1
EXHIBIT A
Audited consolidated balance sheet as of June 30, 1999 and 1998 and the related
consolidated statements of operations, changes in shareholders' equity and
comprehensive income and cash flows for the years ended June 30, 1999, 1998 and
1997 and the related Management's Discussion and Analysis of Financial Condition
and Results of Operations for the years ended June 30, 1999, 1998 and 1997.
2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Regis Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in shareholders' equity and
comprehensive income and cash flows present fairly, in all material respects,
the consolidated financial position of Regis Corporation at June 30, 1999 and
1998, and the consolidated results of its operations and its cash flows for each
of the three years in the period ended June 30, 1999, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
February 8, 2000
3
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
June 30
--------------------------
ASSETS 1999 1998
-------- --------
Current assets:
Cash $ 10,353 $ 10,469
Receivables, net 16,598 14,536
Inventories 70,056 56,030
Deferred income taxes 8,596 6,429
Other current assets 11,780 7,634
-------- --------
Total current assets 117,383 95,098
Property and equipment, net 215,952 183,195
Goodwill 153,956 119,044
Other assets 13,291 11,396
-------- --------
Total assets $500,582 $408,733
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 23,945 $ 20,359
Accounts payable 23,877 26,311
Accrued expenses 58,818 47,478
-------- --------
Total current liabilities 106,640 94,148
Long-term debt 143,041 106,601
Other noncurrent liabilities 16,682 10,717
Commitments (Note 5)
Shareholders' equity:
Common stock, $.05 par value;
issued and outstanding, 40,419,122
and 40,016,121 common shares at
June 30, 1999 and 1998, respectively 2,021 1,334
Additional paid-in capital 148,504 138,620
Accumulated other comprehensive loss (1,095) (1,707)
Retained earnings 84,789 59,020
-------- --------
Total shareholders' equity 234,219 197,267
-------- --------
Total liabilities and shareholders' equity $500,582 $408,733
======== ========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
3
4
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars and shares in thousands, except per share amounts)
Years Ended June 30
---------------------------------------
1999 1998 1997
---- ---- ----
Revenues:
Company-owned salons:
Service $679,658 $588,142 $529,529
Product 264,511 226,513 192,105
-------- -------- --------
944,169 814,655 721,634
Franchise income 47,731 45,965 43,536
-------- -------- --------
991,900 860,620 765,170
-------- -------- --------
Operating expenses:
Company-owned:
Cost of service 388,339 336,585 308,648
Cost of product 142,643 123,757 105,560
Direct salon 81,107 72,609 67,010
Rent 131,943 114,688 101,186
Depreciation 31,368 26,547 24,178
-------- -------- --------
775,400 674,186 606,582
Selling, general and administrative 112,392 99,286 89,857
Depreciation and amortization 12,983 10,012 8,403
Nonrecurring items 16,133 1,979 18,731
Other 9,657 9,299 8,419
-------- -------- --------
Total operating expenses 926,565 794,762 731,992
-------- -------- --------
Operating income 65,335 65,858 33,178
Other income (expense):
Interest (11,588) (10,500) (10,685)
Other, net 1,567 1,225 1,575
-------- -------- --------
Income before income taxes 55,314 56,583 24,068
Income taxes (23,109) (22,689) (14,691)
-------- -------- --------
Net income $ 32,205 $ 33,894 $ 9,377
======== ======== ========
Net income per share:
Basic $.80 $.86 $.25
==== ==== ====
Diluted $.78 $.83 $.24
==== ==== ====
Weighted average common and common
equivalent shares outstanding 41,518 40,604 39,267
====== ====== ======
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
4
5
REGIS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands)
Common Stock
----------------------
Shares Amount
------ -------
Balance, June 30, 1996 25,359,169 $1,268
Net income
Foreign currency translation adjustments
Proceeds from sale of common stock 500,000 25
Proceeds from exercise of stock options 271,082 14
Shares issued under company sponsored programs 15,058 1
Tax benefit realized upon exercise of stock options
