EXHIBIT B
- Audited consolidated balance sheet 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, and related Management's Discussion and Analysis of
Financial Condition and Results of Operations.
REGIS CORPORATION
EXHIBIT B INDEX
Page(s)
-------
Report of Independent Accountants 2
Consolidated Balance Sheet as of June 30, 1995
and 1996 3
Consolidated Statement of Operations for the years
ended June 30, 1994, 1995 and 1996 4
Consolidated Statements of Changes in Shareholders'
Equity for the years ended June 30, 1994, 1995
and 1996 5
Consolidated Statement of Cash Flows for the years
ended June 30, 1994, 1995 and 1996 6-7
Notes to Consolidated Financial Statements 8-33
Management's Discussion and Analysis of Results of
Operations and Financial Condition 34-46
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.
Minneapolis, Minnesota
May 9, 1997
2
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
----------
June 30
-------------------------
ASSETS 1995 1996
---- ----
Current assets:
Cash and cash equivalents $ 3,182 $ 7,558
Accounts receivable 7,823 10,640
Inventories 25,406 32,507
Deferred income taxes 3,036 6,687
Other current assets 6,004 9,691
-------- --------
Total current assets 45,451 67,083
Property and equipment, net 108,342 126,821
Goodwill 72,703 93,352
Other assets 18,340 16,698
-------- --------
Total assets $244,836 $303,954
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt and capital lease
obligations, current portion $ 13,498 $ 19,168
Accounts payable 15,000 20,369
Accrued expenses 32,536 47,261
-------- --------
Total current liabilities 61,034 86,798
Long-term debt and capital lease obligations 71,594 83,213
Other noncurrent liabilities 6,789 6,308
Commitments and contingencies (Notes 5 and 11)
Shareholders' equity:
Capital stock, $.05 par value; authorized,
25,000,000 shares; issued and outstanding,
21,395,093 and 22,537,161 common shares
at June 30, 1995 and 1996, respectively 714 1,127
Additional paid-in capital 90,689 104,634
Retained earnings 14,016 21,874
-------- --------
Total shareholders' equity 105,419 127,635
-------- --------
Total liabilities and shareholders' equity $244,836 $303,954
-------- --------
-------- --------
The accompanying notes are an intergral part
of the consolidated financial statements.
3
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
-----------
Years Ended June 30
--------------------------------
1994 1995 1996
---- ---- ----
Revenues:
Company-owned operations:
Service $336,341 $378,943 $442,366
Product 94,741 120,381 149,523
-------- -------- --------
431,082 499,324 591,889
Franchise revenues 22,479 24,929 25,418
-------- -------- --------
453,561 524,253 617,307
-------- -------- --------
Operating expenses:
Cost of sales:
Service 199,252 225,102 259,765
Product 52,450 64,777 81,165
Rent 55,145 64,439 81,634
Selling, general and admini-
strative 100,808 117,396 125,048
Depreciation and amortization 17,287 20,788 25,259
Provision for restructuring
activities 12,823
Other, primarily franchise expenses 2,907 5,107 5,446
-------- -------- --------
427,849 497,609 591,140
-------- -------- --------
Operating income 25,712 26,644 26,167
Other income (expense):
Interest (8,992) (8,774) (9,880)
Nonrecurring items (10,000) 1,195 700
Other, net 114 793 390
-------- -------- --------
Income before
income taxes 6,834 19,858 17,377
Income taxes (2,951) (8,268) (7,926)
-------- -------- --------
Net income $ 3,883 $ 11,590 $ 9,451
-------- -------- --------
-------- -------- --------
Net income per share:
Primary $.20 $ .54 $ .42
---- ----- -----
---- ----- -----
Fully diluted $.20 $ .53 $ .42
---- ----- -----
---- ----- -----
Common and common equivalent
shares outstanding:
Primary 19,906 21,502 22,487
------ ------ ------
------ ------ ------
Fully diluted 20,481 22,111 22,791
------ ------ ------
------ ------ ------
The accompanying notes are an intergral part
of the consolidated financial statements.
4
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, as previously reported 9,380,000 $ 469 $46,103 $ (7,544) $39,028
Pooling of interests with Supercuts
(before 1996 stock dividend) 2,727,930 136 17,114 6,105 23,355
Balance, June 30, 1993 12,107,930 605 63,217 (1,439) 62,383
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
Effect of pooling of interests 200,055 10 5,016 740 5,766
Shares issued in connection with
salon acquisition 70,000 3 924 927
Proceeds from exercise of stock options 37,679 2 2,674 2,676
Foreign currency translation adjustments (348) (348)
Net income ---------- ----- 3,883 3,883
Balance, June 30, 1994 13,965,664 698 --------- -------- --------
87,741 2,836 91,275
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
Shares issued in connection with employee
benefit plans 10,333 1 433 434
Proceeds from exercise of stock options 9,736 1 134 135
(410) (410)
Foreign currency translation adjustments 11,590 11,590
Net income ---------- ----- --------- -------- --------
Balance, June 30, 1995 14,263,395 714 90,689 14,016 105,419
Stock split effected in the form of a
stock dividend 7,438,190 372 (372)
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
Shares issued in connection with employee
benefit plans 12,842 1 101 102
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 ---------- ----- 9,451 9,451
Balance, June 30, 1996 22,537,161 $1,127 --------- -------- --------
---------- ----- $104,634 $21,874 $127,635
---------- ----- --------- -------- --------
--------- -------- --------
The accompanying notes are an intergral part
of the consolidated financial statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
----------
Years Ended June 30
-------------------------------
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
Net income $ 3,883 $ 11,590 $ 9,451
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 18,012 21,268 25,691
Deferred income taxes (8,648) (5,040) (3,059)
Provision for restructuring charge 12,823
MEI Salons nonrecurring charge 10,000 1,805
Changes in assets and liabilities,
exclusive of investing and
financing activities (1,754) (700) (6,303)
Other 214 1,115 203
-------- ------- -------
Net cash provided by operating
activities 21,707 30,038 38,806
-------- ------- -------
Cash flows from investing activities:
Capital expenditures (22,658) (30,388) (32,605)
Purchases of salon assets, net of cash
acquired and certain obligations
assumed (11,734) (3,259) (29,343)
Advance to Premier Salons (5,850)
Payments from Premier Salons 1,093 103
-------- ------- -------
Net cash used in investing
activities (39,149) (33,544) (61,948)
-------- ------- -------
Cash flows from financing activities:
Borrowings on line of credit 142,384 88,166 150,758
Payments on line of credit (125,419) (87,164) (147,158)
Proceeds from issuance of long-term debt 920 440 29,435
Repayment of long-term debt (7,904) (9,573) (17,164)
Increase in negative book cash 1,153 1,957
Proceeds from sale of assets 7,725
Dividends paid (1,235)
Proceeds from issuance of common stock 9,474 569 10,955
-------- ------- -------
Net cash provided by (used in)
financing activities 19,455 1,316 27,548
-------- ------- -------
Effect of exchange rate changes on cash 87 (109) (30)
-------- ------- -------
Increase (decrease) in cash and cash
equivalents 2,100 (2,299) 4,376
The accompanying notes are an intergral part
of the consolidated financial statements.
