998 and $19,383,481 for the first nine months of fiscal 1998, an
increase of 16.2% and 21.0% respectively over the comparable periods of the
previous year. Franchise royalties totaled $2,189,380 for the third quarter of
fiscal 1998, which is an increase of 13.8% over the third quarter of the
previous year. Franchise royalties for the first nine months increased 19.0% to
$6,157,388 versus the comparable period of the previous year. 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. Franchise
fee revenue (initial franchise fees) was $135,126 during the third quarter of
fiscal 1998, a decrease of 39.3% versus the third quarter of fiscal 1997. The
decrease in franchise fee revenue was due to a decrease in the number of salons
opened during the comparable periods. A total of ten new salons opened in the
third quarter of fiscal 1998 compared to opening 19 salons during the third
quarter of the previous year. Year to date the franchise fee revenue has
increased $30,058 or 4.6% over the prior year comparable period to $677,126.
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 the previous year. Revenue from company-owned salons was
$1,559,641 for the third quarter and $4,366,445 for the first nine months of
fiscal 1998, an increase of 29.9% and 31.3% respectively over the comparable
periods of the previous year. 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 last year. Beauty product and equipment sales for the third
quarter of fiscal 1998 were $2,465,922, an increase of $296,402 or 13.7% over
the third quarter of the previous year. Year to date revenue from beauty
products and equipment was $7,674,415, an increase of 18.8% over the first nine
months of the previous year. 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 for the previous year.
<PAGE>
COSTS & EXPENSES - FRANCHISE OPERATIONS: Total franchise operations expenses
were $769,233 for the third quarter and $2,513,383 for the first nine months of
fiscal 1998. This was a decrease of 0.2% for the third quarter and an increase
of 11.2% over the first nine months of fiscal 1997. The year to date 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%. Also, 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.
Twenty of the Cost Cutters operate inside Wal-Mart Supercenters. During the
third quarter of fiscal 1998 three company-owned salons were sold to a
franchisee and one salon was purchased from a franchisee. Third quarter
operating costs for the company-owned salons were $1,524,259 as compared to
$1,131,824 for the third quarter of the previous year, an increase of 34.7%.
Year to date operating costs were $4,220,867 versus $3,210,315 for the
comparable period of the previous year. 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 third quarter of
fiscal 1998 were $3,547,253 which is an increase of $461,274 or 14.9% over the
third quarter of the prior year. Expenses for the first nine months of fiscal
1998 were $10,698,636 as compared to $9,025,314 in 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. The
third quarter cost of products and equipment sold was $1,900,920 versus a prior
year cost of $1,638,994, an increase of 16.0%. Year to date costs of products
and equipment were $5,937,042 versus $4,911,714 the previous year, an increase
of 20.9%. Margins on the sale of products and equipment were 22.9% and 22.6% for
the third quarter and first nine months respectively. This compares with 24.5%
and 24.0% for the same periods of the previous year. The decrease in margins is
primarily to due to changes in product mix. Salaries and benefits were $898,347
and $2,546,859 for the third quarter and first nine months of fiscal 1998. This
compares with $751,705 and $2,185,036 for the comparable periods of the previous
year and represents an increase of 19.5% and 16.6% respectively. 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 third quarter increased
7.6% to $747,986. Year to date general and administrative expenses increased by
$286,171 or 14.8% over the previous year to $2,214,735. 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 $662,810 for the third quarter and
$1,950,595 for the first nine months of fiscal 1998. This compares to $609,346
and $1,528,788 for the comparable periods of the prior year, an increase of 8.8%
and 27.6% respectively. Operating income as a percent of revenue was 10.2% for
the third quarter and 10.1% for the first nine months of fiscal 1998. This
compares to 10.9% and 9.5% for the comparable periods of the previous fiscal
year.
INTEREST INCOME AND EXPENSE: Interest income was $50,254 for the third quarter
and $156,557 for the first nine months of fiscal 1998, an increase versus the
previous year of 41.2% and 51.9% respectively. Interest expense was $50,479 for
the third quarter and $156,107 for the first nine months of fiscal 1998. This
compares to $54,512 and $95,577 for the comparable periods of fiscal 1997. The
year to date increase in interest expense was due to the debt incurred by the
Company to acquire the We Care Hair chain.