Dividends ---------- ------
Balance, June 30, 1997 26,145,309 1,308
Net income
Foreign currency translation adjustments
Proceeds from sale of common stock 400,000 20
Proceeds from exercise of stock options 124,605 6
Shares issued under company sponsored programs 4,415
Tax benefit realized upon exercise of stock options
Dividends ---------- ------
Balance, June 30, 1998 26,674,329 1,334
Net income
Foreign currency translation adjustments
Less: Reclassification adjustment for translation
losses realized in net income
Stock split effected in the form
of a stock dividend 13,334,156 667
Proceeds from exercise of stock options 309,929 15
Shares issued under company sponsored programs 17,941 1
Shares issued in connection with salon
acquisitions 82,767 4
Tax benefit realized upon exercise of stock options Contribution of shareholder
debt to capital Dividends ---------- ------
Balance, June 30, 1999 40,419,122 $2,021
========== ======
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
5
6
Accumulated
Additional Other
Paid-In Comprehensive Retained Comprehensive
Capital Income (Loss) Earnings Total Income
---------- ------------- --------- --------- -------------
$110,538 $(2,088) $22,715 $132,433
9,377 9,377 $ 9,377
717 717 717
11,100 11,125
3,696 3,710
237 238
853 853
(2,794) (2,794)
-------- -------- ------- -------- -------
126,424 (1,371) 29,298 155,659 $10,094
=======
33,894 33,894 33,894
(336) (336) (336)
10,390 10,410
1,348 1,354
61 61
397 397
(4,172) (4,172)
-------- ------- ------ -------- -------
138,620 (1,707) 59,020 197,267 $33,558
=======
32,205 32,205 32,205
612 612 612
(964)
(667)
3,794 3,809
235 236
2,103 2,107
1,389 1,389
3,030 3,030
(6,436) (6,436)
-------- ------- ------- -------- -------
$148,504 $(1,095) $84,789 $234,219 $31,853
======== ======= ======= ======== =======
7
REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Years Ended June 30
----------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net income $32,205 $33,894 $ 9,377
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 36,129 30,342 27,179
Amortization 8,296 6,455 5,808
Deferred income taxes (1,065) 7,143 1,059
Nonrecurring items 4,400 1,979 330
Other 1,638 233 537
Changes in operating assets and liabilities:
Receivables (3,308) 2,044 (2,165)
Inventories (9,988) (11,335) (8,385)
Other current assets (4,041) (290) 2,358
Other assets (2,191) (2,074) (2,096)
Accounts payable (2,914) (1,391) 6,419
Accrued expenses 12,680 5,368 (2,805)
Other noncurrent liabilities 4,538 1,981 (358)
-------- -------- --------
Net cash provided by operating activities 76,379 74,349 37,258
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (67,249) (58,727) (41,364)
Proceeds from sale of assets 4,455 590 425
Purchases of salon assets, net of cash
acquired and certain obligations assumed (51,017) (24,837) (10,370)
-------- -------- --------
Net cash used in investing activities (113,811) (82,974) (51,309)
-------- -------- --------
Cash flows from financing activities:
Borrowings on revolving credit facilities 237,668 163,254 187,328
Payments on revolving credit facilities (225,075) (148,952) (203,425)
Proceeds from issuance of long-term debt 46,533 9,006 47,145
Repayment of long-term debt (19,100) (25,506) (21,379)
Increase (decrease) in negative book cash balances 602 (4,992)
Dividends paid (6,436) (4,172) (2,794)
Proceeds from issuance of common stock 3,700 11,825 15,073
-------- -------- --------
Net cash provided by financing activities 37,290 6,057 16,956
-------- -------- --------
Effect of exchange rate changes on cash 26 (85) (9)
-------- -------- --------
(Decrease) increase in cash (116) (2,653) 2,896
Cash:
Beginning of year 10,469 13,122 10,226
-------- -------- --------
End of year $ 10,353 $ 10,469 $ 13,122
======== ======== ========
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
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8
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, the
United Kingdom, Canada and Puerto Rico. 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, 1999, approximately 15 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 5 percent is owned by management and the
Company's benefit plans.