6
CONSOLIDATED STATEMENT OF CASH FLOWS, Continued
(Dollars in thousands)
-------------
Years Ended June 30
-------------------------------
1994 1995 1996
---- ---- ----
Cash and cash equivalents:
Beginning of year 3,381 5,481 3,182
-------- ------- -------
End of year $ 5,481 $ 3,182 $ 7,558
-------- ------- -------
-------- ------- -------
Changes in assets and liabilities,
exclusive of investing and financing
activities:
Accounts receivable $ (1,596) $ (1,106) $ (1,190)
Inventories (2,354) (2,723) (3,682)
Other current assets (2,567) 525 (3,299)
Restructuring accruals (2,517)
Accounts payable 1,613 784 1,948
Accrued expenses 3,150 1,820 2,437
-------- ------- -------
$ (1,754) $ (700) $ (6,303)
-------- ------- -------
-------- ------- -------
The accompanying notes are an intergral part
of the consolidated financial statements.
7
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS DESCRIPTION:
Regis Corporation (the Company) owns, operates and franchises 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
or strip shopping centers. Franchised salons are primarily located in
strip shopping centers throughout the United States.
At June 30, 1996, approximately 26 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 6 percent is owned by management and the
Company's benefit plans.
BASIS OF PRESENTATION:
Financial data for all periods presented reflect the retroactive effects of
the October 1996 merger with Supercuts, Inc. (Supercuts) which has been
accounted for as a pooling-of-interests (see Note 3). The financial
statements have been restated by combining the current and historical
financial statements of Regis Corporation with those of Supercuts for each
of the periods presented and including adjustments to conform the
historical accounting policies and practices of Supercuts to those of
Regis.
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.
Continued
8
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
----------------
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES,
continued:
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
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 AND 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.
Continued
9
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES,
continued:
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.
ASSET IMPAIRMENT ASSESSMENTS:
On a quarterly basis, the Company measures and evaluates the recoverability
of its tangible and intangible noncurrent assets using undiscounted cash
flow analysis.
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.
Continued
10
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
1. BUSINESS DESCRIPTION AND SIGNIFICANT ACCOUNTING POLICIES,
continued:
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 the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
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 178,621 213,982
Equipment, furniture and lease-
hold improvements under
capital leases 9,738 10,621
-------- --------
193,175 229,664
Less accumulated depreciation
and amortization (84,442) (101,368)
Less amortization of equipment,
furniture and leasehold
improvements under capital leases (391) (1,475)
-------- --------
$108,342 $ 126,821
-------- --------
-------- --------
Continued
11
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
2. OTHER FINANCIAL STATEMENT DATA, continued:
Goodwill $ 84,369 $108,955
Less accumulated amortization (11,666) (15,603)
-------- --------
$ 72,703 $ 93,352
-------- --------
-------- --------
Accrued expenses:
Payroll and payroll
related costs $ 16,859 $ 20,695
Taxes 3,947 5,670
Insurance 2,474 2,730
Restructuring 6,493
Other 9,256 11,673
-------- --------
$ 32,536 $ 47,261
-------- --------
-------- --------
Negative book cash balances of $3,308,000 and $5,265,000, at June 30, 1995
and 1996, respectively, are included in accounts payable and represent
checks outstanding in excess of cash balances maintained at the respective
banks.
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 $8,216 $ 8,020 $ 9,052
Income taxes 8,256 11,714 15,227
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).
- In connection with 1994 acquisitions, the Company issued 270,055
shares, on a pre-split basis, of its common stock valued at
$6,693,000.
Continued
12
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
2. OTHER FINANCIAL STATEMENT DATA, continued:
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).
- Capital lease obligations of $7,725,000 were entered into during the
year under a sale leaseback transaction. No gain or loss was realized
on the transaction.
- In connection with various acquisitions, the Company entered into
various related seller financing notes payable (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 various acquisitions, the Company entered into
various related seller financing notes payable (Note 3).
3. MERGERS AND ACQUISITIONS:
SUPERCUTS, INC. MERGER:
Effective October 25, 1996, the Company received shareholder approval for
the merger agreement with Supercuts in a stock-for-stock merger
transaction. SUPERCUTS was the national operator of approximately 420
company-owned, and franchisor of approximately 750 affordable hair care
salons at the acquisition date. Each Supercuts shareholder received 0.40
shares of the Company's common stock in exchange for each Supercuts common
share, or approximately 4,550,000 shares of the Company's common stock on a
fully diluted basis. The transaction has been accounted for as a pooling-
of-interests.
