SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth for the periods indicated, selected financial
data derived from the Company's consolidated financial statements.
1992 1993 1994 1995 1996
Sales $ 305,989 $ 340,966 $ 376,971 $ 422,188 $ 499,442
Operating income 17,219 20,568 25,038 30,329 38,229
Net income (b) 4,417 3,858 4,053 14,651 19,124
Net income per share (b) .31 .27 .26 .84(a) 1.05(a)
Total assets 127,933 143,152 165,999 166,323 221,174
Long-term obligations, including
capital lease obligations 54,911 51,822 54,309 37,969 49,717
(a) Fully diluted. For periods prior to fiscal 1995, common equivalent
shares were antidilutive.
(b) To facilitate earnings comparisons, absent the impact of certain
nonrecurring activity, the following information is provided.
The Company incurred nonrecurring gains (charges) in 1993, 1994, 1995
and 1996 of ($5,265), ($10,000), $1,195 and $700, respectively,
associated with resolution of its litigation with MEI Salons. Exclusive
of these nonrecurring items, net income and net income per share,
respectively, would have been $6,859 and $.49 in 1993, $10,053 and $.67
in 1994, $13,946 and $.80 in 1995 and $18,704 and $1.03 in 1996.
KEY RATIOS FOR THE YEARS ENDED JUNE 30,
----------------------------
1995 1996
Cash flow per fully diluted share $ 1.74 $ 2.02
Gross margin percentage 42.8 % 43.1 %
Product sales mix 26.4 % 28.1 %
Debt to capitalization 39.5 % 36.9 %
Operating income as percent of sales 7.3 % 7.7 %
ANNUAL RESULTS
FOR THE YEARS ENDED JUNE 30,
------------------------------------
1994 1995 1996
Sales 100.0 % 100.0 % 100.0 %
Operating expenses:
Cost of sales 57.7 57.2 56.9
Rent 13.0 12.9 13.5
Selling, general and administrative 18.8 19.0 17.9
Depreciation and amortization 3.6 3.5 3.7
Other, including franchise revenues
and expenses 0.2 0.1 0.3
------------------------------------
93.3 92.7 92.3
------------------------------------
Operating income 6.7 7.3 7.7
Other income (expense):
Interest (2.0) (1.5) (1.2)
Nonrecurring items (2.6) 0.3 0.1
Other, net (0.2) (0.1) --
------------------------------------
Income before income taxes 1.9 6.0 6.6
Income taxes (0.8) (2.5) (2.8)
------------------------------------
Net income 1.1 % 3.5 % 3.8 %
------------------------------------
------------------------------------
(16) REGIS CORPORATION 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY
Regis Corporation, based in Minneapolis, is the largest owner and operator of
mall-based hair and retail product salons in the world. The Regis worldwide
operations include 1,963 hairstyling salons at June 30, 1996 operating in 5
divisions: Regis Hairstylists, MasterCuts, Trade Secret, Wal-Mart and
International. Worldwide operations include 72 franchised salons operating
primarily in the Trade Secret division. The Company has more than 20,000
employees worldwide.
During fiscal 1996, the Company's consolidated sales increased 18.3 percent to a
record $499,442,000 and operating income grew 26.0 percent to $38,229,000.
Fiscal 1996 net income was $19,124,000 or $1.05 per share on a fully diluted
basis. Exclusive of nonrecurring gains, fiscal 1996 earnings were $1.03 per
share, an increase of 28.8 percent, compared to $.80 per share in the prior
year.
RESULTS OF OPERATIONS
The Annual Results table at left sets forth for the periods indicated certain
information derived from the Company's Consolidated Statement of Operations
expressed as a percentage of sales. All percentages were computed as a
percentage of company-owned salon sales. For purposes of this analysis,
franchise revenues have been netted against the related franchise expenses and
included in the cost category "Other, including franchise revenues and
expenses." Franchise revenues are not material to the Company, as they represent
approximately 1 percent of total sales.
YEAR-END COMPARISONS
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995:
SALES
SALES for fiscal 1996 were a record $499,442,000, representing an increase of
$77,254,000, or 18.3 percent, over fiscal 1995. Nearly 60 percent of the
increase is attributable to acquisitions occurring in fiscal 1996 and the full
year impact of the fiscal 1995 acquisitions, with the remaining increase due to
net salon openings, and increases in customers served and product sales. Regis
Hairstylists, MasterCuts, Trade Secret and Wal-Mart salons in the United States
and Canada (Domestic salons) accounted for $44,430,000 of the increase in total
sales. The remainder of the sales increase, or $32,824,000, was related to the
Company's salon operations in the United Kingdom, South Africa, Switzerland and
Mexico (International salons) and was largely influenced by the Company's fiscal
1996 acquisitions in the United Kingdom.
For fiscal 1996, sales from Regis Hairstylists were $267,576,000, an increase of
4.1 percent; sales from MasterCuts salons were $83,411,000, an increase of 18.3
percent; Trade Secret company-owned sales were $64,960,000, an increase of 39.8
percent; and International salon sales were $76,287,000, an increase of 75.5
percent.
Same-store sales from Domestic salons open for more than 12 months increased an
average of 3.4 percent, compared to a 4.2 percent increase the previous year.
Same-store sales for the United Kingdom salons (U.K. salons), the primary
component of International salons, increased 1.5 percent during the year. Same-
store sales increases achieved during fiscal 1996 were primarily due to an
increase in the number of customers served. A total of 30,317,000 customers were
served in fiscal 1996, an increase of 11.7 percent, from 27,142,000 customers
served in fiscal 1995. The Company utilizes an audio-visual-based training
system in its salons. Management believes this training system provides its
employees with improved customer service and technical skills and positively
contributes to the increase in customers served.
SERVICE SALES in fiscal 1996 were $355,880,000, an increase of $49,582,000, or
16.2 percent, over fiscal 1995. This increase was primarily due to acquisitions,
net salon openings, and same-store sales growth.
PRODUCT SALES in fiscal 1996 were $138,813,000, an increase of $27,501,000, or
24.7 percent, over fiscal 1995. The Trade Secret retail product salon operations
represented $14,463,000 of this overall increase, reflecting acquisitions
occurring in fiscal 1996 and the full year impact of the fiscal 1995
acquisitions, net salon openings, and same-store sales growth. Product sales for
the Company's Regis Hairstylists, MasterCuts and Wal-Mart salons increased
$8,658,000 and represented 20.0 percent of their fiscal 1996 service and product
sales, up from 18.9 percent in fiscal 1995, reflecting increased customer
awareness and further acceptance of national brand salon merchandise and sales
training of Company employees. The balance of the increase relates to
International salons and was largely caused by the fiscal 1996 salon
acquisitions.
COST OF SALES
Cost of sales in fiscal 1996 was $281,552,000, compared to $238,810,000 in
fiscal 1995. The resulting combined gross margin for fiscal 1996 improved 30
basis points to 43.1 percent, compared to 42.8 percent in fiscal 1995. This
improvement is due to several factors, the most significant of which is an
improved sales leverage on the salaries and commissions structure at Regis
Hairstylists, which is the major component of cost of sales. Improved gross
margin was also the result of an increase in the percentage of product sales in
Regis Hairstylists and MasterCuts, which generally have a higher gross profit
margin than service sales.