BASIS OF PRESENTATION:
The consolidated financial statements for 1998 and 1997 have been
restated to include the retroactive effects of the March 1999 merger
with Heidi's, Inc. (Heidi's), the May 1999 merger with The Barbers,
Hairstyling for Men & Women, Inc. (The Barbers), these transactions were
accounted for as poolings-of-interests (Note 3).
In October 1999, the Company consummated a merger with Supercuts UK in a
stock-for-stock transaction. The acquisition has been accounted for
under the pooling-of-interests basis of accounting and, accordingly, as
discussed in Note 3, the Company's consolidated financial statements
have been restated to retroactively include the accounts and results of
operations of Supercuts UK for all periods presented.
RECLASSIFICATION:
Certain prior period amounts have been reclassified to conform to the
current year presentation.
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 accumulated other comprehensive income (loss) within
shareholders' equity.
7
9
Notes to Consolidated Financial Statements, continued
1. Business Description and Significant Accounting Policies,
--------------------------------------------------------
continued:
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 operations. Fully depreciated assets remain in the
accounts until retired from service.
Effective July 1, 1998, the Company adopted Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". The SOP requires the Company to capitalize
both internal and external costs of developing or obtaining computer
software for internal use based on certain criteria. Previously, the
Company only capitalized costs associated with externally developed or
purchased computer software.
GOODWILL:
Goodwill recorded in connection with the fiscal 1989 purchase of the
publicly held minority interest in the Company, and 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 (acquisitions of salon sites)
is amortized on a straight-line basis, generally over 20 years.
8
10
Notes to Consolidated Financial Statements, continued
1. Business Description and Significant Accounting Policies,
--------------------------------------------------------
continued:
ASSET IMPAIRMENT ASSESSMENTS:
The Company periodically measures and evaluates the recoverability of
its tangible and intangible noncurrent assets using undiscounted cash
flow analyses.
FRANCHISE INCOME AND EXPENSES:
Franchise income includes royalties, initial franchise fees from
franchisees and sales of product and equipment to franchisees. Royalties
are recognized as income in the month in which franchisee services are
rendered or products are sold by franchisees. The Company recognizes
income from initial franchise fees at the time franchisee salons are
opened. Product sales by the Company to franchisees are recorded at the
time product is shipped to franchise locations. Franchise expenses
include all direct expenses such as the cost of product and equipment
sold to franchisees, salaries, marketing costs, and an allocation of
general corporate overhead and occupancy expenses. Cost of product and
equipment sold to franchisees is included in other operating expenses in
the Consolidated Statement of Operations. All other expenses described
above associated with franchise operations are included in selling,
general and administrative expenses in the Consolidated Statement of
Operations.
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 basis 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 current
tax payable for the period and the change during the period in deferred
tax assets and liabilities.
NET INCOME PER SHARE:
Basic earnings per share is calculated as net income divided by
weighted-average common shares outstanding. The Company's only dilutive
securities are issuable under the Company's stock option plan. Diluted
earnings per share is calculated as net income divided by
weighted-average common shares outstanding, increased to include assumed
exercise of dilutive stock options (common equivalent shares).
9
11
Notes to Consolidated Financial Statements, continued
1. Business Description and Significant Accounting Policies,
--------------------------------------------------------
continued:
The following table sets forth a reconciliation of shares used in the
computation of basic and diluted earnings per share:
1999 1998 1997
---- ---- ----
Weighted average shares for basic
earnings per share 40,204,712 39,490,951 38,180,041
Dilutive effect of stock options 1,312,886 1,112,825 1,087,282
----------- ---------- ----------
Weighted average shares for diluted
earnings per share 41,517,598 40,603,776 39,267,323
=========== ========== ==========
USE OF ESTIMATES:
The preparation of consolidated 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.
COMPREHENSIVE INCOME:
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
This statement established standards for reporting and presenting
comprehensive income and its components. Components of comprehensive
income for the Company include net income and foreign currency
translation adjustments and are presented in the Consolidated Statements
of Changes in Shareholders' Equity and Comprehensive Income.
