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 26, 1997
[ ] 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 (I.R.S. 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 8, 1997, the registrant had 2,585,704 outstanding shares of
common stock, $. 10 par value.
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 26, 1997 and June 27, 1996
Condensed Consolidated Statements of Financial Position at
June 26, 1997 and September 26, 1996
Condensed Consolidated Statements of Cash Flows for the
Quarter Ended June 26, 1997 and June 27, 1996
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 11 Statement re: computation of earnings per share
Exhibit 27 Financial Data Schedule
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
THIRD QUARTER F1997
(UNAUDITED)
Three Months Ended Nine Months Ended
June 26, June 27, June 26, June 27,
1997 1996 1997 1996
----------- ----------- ------------ ------------
REVENUES
Franchise Royalties $ 1,923,927 $ 1,588,490 $ 5,175,194 $ 4,481,948
Franchise Fees 222,750 309,299 647,068 919,349
Company-Owned Salons 1,200,842 850,453 3,325,719 1,934,769
Beauty Products & Equipment 2,169,520 2,051,056 6,461,455 6,114,134
Other 81,136 113,319 416,030 313,867
----------- ----------- ------------ ------------
Total Revenues 5,598,175 4,912,617 16,025,466 13,764,067
COSTS & EXPENSES
Franchise Operations
Salaries & Benefits 511,948 456,051 1,464,034 1,362,568
General & Administrative 259,078 243,220 797,015 768,532
----------- ----------- ------------ ------------
Total 771,026 699,271 2,261,049 2,131,100
----------- ----------- ------------ ------------
Company-Owned Salons
Salaries & Benefits 643,027 510,638 1,803,862 1,149,402
General & Administrative 293,086 260,547 907,701 609,649
Cost of Products & Services 195,711 132,097 498,752 298,387
----------- ----------- ------------ ------------
Total 1,131,824 903,282 3,210,315 2,057,438
----------- ----------- ------------ ------------
Distribution & General Administration
Salaries & Benefits 751,705 674,939 2,185,036 1,931,364
General & Administrative 695,280 574,988 1,928,564 1,697,128
Cost of Products & Equipment 1,638,994 1,582,130 4,911,714 4,792,456
----------- ----------- ------------ ------------
Total 3,085,979 2,832,057 9,025,314 8,420,948
----------- ----------- ------------ ------------
OPERATING INCOME 609,346 478,007 1,528,788 1,154,581
OTHER INCOME (EXPENSE)
Interest Income 35,596 30,362 103,063 90,537
Interest Expense (54,512) (15,903) (95,577) (28,465)
Net Gain(Loss) on Disposal of Assets (6,171) - (3,105) 31,092
----------- ----------- ------------ ------------
INCOME BEFORE INCOME TAXES 584,259 492,466 1,533,169 1,247,745
INCOME TAX EXPENSE 244,000 207,000 643,000 524,000
----------- ----------- ------------ ------------
NET INCOME $ 340,259 $ 285,466 $ 890,169 $ 723,745
=========== =========== ============ ============
NET INCOME PER SHARE $ 0.12 $ 0.10 $ 0.32 $ 0.26
=========== =========== ============ ============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 2,820,088 2,758,585 2,811,250 2,735,458
=========== =========== ============ ============
See notes to condensed consolidated financial statements.