Service margins improved to 41.8 percent in fiscal 1996, compared to 41.4
percent in fiscal 1995. Retail product margins declined slightly during fiscal
1996 to 46.4 percent, compared to 46.7 percent during fiscal 1995.
RENT EXPENSE
Rent expense in fiscal 1996 was $67,014,000, or 13.5 percent of sales, compared
to $53,745,000, or 12.9 percent of sales, in fiscal 1995. The percentage
increase is due to the fiscal 1996 U.K. acquisitions of the Essanelle department
store salons and the Steiner salons. When compared to Domestic salon operations,
the U.K. salon operations have higher rent expenses and lower selling and
administrative expenses, because certain costs are absorbed by department stores
and passed on as rent. Rent expense as a percentage of sales for the Company's
Domestic salons was 11.9 percent in fiscal 1996, comparable to the 11.8 percent
in fiscal 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative (SG&A) expense in fiscal 1996 was
$88,721,000, or 17.9 percent of sales, compared to $79,398,000, or 19.0 percent
of sales, in fiscal 1995. Such expenses include costs associated with salon
operations (such as advertising, promotion, insurance, telephone and utilities),
field supervision costs (payroll,
REGIS CORPORATION 1996 (17)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
related taxes and travel) and total home office administration costs (such as
warehousing, salaries, occupancy costs and professional fees). A portion of the
improvement was attributable to the fiscal 1996 U.K. salon acquisitions which,
for the reasons described under rent expense above, have a lower level of SG&A
expense. The balance of the rate improvement was due to continued sales
leveraging of fixed and semi-fixed costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense in fiscal 1996 was 3.7 percent of sales,
compared to 3.5 percent in fiscal 1995. Amortization costs have increased due to
the increased level of intangible assets associated with the Company's salon
acquisition activity. Depreciation expense, the major component within this
category, has remained relatively consistent as a percentage of sales.
OPERATING INCOME
Operating income in fiscal 1996 improved to $38,229,000, an increase of
$7,900,000, or 26.0 percent, over fiscal 1995. Operating income as a percentage
of sales increased to 7.7 percent in fiscal 1996, compared to 7.3 percent in
fiscal 1995. This improvement is attributable primarily to improved gross
margins and the leveraging of selling, general and administrative expense as a
percentage of sales.
INTEREST EXPENSE
Interest expense for fiscal 1996 was $6,106,000, or 1.2 percent of sales, down
from $6,465,000, or 1.5 percent of sales, in fiscal 1995. This improvement
reflects sales leveraging, lower average debt balances and slightly lower
average interest rates during fiscal 1996.
NONRECURRING ITEMS
During fiscal 1996, the Company received $700,000 of principal payments from
Premier Salons under a note agreement. The Company had previously written off
the related receivable, and accordingly, has recorded these recoveries as
nonrecurring gains. There is no assurance that such recoveries will continue.
Fiscal 1995 nonrecurring items are discussed in the comparison of 1995 and 1994
Results of Operations.
INCOME TAXES
The Company's effective income tax rate for fiscal 1996 was 42.0 percent of
pretax income, which is the same as fiscal 1995. The fiscal 1996 effective rate
reflects higher levels of pretax income which reduces the effective rate. The
decrease was offset by the discontinuance of the targeted jobs tax credit.
NET INCOME
Net income for fiscal 1996 was $19,124,000, or $1.05 per share on a fully
diluted basis, compared to net income for fiscal 1995 of $14,651,000, or $.84
per share. Exclusive of nonrecurring items, net income for fiscal 1996 would
have been $1.03 per share on a fully diluted basis, compared to net income for
fiscal 1995 of $.80 per share, an increase of 28.8 percent.
YEAR-END COMPARISONS
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994:
SALES
SALES for fiscal 1995 were a record $422,188,000, representing an increase of
$45,217,000, or 12.0 percent, over fiscal 1994. This increase was attributable
to net salon openings, acquisitions, and increases in same-store sales. Domestic
salons accounted for $38,611,000 of the total sales increase. The balance of the
overall sales increase of $6,606,000 related to the Company's International
salons.
For fiscal 1995, sales from Regis Hairstylists were $257,161,000, an increase of
3.6 percent; sales from MasterCuts salons were $70,510,000, an increase of 18.6
percent; Trade Secret company-owned sales were $46,476,000, an increase of 51.8
percent; and International salon sales were $43,463,000, an increase of 17.9
percent.
Same-store sales from Domestic salons open for more than 12 months increased an
average of 4.2 percent, compared to a 3.4 percent increase the previous year.
Same-store sales for the United Kingdom salons, the primary component of
International salons, increased 11.2 percent during the year. Same-store sales
increases achieved during fiscal 1995 were primarily due to an increase in the
number of customers served. A total of 27,142,000 customers were served in
fiscal 1995, an increase of 10.2 percent, from 24,634,000 customers served in
fiscal 1994.
SERVICE SALES in fiscal 1995 were $306,298,000, an increase of $19,765,000, or
6.9 percent, over fiscal 1994. This increase was primarily due to net salon
openings and increases in customers served.
PRODUCT SALES in fiscal 1995 were $111,312,000, an increase of $22,777,000, or
25.7 percent, over fiscal 1994. The Trade Secret retail product salon operations
represented $14,555,000 of this overall increase, reflecting the full year
impact of the Trade Secret acquisition, additional acquisitions in the current
year and net salon openings. Product sales for the Company's Regis Hairstylists
and MasterCuts salons were $61,878,000, and represented 18.9 percent of their
fiscal 1995 sales, up from 18.0 percent in fiscal 1994, reflecting increased
customer awareness and further acceptance of national brand salon merchandise
and sales training of Company associates.
COST OF SALES
Cost of sales in fiscal 1995 was $238,810,000, compared to $216,266,000 in
fiscal 1994. The resulting combined gross margin for fiscal 1995 improved to
42.8 percent, compared to 42.3 percent in fiscal 1994. This improvement is due
to several factors, the most significant of which is an increase in the
percentage of product sales in Regis Hairstylists and MasterCuts, which
generally have a higher gross profit margin than service sales. Salary and
commissions paid to hairstylists, the major component of cost of sales, also
favorably improved in fiscal 1995 due to the increase in sales from MasterCuts
salons which have lower payroll costs than Regis Hairstylists salons.
Service margins of 41.4 percent in fiscal 1995 are equal to the previous year.
Retail product margins improved during fiscal 1995 to 46.7 percent, compared to
45.5 percent during fiscal 1994. The lower margins in fiscal 1994 were due to
the Trade Secret acquisition, as Trade Secret salons experienced higher payroll
costs due to new store openings
(18) REGIS CORPORATION 1996
and training. In addition, product costs in the Trade Secret division were
higher during the transition period immediately following the fiscal 1994
acquisition and did not reflect the full benefit of the Company's purchasing
power.
RENT EXPENSE
Rent expense in fiscal 1995 was $53,745,000, or 12.9 percent of sales, compared
to $48,622,000, or 13.0 percent of sales, in fiscal 1994. The improvement is due
primarily to strong same-store sales performance in fiscal 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense in fiscal 1995 was $79,398,000, or
19.0 percent of sales, compared to $70,555,000, or 18.8 percent of sales, in
fiscal 1994. The slight increase is primarily due to an increase in worker's
compensation insurance and certain discretionary payments made to employee
benefit plans in response to the Company's strong operating performance in
fiscal 1995.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense in fiscal 1995 was 3.5 percent of sales,
compared to 3.6 percent in fiscal 1994. This improvement relates primarily to
strong same-store sales increases. Depreciation expense, the major component
within this category, is principally associated with the Company's salon
equipment and leasehold improvements.