<PAGE>
NET GAIN (LOSS) ON DISPOSAL OF ASSETS: During the third quarter of fiscal 1998,
the Company sold three company-owned salons. The Company recorded a net gain on
disposal of these assets of $88,232. Year to date, the Company has sold five
company-owned salons and miscellaneous assets. In fiscal 1997, the Company sold
five company-owned salons.
INCOME TAXES: The Company's effective tax rates for the third quarter and first
nine months of fiscal 1998 were 42.0%, respectively, versus a rate of 41.8% and
41.9% for the third quarter and the first nine months of fiscal 1997. The
Company anticipates that the rate for the balance of fiscal 1998 will be
approximately 42%.
NET INCOME: The Company's net income for the third quarter of 1998 was $435,817
or $.10 per diluted share. This was an increase of $95,558 or 28.1% over the
third quarter of fiscal 1997 net income and an increase of $.02 per share. 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 previous year. 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.
The Company currently has a line of credit in the amount of $1,500,000 which
carries an interest rate at the bank's prime rate which expires June 30, 1999.
In addition, the Company also has two term loans with this same lender. One of
these loans carries an interest rate equal to the bank's prime rate and had a
balance of $930,560 at the end of the quarter. The second loan carries an
interest rate of 8.82% and had a balance of $1,268,619 at the end of the
quarter.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as set forth below, the Company is not currently a party to any
material pending legal proceedings. From time to time the Company may become
involved in routine litigation incidental to its business.
LELA BISHOP, ET AL. V. DOCTOR'S ASSOCIATES, INC., FREDERICK DELUCA,
PETER H. BUCK, FRANCHISE WORLD HEADQUARTERS, INC., WE CARE HAIR
DEVELOPMENT, INC., JOHN AMICO, SR., FRED FLORIO, THE BARBERS,
HAIRSTYLING FOR MEN & WOMEN, INC., WE CARE HAIR REALTY, INC., FRANCHISE
REAL ESTATE LEASING CORP., JOHN F. AMICO & COMPANY, WCH, INC. AND JAMI
INTERNATIONAL, INC. (Circuit Court, Third Judicial Circuit, Madison
County, Illinois, Cause No. 97-L-231, filed February 4, 1997).
Approximately 58 present or former We Care Hair(R) franchisees have
joined in this lawsuit and requested certification of the lawsuit as a
class action pursuant to 735 ILCS Section 5/2-801 et seq. on behalf of
all past and present We Care Hair(R) franchisees. This lawsuit has been
brought against the above defendants for alleged breaches of fiduciary
duty. The plaintiffs further allege that We Care Hair Development, Inc.
and all other defendants in this lawsuit have violated the Illinois
Anti-trust Statute, 740 ILCS Section 10/3 (2) or (3), by requiring We
Care Hair(R) franchisees to purchase alleged unusable hair care
products. The plaintiffs further allege that We Care Development, Inc.
and all other defendants in this lawsuit have violated the Illinois
Franchise Disclosure Act by using a standard franchise agreement for We
Care Hair(R) franchises that
<PAGE>
violated the anti-waiver provisions of 815 ILCS Section 705/41, and by
engaging in fraudulent practices and selling franchises at certain
times during which We Care Development, Inc.'s registration with the
Illinois Attorney General's Office had lapsed. The Company and its
subsidiary, WCH, Inc., have been named as defendants in this lawsuit
under the theory that they acted with all other defendants pursuant to
a civil conspiracy and/or mutual scheme with concerted action for the
purpose of constructively terminating the We Care Hair(R) franchises
throughout the country by convincing We Care Hair(R) franchisees to
execute new franchise agreements with the Company to operate as Cost
Cutters franchisees and decrease and/or eliminate all services and
advertising for the remaining We Care Hair(R) franchisees in violation
of the Illinois Franchise Disclosure Act. We Care Hair Realty, Inc., a
wholly-owned subsidiary of WCH, Inc., has been named as a defendant in
this lawsuit under the theory that it also participated in the
conspiracy or scheme by attempting to transfer the We Care Hair(R)
subleases to the Company and WCH, Inc. The plaintiffs seek to recover
an award of actual damages, punitive damages, treble damages and
attorneys fees in an amount not to exceed, in the aggregate, under all
counts of the complaint, against all defendants, the sum of $74,950 for
each franchisee, and for court costs.