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
June 26, September 26,
1997 1996
----------- -------------
ASSETS (Unaudited) (Note 1)
Current assets:
Cash $ 2,070,426 $1,317,448
Trade receivable, less allowance for doubtful
accounts of $450,000 in June, 1997 and
$315,000 in September, 1996 2,893,432 2,163,968
Notes receivable 422,641 235,206
Inventories held for resale 1,417,578 1,199,939
Prepaid expenses 76,169 74,372
Deferred income taxes 287,000 287,000
----------- ----------
Total current assets 7,167,246 5,277,933
Notes receivable, less current portion and allowance for
doubtful notes of $100,000 in June, 1997 and
September, 1996 745,545 733,924
Property, equipment and leasehold impovements, at cost:
Equipment 1,996,181 1,918,682
Leasehold improvements 910,037 852,109
----------- ----------
2,906,218 2,770,791
Less accumulated depreciation 2,024,589 1,816,151
----------- ----------
Net property, equipment and leasehold improvements 881,629 954,640
Investment in franchise contracts, less accumulated
amortization of $347,839 in June, 1997 and
$221,805 in September, 1996 2,664,943 733,419
Deferred income taxes 338,000 338,000
Other assets 252,712 210,287
----------- ----------
Total assets $12,050,075 $8,248,203
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt and capital
lease obligations $ 312,565 $ 86,675
Accounts payable 699,046 481,897
Deferred franchise fees 107,750 113,750
Committed advertising 714,350 521,208
Accrued compensation and related payroll taxes 723,274 741,704
Other accrued expenses 453,958 287,011
Income taxes payable (17,464) 82,943
----------- ----------
Total current liabilities 2,993,479 2,315,188
Long term debt and capital lease obligations 2,196,985 56,250
Deferred franchise fees 226,000 226,000
Deferred compensation 265,125 204,278
Shareholders' equity:
Common stock 257,820 256,827
Additional paid in capital 406,570 375,733
Retained earnings 5,704,096 4,813,927
----------- ----------
Total shareholder's equity 6,368,486 5,446,487
----------- ----------
Total liabilities and shareholders' equity $12,050,075 $8,248,203
=========== ==========
Note 1: The balance sheet at September 26, 1996 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 1996 items have been
reclassified to conform with the fiscal 1997 presentation.
See notes to condensed consolidated financial statements.
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 26, June 26,
1997 1996
----------- -----------
OPERATING ACTIVITIES
Net income $ 890,169 $ 723,745
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 367,483 267,500
Provision for losses on accounts and notes receivable 191,286 204,646
(Gain)/Loss on sales of property and equipment 3,105 (31,092)
Deferred income taxes - (60,000)
Stock compensation 19,080 56,198
Stock awarded to Franchisees under the
Designer Salon Program - 39,450
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts and notes receivable (1,119,806) (1,196,487)
Inventories held for resale (217,639) (364,356)
Prepaid expenses (1,797) (61,411)
Other assets (42,425) (21,276)
(Decrease) increase in:
Payables and accrued expenses 619,655 (92,366)
Deferred franchise fees (6,000) (80,227)
Income taxes payable (100,407) (14,625)
----------- -----------
Net cash provided by (used in) operating activities 602,704 (630,301)
INVESTING ACTIVITIES
Proceeds from sale of property and equipment 111,786 35,880
Capital expenditures (283,329) (458,049)
Investment in franchise contracts (2,057,558) (30,177)
----------- -----------
Net cash used in investing activities (2,229,101) (452,346)
FINANCING ACTIVITIES
Additions to long-term debt 2,500,000 500,000
Principle payments on long-term debt (121,700) (56,250)
Principle payments on capital lease obligations (11,675) (18,510)
Proceeds from issuance of stock options 12,750 -
----------- -----------
Net cash provided by(used in) financing activities 2,379,375 425,240
----------- -----------
Net increase(decrease) in cash and cash equivalents 752,978 (657,407)
Cash and cash equivalents at beginning of period 1,317,448 2,121,310
----------- -----------
Cash and cash equivalents at end of period $ 2,070,426 $ 1,463,903
=========== ===========
CASH PAID DURING PERIOD FOR:
Interest $ 95,577 $ 28,465
Taxes $ 743,407 $ 598,625
See notes to condensed consolidated financial statements.
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-Q 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 26, 1997, are not necessarily indicative of the results that
may be expected for the year ended September 25, 1997. 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 26, 1996.