OPERATING INCOME
Operating income in fiscal 1995 improved to $30,329,000, an increase of
$5,291,000 over fiscal 1994. Operating income as a percentage of sales increased
60 basis points to 7.3 percent in fiscal 1995 compared to 6.7 percent in fiscal
1994. This improvement is attributable primarily to increased same-store sales
in fiscal 1995 and improved gross margins. Operating income improvement in the
U.K. salons was offset by a decrease in the South African salons operating
income.
INTEREST EXPENSE
Interest expense for fiscal 1995 was $6,465,000, or 1.5 percent of sales, down
from $7,432,000, or 2.0 percent of sales, in fiscal 1994. This improvement
reflects the effect of principal reductions in senior notes and lower average
balances on the Company's revolving line of credit facility throughout fiscal
1995.
NONRECURRING ITEMS
During fiscal 1995, the Company received a $2,500,000 cash settlement associated
with its directors' and officers' insurance claim. Certain other negative events
also occurred in fiscal 1995 with respect to the Company's investment in and
advances to Premier Salons, which caused the Company to re-evaluate and write
off the net carrying value ($2,305,000) of all remaining net assets associated
with the fiscal 1994 MEI litigation settlement. In addition, during fiscal 1995,
the Company issued 93,220 shares on a pre-split basis of its common stock to the
bankruptcy creditors of MEI as final resolution of the stock guarantee. This was
fewer shares than the Company originally estimated when the transaction was
recorded the previous year, which resulted in a $500,000 pretax gain. As a
result of these transactions, the Company recorded a $695,000 pretax gain during
the first and second quarters of the year ended June 30, 1995 and adjusted the
amounts previously recorded by decreasing shareholders' equity by $500,000.
During the third and fourth quarters of fiscal 1995, the Company received
$500,000 of principal payments from Premier Salons under the note agreement. The
Company had previously written off the related receivable, and accordingly, has
recorded these recoveries as nonrecurring gains. There is no assurance that such
recoveries will continue.
INCOME TAXES
The Company's effective income tax rate for fiscal 1995 was 42.0 percent of
pretax income, compared to 42.7 percent in fiscal 1994. The decrease in the
effective rate is attributable to the Company's ability to utilize South African
losses to offset U.K. taxable income during fiscal 1995.
NET INCOME
Net income for fiscal 1995 improved to $14,651,000, or $.84 per share on a fully
diluted basis, compared to net income for fiscal 1994 of $4,053,000, or $.26 per
share. Exclusive of the effect of nonrecurring items, net income for fiscal 1995
would have been $.80 per share on a fully diluted basis, compared to net income
for fiscal 1994 of $.63 per share, an increase of 27.0 percent.
EFFECTS OF INFLATION
The Company has generally been protected against inflationary increases, as
payroll expense and related benefits (the Company's major expense components)
for Regis Hairstylists and International salon associates are primarily variable
costs of sales. The Company compensates the great majority of its hairstylists
with a percentage commission based on the sales they generate, thereby enabling
salon payroll expense, as a percentage of sales, to remain relatively constant.
The Company does not believe inflation has had a significant impact on the
results of operations for the MasterCuts or Trade Secret divisions.
LIQUIDITY AND CAPITAL RESOURCES
Customers generally pay for salon services and merchandise in cash at the time
of sale, which reduces the Company's working capital requirements. Net cash
provided by operating activities (before capital expenditures and debt principal
repayments) in fiscal 1996 increased to $36,918,000, compared to $30,651,000
during the same period the previous year. The increase between the two periods
was primarily due to improved operating performance in fiscal 1996.
During fiscal 1996, the Company had worldwide capital expenditures of
$39,607,000, of which $13,517,000 related to acquisitions. The Company
constructed 116 new salons (31 Regis Hairstylists, 33 MasterCuts, 40 Trade
Secret, 3 Wal-Mart and 9 International) and acquired 383 salons. The Company
also completed 65 major remodeling projects, including 10 conversions of
existing salons to another salon concept. All capital expenditures during fiscal
1996 were funded by the Company's operations and borrowings under its revolving
credit facilities.
The Company anticipates its worldwide salon development program for fiscal 1997
will include a minimum of 150 new salons and 60 major remodeling and conversion
projects. It is expected that expenditures for these new salons and other
projects will be approximately $28,000,000 in fiscal 1997.
REGIS CORPORATION 1996 (19)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
In September 1995, the Company completed the acquisitions of Essanelle Limited
(Essanelle) and S&L du Lac. The $6,300,000 aggregate purchase price was paid to
the selling shareholder in cash at closing. Additionally, the Company made a
$992,000 cash payment at closing to Essanelle to facilitate the payoff of
existing debt of Essanelle. The purchase price was funded through a combination
of proceeds from the issuance of the Company's common stock and long-term debt
issued by banks.
In January 1996, the Company completed the acquisitions of Steiner Salons
Limited and Steiner Hairdressing Limited. The $2,800,000 aggregate purchase
price was paid to the selling shareholder in cash at closing. The purchase price
was funded with borrowings under the Company's revolving credit facility and
long-term debt from banks.
In June 1996, the Company completed the acquisition of National Hair Care
Centers, LLC. Of the $12,257,000 aggregate purchase price, $10,364,000 was paid
in cash at closing and the balance was settled by the Company's issuance of a
note for $1,797,000 and a $96,000 noncompete agreement. The cash portion of
the purchase price was funded with proceeds from the sale of 200,000 shares
of common stock and a $5,000,000 senior term note.
In February 1996, the Company issued a $10,000,000 senior note, bearing interest
at 6.94 percent, due in July 2005. Proceeds associated with this borrowing were
utilized to refinance the $10,000,000 principal payment on the senior notes paid
in June 1996. In June 1996, the Company issued a $5,000,000 senior note, bearing
interest at 7.99 percent, due in July 2003. Proceeds associated with this
borrowing were utilized to partially fund the acquisition of National Hair Care
Centers, LLC. The agreement under which the notes were issued contains financial
and restrictive covenants similar to those contained in the Company's existing
senior notes.
In connection with the U.K. acquisitions, the Company's U.K. subsidiary entered
into various term notes, denominated in pounds sterling, primarily with U.K.
banks which have interest rates ranging from 4 percent fixed to the LIBOR rate
plus 2.5 percent and are subject to annual mandatory principal repayments until
July 2000. These U.K. notes contain covenants applicable to the U.K. subsidiary,
including limitations on incurring debt, investments, mergers or consolidations
and transactions with affiliates. In addition, the U.K. subsidiary must maintain
certain interest coverage and debt-to-equity ratios.
During fiscal 1996, the Company repaid the outstanding principal amount of
$2,187,500 of subordinated debt associated with the financing of the Beauty
Express acquisition. In addition, the Company's subordinated convertible
debenture of $2,812,500 was also converted to 375,000 shares, on a pre-split
basis, of the Company's common stock.