10
12
Notes to Consolidated Financial Statements, continued
2. Other Financial Statement Data
Comprehensive income for the Company includes net income and foreign
currency translation charged or credited to the cumulative translation
account within shareholders' equity. Comprehensive income for the three
months ended September 30, 1999 and 1998 was as follows:
(Dollars in thousands)
----------------------
1999 1998
---- ----
Property and equipment:
Land $ 2,190 $ 2,190
Buildings and improvements 20,377 19,468
Equipment, furniture, software and
leasehold improvements 344,246 288,666
Equipment, furniture and leasehold
improvements under capital leases 14,093 13,718
----------- -----------
380,906 324,042
Less accumulated depreciation
and amortization (159,316) (136,972)
Less amortization of equipment,
furniture and leasehold
improvements under capital leases (5,638) (3,875)
------------- ------------
$ 215,952 $ 183,195
========= =========
Goodwill $ 190,274 $ 147,125
Less accumulated amortization (36,318) (28,081)
--------- ---------
$ 153,956 $ 119,044
========= =========
Accrued expenses:
Payroll and payroll related costs $ 27,270 $ 25,120
Insurance 8,656 6,989
Transaction and restructuring 5,981 1,630
Other 16,911 13,739
--------- ---------
$ 58,818 $ 47,478
========= =========
Utilization
------------
July 1, 1999 June 30,
1998 Additions Cash Non-Cash 1999
------- --------- ---- -------- --------
Transaction and Restructuring:
Restructuring-International
Severance $ 966 $ (404) $ 562
Salon closures and dispositions 3,806 193 $(2,812) 1,187
Other 844 (105) (388) 351
------ ------- ------- ------
5,616 (316) (3,200) 2,100
Restructuring-Mergers
Severance $1,232 2,526 (875) 2,883
Salon closures and dispositions 398 430 (93) (620) 115
Other 1,400 (74) (580) 746
------- ------- ------ ------- ------
1,630 4,356 (1,042) (1,200) 3,744
Transaction Charges-Mergers 2,066 (1,929) 137
------ ------- ------- ------ ------
$1,630 $12,038 $(3,287) $(4,400) $5,981
====== ======= ======= ======= ======
11
13
Notes to Consolidated Financial Statements, continued
2. Other Financial Statement Data, continued:
------------------------------
The following provides supplemental disclosures of cash flow activity:
(Dollars in thousands)
----------------------
1999 1998 1997
---- ---- ----
Cash paid during the year for:
Interest $11,269 $10,117 $10,996
Income taxes 24,352 14,696 14,183
Non-cash investing and financing activities include the following:
. In 1999 and 1998, the Company financed capital expenditures
totaling $3.5 million and $5.9 million, respectively, through the
issuance of capital leases.
. In 1999, in connection with the Company's merger with Heidi's, a
shareholder contributed a $3.0 million note to equity.
. In 1999 and 1998, in connection with various acquisitions, the
Company entered into seller-financed payables and non-compete
agreements as well as issuing 82,767 shares of the Company's
stock (Note 3).
. In 1997, in connection with various acquisitions, the Company
entered into seller-financed notes payable of approximately $2.6
million.
12
14
Notes to Consolidated Financial Statements, continued
3. Mergers and Acquisitions:
------------------------
SUPERCUTS (HOLDINGS) LIMITED MERGER:
Effective October 31, 1999, the Company consummated a merger with
Supercuts (Holdings) Limited (Supercuts UK). Supercuts UK is a United
Kingdom based company operating 68 hairstyling salons under the
Supercuts brand name. Under the terms of the merger agreement, the
shareholders of Supercuts UK, a privately held company, received
1,778,000 shares of Regis Corporation common stock. The 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.
Revenues and net income for each of the combining entities prior to the
merger were as follows:
Year Ended Year Ended Year Ended
June 30, 1999 June 30, 1998 June 30, 1997
------------- ------------- -------------
Revenues:
Regis $974,872 $848,444 $756,242
Supercuts UK 17,028 12,176 8,928
-------- -------- --------
Combined total $991,900 $860,620 $765,170
======== ======== ========
Net Income:
Regis $ 30,346 $ 32,699 $ 8,258
Supercuts UK 1,859 1,195 1,119
-------- -------- --------
Combined total $ 32,205 $ 33,894 $ 9,377
======== ======== ========
Prior to the combination, Supercuts UK's fiscal year ended on the
Saturday closest to August 31. In recording the pooling-of-interests
combination, Supercuts UK's financial statements for the years ended
September 4, 1999, August 29, 1998 and August 30, 1997, were combined
with Regis' financial statements for the years ended June 30, 1999,
1998, and 1997, respectively.
