Supercuts 2012 Annual Report Download - page 29

Table of Contents
• The debt obligations represented by the notes may limit our ability to obtain additional financing, require us to dedicate a
substantial portion of our cash flow from operations to pay our debt, limit our ability to adjust rapidly to changing market
conditions and increase our vulnerability to downtowns in general economic conditions in our business.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company's corporate offices are headquartered in a 270,000 square foot, four building complex in Edina, Minnesota owned or leased
by the Company. The Company also operates small offices in Toronto, Canada; Coventry and London, England; Boca Raton, Florida; and
Chattanooga, Tennessee. These offices are occupied under long-term leases.
The Company owns distribution centers located in Chattanooga, Tennessee and Salt Lake City, Utah. The Chattanooga facility currently
utilizes 230,000 square feet while the Salt Lake City facility utilizes 210,000 square feet. The Salt Lake City facility may be expanded to
290,000 square feet to accommodate future growth.
The Company operates all of its salon locations and hair restoration centers under leases or license agreements. Substantially all of its
North American locations in regional malls are operating under leases with an original term of at least ten years. Salons operating within strip
centers and Walmart Supercenters have leases with original terms of at least five years, generally with the ability to renew, at the Company's
option, for one or more additional five year periods. Salons operating within department stores in Canada and Europe operate under license
agreements, while freestanding or shopping center locations in those countries have real property leases comparable to the Company's domestic
locations.
The Company also leases the premises in which certain franchisees operate and has entered into corresponding sublease arrangements
with the franchisees. These leases have a five year initial term and one or more five year renewal options. All lease costs are passed through to
the franchisees. Remaining franchisees, who do not enter into sublease arrangements with the Company, negotiate and enter into leases on their
own behalf.
None of the Company's salon leases are individually material to the operations of the Company, and the Company expects that it will be
able to renew its leases on satisfactory terms as they expire. See Note 10 to the Consolidated Financial Statements in Part II, Item 8 of this
Form 10-K.
Item 3. Legal Proceedings
The Company is a defendant in various lawsuits and claims arising out of the normal course of business. Like certain other large retail
employers, the Company has been faced with allegations of purported class-wide consumer and wage and hour violations. In addition, the
Company is a nominal defendant, and nine current and former directors and officers of the Company are named defendants, in a shareholder
derivative action in Minnesota state court. The derivative shareholder alleges that the individual defendants breached their fiduciary duties to
the Company in connection with their approval of certain executive compensation arrangements and certain related party transactions. A
Special Litigation Committee has been formed per the direction of the judge in the matter. The Company is working with outside counsel to
formulate its next steps in keeping with the court. Litigation is inherently unpredictable and the outcome of these matters cannot presently be
determined. Although the actions are being vigorously defended, the Company could in the future incur judgments or enter into settlements of
claims that could have a material adverse effect on its results of operations in any particular period.
27