The Company has renewed its existing revolving credit facility and cash
management program. Under terms of this renewal, the revolving credit facility
allows for borrowings of up to $20,000,000, bears interest at the prime rate,
and matures in October 1998. The facility also allows for borrowings bearing
interest at an adjusted LIBOR rate plus a LIBOR margin up to 1.50 percent. The
revolving credit facility requires a quarterly commitment fee of 1/4 percent per
annum on the unused portion of the facility. The renewed credit agreement
contains certain financial and restrictive covenants similar to those in the
Company's senior debt agreement. As of June 30, 1996, borrowings of $9,100,000
were outstanding under this credit facility.
At June 30, 1996, the Company had outstanding $24,000,000 of 11.52 percent
fixed-rate senior notes after repayments of $10,000,000 and $9,000,000 of the
notes during fiscal years 1996 and 1995, respectively. The notes require annual
mandatory repayments of $10,000,000 in June 1997 and $14,000,000 in June 1998.
The notes contain certain financial and restrictive covenants (see
Note 5 of Notes to the Consolidated Financial Statements) and carry a
substantial penalty based on yield maintenance in the event of voluntary
prepayment.
Subsequent to June 30, 1996, the Company signed a merger agreement with
Supercuts, Inc., which is expected to be accounted for as a pooling-of-
interests. Supercuts is a national operator and franchisor of over 1,150
affordable hair care salons. (See Note 3 of Notes to the Consolidated Financial
Statements for additional details.)
Transactions by the Company's International salons are invoiced and paid in
local currency. Accordingly, the Company is subject to risks associated with
fluctuations in currency exchange rates.
Management believes that cash generated from operations and amounts available
under its revolving credit facility will be sufficient to fund its anticipated
capital expenditures and required debt repayments for the foreseeable future.
The Company paid dividends of $.07 per share during fiscal 1996. The Company did
not pay dividends during fiscal 1995 due to debt covenant restrictions. On
August 13, 1996, the Board of Directors of the Company approved the payment of
a $.02 per share quarterly dividend payable to shareholders of record on August
23, 1996.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of",
was issued in March 1995 and is effective for fiscal years beginning after
December 15, 1995. The Company believes implementation of this accounting
standard in fiscal 1997 will not have a material impact on earnings.
(20) REGIS CORPORATION 1996
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30
-------------------------
ASSETS 1995 1996
Current assets:
Cash and cash equivalents $ 1,244 $ 5,471
Accounts receivable 3,931 6,991
Inventories 23,406 30,600
Deferred income taxes 2,204 1,806
Other current assets 4,271 4,501
-------------------------
Total current assets 35,056 49,369
Property and equipment, net 73,939 95,089
Goodwill 51,421 70,732
Other assets 5,907 5,984
-------------------------
Total assets $ 166,323 $ 221,174
-------------------------
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 11,990 $ 13,668
Accounts payable 9,163 13,875
Accrued expenses 23,985 29,392
-------------------------
Total current liabilities 45,138 56,935
Long-term debt 37,969 49,717
Other noncurrent liabilities 6,789 6,308
Commitments (Note 6)
Shareholders' equity:
Capital stock, $.05 par value; authorized,
25,000,000 shares; issued and outstanding,
16,932,066 and 18,061,292 common shares
at June 30, 1995 and 1996, respectively 565 903
Additional paid-in capital 65,460 79,378
Retained earnings 10,402 27,933
-------------------------
Total shareholders' equity 76,427 108,214
-------------------------
Total liabilities and shareholders' equity $ 166,323 $ 221,174
-------------------------
-------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
REGIS CORPORATION 1996 (21)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30
----------------------------------------
1994 1995 1996
Sales:
Company-owned operations:
Service $ 286,533 $ 306,298 $ 355,880
Product 88,535 111,312 138,813
----------------------------------------
375,068 417,610 494,693
Franchise revenues 1,903 4,578 4,749
----------------------------------------
376,971 422,188 499,442
----------------------------------------
Operating expenses:
Cost of sales:
Service 167,990 179,501 207,201
Product 48,276 59,309 74,351
Rent 48,622 53,745 67,014
Selling, general and administrative 70,555 79,398 88,721
Depreciation and amortization 13,583 14,799 18,380
Other, primarily franchise expenses 2,907 5,107 5,546
----------------------------------------
351,933 391,859 461,213
----------------------------------------
Operating income 25,038 30,329 38,229
Other income (expense):
Interest (7,432) (6,465) (6,106)
Nonrecurring items (10,000) 1,195 700
Other, net (537) 206 155
----------------------------------------
Income before income taxes 7,069 25,265 32,978
Income taxes (3,016) (10,614) (13,854)
----------------------------------------
Net income $ 4,053 $ 14,651 $ 19,124
----------------------------------------
----------------------------------------
Net income per share:
Primary $ .26 $ .86 $ 1.06
----------------------------------------
----------------------------------------
Fully diluted $ .26 $ .84 $ 1.05
----------------------------------------
----------------------------------------
Common and common equivalent
shares outstanding:
Primary 15,591 17,039 18,001
----------------------------------------
----------------------------------------
Fully diluted 16,166 17,648 18,291
----------------------------------------
----------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
(22) REGIS CORPORATION 1996
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
--------------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
Balance, June 30, 1993 9,380,000 $ 469 $ 46,103 $ (7,544) $ 39,028
Proceeds from public offering of common
stock, net of offering costs of $1,087 1,050,000 53 8,310 8,363
Shares issued in connection with resolution
of MEI Salons litigation 500,000 25 7,600 7,625
Shares issued in connection with
salon acquisition 70,000 3 924 927
Proceeds from exercise of stock options 646 8 8
Foreign currency translation adjustments (348) (348)
Net income 4,053 4,053
----------------------------------------------------------------------
Balance, June 30, 1994 11,000,646 550 62,945 (3,839) 59,656
Additional shares issued and adjustment of
amounts previously recorded in
connection with finalization of the 1994
resolution of MEI Salons litigation 93,220 5 (505) (500)
Shares issued in connection with
salon acquisitions 184,442 9 2,886 2,895
Proceeds from exercise of stock options 9,736 1 134 135
Foreign currency translation adjustments (410) (410)
Net income 14,651 14,651
----------------------------------------------------------------------
Balance, June 30, 1995 11,288,044 565 65,460 10,402 76,427
Stock split effected in the form of a
stock dividend 5,950,514 298 (298)
Shares issued in connection with
subordinated debt conversion 375,000 19 2,794 2,813
Proceeds from sale of common stock 370,000 18 10,013 10,031
Proceeds from exercise of stock options 77,734 3 819 822
Tax benefit realized upon exercise of
stock options 590 590
Dividends (1,235) (1,235)
Foreign currency translation adjustments (358) (358)
Net income 19,124 19,124
----------------------------------------------------------------------
Balance, June 30, 1996 18,061,292 $ 903 $ 79,378 $ 27,933 $ 108,214
----------------------------------------------------------------------
----------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
REGIS CORPORATION 1996 (23)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30
----------------------------------------
1994 1995 1996
Cash flows from operating activities:
Net income $ 4,053 $ 14,651 $ 19,124
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 14,307 15,279 18,812
Deferred income taxes (868) (979) 192
MEI Salons nonrecurring charge 10,000 1,805
Changes in assets and liabilities, exclusive of
investing and financing activities (2,307) (1,795) (2,190)
Other 726 1,690 980
----------------------------------------
Net cash provided by operating activities 25,911 30,651 36,918
----------------------------------------
Cash flows from investing activities:
Capital expenditures (15,786) (15,274) (26,090)
Purchases of salon assets, net of cash acquired
and certain obligations assumed (10,802) (2,546) (27,669)
Advance to Premier Salons (5,850)
Payments from Premier Salons 1,093 103
----------------------------------------
Net cash used in investing activities (31,345) (17,717) (53,759)
----------------------------------------
Cash flows from financing activities:
Borrowings on line of credit 130,114 76,966 117,558
Payments on line of credit (124,061) (82,564) (114,258)
Proceeds from issuance of long-term debt 23,284
Repayment of long-term debt (7,904) (9,573) (15,104)
Dividends paid (1,235)
Proceeds from issuance of common stock 8,363 135 10,853
----------------------------------------
Net cash provided by (used in) financing activities 6,512 (15,036) 21,098
----------------------------------------
Effect of exchange rate changes on cash 87 (109) (30)
----------------------------------------
Increase (decrease) in cash and cash equivalents 1,165 (2,211) 4,227
Cash and cash equivalents:
Beginning of year 2,290 3,455 1,244
----------------------------------------
End of year $ 3,455 $ 1,244 $ 5,471
----------------------------------------
----------------------------------------
Changes in assets and liabilities, exclusive of investing
and financing activities:
Accounts receivable $ (207) $ (889) $ (1,433)
Inventories (1,934) (1,689) (3,775)
Other current assets (1,904) 581 158
Accounts payable 2,110 (781) 3,248
Accrued expenses (372) 983 (388)
----------------------------------------
$ (2,307) $ (1,795) $ (2,190)
----------------------------------------
----------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
(24) REGIS CORPORATION 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
Regis Corporation (the Company) owns and operates hairstyling and hair care
salons throughout the United States and in a number of other countries,
principally the United Kingdom (U.K.). Substantially all of the hairstyling and
hair care salons owned and operated by the Company in the United States are
located in leased space in enclosed mall shopping centers. During 1994, through
the acquisition of Trade Secret, the Company entered the franchising business
(Note 3).