As a result of the merger, the Company recorded a merger and transaction
charge of $14,322,000, on a pre-tax basis, during the quarter ended
December 31, 1996. This charge included $7,717,000 for professional fees
including investment banking, legal, accounting and miscellaneous
transaction costs, $3,465,000 for severance, and a non-cash charge of
$3,140,000 for the write-off of duplicative operating assets, principally
associated with the closure of the Supercuts headquarters.
Continued
13
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
3. MERGERS AND ACQUISITIONS, continued:
The severance accrual of $3,465,000 covers the termination of approximately
105 Supercuts employees who had duplicate positions in corporate office
functions. These corporate overhead departments included finance and
accounting, human resources, legal, management information systems,
purchasing, real estate and marketing.
Since the Supercuts transaction has been accounted for as a pooling-of-
interests, prior period financial statements have been restated to reflect
this merger as if the merged companies had always been combined. To effect
the restatement, significant accounting adjustments were necessary to
conform the accounting practices of Supercuts to those of Regis. The
conforming accounting adjustments included adjustments to previously
reported Supercuts revenues resulting in added revenues of $6,366,000,
$8,813,000 and $13,008,000, respectively, for conformed years ended June 30,
1994, 1995, and 1996, and adjustment to previously reported Supercuts net
income (loss) resulting in reduction of previously reported net income or
increase in previously reported net loss of $(6,889,000), $(8,798,000) and
$(3,300,000), respectively, net of corresponding tax benefit of $4,222,000,
$5,393,000, and $2,197,000, respectively, for conformed years ended June 30,
1994, 1995 and 1996. These conforming adjustments principally relate to
consolidation of previously unconsolidated investor/franchisee stores,
change in goodwill amortization periods and reversal of the capitalization
of certain development costs.
Prior to the merger, Supercuts' fiscal year for financial reporting
purposes ended on December 31. No material adjustment to retained earnings
was necessary to conform with Regis' year end.
Revenues and net income (loss) for the combining entities for the three
years ended June 30, 1996 were as follows (dollars in thousands):
Supercuts,
Fiscal year ended June 30 Regis as conformed Combined
------------------------- -------- ------------ --------
1996
----
Revenues 499,442 117,865 617,307
Net income (loss) 19,124 (9,673) 9,451
1995
----
Revenues 422,188 102,065 524,253
Net income (loss) 14,651 (3,061) 11,590
1994
----
Revenues 376,971 76,590 453,561
Net income (loss) 4,053 (170) 3,883
Continued
14
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
3. Mergers and Acquisitions, continued:
OTHER ACQUISITIONS:
NATIONAL HAIR CARE CENTERS:
Effective June 1, 1996, the Company acquired 154 salons from National Hair
Care Centers, LLC. 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.
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.
Continued
15
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
3. MERGERS AND ACQUISITIONS, continued:
OTHER:
During 1995 and 1996, the Company made numerous additional acquisitions.
The cost in excess of net tangible and identifiable intangible assets
acquired was approximately $6,700,000 and $7,900,000 in 1995 and 1996,
respectively, and is being amortized on a straight-line basis over periods
of up to 17 years. Of the aggregate purchase price of approximately
$9,800,000 associated with these acquisitions in 1995, approximately
$3,600,000 was paid in cash at closing; approximately $3,300,000 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 aggregate purchase price
of approximately $11,600,000 associated with these acquisitions in 1996,
approximately $9,200,000 was paid in cash at closing and approximately
$2,400,000 is payable during the next 3 years.
The following represents the unaudited pro forma results of operations of
the Company (restated for the inclusion of Supercuts results) 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
---- ----
Revenues $617,011 $669,810
Income before income taxes 21,019 16,969
Net income 12,538 9,217
Net income per share $ .55 $ .40
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.
The aforementioned acquisitions, except Supercuts, 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.
Continued
16
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
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 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.
Continued
17
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
4. RESOLUTION OF LITIGATION, continued:
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 facilities 26,700 30,300
Equipment and leasehold notes payable 7,464 11,112
Other notes payable, principally
subordinated notes 13,562 9,654
U.K. term notes 9,265
Investor loan notes 3,366 3,050
-------- --------
85,092 102,381
Less current portion (13,498) (19,168)
-------- --------
Long-term portion $ 71,594 $ 83,213
-------- --------
-------- --------
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.
Continued
18
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
5. FINANCING ARRANGEMENTS, continued:
At June 30, 1996, the Company's revolving credit facilities included
$21,200,000 outstanding under the Supercuts facility, and $9,100,000 under
the Regis facility. The weighted average interest rate on the Supercuts
facility was 8.3 percent at June 30, 1996. The Supercuts facility was
refinanced under terms and conditions consistent with those of the
Company's existing senior term notes in October 1996, with $22,000,000 of
additional senior term notes with mandatory repayments of $10,000,000 and
$12,000,000 in fiscal years 2005 and 2007, respectively. Also, subsequent
to June 30, 1996, the Company borrowed an additional $23,000,000, under
long-term senior term notes with mandatory repayment over fiscal years 1999
through 2007 to fund merger related costs and to pay down the Regis
revolving credit facility. Although utilized to pay down borrowings under
the revolving credit facility, $5,000,000 of the borrowings is intended to
make funds available to support franchisee expansion, and $8,000,000 is
intended to refinance a portion of the principal payment on the 11.52
percent senior term notes due in June 1997. These additional term note
borrowings bear interest at fixed rates ranging from 7.16 to 8.18 percent.