13
15
Notes to Consolidated Financial Statements, continued
3. Mergers and Acquisitions, continued
------------------------
THE BARBERS, HAIRSTYLING FOR MEN & WOMEN, INC. MERGER:
Effective May 20, 1999, the Company consummated the merger with The
Barbers, Hairstyling for Men & Women, Inc. (The Barbers) in a
stock-for-stock transaction. The Barbers was a national operator and
franchisor of 979 affordable hair care salons. Each shareholder of The
Barbers received .50 shares of the Company's common stock in exchange
for each share of The Barbers common stock, resulting in the issuance of
approximately 2.0 million shares of the Company's common stock. The
Barbers 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.
As a result of the merger, the Company recorded a nonrecurring charge of
$4.8 million during the quarter ended June 30, 1999. This charge
included $1.4 million for professional fees including investment
banking, legal, accounting and miscellaneous transaction costs and $3.4
million for severance and other costs, principally associated with the
closure of The Barbers headquarters. Severance expense of $2.1 million
covered the termination of approximately 20 employees of The Barbers who
had duplicate positions within the corporate office functions. These
corporate overhead departments primarily included finance, accounting
and human resources.
Revenues and net income for each of the combining entities prior to the
merger were as follows (dollars in thousands):
Nine Months Ended Year Ended Year Ended
March 31, 1999 June 30, 1998 June 30, 1997
-------------- ------------- -------------
Revenues:
Regis $693,063 $822,964 $735,415
The Barbers 20,984 25,480 20,827
-------- -------- --------
Combined total $714,047 $848,444 $756,242
======== ======== ========
Net Income:
Regis 24,321 30,988 7,034
The Barbers 1,472 1,711 1,224
-------- -------- --------
Combined total $ 25,793 $ 32,699 $ 8,258
======== ======== ========
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16
3. Mergers and Acquisitions, continued:
------------------------
HEIDI'S, INC. MERGER:
Effective March 15, 1999, the Company consummated the merger with
Heidi's, Inc. (Heidi's), a company based in Detroit, Michigan, which
operated 24 salons in shopping malls. Under the terms of the merger
agreement, the shareholders of Heidi's, a privately held company,
received 537,937 shares of Regis Corporation common stock. The
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.
As a result of the merger, the Company recorded a nonrecurring charge of
$1.2 million during the quarter ended March 31, 1999. This charge
included $0.7 million for professional fees including investment
banking, legal, accounting and miscellaneous transaction costs and $0.5
million for severance and other costs, principally associated with the
closure of Heidi's headquarters. Severance expense of $0.4 million
covered the termination of approximately ten Heidi's employees who had
duplicate positions within corporate office functions. In addition,
during the fourth quarter of 1999, the Company recorded a $0.4 million
charge related to impaired salon assets.
Revenues and net income for each of the combining entities prior to the
merger were as follows (dollars in thousands):
Six Months Ended Year Ended Year Ended
December 31, 1998 June 30, 1998 June 30, 1997
----------------- ------------- -------------
Revenues:
Regis $441,367 $798,144 $713,219
Heidi's 13,367 24,820 22,196
-------- -------- --------
Combined total $454,734 $822,964 $735,415
======== ======== ========
Net Income:
Regis 16,882 30,488 6,574
Heidi's 443 500 460
-------- -------- --------
Combined total $ 17,325 $ 30,988 $ 7,034
======== ======== ========
SUPERCUTS, INC. MERGER:
During October 1996, the Company received shareholder approval for its
merger with Supercuts, Inc. (Supercuts) in a stock-for-stock
transaction, resulting in the issuance of approximately 4.5 million
shares of the Company's common stock. Supercuts was the national
operator of approximately 430 company-owned and franchisor of
approximately 740 affordable hair care salons at the acquisition date.
