EXHIBIT C
- Unaudited consolidated balance sheet as of September 30, 1996, and the
related consolidated statements of operations and cash flows for the
three months ended September 30, 1995 and 1996, and related
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
REGIS CORPORATION
INDEX
EXHIBIT C Page No.
--------
Unaudited Consolidated Financial Statements:
Balance Sheet as of June 30, 1996
and September 30, 1996 1
Statement of Operations for the three
months ended September 30, 1995 and 1996 2
Statement of Cash Flows for the three
months ended September 30, 1995 and 1996 3
Notes to Consolidated Financial Statements 4-7
Review Report of Independent Accountants 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-15
Exhibit 15 Letter Re: Unaudited Interim Financial Information 16
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996 AND SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
JUNE 30, 1996 SEPTEMBER 30, 1996
(UNAUDITED)
------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 7,558 $ 3,228
Accounts receivable 10,640 8,990
Inventories 32,507 35,069
Deferred income taxes 6,687 8,518
Other current assets 9,691 8,939
------- -------
Total current assets 67,083 64,744
Property and equipment, net 126,821 128,902
Goodwill 93,352 95,796
Other assets 16,698 16,065
------- -------
Total assets $303,954 $305,507
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt and capital lease obligations, current portion $ 19,168 $ 19,293
Accounts payable 20,369 23,413
Accrued expenses 40,768 36,989
Restructuring accruals 6,493 5,714
------- -------
Total current liabilities 86,798 85,409
Long-term debt and capital lease obligations 83,213 81,214
Other noncurrent liabilities 6,308 6,227
Contingencies (Note 5)
Shareholders' equity:
Capital stock, $.05 par value; authorized,
25,000,000 shares; issued and outstanding,
22,537,161 common shares at June 30, 1996 and
22,589,455 common shares at September 30, 1996 1,127 1,128
Additional paid-in capital 104,634 105,114
Retained earnings 21,874 26,415
------- -------
Total shareholders' equity 127,635 132,657
------- -------
Total liabilities and shareholders'
equity $303,954 $305,507
------- -------
------- -------
See accompanying notes to unaudited consolidated financial statements.
1
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1996
---- ----
Revenues:
Company-owned operations:
Service $ 100,410 $121,540
Product 33,476 42,381
------- -------
133,886 163,921
Franchise revenues 6,689 6,684
------- -------
140,575 170,605
------- -------
Operating expenses:
Cost of sales:
Service 58,427 70,011
Product 18,134 23,393
Rent 17,569 23,069
Selling, general and administrative 29,839 34,019
Depreciation and amortization 5,722 6,889
Other, primarily franchise expenses 1,831 864
------- -------
131,522 158,245
------- -------
Operating income 9,053 12,360
Other income (expense):
Interest (2,236) (2,450)
Nonrecurring gains 137 218
Other, net 35 210
------- -------
Income before income taxes 6,989 10,338
Income taxes (2,971) (5,797)
------- -------
Net income $ 4,018 $ 4,541
------- -------
------- -------
Net income per share $ .18 $ .20
------- -------
------- -------
Common and common equivalent shares outstanding 22,421 23,316
------- -------
------- -------
See accompanying notes to unaudited consolidated financial statements.
2
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1995 1996
---- ----
Cash flows from operating activities:
Net income $ 4,018 $ 4,541
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,829 6,970
Deferred income taxes 577 (1,182)
Changes in assets and liabilities, exclusive
of investing and financing activities (1,677) (1,283)
Other 312 1,150
--------- ---------
Net cash provided by operating activities 9,059 10,196
--------- ---------
Cash flows from investing activities:
Capital expenditures (8,866) (8,319)
Purchases of salon assets, net of cash acquired and
certain obligations assumed (9,152) (4,611)
--------- ---------
Net cash used in investing activities (18,018) (12,930)
--------- ---------
Cash flows from financing activities:
Borrowings on line of credit 47,766 44,983
Payments on line of credit (40,817) (44,700)
Proceeds from issuance of long-term debt 6,222
Repayment of long-term debt (496) (2,236)
Dividends paid (285) (361)
Proceeds from issuance of common stock 212 711
--------- ---------
Net cash provided by (used in) financing activities 12,602 (1,603)
--------- ---------
Effect of exchange rate changes on cash (17) 7
--------- ---------
Increase (decrease) in cash and cash equivalents 3,626 (4,330)
Cash and cash equivalents:
Beginning of period 2,335 6,562
--------- ---------
End of period $ 5,961 $ 2,232
--------- ---------
--------- ---------
Changes in assets and liabilities, exclusive of
investing and financing activities:
Accounts receivable $ 402 $ 1,676
Inventories 501 (2,161)
Other current assets (2,899) 745
Restructuring accrual (779)
Accounts payable 412 3,046
Accrued expenses (93) (3,810)
--------- ---------
$ (1,677) $(1,283)
--------- ---------
--------- ---------
See accompanying notes to unaudited consolidated financial statements.