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 equipment notes payable are primarily comprised of capital lease
obligations totaling $6,346,000 and $7,464,000 at June 30, 1996, and 1995,
respectively. These capital lease obligations bear an average interest
rate of approximately 12 percent and are payable in monthly installments
over average terms of approximately 5 years. These balances exclude future
interest payable of $1,574,000 and $2,331,000 at June 30, 1996 and 1995,
respectively.
Continued
19
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
5. FINANCING ARRANGEMENTS, continued:
The Company's subordinated debt consists primarily of subordinated
promissory notes associated with various acquisitions, which bear interest
in the range of 5.84 to 12 percent per year and require monthly payments
over terms ranging from 2 to 7 years. At June 30, 1996, included in the
total subordinated debt is $1,776,000 payable to a minority interest
shareholder in a majority owned subsidiary of the Company.
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 investor loan notes bear interest at an annual rate of 25%. These
notes and accrued interest were paid in December 1996.
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 at June 30, 1996, are as follows:
Fiscal Year (Dollars in thousands)
1997 $19,168
1998 20,451
1999 15,726
2000 6,349
2001 2,352
Thereafter 38,335
-------
$102,381
-------
-------
Continued
20
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
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 $34,575 $41,719 $49,667
Percentage rent based on sales 9,377 9,634 16,078
Real estate taxes and other
expenses 11,193 13,086 15,889
------ ------ ------
$55,145 $64,439 $81,634
------ ------ ------
------ ------ ------
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 $ 57,021
1998 52,485
1999 44,612
2000 35,088
2001 25,826
Thereafter 87,386
-------
Total minimum lease payments $302,418
-------
Continued
21
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
6. COMMITMENTS, continued:
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 $ 9,376 $11,085 $ 9,142
State 1,875 2,217 1,828
International 348 6 15
Deferred:
United States (8,348) (5,040) (2,596)
International (300) - (463)
------- ------- -------
$ 2,951 $ 8,268 $ 7,926
------- ------- -------
------- ------- -------
Continued
22
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
7. INCOME TAXES, continued:
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 721 632
Compensation 724 1,051
Vacation 340 462
Restructuring - 4,180
Other, net 610 -
------- -------
$ 2,947 $ 6,687
------- -------
------- -------
Net noncurrent deferred tax asset
(liability):
Depreciation and amortization $(1,715) $(3,286)
Deferred rent 1,263 1,816
Nonrecurring items 2,126 1,359
Compensation 725 851
Excess of tax over book basis
of certain assets associated with
store development program 8,016 8,068
Other, net (318) 476
------- -------
$10,097 $ 9,284
------- -------
------- -------
Management believes no valuation allowance for the net deferred tax asset
is required due to its recoverability through reduction of future taxable
income.
Continued
23
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
7. INCOME TAXES, continued:
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 before income taxes:
United States $7,070 $19,887 $16,709
International (236) (29) 668
------ ------- -------
$6,834 $19,858 $17,377
------ ------- -------
------ ------- -------
Computed income tax expense at
federal statutory rate $2,324 $ 6,950 $ 6,082
Increase (decrease) in income taxes
resulting from:
State income taxes, net of federal
income tax benefit 565 971 953
Net effect of targeted jobs tax
credit (459) (486)
Other, principally nondeductible
acquisition costs 521 833 891
------ ------- -------
Income tax expense $2,951 $ 8,268 $ 7,926
------ ------- -------
------ ------- -------
In September 1996, Supercuts completed an Internal Revenue Service
examination. As part of its September 30, 1996 income tax provision, the
Company recorded a $1,500,000 change in estimate associated with income tax
matters related to years prior to 1996.
Continued
24
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
8. RESTRUCTURING:
During the three months ended December 31, 1995, a majority of the Board of
Directors of Supercuts concluded that it was appropriate to modify
Supercuts' strategic growth plans and to replace its Chairman of the Board
and Chief Executive Officer (Lipson). It was decided that future expansion
efforts would focus primarily on expanding with existing franchisees in
existing franchise markets. Additionally, because of the significant
operating losses and negative cash flow from certain salons, it was decided
that salons in certain markets would be closed or sold to franchisees or
other third parties. The anticipated date of completion of the
restructuring is December 1997. Until closures and dispositions are
completed, the results of operations of these salons will continue to be
included in the Company's results.
The restructuring charge described above was approximately $11,965,000 (as
adjusted from the $18,925,000 originally reported due to conforming
accounting adjustments - Note 3). Approximately $7,000,000 of this charge
relates to store closings or dispositions. The balance relates principally
to the Lipson litigation (Note 11). This charge was recorded in the quarter
ended December 31, 1995.
In order to revise estimates included in the December 1995 restructuring
charge for legal and professional fees, an additional $858,000 was charged
against earnings in the quarter ended June 30, 1996. This additional charge
resulted in aggregate restructuring charges of $12,383,000 for the year
ended June 30, 1996. Of the $12,383,000 charge, $4,384,000 was related to
non-cash activity (i.e. primarily the write-off of assets that were
purchased before the merger and do not require a cash outlay for disposal).
As of June 30, 1996, $6,493,000 of the Company's 1996 restructuring
charges are included in accrued expenses in the balance sheet and are
primarily associated with litigation matters, as described in Note 11,
and salon closures and dispositions.
In the quarter ended December 31, 1996, an additional $2,909,000 was
charged against earnings to revise restructuring charge estimates made in
fiscal 1996 and $1,500,000 was charged against earnings associated with
identified Regis salon closures. The changes in the estimated June 30,
1996 restructuring charges represent changes in accounting estimates
associated with litigation matters, legal and professional fees and lease
obligations. Of the $4,409,000 charge recorded in the quarter ended
December 31, 1996, $330,000 was related to non-cash activity.
The Supercuts and Regis salons identified for closure or disposition,
related to the December 1995 and 1996 restructuring charges described
above, contributed approximately $7,000,000 of annual revenues with
associated after-tax annualized operating losses of approximately
$1,000,000.