As a result of the merger, the Company recorded a pre-tax merger
restructuring and transaction charge of $14.3 million.
15
17
Notes to Consolidated Financial Statements, continued
3. Mergers and Acquisitions, continued:
------------------------
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.
OTHER ACQUISITIONS:
During 1999 and 1998, the Company made numerous acquisitions in addition
to its mergers with The Barbers and Heidi's. These acquisitions have
been recorded using the purchase method of accounting. Accordingly, the
purchase prices have been allocated to assets acquired and liabilities
assumed based on their estimated fair values at the date of acquisition.
The acquisitions recorded using the purchase method of accounting,
individually and in the aggregate, are not material to the Company's
operations.
Costs in excess of net tangible and identifiable intangible assets
acquired and components of the aggregate purchase prices of the
acquisitions were as follows:
(Dollars in thousands)
1999 1998
---- ----
Costs in excess of net tangible
and identifiable intangible
assets acquired $45,147 $21,743
======= =======
Components of aggregate purchase price:
Cash $51,017 $24,837
Stock 2,107
Current and noncurrent
payables 2,830 2,180
------- -------
$55,954 $27,017
======= =======
16
18
Notes to Consolidated Financial Statements, continued
4. Financing Arrangements:
----------------------
The Company's long-term debt consists of the following:
(Dollars in thousands)
Interest Maturity
Rate % Dates 1999 1998
------ ----- ---- ----
Senior term notes 6.27-8.18 2000-2008 $109,919 $68,000
Revolving credit facilities 5.96-7.38 2000-2001 41,343 28,750
Equipment and leasehold
notes payable 8.00-11.90 2000-2004 11,236 12,113
UK term notes 5.23-5.40 2001-2003 520 6,159
Other notes payable 5.00-11.90 2000-2007 3,968 11,938
-------- --------
166,986 126,960
Less current portion (23,945) (20,359)
-------- --------
Long-term portion $143,041 $106,601
======== ========
In January 1999, the Company borrowed $15 million under a 6.27 percent
senior term note due June 2003 and $10 million under a 6.83 percent
senior term note due December 2005 to finance recent acquisitions by the
Company. In September 1998, the Company borrowed $7.5 million under a
6.55 percent senior term note due September 2003 to refinance the
Company's distribution center revolving line of credit established in
fiscal 1998.
In July 1998, the Company paid down its revolving credit facilities by
$14.0 million with the proceeds of a 7.14 percent senior term note with
interest due quarterly, and principal payments of $9.0 million and $5.0
million due in July 2007 and 2008, respectively.
In March 1997, the Company entered into a treasury lock agreement for
the purpose of establishing the effective interest rate on the
refinancing of a $14.0 million senior term note which matured in June
1998. The contract was entered into to reduce the risk to the Company of
future interest rate fluctuations. The contract had a notional amount of
$14.0 million and was tied to the U.S. government ten-year treasury note
rate. Upon settlement of the agreement in June 1998, the Company
incurred a loss of $1.6 million on the contract. This loss is being
amortized as additional interest expense through 2008. The Company does
not enter into financial instruments for trading or speculative
purposes.
In March 1999, the Company retired the majority of its UK term notes due
June 2001 with proceeds from its revolving line of credit. To facilitate
this, the Company amended its existing working capital line of credit
agreement to increase the amount available by $10 million to $45
million, eliminated covenants related to the Company's international
operations and added a multi-currency provision to the existing
revolving credit facility. This facility bears interest
17
19
Notes to Consolidated Financial Statements, continued
4. Financing Arrangements, continued:
----------------------
at the prime rate or LIBOR rate plus 1.00 to 1.25 percent based on the
Company's debt to capitalization ratio. The prime rate at June 30, 1999
and 1998 was 7.75 percent and 8.5 percent, respectively. 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. Letters of
credit totaling $0.9 million were outstanding at June 30, 1999 and 1998,
which reduce the amount available under the revolving credit facility.