This case is in the early pretrial stage. The Company, WCH, Inc. and We Care
Hair Realty, Inc. have initiated an action in Illinois Federal District Court
seeking to compel arbitration of the claims of the plaintiffs. The co-defendants
have initiated a separate action in Illinois Federal District Court also seeking
to compel arbitration of the claims of the plaintiffs. By order dated September
25, 1997, the Federal district Court compelled all non-Illinois plaintiffs to
arbitrate their disputes with the co-defendants, and enjoined all non-Illinois
plaintiffs from continuing the lawsuit against all defendants, including the
Company, WCH, Inc. and We Care Hair Realty, Inc. The plaintiffs have appealed
this ruling. In addition, on March 9, 1998, the Appellate Court of Illinois -
Fifth District ordered the State Court proceeding to be transferred to the
Circuit Court of Cook County, Illinois.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Exhibit
Number Description
- ------ -----------
10.1 First Amendment to Term Loan and Credit Agreement between The Barbers,
Hairstyling for Men & Women, Inc. and Norwest Bank Minnesota, N.A.
dated May 20, 1998
10.2 Revolving Note between The Barbers, Hairstyling for Men & Women, Inc.
and Norwest Bank Minnesota, N.A. dated May 20, 1998
27.1 Financial Data Schedule: Restatement of Annual Financial Statements for
Fiscal Years 1995, 1996, and 1997
27.2 Financial Data Schedule: Restatement of Quarterly Financial Statements
for Fiscal Year 1997
27.3 Financial Data Schedule: Restatement of Quarterly Financial Statements
for Fiscal Year 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
(Registrant)
Date: August 7, 1998 By: /s/ Frederick A. Huggins
------------------------
Frederick A. Huggins
President
By: /s/ J. Brent Hanson
-------------------
J. Brent Hanson
Chief Financial Officer
Exhibit 10.1
[LOGO] NORWEST(R) NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION FIRST AMENDMENT
================================================================================
This First Amendment (the "First Amendment") dated as of May 20, 1998 is between
Norwest Bank Minnesota, National Association (the "Bank") and The Barbers,
Hairstyling for Men & Women, Inc. (the "Borrower").
BACKGROUND
The Borrower and the Bank entered into a Term Loan and Credit Agreement dated
January 22, 1997 (the "Agreement"), pursuant to which the Bank extended to the
Borrower: 1) a $1,500,000.00 revolving line of credit (the "Line"); 2) a
$1,500,000.00 term loan ("Term Loan A"); and 3) a $1,000,000.00 term loan ("Term
Loan B"). Borrowings under the Line are evidenced by a promissory note dated
January 22, 1997 (the "1997 Revolving Note").
The Borrower has requested that the Bank: 1) extend the expiration date of the
Line to June 30, 1999; and 2) allow for the issuance of irrevocable standby or
documentary letters of credit under the Line. The Bank is willing to grant these
requests subject to the terms and conditions of this First Amendment.
Capitalized terms not otherwise defined in this First Amendment shall have the
meaning given them in the Agreement.
In consideration of the premises, the Bank and the Borrower agree that the
Agreement is hereby amended as of the date of this First Amendment as follows:
1. Section 1.2 of the Agreement is hereby deleted in its entirety and restated
as follows:
"1.2 LINE AVAILABILITY PERIOD. The "Line Availability Period" will
mean the period of time from the Effective Date or the date on
which all conditions precedent described in this Agreement
have been met, whichever is later, to June 30, 1999 (the "Line
Expiration Date")."
2. A new Section 1.4 is hereby added to the Agreement as follows:
"1.4 STANDBY LETTERS OF CREDIT
(a) Issuance and Expiration. During the Line Availability Period,
the Bank, in its sole discretion, agrees to issue standby
letters of credit ("Standby L/Cs") for the account of the
Borrower, provided that the Borrower is in compliance with the
terms of this Agreement. Prior to the issuance of a Standby
L/C, the Borrower will execute the Bank's standard Application
and Agreement for Irrevocable Standby Letter of Credit (the
"Standby L/C Agreement") and such other documents as the Bank
deems necessary.