3
REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION OF INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
The unaudited consolidated statement of operations for the three
months ended September 30, 1995 and 1996, reflects, in the opinion
of management, all adjustments (which, with the exception of the
matters discussed in Notes 3 and 4 herein, include only normal
recurring adjustments) necessary to fairly present the results of
operations for the interim periods. The results of operations for
any interim period are not necessarily indicative of results for the
full year.
The year-end balance sheet data was derived from audited financial
statements, but does not include all disclosures required by
generally accepted accounting principles. The unaudited interim
consolidated financial statements should be read in conjunction with
the Company's consolidated financial statements for the year ended
June 30, 1996, which are included herein in Exhibit A to the
Company's May 14, 1997 report on Form 8-K.
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 prepared by combining the current
and historical financial statements of Regis Corporation with those
of Supercuts for the periods presented.
COST OF PRODUCT SALES. On an interim basis, product costs are
determined by applying an estimated gross profit margin.
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 analyses.
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 adopted effective July 1, 1996, and did not have a
significant effect on the consolidated financial statement.
2. NONRECURRING GAINS: During the first quarter of fiscal 1997 and
1996, the company received $218,000 and $137,000, respectively, of
principal payments from premier salons. The company had previously
written off the related receivable, and accordingly, is recording
all subsequent principal payments as nonrecurring gains.
4
3. MERGERS AND ACQUISITIONS:
SUPERCUTS, INC.
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 common share, or approximately 4,550,000 shares of
the Company's common stock on a fully diluted basis.
The Supercuts transaction was accounted for as a
pooling-of-interests; therefore, prior financial statements have
been restated to reflect this merger. To effect the restatement,
significant accounting adjustments were necessary to conform the
accounting practices of Supercuts to those of Regis. A detailed
description of the nature of these conforming accounting adjustments
has been included in the notes to the Company's consolidated financial
statements for the year ended June 30, 1996, which are included in
Exhibit A to the Company's May 14, 1997 Report on Form 8-K filed with
the Securities and Exchange Commission. The conforming accounting
adjustments included adjustments to previously reported Supercuts net
income (loss) and shareholders' equity due 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. In
addition, for periods preceding the merger, there were no
intercompany transactions which required elimination from the
combined consolidated results.
OTHER ACQUISITIONS
The following represents the unaudited pro forma results of
operations of the Company (restated for the inclusion of Supercuts
results) as if acquisitions occurring in fiscal 1996, primarily the
U.K. and the Wal-mart acquisitions, as more fully described under
Management's Discussion and Analysis of Financial Condition and
Results of Operations, and the related common stock activity had
occurred at the beginning of fiscal 1996.
(Dollars in thousands, except per share amounts)
------------------------------------------------
Three months ended
September 30, 1995
------------------
Revenues $162,172
Income before income taxes 7,490
Net income 4,402
Net income per share $.20
5
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.
4. INCOME TAXES:
As reflected in the Statement of Operations for Supercuts for the
quarter ended September 30, 1996, Supercuts recorded as part of its
September 30, 1996 income tax provision, a $1,500,000 change in
estimate associated with income tax matters related to years prior
to 1996. this change in estimate includes tax changes resulting
from the completion of an Internal Revenue Service examination in
the quarter ended September 30, 1996. Accordingly, this change in
estimate is included in the financial results for the combined
companies of Regis and Supercuts for the three months ended
September 30, 1996.