Continued
25
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
9. 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.
401(k) BENEFIT PLAN:
The Company has a 401(k) defined contribution plan. All Supercuts
employees with more than one year of service are eligible to participate in
this plan and may elect to make contributions between 1% and 15% of their
gross pay. The Company will match 50% on the first 1% to 5% of the
employee's contribution. As a result of the merger with Regis Corporation,
the 401(k) defined contribution plan was terminated on October 23, 1996.
Continued
26
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
9. EMPLOYEE BENEFIT PLANS, continued:
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 110 132 172
401(k) 173 212
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.
Continued
27
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
9. EMPLOYEE BENEFIT PLANS, continued:
Stock options and shares reserved for grant are as follows:
Options Outstanding
Shares ------------------------
Reserved Price
for Grant Shares Per Share
--------- ------- -------------
Balance, June 30, 1993 677,896 484,021 $4.00 - 35.63
Additional shares reserved 600,000
Granted (856,900) 856,900 7.50 - 34.53
Cancelled 92,365 (92,365) 4.00 - 35.63
Exercised (38,524) 4.00 - 27.63
-------- --------- -------------
Balance, June 30, 1994 513,361 1,210,032 4.00 - 34.53
Additional shares reserved 450,000
Granted (170,100) 170,100 12.37 - 20.70
Cancelled 63,233 (63,233) 4.00 - 34.53
Exercised (20,082) 4.00 - 27.35
-------- --------- -------------
Balance, June 30, 1995 856,494 1,296,817 4.00 - 34.53
Granted (450,400) 450,400 11.95 - 19.40
Cancelled 79,262 (79,262) 4.00 - 34.53
Exercised (108,525) 4.00 - 15.58
-------- --------- -------------
Balance, June 30, 1996 485,356 1,559,430 $4.00 - 34.38
-------- --------- -------------
-------- --------- -------------
Options exercisable at
June 30, 1996 596,737 $4.00 - 34.38
Continued
28
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
9. EMPLOYEE BENEFIT PLANS, continued:
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 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 80,000 shares of common stock at prices ranging from
$4.00 to $34.38 per share have been granted through 1996. All options vest
over a 4-year period. At June 30, 1996, there were 40,625 options
exercisable at prices ranging from $4.00 to $34.38 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.
Continued
29
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
10. 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
---- ---- ----
Revenues:
United States $408,700 $472,316 $531,599
International 44,861 51,937 85,708
-------- -------- --------
$453,561 $524,253 $617,307
-------- -------- --------
-------- -------- --------
Operating income:
United States $ 25,148 $ 25,543 $ 23,552
International 564 1,101 2,615
-------- -------- --------
$ 25,712 $ 26,644 $ 26,167
-------- -------- --------
-------- -------- --------
Total assets:
United States $219,492 $238,083 $275,954
International 7,452 6,753 28,000
-------- -------- --------
$226,944 $244,836 $303,954
-------- -------- --------
-------- -------- --------
11. CONTINGENCIES:
On March 13, 1996, Mr. David E. Lipson and DEL Holding Corporation ("DEL"),
a Nevada corporation, which Supercuts believes is wholly owned by Mr.
Lipson, brought legal action against Supercuts, a wholly owned subsidiary
of the Company, and certain Supercuts directors and officers. The initial
lawsuit, prior to subsequent amendments, sought payment of $3,000,000,
allegedly due to DEL pursuant to a Consulting Agreement dated as of August
22, 1995, between Supercuts and DEL. The initial lawsuit also sought
unspecified damages allegedly sustained by Mr. Lipson as a result of a
delay in his ability to sell 1,508,220 shares of Supercuts' common stock,
which were sold by him between February 20 and February 28, 1996, because
of Supercuts' refusal to remove restrictive legends from certificates
representing such stock. According to his lawsuit, Mr. Lipson sold the
number of shares noted for an aggregate of $7,800,000 or a reported average
price of $5.20 per share. Supercuts' common stock price range for the
month of February 1996, was a high of 7-3/8, a low of 5-1/8 and a close of
5-1/8. All matters that were heard in the United States District Court for
the Northern District of Illinois, Eastern Division, Case No. 96C-0822, are
currently on appeal in the United States Court of Appeals for the Seventh
Circuit.
Continued
30
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
11. CONTINGENCIES, continued:
In August 1996, Mr. Lipson also brought legal action against Supercuts in
the Circuit Court of Cook County, Illinois alleging that Supercuts has
defamed him. Mr. Lipson requests a judgment "in excess of $200,000,000."
The court has set a hearing date of June 18, 1997 with respect to this
matter. Mr. Lipson has also filed suit against Supercuts in the Court of
Chancery of the State of Delaware seeking advancement of expenses incurred
by him in certain litigation and other proceedings. On December 10, 1996,
the Delaware Court ruled that Mr. Lipson is entitled to an advancement of
certain expenses incurred by him, but did not establish the amount of the
advancement.
While additional future charges, if any, related to this litigation could
have a material adverse impact on the Company's net income in the quarterly
period in which they would be recorded, management of the Company believes,
based on the advice of counsel, that such additional charges, if any, will
not have a material adverse effect on the consolidated financial position
or annual results of operations of the Company.
12. SHAREHOLDERS' EQUITY:
In addition to the shareholder equity activity described in
Note 9, the following activity has taken place:
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.
INCREASE IN AUTHORIZED SHARES:
On November 12, 1996, at the annual meeting of the shareholders of the
Company, the shareholders approved an increase in the authorized shares of
common stock of the Company from 25,000,000 to 50,000,000.
SHAREHOLDERS' RIGHTS PLAN:
In December 1996, the Board of Directors adopted a shareholders' rights
plan and declared a dividend of one preferred share purchase right on each
outstanding share of common stock.