(b) Fees. The Borrower shall pay a standby letter of credit fee of
1.0% per annum on the face amount of each Standby L/C, subject
to a minimum fee of $200.00, and calculated on the basis of
actual days elapsed in a 360-day year. This fee shall be paid
annually in advance and is in addition to all other fees or
expenses provided for in the L/C Application.
(c) Reduction of Line Availability. Availability under the Line
shall be reduced dollar for dollar by the face amount of all
outstanding Standby L/Cs, plus any unreimbursed draws. Without
limiting any rights and remedies available to the Bank under
any Standby L/C Agreement, any draw under a Standby L/C may,
at the Bank's option, be repaid through an automatic advance
under the Line, which shall be repayable according to the
terms of this Agreement.
<PAGE>
(d) Cash Collateralization of Outstanding Standby L/Cs. Should a
default occur under this Agreement, the Bank may require the
Borrower to deposit with it in a non-interest bearing account,
immediately available funds equal to the face amount of
outstanding Standby L/Cs. The Borrower hereby grants the Bank
a security interest in these funds as security for all of the
Borrower's obligations to the Bank."
3. A new Section 1.5 is hereby added to the Agreement as follows:
"1.5 DOCUMENTARY LETTERS OF CREDIT
(a) Issuance and Expiration. During the Line Availability Period,
the Bank, in its sole discretion, agrees to issue documentary
letters of credit ("Documentary L/Cs") for the account of the
Borrower, provided that the Borrower is in compliance with the
terms of this Agreement. Each Documentary L/C must expire
prior to the Line Expiration Date and must require drafts
payable at sight. Prior to the issuance of a Documentary L/C,
the Borrower will execute the Bank's standard Application and
Agreement for Irrevocable Documentary Letters of Credit (the
"Documentary L/C Agreement") and such other documents as the
Bank deems necessary.
(b) Fees and Expenses. Fees and expenses related to each
Documentary L/C will be agreed upon at issuance.
(c) Reduction of Line Availability. Availability under the Line
shall be reduced dollar for dollar by the face amount of all
outstanding Documentary L/Cs, plus any unreimbursed draws.
Without limiting any rights and remedies available to the Bank
under the Documentary L/C Agreement and related documents, any
draw under a Documentary L/C may, at the Bank's option, be
repaid through an automatic advance under the Line, which
shall be repayable according to the terms of this Agreement.
(d) Cash Collateralization of Outstanding Documentary L/Cs. Should
a default occur under this Agreement the Bank may require the
Borrower to deposit with it in a non-interest bearing account
immediately available funds equal to the face amount of
outstanding Documentary L/Cs. The Borrower hereby grants the
Bank a security interest in these funds as security for all of
the Borrower's obligations to the Bank.
4. Section 9.2 of the Agreement is hereby deleted in its entirety and restated
as follows:
"9.2 FINANCIAL COVENANTS
During the time period that credit is available under this
Agreement, and afterward until all amounts due under the
Documents are paid in full, unless the Bank shall otherwise
agree in writing, the Borrower agrees to comply with the
financial covenants described below, which shall be calculated
using generally accepted accounting principles consistently
applied, except as they may be otherwise modified by the
following capitalized definitions:
(a) Tangible Net Worth. Maintain a minimum Tangible Net Worth of
at least $4,000,000.00 as of September 30, 1998.
"Tangible Net Worth" means total assets less total liabilities
and less the following types of assets: (1) leasehold
improvements; (2) receivables and other investments in or
amounts due from any ten percent shareholder, director,
officer, employee or other person or entity related to or
affiliated with the Borrower; (3) goodwill, patents,
copyrights, mailing lists, trade names, trademarks, servicing
<PAGE>
rights, organizational and franchise costs, bond underwriting
costs and other like assets properly classified as intangible.
(b) Total Liabilities to Tangible Net Worth Ratio. Maintain a
ratio of total liabilities to Tangible Net Worth of less than
1.5 to 1.0 as of September 30, 1998.