At June 30, 1996, approximately 33 percent of the Company's outstanding common
stock is owned by Curtis Squire, Inc. (CSI), which is a holding company
controlled by the Chairman of the Board of Directors of the Company, and
approximately 7 percent is owned by management and the Company's benefit plans.
CONSOLIDATION:
The financial statements include the accounts of the Company and all of its
wholly-owned subsidiaries. In consolidation, all material intercompany accounts
and transactions are eliminated.
FOREIGN CURRENCY TRANSLATION:
Financial position, results of operations and cash flows of the Company's
international subsidiaries are measured using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
exchange rates in effect at each fiscal year end. Income statement accounts are
translated at the average rates of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in the cumulative translation account in
shareholders' equity.
FRANCHISE REVENUES AND EXPENSES:
Franchise revenues include royalties and initial franchise fees from
franchisees, and product sales made by the Company to franchisees. Royalties
are recognized as revenue in the month in which franchisee services are rendered
or products are sold by franchisees. The Company recognizes revenues from
initial franchise fees at the time franchisee retail product salons are opened.
Product sales by the Company to franchisees are recorded as revenue at the time
product is shipped to franchisee locations. Franchise expenses include all
direct expenses, such as the cost of product sold to franchisees by the Company,
salaries, marketing costs, and an allocation of general corporate overhead and
occupancy expenses.
CASH EQUIVALENTS:
The Company considers its investments in all highly liquid debt instruments with
original maturities of 3 months or less at date of purchase to be cash
equivalents. The carrying amount approximates fair value because of the short
maturity of those instruments.
INVENTORIES:
Inventories consist principally of hair care products held either for use in
salon services or for sale. Inventories are stated at the lower of cost or
market with cost determined on the first-in, first-out method.
PROPERTY AND EQUIPMENT:
Property and equipment are carried at cost, less accumulated depreciation and
amortization. Depreciation and amortization of property and equipment are
computed on the straight-line method over estimated useful asset lives (shorter
of asset life or lease term for leasehold improvements).
Expenditures for maintenance and repairs and minor renewals and betterments
which do not improve or extend the life of the respective assets are expensed.
All other expenditures for renewals and betterments are capitalized. The assets
and related depreciation accounts are adjusted for property retirements and
disposals with the resulting gain or loss included in income. Fully depreciated
assets remain in the accounts until retired from service.
GOODWILL:
Goodwill recorded in connection with the fiscal 1989 purchase of the publicly
held minority interest in the Company and with the acquisitions of business
operations in which the Company has not previously been involved is amortized on
a straight-line basis generally over 40 years. Goodwill recorded in
connection with acquisitions which expand the Company's existing business
activities (acquisition of salon sites) is amortized on a straight-line basis
generally over 12 to 17 years depending upon the lease terms of the
salon sites acquired. The Company periodically evaluates the recoverability of
goodwill based on analyses of estimated future undiscounted cash flows.
CONSULTING AND NONCOMPETE ASSETS:
Consulting and noncompete assets recorded in connection with the Company's
various acquisitions are amortized on a straight-line basis over the life of the
agreement generally from 3 to 10 years.
PREOPENING COSTS:
Advertising, sales promotion and expenditures associated with the opening of new
salon locations are charged to operations as incurred.
INCOME TAXES:
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred income tax assets and liabilities are
determined based on the differences between the financial statement and tax
bases of assets and liabilities using currently enacted tax rates in effect for
the years in which the differences are expected to reverse. Income tax expense
is the tax payable for the period and the change during the period in deferred
tax assets and liabilities.
REGIS CORPORATION 1996 (25)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NET INCOME PER SHARE:
Primary and fully diluted net income per common and common equivalent share has
been computed by dividing net income by the weighted average number of common
and common equivalent shares outstanding for each period presented using the
modified treasury stock method. Common equivalent shares relate primarily to
incentive stock options granted to employees.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
STOCK SPLIT:
In May 1996, the Company's Board of Directors authorized a three-for-two stock
split in the form of a 50 percent stock dividend distributed on June 4, 1996 to
shareholders of record on May 20, 1996. All per share and number of share data
have been retroactively restated to reflect the stock split, except for the
Consolidated Statements of Changes in Shareholders' Equity.
2. OTHER FINANCIAL STATEMENT DATA:
The following provides additional information concerning selected balance sheet
accounts at June 30, 1995 and 1996:
(Dollars in thousands)
1995 1996
Property and equipment:
Land $ 700 $ 700
Building and improvements 4,116 4,361
Equipment, furniture and lease-
hold improvements 142,799 176,980
-------------------------
147,615 182,041
Less accumulated depreciation
and amortization (73,676) (86,952)
-------------------------
$ 73,939 $ 95,089
-------------------------
-------------------------
Goodwill $ 58,883 $ 80,634
Less accumulated amortization (7,462) (9,902)
-------------------------
$ 51,421 $ 70,732
-------------------------
-------------------------
Accrued expenses:
Payroll and payroll
related costs $ 12,964 $ 16,647
Taxes 3,754 5,577
Insurance 2,421 2,339
Other 4,846 4,829
-------------------------
$ 23,985 $ 29,392
-------------------------
-------------------------
The following provides supplemental disclosures of cash flow activity for the
years ended June 30, 1994, 1995 and 1996:
(DOLLARS IN THOUSANDS)
1994 1995 1996
Cash paid during the year for:
Interest $7,416 $6,454 $5,791
Income taxes 4,925 9,298 14,760
Noncash investing and financing activities included the following:
Year ended June 30, 1994:
- - In connection with the acquisition of Trade Secret, the Company entered
into a note agreement whereby $3,947,000 of the purchase price will be paid
over a seven-year period (Note 3).