Continued
31
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
12. SHAREHOLDERS' EQUITY, continued:
The rights become exercisable only following the acquisition by a person or
group, without the prior consent of the Board of Directors, of 20 percent
or more of the Company's voting stock, or following the announcement of a
tender offer or exchange offer to acquire any interest of 20 percent or
more. If the rights become exercisable, they entitle all holders, except
the take-over bidder, to purchase stock in the Company at a bargain price.
13. RELATED PARTY TRANSACTION:
In addition to related party activity described in Notes 1, 9, and 11,
Supercuts entered into an agreement with DEL pursuant to which DEL was
compensated for Mr. Lipson's past services as Chairman of the Supercuts
Board of Directors and Chief Executive Officer. Under this agreement,
Supercuts paid DEL amounts of approximately $225,000, $450,000 and $400,000
in 1996, 1995 and 1994, respectively. Under this agreement, upon Mr.
Lipson's separation from Supercuts, DEL would receive semi-annual payments
of $150,000 over a ten year period, and would accelerate in the event of a
change in control, as defined. Supercuts is currently disputing various
terms of the DEL agreement, including Mr. Lipson's contention that $3
million was due under this agreement on his termination, January 4, 1996.
Continued
32
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
-----------
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
(Dollars in thousands, except per share amounts)
Quarter Ended
-------------------------------------
Septem- Decem- Year
ber 30 ber 31 March 31 June 30 Ended
-------- -------- -------- ------- ------
1996
----
Revenues $140,575 $155,316 $155,465 $165,951 $617,307
Operating income 9,053 (3,240) 8,966 11,388 26,167
Net income 4,018 (3,815) 3,952 5,296 9,451
Primary net income
per share (a) .18 (.17) .17 .23 .42(c)
Fully diluted net income
per share (a) .18 (.17) .17 .23 .42(c)
Dividends declared
per share (d) .017 .017 .017 .02 .07
1995
----
Revenues $125,858 $132,766 $128,403 $137,226 $524,253
Operating income 5,929 7,019 6,189 7,507 26,644
Net income 2,244 3,143 2,823 3,380 11,590
Primary net income
per share (b) .11 .15 .13 .16 .54(c)
Fully diluted net income
per share (b) .10 .14 .13 .15 .53(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 $.18, $.16, $.17, $.25
and $.76, respectively. Exclusive of nonrecurring gains, fully diluted net
income per share for the aforementioned periods would have been $.18, $.16,
$.17, $.25 and $.75, 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 $.10, $.13, $.12, $.15
and $.51, respectively. Exclusive of nonrecurring gains, fully diluted net
income per share for the aforementioned periods would have been $.10, $.13,
$.12, $.15 and $.50, 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.
(d) Dividends declared per share on the outstanding Regis shares.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY
Regis Corporation, based in Minneapolis, is the largest owner, operator
and franchisor of mall-based hair and retail product salons in the world.
The Regis worldwide operations include 3,131 hairstyling salons at June 30,
1996 operating in six divisions: Regis Hairstylists, Supercuts, MasterCuts,
Trade Secret, Wal-Mart and International. Worldwide operations include 661
franchised Supercuts salons and 72 other franchised salons operating
primarily in the Trade Secret division. The Company has more than 25,000
employees worldwide.
During fiscal 1996, the Company's consolidated revenues increased 17.7
percent to a record $617,307,000. Operating income grew 46.3 percent to
$38,990,000 before the provision for restructuring activities of $12,823,000
related to Supercuts. Exclusive of nonrecurring gains and the restructuring
charge, fiscal 1996 earnings were $.75 per share, an increase of 50 percent,
compared to $.50 per share in the prior year.
Effective October 25, 1996, the Company received shareholder approval for
the merger agreement with Supercuts, Inc. (Supercuts) in a stock-for-stock
merger transaction. Supercuts is a national operator of approximately 450
company owned/managed and franchisor of over 700 affordable hair care salons.
Each Supercuts shareholder received 0.40 shares of the Company's common stock
in exchange for each Supercuts, Inc. common share, or approximately 4,550,000
shares of the Company's common stock on a fully diluted basis.
Financial data for all periods presented reflect the retroactive effects
of the October 1996 merger with Supercuts which has been accounted for as a
pooling-of-interests. The financial statements have been prepared by
combining the current and historical financial statements of Regis
Corporation with those of Supercuts for each of the periods presented.
34
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
information derived from the Company's Consolidated Statement of Operations
expressed as a percentage of revenues. All percentages were computed as a
percentage of company-owned salon revenues. 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 less than 5 percent of total revenues.
FOR THE YEARS ENDED JUNE 30,
----------------------------
1994 1995 1996
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Operating expenses:
Cost of sales 58.4 58.1 57.6
Rent 12.8 12.9 13.8
Selling, general and administrative 23.4 23.5 21.1
Depreciation and amortization 4.0 4.2 4.3
Provision for restructuring activities 2.2
Other, including franchise revenues and expenses (4.6) (4.0) (3.4)
----- ------ -----
94.0 94.7 95.6
----- ------ -----
Operating income 6.0 5.3 4.4
Other income (expense):
Interest (2.1) (1.7) (1.7)
Nonrecurring items (2.3) 0.2 0.2
Other, net - 0.2 -
----- ------ -----
Income before income taxes 1.6 4.0 2.9
Income taxes (0.7) (1.7) (1.3)
----- ------ -----
Net income 0.9% 2.3% 1.6%
----- ------ -----
----- ------ -----
35
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995:
SALES
REVENUES. Revenues for fiscal 1996 were a record $617,307,000,
representing an increase of $93,054,000, or 17.7 percent, over fiscal 1995.