The Company's effective income tax rate, exclusive of the impact of
nondeductible merger and transaction costs and the $1,500,000 change
in estimate, for fiscal 1997 is estimated to be approximately 42
percent, consistent with that incurred for fiscal 1996.
5. 1996 RESTRUCTURING CHARGE:
At September 30, 1996, of the Company's 1996 restructuring charge,
$5,714,000 remained in accrued expenses in the balance sheet
primarily associated with related litigation and salon closures and
dispositions.
6. CONTINGENCIES:
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, 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.
6
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.
7
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of Regis Corporation:
We have reviewed the accompanying consolidated balance sheet of Regis
Corporation as of September 30, 1996, and the related consolidated statements
of operations and cash flows for the three months ended September 30,
1995 and 1996. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of June 30, 1996, and the
related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year then ended (not fully presented herein);
and in our report dated May 9, 1997, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of June 30, 1996, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
May 14, 1997
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 3,177 hairstyling salons at September
30, 1996 operating in six divisions: Regis Hairstylists, Supercuts,
MasterCuts, Trade Secret, Wal-Mart and International. Worldwide operations
include 730 franchised Supercuts salons and 61 other franchised salons
operating primarily in the Trade Secret division. The Company has more than
25,000 employees worldwide.
During the first quarter of fiscal 1997, the Company's consolidated sales
increased 21.4 percent to a record $170,605,000 and operating income grew
36.5 percent to $12,360,000. Exclusive of nonrecurring gains, earnings per
share increased 38.9 percent in the first quarter of fiscal 1997 to $.25 per
share, compared to $.18 per share in the same period the prior year.
Effective October 25, 1996, the Company received shareholder approval for
the merger agreement with 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.
The Company expects to record a nonrecurring pretax charge in the second
quarter ended December 31, 1996 in the range of approximately $18 million for
transaction, restructuring and other nonrecurring costs associated with the
merger. A significant portion of this charge will be nondeductible for
income tax purposes.
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 total revenue from company-owned salon operations. For
purposes of this analysis, revenues from the Company's franchise operations
have been netted against the related franchise expenses, as included in the
cost category "Other, including franchise revenues and expenses". This was
done to facilitate a meaningful comparison of the historical expense ratios
of the Company. Franchise revenues are not material to the Company as they
represent less than 5 percent of total revenues.
9
WORLDWIDE OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1995 1996
---- ----
Revenues 100.0% 100.0%
Operating expenses:
Cost of sales 57.2 57.0
Rent 13.1 14.1
Selling, general and administrative 22.3 20.8
Depreciation and amortization 4.3 4.2
Other, including franchise revenues
and expenses (3.7) (3.6)
----- -----
93.2 92.5
----- -----
Operating income 6.8 7.5
Other income (expense):
Interest (1.7) (1.4)
Nonrecurring gains 0.1 0.1
Other, net 0.1
----- -----
Income before income taxes 5.2 6.3
Income taxes (2.2) (3.5)
----- -----
Net income 3.0% 2.8%
----- -----
----- -----
THREE MONTHS ENDED SEPTEMBER 30, 1996, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995:
REVENUES. Revenues for the first quarter of fiscal 1997 grew to a record
$170,605,000, representing an increase of $30,030,000, or 21.4 percent, over
the same period in fiscal 1996. Approximately 75 percent of the increase is
attributable to salon acquisitions occurring subsequent to the first quarter
of fiscal 1996, 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 $18,360,000 of the total revenue
increase. The remainder of the revenue increase of $11,670,000 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 salon acquisitions subsequent to the first quarter of fiscal
1996 in the United Kingdom.
For the first quarter of fiscal 1997, revenues from Regis Hairstylists
were $67,172,000, an increase of 2.1 percent, and revenues from Supercuts
were $30,747,000, an increase of 6.6 percent. Revenues from MasterCuts were
$22,783,000, an increase of 16.1 percent; Trade Secret company-owned revenues
were $19,180,000, an increase of 35.1 percent; revenues from Wal-Mart salons
were $7,427,000, a newly acquired division compared to the same period a year
ago;
10
and International salon sales were $22,335,000, an increase of more than 100
percent, principally due to acquisitions subsequent to the first quarter of
fiscal 1996.