NOTE B - NET INCOME PER SHARE
The net income per share is computed using the weighted average number
of shares of common stock, and common stock equivalents, outstanding during the
periods presented.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, EARNINGS PER SHARE, which is required to be adopted on
December 31, 1997. At that time, the company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. The impact is expected to
result in a $.01 increase in primary earnings per share for the third quarters
of both fiscal years. Year to date primary earnings per share would increase
$.03 for the current fiscal year and $.02 for the previous fiscal year.
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 947 franchised and company-owned salons in operation as
of June 26, 1997, compared to 768 at June 27, 1996. 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 1997
and 1996 include 52 weeks of operations.
RESULTS OF OPERATIONS
REVENUES: The Company's total revenues were $5,598,175 for the third quarter of
fiscal 1997 and $16,025,466 for the first nine months of fiscal 1997, an
increase of 14.0% and 16.4% respectively over the comparable periods of the
previous year. Franchise royalties totaled $1,923,927 for the third quarter of
fiscal 1997 which is an increase of 21.1% over the third quarter of the previous
year. Franchise royalties for the first nine months increased 15.5% to
$5,175,194 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 1997, including new salon openings and the
purchase of the We Care Hair franchises, as compared to the same period of
fiscal 1996 and an increase in average per store sales by franchised salons.
Franchise fee revenue (initial franchise fees) was $222,750 during the third
quarter of fiscal 1997, an decrease of 28.0% versus the third quarter of fiscal
1996. The decrease in franchise fee revenue was due to a decrease in the number
of salons opened during the comparable periods. A total of nineteen new salons
opened in the third quarter of fiscal 1997 compared to opening 30 salons during
the third quarter of the previous year. Year to date the franchise fee revenue
has decreased $272,281 or 29.6% over the prior year comparable period to
$647,068. This represents openings of 51 franchised locations and four
company-owned salons versus 78 franchised locations and eight company-owned
salons for the first nine months of the previous year. Revenue from
company-owned salons was $1,200,842 for the third quarter and $3,325,719 for the
first nine months of fiscal 1997, an increase of 41.2% and 71.9% 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 1997 were $2,169,520, an increase of
$118,464 or 5.8% over the third quarter of the previous year. Year to date
revenue from beauty products and equipment was $6,461,455, an increase of 5.7%
over the first nine months of the previous year. The increase in beauty product
and equipment sales includes a $225,000 increase in export sales. Product sales
also increased due to the addition of new salons and selected price increases.
Equipment prices also increased, but total equipment sales decreased 9.3%
because of a decrease in the number of new salon openings.
COSTS & EXPENSES - FRANCHISE OPERATIONS: Total franchise operations expenses
were $771,026 for the third quarter and $2,261,049 for the first nine months of
fiscal 1997. This was an increase of 10.3% and 6.1% respectively over the
comparable periods of fiscal 1996. The 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%.
COSTS & EXPENSES - COMPANY-OWNED SALONS: The Company presently owns and operates
twenty-one salons: twenty operate as Cost Cutters salons and one operates as a
City Looks. Sixteen of the Cost Cutters operate inside Wal-Mart Supercenters.
Third quarter operating costs for the company-owned salons were $1,131,824 as
compared to $903,282 for the third quarter of the previous year, an increase of
25.3%. Year to date operating costs were $3,210,315 versus $2,057,438 for the
comparable period of the previous year. The increase was primarily due to the
costs associated with opening and operating new Cost Cutters salons.