Nearly 50 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, Supercuts, MasterCuts, Trade
Secret and Wal-Mart salons in the United States and Canada (Domestic salons)
accounted for $60,230,000 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, revenues from Regis Hairstylists were $267,576,000, an
increase of 4.1 percent; revenues from Supercuts were $117,865,000, an
increase of 15.5 percent; revenues from MasterCuts salons were $83,411,000,
an increase of 18.3 percent; Trade Secret company-owned revenues were
$64,960,000, an increase of 39.8 percent; and International salon revenues
were $76,287,000, an increase of 75.5 percent.
A total of 64,400,000 customers were served in fiscal 1996, an increase
of 10.1 percent, from 58,500,000 customers served in fiscal 1995. The
Company utilizes an audiovisual-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 REVENUES. Service revenues in fiscal 1996 were $442,366,000, an
increase of $63,423,000, or 16.7 percent, over fiscal 1995. This increase
was primarily due to acquisitions, net salon openings, and same-store sales
growth.
PRODUCT REVENUES. Product revenues in fiscal 1996 were $149,523,000, an
increase of $29,142,000, or 24.2 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 revenues for the Company's Regis Hairstylists,
Supercuts, MasterCuts and Wal-Mart salons increased $10,299,000 and
represented 18.0 percent of their fiscal 1996 service and product revenues,
up from 17.3 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.
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COST OF SALES
Cost of sales in fiscal 1996 was $340,930,000, compared to $289,879,000
in fiscal 1995. The resulting combined gross margin for fiscal 1996 improved
50 basis points percent to 42.4 percent, compared to 41.9 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 revenues in Regis Hairstylists and MasterCuts, which generally have a
higher gross profit margin than service revenues.
Service margins improved to 41.3 percent in fiscal 1996, compared to 40.6
percent in fiscal 1995. Retail product margins declined during fiscal 1996
to 45.7 percent, compared to 46.2 percent during fiscal 1995.
RENT EXPENSE
Rent expense in fiscal 1996 was $81,634,000, or 13.8 percent of revenues,
compared to $64,439,000, or 12.9 percent of revenues, 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative (SG&A) expense in fiscal 1996 was
$125,048,000, or 21.1 percent of revenues, compared to $117,396,000, or 23.5
percent of revenues, in fiscal 1995. Such expenses include costs associated
with salon operations (such as advertising, promotion, insurance, telephone
and utilities), field supervision costs (payroll, 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 4.3 percent of
revenues, compared to 4.2 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 percent of
revenues.
37
RESTRUCTURING CHARGES
See Note 8 to the Consolidated Financial Statements.
OPERATING INCOME
Operating income in fiscal 1996 improved to $38,990,000 before the
provision for restructuring activities of $12,823,000 related to Supercuts,
an increase of $12,346,000, or 46.3 percent, over fiscal 1995. Operating
income, excluding the restructuring charge, increased to 6.6 percent of
revenues in fiscal 1996, compared to 5.3 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
revenues.
Operating income, after the provision for restructuring activities, was
$26,167,000 in fiscal 1996 compared to $26,644,000 in fiscal 1995.
INTEREST EXPENSE
Interest expense for fiscal 1996 was $9,880,000, or 1.7 percent of
revenues, compared to $8,774,000, or 1.7 percent of revenues, in fiscal 1995.
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 45.6 percent
of pre-tax income compared to 41.6 percent of pre-tax income for fiscal 1995.
The increase in the effective rate is attributable to the Company's
inability to fully utilize the income tax benefits of the Supercuts operating
losses in certain states.
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NET INCOME
Net income for fiscal 1996 was $9,451,000, or $.42 per share on a fully
diluted basis, compared to net income for fiscal 1995 of $11,590,000, or $.53
per share. Exclusive of nonrecurring gains and the restructuring charge, net
income for fiscal 1996 would have been $.75 per share on a fully diluted basis,
compared to net income for fiscal 1995 of $.50 per share, an increase of 50
percent.
39
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994:
REVENUES
REVENUES. Revenues for fiscal 1995 were a record $524,253,000,
representing an increase of $70,692,000, or 15.6 percent, over fiscal 1994.
This increase was attributable to net salon openings, acquisitions, and
increases in same-store sales. Domestic salons accounted for $64,086,000 of
the total revenue increase. The balance of the overall revenue increase of
$6,606,000 related to the Company's International salons.
For fiscal 1995, revenues from Regis Hairstylists were $257,161,000, an
increase of 3.6 percent; revenues from Supercuts salons were $102,065,000, an
increase of 33.3 percent; revenues from MasterCuts salons were $70,510,000,
an increase of 18.6 percent; Trade Secret company-owned revenues were
$46,476,000, an increase of 51.8 percent; and International salon revenues
were $43,463,000, an increase of 17.9 percent.
A total of 58,500,000 customers were served in fiscal 1995, an increase
of 10.4 percent, from 53,000,000 customers served in fiscal 1994.
SERVICE REVENUES. Service revenues in fiscal 1995 were $378,943,000, an
increase of $42,602,000, or 12.7 percent, over fiscal 1994. This increase
was primarily due to net salon openings and increases in customers served.
PRODUCT REVENUES. Product revenues in fiscal 1995 were $120,381,000, an
increase of $25,640,000, or 27.1 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 revenues for the Company's Regis Hairstylists, Supercuts and
MasterCuts salons were $70,947,000, and represented 17.3 percent of their
fiscal 1995 revenues, up from 16.9 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 $289,879,000, compared to $251,702,000
in fiscal 1994. The resulting combined gross margin for fiscal 1995 improved
to 41.9 percent, compared to 41.6 percent in fiscal 1994. This improvement is
due to several factors, the most significant of which is an increase in the
percentage of product revenues in Regis Hairstylists and MasterCuts, which
generally have a higher gross profit margin than service revenues. 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.