During the first quarter of fiscal 1997, same-store sales from Domestic
salons open more than twelve months increased 2.5 percent, compared to a 4.1
percent same-store sales increase during the same period the previous year.
Same-store sales for the United Kingdom salons (U.K. salons), the primary
component of International salons, increased 4.4 percent during the quarter.
Same-store sales increases achieved during the first quarter of fiscal 1997
are primarily due to an increase in the number of customers served. 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 the first quarter of fiscal 1997
were $121,540,000, an increase of $21,130,000, or 21.0 percent, over the
same period in fiscal 1996. This increase was primarily due to acquisitions,
net salon openings and same-store sales growth.
PRODUCT REVENUES. Product revenues in the first quarter of fiscal 1997
were $42,381,000, an increase of $8,905,000, or 26.6 percent, over the same
period in fiscal 1996. The Trade Secret retail product salon operations
represented $3,854,000 of this overall increase, reflecting salon
acquisitions occurring subsequent to the first quarter of fiscal 1996, net
salon openings, and same-store sales growth. Product revenues for the
Company's Regis Hairstylists, Supercuts, MasterCuts and Wal-Mart salons
increased $3,453,000. This increase in product revenue mix reflects the
impact of the Wal-Mart salons acquisition, which have a higher percentage of
product sales, increased customer awareness, further acceptance of national
brand salon merchandise, and sales training of Company employees. The
balance of the product revenues increase relates to International salons,
largely caused by fiscal 1996 salon acquisitions.
COST OF REVENUES
Cost of both service and product revenues in the first quarter of fiscal
1997 was $93,404,000, compared to $76,561,000, in the same period the
previous year. The resulting combined gross margin percentage for the first
quarter of fiscal 1997 was 43.0 percent of revenues compared to 42.8 percent
of revenues in the same period the previous year. As further discussed
below, this slight improvement in gross margin was primarily due to Supercuts
partially offset by declines caused by the impact of the Wal-Mart salons
acquired in June 1996.
Service margins were 42.4 percent in the first quarter of fiscal 1997,
compared to 41.8 percent in the same period the previous year. This increase
in margin was primarily due to the continued sales maturation of Supercuts.
This was partially offset by decline in margins for the Wal-Mart salon
division, which had higher fixed cost payrolls as a percentage of revenues
due to lower average revenue volume for these maturing salons.
Retail product margins declined to 44.8 percent in the first
quarter of fiscal 1997, compared to 45.9 percent in the same period the
previous year. The Wal-Mart salon division was
11
the major factor for the difference in margins between the comparable
periods. The operating statement reflects the sale of higher cost
inventories purchased in connection with the Wal-Mart salons acquisition.
RENT EXPENSE
Rent expense in the first quarter of fiscal 1997 was $23,069,000, or 14.1
percent of revenues, compared to $17,569,000, or 13.1 percent of revenues, in
the same period the previous year. The primary reason for the increase as a
percentage of revenues is due to fiscal 1996 department store salon
acquisitions in the U.K., causing the International salon division to now
comprise a larger percentage of the overall results. When compared to
Domestic salon operations, the U.K. salon operations have higher rent
expenses, offset by 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 the first quarter
of fiscal 1997 was $34,019,000, or 20.8 percent of revenues, compared to
$29,839,000, or 22.3 percent of revenues, in the same period the previous
year. Such expenses include costs directly related to salon operations (such
as advertising, promotion, insurance, telephone and utilities), field
supervision costs (payroll, related taxes and travel) and home office
administration costs (such as warehousing, salaries, occupancy costs and
professional fees). As previously discussed, the fiscal 1996 U.K. department
store salon acquisitions had a favorable effect on 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 the first quarter of fiscal 1997
decreased to 4.2 percent from 4.3 percent of revenues last year.