- - In connection with resolution of the MEI Salons litigation, the Company
issued 500,000 shares, on a pre-split basis, of its common stock valued at
$7,625,000 (Note 4).
Year ended June 30, 1995:
- - In connection with 1995 acquisitions, the Company issued 184,442 shares, on
a pre-split basis, of its common stock valued at $2,895,000 (Note 3).
Year ended June 30, 1996:
- - In connection with the conversion of the Company's $2,812,500 of
convertible debt, 375,000 shares, on a pre-split basis, of common stock
were issued (Note 5).
- - In connection with the acquisitions of Essanelle Limited, S&L DuLac, Inc.
and the Steiner companies, the Company assumed $1,575,000 of term
indebtedness (Note 3).
3. MERGERS AND ACQUISITIONS:
NATIONAL HAIR CARE CENTERS:
Effective June 1, 1996, the Company acquired 154 salons from National Hair Care
Centers, L.L.C. The salons are located within Wal-Mart stores and supercenters
throughout the United States and perform hairstyling services and offer hair
care products. Of the $ 12,257,000 purchase price, $10,364,000 was paid in cash
at closing and the balance was settled by the Company's issuance of a note for
$1,797,000 and a $96,000 noncompete agreement. The cost in excess of net
tangible and identifiable intangible assets acquired was approximately
$6,900,000 and is being amortized on a straight-line basis over 17 years.
(26) REGIS CORPORATION 1996
U.K. ACQUISITIONS:
In September 1995, the Company acquired the outstanding shares of common stock
of Essanelle Limited and S&L DuLac, Inc. which operate 87 hairstyling salons in
major department stores throughout the U.K. (79 salons) and Switzerland (8
salons). The $6,300,000 aggregate purchase price was paid in cash at closing.
The cost in excess of net tangible and identifiable intangible assets acquired
was approximately $6,600,000 and is being amortized on a straight-line basis
over 15 years.
In January 1996, the Company acquired 91 salons from Steiner Salons Limited and
Steiner Hairdressing Limited operating throughout the U.K. The $2,824,000
aggregate purchase price was paid in cash at closing. The cost in excess of net
tangible and identifiable intangible assets acquired is approximately $2,600,000
and is being amortized on a straight-line basis over 15 years.
TRADE SECRET:
Effective December 1, 1993, the Company acquired 24 company-owned Trade Secret
retail product salons and the franchisor's rights for 64 franchised Trade Secret
salons. Trade Secret salons, which are located in enclosed mall shopping
centers throughout the United States, offer hair care and beauty products and
perform hairstyling services. Of the $11,983,000 aggregate purchase price,
$8,036,000 was paid in cash at closing and the balance was settled by the
Company's issuance of a note for $3,947,000. The cost in excess of net tangible
and identifiable intangible assets acquired was approximately $11,500,000 and is
being amortized on a straight-line basis over 40 years.
OTHER:
During 1995 and 1996, the Company made numerous additional acquisitions,
aggregating 35 and 51 hairstyling and retail product salons, respectively. The
cost in excess of net tangible and identifiable intangible assets acquired was
approximately $4,700,000 and $5,900,000 in 1995 and 1996, respectively, and is
being amortized on a straight-line basis over periods of up to 17 years. Of the
$7,225,000 aggregate purchase price associated with these acquisitions in 1995,
$2,928,000 was paid in cash at closing, $1,403,000 is payable during the next
5 years and 184,442 shares, on a pre-split basis, of common stock were
issued by the Company. Of the $9,234,000 aggregate purchase price associated
with these acquisitions in 1996, $7,430,000 was paid in cash at closing and
$1,804,000 is payable during the next 3 years.
The following represents the unaudited pro forma results of operations of the
Company as if the previously described 1996 acquisitions and related common
stock activity had occurred at the beginning of fiscal 1996, as well as at the
beginning of the immediately preceding fiscal year:
(UNAUDITED,
DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
1995 1996
Sales $ 514,946 $ 551,945
Income before income taxes 26,426 32,570
Net income 15,599 18,890
Net income per share $ .86 $ 1.02
These pro forma results may not be indicative of results that actually would
have occurred had the acquisitions taken place at the beginning of the periods
presented or of results which may occur in the future.
All of the aforementioned acquisitions have been recorded using the purchase
method of accounting. Accordingly, the purchase prices have been allocated to
assets acquired and liabilities assumed based on their estimated fair values at
the date of acquisition.
PENDING MERGER:
Subsequent to June 30, 1996, the Company signed a merger agreement with
Supercuts, Inc. in a stock-for-stock merger transaction. Supercuts is a national
operator and franchisor of over 1,150 affordable hair care salons. The
agreement calls for each Supercuts shareholder to receive 0.40 shares of the
Company's common stock in exchange for each Supercuts, Inc. common share, or
approximately 4,600,000 shares of the Company's common stock on a fully diluted
basis. The transaction is intended to be accounted for as a
pooling-of-interests and is subject to regulatory and shareholder approval.
4. RESOLUTION OF LITIGATION:
During fiscal 1994, the Company resolved its litigation with a former joint
venture partner, MEI Diversified Inc. (MEI), resulting in both parties
terminating all claims against each other and causing the Company to record a
$10,000,000 pretax charge. The primary components of the $10,000,000 charge are
$7,625,000 for the estimated value of the incremental shares required to be
issued to the bankruptcy creditors of MEI and $2,850,000 for the valuation
allowance associated with the GEMM receivable as described below. As part of
the resolution, the Company issued 500,000 shares, on a pre-split basis, of its
common stock to the bankruptcy creditors of MEI and guaranteed that the value of
the stock issued would reach $8,750,000, or $17.50 per share, within 12 months.
The guarantee required the Company to issue up to an additional 200,000 shares,
on a pre-split basis, of its common stock to satisfy any deficiency in value.
In fiscal 1994, as part of the litigation resolution, the Company
REGIS CORPORATION 1996 (27)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
advanced $5,850,000 to GEMM, Inc. (Premier Salons) to finance that company's
acquisition of salons from the bankruptcy creditors of MEI. In return, the
Company received 1,000,000 shares of $6 par value per share preferred stock
of Premier Salons and a note receivable of $5,850,000, bearing interest at an
annual rate of prime plus 1/2 percent. Of the note receivable balance,
$850,000 was paid in March 1994 and the remaining balance of $5,000,000 is
due in 60 monthly installments, commencing in January 1995. The note is
partially collateralized by a department store license agreement and
underlying operating assets.
During fiscal 1995, the Company received a $2,500,000 cash settlement
associated with its directors and officers insurance claim. Certain other
negative events also occurred in fiscal 1995 with respect to the Company's
investment in and advances to Premier Salons which caused the Company to
re-evaluate and write off the net carrying value ($2,305,000) of all
remaining net assets associated with the fiscal 1994 MEI litigation
settlement. In addition, during fiscal 1995, the Company issued 93,220
shares, on a pre-split basis, of its common stock to the bankruptcy creditors
of MEI as final resolution of the stock guarantee. This was fewer shares than
the Company originally estimated when the transaction was recorded the
previous year which resulted in a $500,000 pretax gain. As a result of these
transactions, the Company recorded a $695,000 pretax gain during the first
and second quarters of the year ended June 30, 1995 and adjusted the amounts
previously recorded by decreasing shareholders' equity by $500,000.