40
Service margins of 40.6 percent in fiscal 1995, compared to 40.8 percent
in the previous year. Retail product margins improved during fiscal 1995 to
46.2 percent, compared to 44.6 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 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 $64,439,000, or 12.9 percent of revenues,
compared to $55,145,000, or 12.8 percent of revenues, in fiscal 1994. Rent
expense as a percent of revenues have remained relatively consistent.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense in fiscal 1995 was
$117,396,000, or 23.5 percent of revenues, compared to $100,808,000, or 23.4
percent of revenues, 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 4.2 percent of
revenues, compared to 4.0 percent in fiscal 1994. 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
percent of revenues.
OPERATING INCOME
Operating income in fiscal 1995 improved to $26,644,000, an increase of
$932,000 over fiscal 1994. Operating income as a percentage of revenues
decreased 70 basis points to 5.3 percent in fiscal 1995 compared to 6.0
percent in fiscal 1994.
INTEREST EXPENSE
Interest expense for fiscal 1995 was $8,774,000, or 1.7 percent of
revenues, down from $8,992,000, or 2.1 percent of revenues, 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.
41
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 pre-tax gain. As a result of
these transactions, the Company recorded a $695,000 pre-tax 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 41.6 percent
of pre-tax income, compared to 43.2 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 $11,590,000, or $.53 per share on
a fully diluted basis, compared to net income for fiscal 1994 of $3,883,000,
or $.20 per share. Exclusive of the effect of nonrecurring items, net income
for fiscal 1995 would have been $.50 per share on a fully diluted basis,
compared to net income for fiscal 1994 of $.20 per share, an increase of 150
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 Supercuts,
MasterCuts or Trade Secret divisions.
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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 in fiscal 1996 increased to $38,806,000,
compared to $30,038,000 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
$46,407,000, of which $13,802,000 related to acquisitions. The Company
constructed 160 new salons (31 Regis Hairstylists, 44 Supercuts, 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 170 new salons and 60 major remodeling
and conversion projects. It is expected that expenditures for these new
salons and other projects will be approximately $36,000,000 in fiscal 1997.
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.
43
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.
44
At June 30, 1996, there was $21,200,000 outstanding under the Supercuts
revolving credit facility. In October 1996, the Supercuts facility was
refinanced under terms and conditions consistent with that of the Company's
long-term borrowings with $22,000,000 of additional long-term notes with
mandatory repayments of $10,000,000 and $12,000,000 in fiscal years 2005 and
2007, respectively. Also, in October and December 1996, the Company borrowed
an additional $10,000,000 and $5,000,000, under long-term senior term notes
with mandatory repayment over fiscal years 1999 through 2003 to fund merger
related costs and to pay down the Regis revolving credit facility. Although
utilized to pay down borrowings under the revolving credit facility, the
$5,000,000 borrowing is intended to make available funds to help franchisee
expansion. These additional term note borrowings bear interest at fixed rates
ranging from 7.16 to 7.8 percent. In April 1997, the Company borrowed
$8,000,000 under a long-term senior term note with a fixed interest rate of
8.18 percent due in fiscal 2007, to provide funds to refinance $8,000,000 of
the principal payment due on the 11.52 percent senior term notes in June 1997.
See restructuring activities discussed in Note 8 to the Consolidated
Financial Statements.
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, 1996. The Company believes implementation of this accounting
standard in fiscal 1997 will not have a material impact on earnings.
On March 13, 1996, Mr. David E. Lipson and DEL Holding Corporation ("DEL"),
a Nevada corporation, which the Company believes is wholly owned by Mr. Lipson,
brought legal action against Supercuts, Inc., ("Supercuts") a wholly owned
subsidiary of the Company, and certain Supercuts directors and officers. The
initial lawsuit, prior to subsequent amendments, sought payment of $3,000,000,
allegedly due to DEL pursuant to a Consulting Agreement dated as of August 22,
1995, between Supercuts and DEL. The initial lawsuit also sought unspecified
damages allegedly sustained by Mr. Lipson as a result of a delay in his ability
to sell 1,508,220 shares of Supercuts' common stock, which were sold by him
between February 20 and February 28, 1996, because of Supercuts' refusal to
remove restrictive legends from certificates representing such stock. According
to his lawsuit, Mr. Lipson sold the number of shares noted for an
45
aggregate of $7,800,000 or a reported average price of $5.20 per share.
Supercuts' common stock price range for the month of February 1996, was a
high of 7-3/8, a low of 5-1/8 and a close of 5-1/8. Certain matters relating
to this case that were heard in the United States District Court for the
Northern District of Illinois, Eastern Division, Case No. 96C-0822, are
currently on appeal in the United States Court of Appeals for the Seventh
Circuit.
In August 1996, Mr. Lipson also brought legal action against Supercuts in
the Circuit Court of Cook County, Illinois alleging that Supercuts has
defamed him. Mr. Lipson requests a judgment "in excess of $200,000,000."
Supercuts has denied these allegations.
Mr. Lipson has also filed suit against Supercuts in the Court of Chancery
of the State of Delaware seeking advancement of expenses incurred by him in
certain litigation and other proceedings. On December 10, 1996, the Delaware
Court ruled that Mr. Lipson is entitled to an advancement of certain expenses
incurred by him, but did not establish the amount of the advancement. The amount
to be advanced is under negotiation.
On April 17, 1997, the Securities and Exchange Commission charged Mr. Lipson
with unlawful insider trading in Supercuts stock during 1995, alleging that he
avoided a loss of approximately $621,000 through such trading. Mr. Lipson has
stated that he intends to contest the charges.
While additional future charges, if any, related to this litigation could
have a material adverse impact on the Company's net income in the quarterly
period in which they would be recorded, management of the Company believes,
based on the advice of counsel, that such additional charges, if any, will
not have a material adverse effect on the consolidated financial position or
annual results of operations of the Company.
46