(c) Net Profit. Achieve a minimum after-tax net profit of
$500,000.00 as of September 30, 1998.
(d) Cash Flow Coverage Ratio. Maintain a ratio of after-tax net
profit plus depreciation and amortization to Current
Maturities of Long Term Debt of at least 1.5 to 1.0 as of
September 30, 1998.
"Current Maturities of Long Term Debt" means that portion of
the Borrower's long term debt and capital leases payable
within 12 months of the determination date."
5. An introductory paragraph is hereby added to Section 9.3 of the Agreement as
follows:
"9.3 OTHER COVENANTS
During the time period that credit is available under this
Agreement, and afterward until all amounts due under the
Documents are paid in full, unless the Bank shall otherwise
agree in writing, the Borrower agrees to:"
6. A new Section 9.3(k) is hereby added to the Agreement as follows:
"(k) Out of Debt Period. Reduce the principal outstanding under
the Revolving Note, excluding any advances under Standby L/Cs
and Documentary L/Cs, to $0.00 for 30 consecutive days each
calendar year."
7. All references in the Agreement to "Exhibit B" are revised to read "Exhibit
A".
8. Simultaneously with the execution of this First Amendment, the Borrower shall
execute and deliver to the Bank a promissory note (the "Revolving Note") in form
and content acceptable to the Bank, which shall replace, but not be deemed to
satisfy, the 1997 Revolving Note. The initial balance of the Revolving Note
shall be the balance of the 1997 Revolving Note as of the date of this First
Amendment. Each reference in the Agreement to the Revolving Note shall be deemed
to refer to the Revolving Note dated as of the date of this First Amendment.
9. The Borrower hereby represents and warrants to the Bank as follows:
A. The Agreement as amended by this First Amendment remains
in full force and effect.
B. The Borrower has no knowledge of any default under the
terms of the Agreement or any note evidencing any of the obligations of
the Borrower that are documented in the Agreement, or of any event that
with notice or the lapse of time or both would constitute a default
under the Agreement or any such notes.
C. The execution, delivery and performance of this First
Amendment and the Revolving Note are within its corporate powers, have
been duly authorized and are not in contravention of law or the terms
of the Borrower's articles of incorporation or by-laws, or of any
undertaking to which the Borrower is a party or by which it is bound.
D. The resolutions set forth in the Corporate Certificate of
Authority dated June 23, 1994 and delivered by the Borrower to the Bank
have not been amended or rescinded, and remain in full force and
effect.
<PAGE>
10. Except as modified by this First Amendment, the Agreement remains unchanged
and in full force and effect.
IN WITNESS WHEREOF, the Bank and Borrower have executed this First Amendment as
of the date and year first above written.
NORWEST BANK MINNESOTA, THE BARBERS, HAIRSTYLING FOR
NATIONAL ASSOCIATION MEN & WOMEN, INC.
By: /s/ Brian Opp By: /s/ J. Brent Hanson
------------------------------------ ----------------------------------
Its: Vice President Its: Vice President & CFO
------------------------------ -----------------------------
Exhibit 10.2
[LOGO] NORWEST(R) NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION REVOLVING NOTE
================================================================================
$1,500,000.00 May 20, 1998
FOR VALUE RECEIVED, The Barbers, Hairstyling for Men & Women, Inc. (the
"Borrower") promises to pay to the order of Norwest Bank Minnesota, National
Association (the "Bank"), at its principal office or such other address as the
Bank or holder may designate from time to time, the principal sum of ONE MILLION
FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($1,500,000.00) or the amount shown on
the Bank's records to be outstanding, plus interest (calculated on the basis of
actual days elapsed in a 360-day year) accruing on the unpaid balance at the
annual interest rate defined below. Absent manifest error the Bank's records
will be conclusive evidence of the principal and accrued interest owing
hereunder.
This Revolving Note is issued pursuant to a First Amendment of even date
herewith amending a Term Loan and Credit Agreement dated January 22, 1997 (as
amended, the "Agreement") between the Bank and the Borrower and shall replace
but not be deemed to satisfy the 1997 Revolving Note as defined in the First
Amendment. The Agreement, and any amendments or substitutions thereto, contain
additional terms and conditions including default and acceleration provisions.
