Supercuts 2006 Annual Report Download - page 16

personnel management and capital expenditure decisions. However, the franchise agreements afford certain rights to the Company, such as the
right to approve location, suppliers and the sale of a franchise. Additionally, franchisees are required to conform to company established
operational policies and procedures relating to quality of service, training, design and decor of stores, and trademark usage. The Company’s
field personnel make periodic visits to franchise stores to ensure that the stores are operating in conformity with the standards for each
franchising program. All of the rights afforded the Company with regard to the franchise operations allow the Company to protect its brands,
but do not allow the Company to control the franchise operations or make decisions that have a significant impact on the success of the
franchise salons.
To further ensure conformity, the Company may enter into the lease for the store site directly with the landlord, and subsequently sublease
the site to the franchisee. The franchise agreement and sublease provide the Company with the right to terminate the sublease and gain
possession of the store if the franchisee fails to comply with the Company’s operational policies and procedures. See Note 6 of “Notes to
Consolidated Financial Statements” for further information.
Franchise Terms. Pursuant to their franchise agreement with the Company, each franchisee pays an initial fee for each store and
ongoing royalties to the Company. In addition, for most franchise concepts, the Company collects advertising funds from franchisees and
administers the funds on behalf of the concept. Franchisees are responsible for the costs of leasehold improvements, furniture, fixtures,
equipment, supplies, inventory and certain other items, including initial working capital.
Additional information regarding each of the major franchisee brands is listed below:
Supercuts (North America)
The majority of existing Supercuts franchise agreements have a perpetual term, subject to termination of the underlying lease
agreement or termination of the franchise agreement by either the Company or the franchisee. The agreements also provide the Company
a right of first refusal if the store is to be sold. The franchisee must obtain the Company’s approval in all instances where there is a sale of
the franchise. The current franchise agreement is site specific and does not provide any territorial protection to a franchisee, although
some older franchise agreements do include limited territorial protection. During fiscal year 2001, the Company began selling
development agreements for new markets which include limited territory protection for the Supercuts concept. The Company has a
comprehensive impact policy that resolves potential conflicts among franchisees and/or the Company regarding proposed salon sites.
Cost Cutters, First Choice Haircutters and Magicuts (North America)
The majority of existing Cost Cutters’ franchise agreements have a 15 year term with a 15 year option to renew (at the option of the
franchisee), while the majority of First Choice Haircutters’ franchise agreements have a ten year term with a five year option to renew.
The majority of Magicuts’ franchise agreements have a term equal to the greater of five years or the current initial term of the lease
agreement with an option to renew for two additional five year periods. All of the agreements also provide the Company a right of first
refusal if the store is to be sold. The franchisee must obtain the Company’s approval in all instances where there is a sale of the franchise.
The current franchise agreement is site specific. Franchisees may enter into development agreements with the Company which provide
limited territorial protection.
Pro Cuts (North America)
The majority of existing Pro Cuts franchise agreements have a ten year term with a ten year option to renew. The agreements also
provide the Company a right of first refusal if the store is to be
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