Depreciation expense, the major component within this category, has remained
relatively consistent as a percentage of sales.
OPERATING INCOME
Operating income in the first quarter of fiscal 1997 improved to
$12,360,000, an increase of $3,307,000, or 36.5 percent, over the same period
the previous year. Operating income as a percentage of revenues was 7.5
percent in the first quarter of fiscal 1997 compared to 6.8 percent in the
same period the previous year. As a percent of revenues, the improvement is
attributable primarily to Supercuts due to salon maturation.
12
INTEREST EXPENSE
Interest expense for the first quarter of fiscal 1997 was $2,450,000, or
1.4 percent of revenues, compared to $2,236,000, or 1.7 percent of revenues
in the same period the previous year. The slight improvement as a percent of
revenues is due to sales leveraging as the expense amount remains relatively
consistent.
NONRECURRING GAINS
During the first quarters of fiscal 1997 and 1996, the Company received
$218,000 and $137,000, respectively, of principal payments from Premier
Salons. The Company had previously written off the related receivable, and
accordingly, is recording all subsequent principal payments as a nonrecurring
gain.
INCOME TAXES
As reflected in the Statement of Operations for Supercuts for the quarter
ended September 30, 1996, Supercuts recorded as part of its September 30,
1996 income tax provision, a $1,500,000 change in estimate associated with
income tax matters related to years prior to 1996. This change in estimate
includes tax changes resulting from the completion of an Internal Revenue
Service examination in the quarter ended September 30, 1996. Accordingly,
this change in estimate is included in the financial results for the combined
companies of Regis and Supercuts for the three months ended September 30,
1996.
The Company's effective income tax rate, exclusive of the impact of
nondeductible merger and transaction costs and the $1,500,000 change in
estimate, during fiscal 1997 is estimated to be approximately 42 percent,
consistent with that incurred during fiscal 1996.
NET INCOME
Net income for the first quarter of fiscal 1997 increased to $4,541,000,
or $.20 per share, compared to net income of $4,018,000, or $.18 per share in
the same period the previous year. Exclusive of the effect of the
nonrecurring income items in both periods, net income for the first quarter
fiscal 1997 would have been $5,911,000 or $.25 per share, compared to net
income for the first quarter of fiscal 1996 of $3,936,000, or $.18 per share.
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 the first quarter of fiscal 1997 was
$10,196,000, compared to $9,059,000 during the same period the previous year.
The increase between the two periods is mainly due to improved operating
performance.
13
During the first quarter of fiscal 1997, the Company had worldwide new
salon capital expenditures of $9,214,000, $895,000 of which relates to
acquisitions. The Company constructed 5 new Regis Hairstylists salons, 2 new
Supercuts salons, 9 new MasterCuts salons, 16 new Trade Secret salons, 6 new
Wal-Mart salons and 4 new International salons, and completed 9 major
remodeling projects. All capital expenditures during the first quarter of
fiscal 1997 were funded by cash flow from 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 (including the 42 new salons opened and 9 remodeling
projects completed during the first quarter of fiscal 1997). It is expected
that expenditures for these new salons and other projects will be
approximately $36,000,000 in fiscal 1997, excluding acquisition activity.
The Company has a $20,000,000 revolving credit facility which 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. As of September 30, 1996, borrowings of $8,700,000 were
outstanding under this credit facility.
At September 30, 1996, the Company had three outstanding senior term
notes: a $24,000,000 note bearing interest at a fixed rate of 11.52 percent
which is subject to annual mandatory payments of $10,000,000 on June 30, 1997
and $14,000,000 on June 30, 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 July 2003.
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.
At September 30, 1996, there was $21,300,000 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. 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 2005 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.
At September 30, 1996, of the Company's 1996 restructuring charge,
$5,714,000 remained in accrued expenses in the balance sheet primarily
associated with related litigation and salon closures and dispositions.
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 facilities will be sufficient to fund
its anticipated capital expenditures and required debt repayments for the
foreseeable future.
In September 1996, the Company paid a quarterly dividend of $361,000 or 2
cents per share.
See contingencies discussed in Note 6 to the unaudited consolidated
financial statements.
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