The terms of the Agreement are incorporated into this Revolving Note by
reference. Capitalized terms not expressly defined herein shall have the
meanings given them in the Agreement.
INTEREST RATE. The principal balance outstanding under this Revolving Note will
bear interest at an annual rate equal to the Base Rate, floating. The Base Rate
is the "base" or "prime" rate of interest established by the Bank from time to
time at its principal office in Minneapolis, Minnesota.
REPAYMENT TERMS
INTEREST. Interest will be payable on the last day of each month, beginning May
31, 1998 or on DEMAND.
PRINCIPAL. Principal and any unpaid interest, will be due on the earlier of
DEMAND or June 30, 2000.
ADDITIONAL TERMS AND CONDITIONS. The Borrower agrees to pay all costs of
collection, including reasonable attorneys' fees and legal expenses incurred by
the Bank in the event this Revolving Note is not duly paid. This Revolving Note
will be governed by the substantive laws of the State of Minnesota.
WAIVER OF PRESENTMENT AND NOTICE OF DISHONOR. Borrower and any other person who
signs, guarantees or endorses this Revolving Note, to the extent allowed by law,
hereby waives presentment, demand for payment, notice of dishonor, protest, and
any notice relating to the acceleration of the maturity of this Revolving Note.
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
BY: /s/ J. BRENT HANSON
------------------------
ITS: VICE PRESIDENT & CFO
--------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS A RESTATEMENT OF SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEARS 1995, 1996, AND 1997
CONTAINED IN THE COMPANY'S REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS RESTATEMENT IS TO
COMPLY WITH THE STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS
PER SHARE".
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> SEP-28-1995 SEP-26-1996 SEP-25-1997
<PERIOD-START> SEP-30-1994 SEP-29-1995 SEP-27-1996
<PERIOD-END> SEP-28-1995 SEP-26-1996 SEP-25-1997
<CASH> 2,121,310 1,317,448 2,789,933
<SECURITIES> 0 0 0
<RECEIVABLES> 1,806,764 2,714,174 3,892,718
<ALLOWANCES> 210,000 315,000 450,000
<INVENTORY> 1,052,984 1,199,939 1,684,312
<CURRENT-ASSETS> 5,001,895 5,277,933 8,397,707
<PP&E> 2,506,003 2,770,791 2,989,354
<DEPRECIATION> 1,764,896 1,816,151 2,094,285
<TOTAL-ASSETS> 7,581,727 8,248,203 12,908,542
<CURRENT-LIABILITIES> 2,763,461 2,315,188 3,370,875
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 253,883 256,827 259,195
<OTHER-SE> 4,033,437 5,189,660 6,677,997
<TOTAL-LIABILITY-AND-EQUITY> 7,581,727 8,248,203 12,908,542
<SALES> 7,137,495 8,018,860 8,885,278
<TOTAL-REVENUES> 14,916,313 18,565,751 22,121,800
<CGS> 5,540,578 6,162,530 6,727,361
<TOTAL-COSTS> 7,030,131 9,287,271 11,174,741
<OTHER-EXPENSES> 6,540,039 7,605,940 8,554,536
<LOSS-PROVISION> 158,157 232,578 217,009
<INTEREST-EXPENSE> 32,813 39,368 151,134
<INCOME-PRETAX> 1,423,910 1,822,354 2,424,413
<INCOME-TAX> 584,000 765,000 1,018,000
<INCOME-CONTINUING> 839,910 1,057,354 1,406,413
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 839,910 1,057,354 1,406,413
<EPS-PRIMARY> 0.22 0.28 0.36
<EPS-DILUTED> 0.21 0.26 0.33
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS A RESTATEMENT OF SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED FINANCIAL STATEMENTS FOR THE FIRST, SECOND AND THIRD QUARTERS
OF FISCAL YEAR 1997 CONTAINED IN THE COMPANY'S REPORT ON FORM 10-QSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THIS
RESTATEMENT IS TO COMPLY WITH THE STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 128, "EARNINGS PER SHARE".