During fiscal 1996 and the third and fourth quarters of fiscal 1995, the
Company received $700,000 and $500,000, respectively, of principal payments
from Premier Salons under the note agreement. The Company had previously
written off the related receivable, and accordingly, has recorded these
recoveries as nonrecurring gains. There is no assurance that such recoveries
will continue.
5. FINANCING ARRANGEMENTS:
The Company's long-term debt consists of the following at June 30, 1995 and
1996:
(Dollars in thousands)
1995 1996
Senior term notes $34,000 $39,000
Revolving credit facility 5,800 9,100
U.K. term notes 9,265
Subordinated notes, Trade Secret
and other acquisitions (Note 3) 8,682 5,701
Other notes 1,477 319
-----------------
49,959 63,385
Less current portion (11,990) (13,668)
-----------------
Long-term portion $37,969 $49,717
-----------------
-----------------
At June 30, 1996, the senior term notes consist of 3 note agreements: a
$24,000,000 note, bearing interest at a fixed rate of 11.52 percent which is
subject to annual mandatory repayments of principal until final maturity in
June 1998; a $10,000,000 note, bearing interest at a fixed 6.94 percent,
which is due in July 2005; and a $5,000,000 note, bearing interest at a fixed
7.99 percent, which is due in June 2003.
The Company renewed its revolving credit facility in June 1996. Under terms
of this renewal, the revolving credit facility allows for borrowings, based
on continuing compliance with the terms and conditions of the credit
facility, of up to $20,000,000, bears interest at the prime rate, and matures
in October 1998. The prime rate at June 30, 1996 was 8.25 percent. The
facility also allows for borrowings bearing interest at an adjusted LIBOR
rate plus a LIBOR margin up to 1.50 percent. The revolving credit facility
requires a quarterly commitment fee at the rate of 1/4 percent per year on
the unused portion of the facility.
The senior term notes and the revolving credit facility agreements contain
covenants, including limitations on incurrence of debt, granting of liens,
investments, merger or consolidation, and transactions with affiliates. In
addition, the Company must maintain specified interest coverage and
debt-to-equity ratios.
The Company's subordinated debt consists primarily of a subordinated
promissory note for $2,782,000 associated with the Trade Secret acquisition,
which bears interest at 8 percent per year and requires monthly payments over
7 years.
In connection with the U.K. acquisitions (Note 3), the Company's U.K.
subsidiary has various term notes, denominated in pounds sterling, primarily
with U.K. banks (U.K. notes) bearing interest at rates varying from 4 percent
to the LIBOR rate plus 2.5 percent and are subject to annual mandatory
principal repayments until final maturity in July 2000. The LIBOR rate at
June 30, 1996 was 5.875 percent.
The U.K. notes contain covenants applicable to the U.K. subsidiary, including
limitations on incurring debt, investments, merger or consolidation and
transactions with affiliates. In addition, the U.K. subsidiary must maintain
certain interest coverage and debt-to-equity ratios.
The fair value of the senior term and subordinated notes based upon a
discounted cash flow analysis using the Company's current incremental
borrowing rate approximates their carrying values at June 30, 1996.
Aggregate maturities of long-term debt are as follows:
Fiscal Year (Dollars in thousands)
1997 $13,668
1998 17,775
1999 12,897
2000 2,869
2001 940
Thereafter 15,236
-------
$63,385
-------
-------
(28) REGIS CORPORATION 1996
6. COMMITMENTS:
OPERATING LEASES:
The Company is committed under long-term operating leases for the rental of
most of its salon locations. The terms of the leases range from 1 to 20
years, with many leases renewable for an additional 5- to 10-year term at the
option of the Company, and certain leases include escalation provisions. The
Company is generally required to pay additional rent based on a percentage of
sales and, in most cases, real estate taxes and other expenses. Rent expense
for the Company's international department store salons is based primarily on
a percentage of sales.
Total rent expense includes the following:
(DOLLARS IN THOUSANDS)
1994 1995 1996
Minimum rent $29,096 $32,736 $37,386
Percentage rent based on sales 9,377 9,634 16,078
Real estate taxes and other
expenses 10,149 11,375 13,550
--------------------------------------
$48,622 $53,745 $67,014
--------------------------------------
--------------------------------------
FUTURE MINIMUM LEASE PAYMENTS:
As of June 30, 1996, future minimum lease payments (excluding percentage
rents based on sales) due under existing noncancellable operating leases with
remaining terms of greater than 1 year are as follows:
Fiscal Year (Dollars in thousands)
1997 $ 45,354
1998 42,028
1999 36,041
2000 29,827
2001 24,386
Thereafter 85,094
--------
Total minimum lease payments $262,730
--------
--------
SALON DEVELOPMENT PROGRAM:
As a part of its salon development program, the Company continues to
negotiate and enter into leases and commitments for the acquisition of
equipment and leasehold improvements related to future salon locations.
7. INCOME TAXES:
The provision for income taxes consists of:
(Dollars in thousands)
1994 1995 1996
Current:
Federal $2,439 $9,541 $10,901
State 1,097 2,046 2,746
International 348 6 15
Deferred:
United States (568) (979) (271)
International (300) 463
---------------------------
$3,016 $10,614 $13,854
---------------------------
---------------------------
The components of the net deferred tax asset and liability are as follows:
(DOLLARS
IN THOUSANDS)
1995 1996
Net current deferred tax asset:
Nonrecurring items $ 552 $ 362
Insurance 713 632
Compensation 581 812
Other, net 358
------------------
$ 2,204 $ 1,806
------------------
------------------
Net noncurrent deferred
tax asset (liability):
Depreciation and amortization $(3,811) $(3,081)
Deferred rent 1,263 1,365
Nonrecurring items 2,126 1,359
Compensation 725 851
Other, net (412) (116)
------------------
$ (109) $ 378
------------------
------------------
Management believes no valuation allowance for the net deferred tax asset is
required due to its recoverability through reduction of future taxable
income.
REGIS CORPORATION 1996 (29)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the provision for income taxes and the amount computed by
applying the federal statutory income tax rate to income before income taxes
is as follows:
(Dollars in thousands)
1994 1995 1996
Income (loss) before income taxes:
United States $7,305 $25,294 $32,310
International (236) (29) 668
--------------------------
$7,069 $25,265 $32,978
--------------------------
--------------------------
Computed income tax expense
at federal statutory rate $2,403 $ 8,844 $11,542
Increase (decrease) in income
taxes resulting from:
State income taxes, net of
federal income
tax benefit 563 1,130 1,621
Net effect of targeted jobs
tax credit (459) (486)
Other, principally nondeductible
acquisition costs 509 1,126 691
--------------------------
Income tax expense $3,016 $10,614 $13,854
--------------------------
--------------------------
8. EMPLOYEE BENEFIT PLANS:
EMPLOYEE STOCK OWNERSHIP PLAN:
The Company has a qualified employee stock ownership plan (ESOP) covering
substantially all field supervisors, warehouse and corporate office
employees. Contributions to the ESOP are at the discretion of the Company.