COSTS & EXPENSES - DISTRIBUTION AND GENERAL ADMINISTRATION: Total operating
expenses for distribution and general administration for the third quarter of
fiscal 1997 were $3,085,979 which is an increase of $253,922 or 9.0% over the
third quarter of the prior year. Expenses for the first nine months of fiscal
1997 were $9,025,314 as compared to $8,420,948 in fiscal 1996, an increase of
7.2%. 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 $1,638,994 versus a prior
year cost of $1,582,130, an increase of 3.6%. Year to date costs of products and
equipment were $4,911,714 versus $4,792,456 the previous year, an increase of
2.5%. Margins on the sale of products and equipment were 24.5% and 24.0% for the
third quarter and first nine months respectively. This compares with 22.9% and
21.6% for the same periods of the previous year. The increase in margins is
primarily to due to changes in product mix. Salaries and benefits were $751,705
and $2,185,036 for the third quarter and first nine months of fiscal 1997. This
compares with $674,939 and $1,931,364 for the comparable periods of the previous
year and represents an increase of 11.4% and 13.1% 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
20.9% to $695,280. Year to date general and administrative expenses increased by
$231,436 or 13.6% over the previous year to $1,928,564. Legal and other
professional fees related to the We Care Hair franchises accounted for over half
of this increase.
OPERATING INCOME: Operating income was $609,346 for the third quarter and
$1,528,788 for the first nine months of fiscal 1997. This compares to $478,007
and $1,154,581 for the comparable periods of the prior year, an increase of
27.5% and 32.4% respectively. Operating income as a percent of revenue was 10.9%
for the third quarter and 9.5% for the first nine months of fiscal 1997. This
compares to 9.7% and 8.4% for the comparable periods of the previous fiscal
year.
INTEREST INCOME AND EXPENSE: Interest income was $35,596 for the third quarter
and $103,063 for the first nine months of fiscal 1997, an increase versus the
previous year of 17.2% and 13.8% respectively. Interest expense was $54,512 for
the third quarter and $95,577 for the first nine months of fiscal 1997. This
compares to $15,903 and $28,465 for the comparable periods of fiscal 1996. The
increase in interest expense was due to the debt incurred by the Company to
acquire the We Care Hair chain.
NET GAIN(LOSS) ON DISPOSAL OF ASSETS: Gains and losses on disposal of assets
have been minimal. Year to date, the Company has sold five company-owned salons.
In fiscal 1996, the Company sold one company-owned salon and one rental
property.
INCOME TAXES: The Company's effective tax rates for the third quarter and first
nine months of fiscal 1997 were 41.8% and 41.9%, respectively, versus a rate of
42.0% for the third quarter and the first nine months of fiscal 1996. The
Company anticipates that the rate for the balance of fiscal 1997 will be
approximately 42%.
NET INCOME: The Company's net income for the third quarter of 1997 was $340,259
or $.12 per share. This was an increase of $54,793 or 19.2% over the third
quarter of fiscal 1996 net income and an increase of $.02 per share. Net income
for the first nine months of fiscal 1997 was up 23.0% to $890,169. Earnings per
share for the first nine months were $.32 per share as compared to $.26 for the
previous year.
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 1997 to be approximately $400,000, primarily due to
the addition of several new company-owned salons and routine replacement of
office equipment.
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, 1998.
In addition, the Company also has three 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 $75,000 at June 26, 1997. A second loan also carries an interest rate
equal to the bank's prime rate and had a balance of $1,000,000 at the end of the
quarter. The third loan carries an interest rate if 8.82% and had a balance of
$1,434,550.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 4, 1997, the Company was named as a defendant in 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). Eighteen We Care
Hair(R) franchisees have filed 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,
fraud, violations of the Illinois Franchise Disclosure Act and violations of the
Illinois Anti-trust Statute. 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. The
Barbers and its wholly-owned 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 Barbers to operate as Cost Cutters
franchisees and decrease and/or eliminate all services and advertising for
remaining We Care Hair(R) franchisees. 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 Barbers and WCH, Inc. This case is
in the early pretrial stage.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
Exhibit
Number Description
- ------ -----------
11 Statement re: computation of earnings per share
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K under item 2 on February 6, 1997
and filed an amendment to such report on April 7, 1997 which included
financial statements required by Item 7 of Form 8-K.
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 8, 1997 By: /s/ Frederick A. Huggins
Frederick A. Huggins
President
By: /s/ J. Brent Hanson
J. Brent Hanson
Chief Financial Officer