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> SEP-25-1997 SEP-25-1997 SEP-25-1997
<PERIOD-START> SEP-27-1996 SEP-27-1996 SEP-27-1996
<PERIOD-END> DEC-26-1996 MAR-27-1997 JUN-26-1997
<CASH> 1,038,224 1,565,412 2,070,426
<SECURITIES> 0 0 0
<RECEIVABLES> 3,234,916 3,804,373 3,766,073
<ALLOWANCES> 350,000 350,000 450,000
<INVENTORY> 1,323,794 1,398,597 1,417,578
<CURRENT-ASSETS> 5,640,347 6,800,168 7,167,246
<PP&E> 2,823,543 2,875,477 2,906,218
<DEPRECIATION> 1,886,516 1,953,244 2,024,589
<TOTAL-ASSETS> 8,535,511 11,511,824 12,050,075
<CURRENT-LIABILITIES> 2,368,568 2,719,750 2,993,476
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 257,145 257,145 257,820
<OTHER-SE> 5,427,735 5,758,331 6,110,666
<TOTAL-LIABILITY-AND-EQUITY> 8,535,511 11,511,824 12,050,075
<SALES> 1,845,292 4,291,935 6,461,455
<TOTAL-REVENUES> 4,843,053 10,427,291 16,025,466
<CGS> 1,412,890 3,272,722 4,911,714
<TOTAL-COSTS> 2,473,276 5,351,213 8,122,029
<OTHER-EXPENSES> 2,017,194 4,156,636 6,374,649
<LOSS-PROVISION> 34,618 60,000 191,286
<INTEREST-EXPENSE> 5,698 41,066 95,577
<INCOME-PRETAX> 377,313 948,909 1,533,169
<INCOME-TAX> 158,000 399,000 643,000
<INCOME-CONTINUING> 219,313 549,909 890,169
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 219,313 549,909 890,169
<EPS-PRIMARY> 0.06 0.14 0.23
<EPS-DILUTED> 0.05 0.13 0.21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR THE FIRST, SECOND AND THIRD QUARTERS OF
FISCAL YEAR 1998 CONTAINED IN THE COMPANY'S REPORT ON FORM 10-QSB AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> SEP-24-1998 SEP-24-1998 SEP-24-1998
<PERIOD-START> SEP-26-1997 SEP-26-1997 SEP-26-1997
<PERIOD-END> DEC-25-1997 MAR-26-1998 JUN-25-1998
<CASH> 2,633,123 2,148,179 2,903,893
<SECURITIES> 0 0 0
<RECEIVABLES> 4,301,633 4,483,095 4,410,284
<ALLOWANCES> 500,000 550,000 600,000
<INVENTORY> 1,801,869 1,748,960 2,010,049
<CURRENT-ASSETS> 8,710,979 8,306,431 9,171,913
<PP&E> 3,069,321 3,478,317 3,643,733
<DEPRECIATION> 2,165,883 2,227,479 2,283,828
<TOTAL-ASSETS> 13,176,736 13,163,398 14,001,891
<CURRENT-LIABILITIES> 3,380,012 2,959,856 3,343,290
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 260,050 261,545 394,530
<OTHER-SE> 7,006,032 7,479,887 7,804,769
<TOTAL-LIABILITY-AND-EQUITY> 13,176,736 13,163,398 14,001,891
<SALES> 2,661,215 5,208,493 7,674,415
<TOTAL-REVENUES> 6,436,828 12,879,926 19,383,481
<CGS> 2,090,946 4,036,122 5,937,042
<TOTAL-COSTS> 3,349,614 6,732,730 10,157,909
<OTHER-EXPENSES> 2,569,871 4,859,411 7,274,977
<LOSS-PROVISION> 66,835 181,253 242,594
<INTEREST-EXPENSE> 54,119 105,628 156,107
<INCOME-PRETAX> 516,010 1,308,530 2,059,347
<INCOME-TAX> 217,000 550,000 865,000
<INCOME-CONTINUING> 299,010 758,530 1,194,347
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 299,010 758,530 1,194,347
<EPS-PRIMARY> 0.08 0.19 0.31
<EPS-DILUTED> 0.07 0.18 0.28
</TABLE>