PROFIT SHARING PLAN:
The Company has a qualified profit sharing plan (PSP) covering the same
employees as its ESOP. Contributions to the PSP are at the discretion of the
Company.
EXECUTIVE STOCK AWARD PLAN:
The Company has a nonqualified executive stock award plan (ESAP) covering
those employees not eligible to participate under the qualified ESOP and PSP.
Contributions to the ESAP are at the discretion of the Company.
STOCK PURCHASE PLAN:
The Company has an employee stock purchase plan (SPP) available to
substantially all employees. Under terms of the plan, eligible employees may
purchase the Company's common stock through payroll deductions. The Company
contributes an amount equal to 15 percent of the purchase price of the stock
to be purchased, not to exceed $1,200,000 in the aggregate.
Company contributions to the aforementioned plans, which are charged to
earnings in the period contributed, included the following:
(Dollars in thousands)
1994 1995 1996
ESOP $344 $428 $616
PSP 119
ESAP 131 197 231
SPP 97 115 150
EMPLOYEE STOCK OPTION PLAN:
The Company's Stock Option Plan (the Plan), as amended, provides for granting
both incentive stock options and nonqualified stock options. A total of
1,650,000 shares of common stock may be granted under the Plan to employees
of the Company for a term not to exceed 10 years from the date of grant. The
Plan contains restrictions on transferability, time of exercise, exercise
price and on disposition of any shares acquired through exercise of the
options. Incentive stock options are granted at not less than fair market
value on the date of grant. The Board of Directors determines the Plan
participants and establishes the terms and conditions of each option.
Stock options and shares reserved for grant are as follows:
Options Outstanding
Shares --------------------------
Reserved Price
for Grant Shares Per Share
Balance, June 30, 1993 393,000 207,000 $ 4.00 - 8.67
Additional shares reserved 600,000
Granted (733,500) 733,500 7.50 - 8.67
Cancelled 22,200 (22,200) 4.00 - 8.67
Exercised (1,800) 4.00
---------------------------------------
Balance, June 30, 1994 281,700 916,500 4.00 - 8.67
Additional shares reserved 450,000
Granted (166,500) 166,500 12.37
Cancelled 21,900 (21,900) 4.00 - 8.67
Exercised (19,482) 4.00 - 8.67
---------------------------------------
Balance, June 30, 1995 587,100 1,041,618 4.00 - 12.37
Granted (216,000) 216,000 17.67
Cancelled 30,000 (30,000) 4.00 - 12.37
Exercised (107,625) 4.00 - 12.37
---------------------------------------
Balance, June 30, 1996 401,100 1,119,993 $ 4.00 - 17.67
---------------------------------------
---------------------------------------
Options exercisable at
June 30, 1996 277,293 $ 4.00 - 12.37
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, a new standard of accounting and
reporting for stock-based compensation plans. The Company is not required to
adopt the new standard until fiscal 1997. The Company will continue to
measure compensation cost, if any, for its stock option plans using the
intrinsic value based method of accounting it has
(30) REGIS CORPORATION 1996
historically used. Therefore, the new standard will have no effect on the
Company's operating results. The Company's financial statement disclosures
will be expanded in fiscal 1997, as required, to include pro forma
disclosures as if the fair value based method of accounting had been followed.
BOARD OF DIRECTORS STOCK OPTION PLAN:
The Company also has a stock option plan for its outside directors. Options
to purchase 63,000 shares of common stock at prices ranging from $4.00 to
$17.67 per share have been granted through 1996. All options vest over a
4-year period. At June 30, 1996, there were 23,625 options exercisable at
prices ranging from $4.00 to $12.37 per share. During fiscal 1996, 5,625
options were exercised.
OTHER:
The Company has established several unfunded deferred compensation plans
which cover certain management and executive personnel. The amounts charged
to earnings for these plans were $106,000 in 1994, $128,000 in 1995 and
$379,000 in 1996.
The Company has a survivor benefit plan for the Chairman of the Board's
spouse, payable upon his death, at a rate of $300,000 annually, adjusted for
inflation. The Company has the ability and intent to fund future payments
through certain life insurance policies on the Chairman of the Board.
9. GEOGRAPHIC BUSINESS OPERATIONS:
The Company owns and operates hairstyling and hair care salons throughout the
United States and in several other countries, principally the U.K. A summary
of the Company's operations by geographic area is presented below. All
intercompany revenues and expenses have been eliminated.
(Dollars in thousands)
1994 1995 1996
Sales:
United States $332,110 $370,251 $413,734
International 44,861 51,937 85,708
------------------------------
$376,971 $422,188 $499,442
------------------------------
------------------------------
Operating income:
United States $ 24,474 $ 29,228 $ 35,614
International 564 1,101 2,615
------------------------------
$ 25,038 $ 30,329 $ 38,229
------------------------------
------------------------------
Total assets:
United States $158,547 $159,570 $193,174
International 7,452 6,753 28,000
------------------------------
$165,999 $166,323 $221,174
------------------------------
------------------------------
REPORT OF INDEPENDENT
ACCOUNTANTS
To the Shareholders and Directors of
Regis Corporation:
We have audited the accompanying consolidated balance sheet of Regis
Corporation as of June 30, 1995 and 1996, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
the years ended June 30, 1994, 1995 and 1996. 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 audits 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 Regis
Corporation as of June 30, 1995 and 1996, and the consolidated results of its
operations and its cash flows for the years ended June 30, 1994, 1995 and
1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand, L.L.P.
Coopers & Lybrand, L.L.P.
Minneapolis, Minnesota
August 20, 1996
REGIS CORPORATION 1996 (31)
QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
----------------------------------------------- YEAR
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 ENDED
1996
Sales $111,720 $126,604 $126,199 $134,919 $499,442
Operating
income 8,442 10,353 8,841 10,593 38,229
Net income 4,177 5,175 4,409 5,363 19,124
Primary net
income
per share (a) .24 .29 .24 .29 1.06
Fully diluted
net income
per share (a) .23 .29 .24 .29 1.05
Dividends
declared
per share .017 .017 .017 .02 .07
1995
Sales $102,369 $108,366 $102,657 $108,796 $422,188
Operating
income 7,078 8,007 6,657 8,587 30,329
Net income 3,126 4,040 3,216 4,269 14,651
Primary
net income
per share (b) .19 .24 .19 .25 .86(c)
Fully diluted
net income
per share (b) .18 .23 .18 .24 .84(c)
(a)For the quarters ended September 30, 1995, December 31, 1995, March 31, 1996
and June 30, 1996 and the full year 1996, exclusive of nonrecurring gains,
primary net income per share would have been $.23, $.29, $.23, $.28 and
$1.04, respectively. Exclusive of nonrecurring gains, fully diluted net
income per share for the aforementioned periods would have been $.23, $.28,
$.23, $.28 and $1.03, respectively.
(b)For the quarters ended September 30, 1994, December 31, 1994, March 31, 1995
and June 30, 1995 and the full year 1995, exclusive of nonrecurring gains,
primary net income per share would have been $.18, $.22, $.18, $.24 and
$.82, respectively. Exclusive of nonrecurring gains, fully diluted net
income per share for the aforementioned periods would have been $.17, $.21,
$.17, $.23 and $.80, respectively.
(c)The summation of quarterly net income per share does not equate to the
calculation for the full fiscal year, as quarterly calculations are performed
on a discrete basis.