The Company also has an additional revolving credit facility which, at
the discretion of the lender, allows for borrowings up to $20.0 million
and bears interest at the prime rate or LIBOR plus 1.0 percent. There
were $10 million of borrowings under this facility as of June 30, 1999,
and no borrowings as of June 30, 1998.
In July 1999, the Company replaced both of its existing revolving credit
facilities with a new senior credit facility which allows for borrowings
of $180 million due in July, 2002, and bears interest at prime rate or
LIBOR rate plus .50 to 1.00 percent, based on the Company's debt to
capitalization ratio.
The equipment and leasehold notes payable are primarily comprised of
capital lease obligations totaling $8.9 million at June 30, 1999 and
1998, respectively. These capital lease obligations are payable in
monthly installments over five years.
The debt 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 fair values of the senior term, equipment and leasehold and
subordinated notes payable, based upon discounted cash flow analyses
using the Company's current incremental borrowing rate, approximate
their carrying values at June 30, 1999.
Aggregate maturities of long-term debt at June 30, 1999 are as follows:
Fiscal Year (Dollars in thousands)
2000 $23,945
2001 17,043
2002 34,710
2003 10,545
2004 17,676
Thereafter 63,067
--------
$166,986
========
18
20
5. Commitments:
-----------
OPERATING LEASES:
The Company is committed under long-term operating leases for the rental
of most of its company-owned salon locations. The terms of the leases
range from one to 20 years, with many leases renewable for an additional
five to ten year term at the option of the Company, and certain leases
include escalation provisions. For certain leases, the Company is
required to pay additional rent based on a percent 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
percent of sales.
The Company also leases the premises in which the majority of its
franchisees operate and has entered into corresponding sublease
arrangements with the franchisees. These leases, generally with terms of
approximately five years, are expected to be renewed on expiration.
Future minimum lease payments for the next five years, which are
reimbursable from the franchisees under sublease arrangements, are
approximately $22.6 million annually. All additional lease costs are
passed through to the franchisees.
Total rent expense, net of sublease income from franchisees, includes
the following:
(Dollars in thousands)
-----------------------
1999 1998 1997
---- ---- ----
Minimum rent $ 82,578 $ 75,589 $ 66,284
Percentage rent based on sales 22,513 16,912 16,799
Real estate taxes and other
expenses 26,852 22,187 18,103
-------- -------- ---------
$131,943 $114,688 $101,186
======== ======== ========
FUTURE MINIMUM LEASE PAYMENTS:
As of June 30, 1999, future minimum lease payments (excluding percentage
rents based on sales and sublease rental obligations which are passed
through to the franchisees) due under existing noncancellable operating
leases with remaining terms of greater than one year are as follows:
19
21
Notes to Consolidated Financial Statements, continued
5. Commitments, continued:
----------------------
Fiscal Year (Dollars in thousands)
----------- ----------------------
2000 $ 92,084
2001 79,165
2002 66,939
2003 55,342
2004 43,064
Thereafter 98,837
--------
Total minimum lease payments $435,431
========
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.
6. Income Taxes:
------------
The provision for income taxes consists of:
(Dollars in thousands)
----------------------
1999 1998 1997
---- ---- ----
Current:
Federal $20,661 $12,401 $11,070
State 3,190 2,019 1,721
International 323 1,126 841
Deferred:
United States (393) 7,039 1,083
International (672) 104 (24)
------- ------- -------
$23,109 $22,689 $14,691
======= ======= =======
The components of the net deferred tax asset are as follows:
(Dollars in thousands)
----------------------
1999 1998
---- ----
Net current deferred tax asset:
Insurance $ 2,587 $ 2,234
Payroll and payroll 2,624 2,200
related costs
Nonrecurring items 2,581 2,065
Other, net 804 (70)
-------- -------
$ 8,596 $ 6,429
======== =======
Net noncurrent deferred tax asset:
Depreciation and amortization $(3,496) $(1,235)
Deferred rent 2,128 1,985
Payroll and payroll
related costs 2,444 1,265
Other, net (268) (105)
------- -------
$ 808 $ 1,910
======= =======
20
22
Notes to Consolidated Financial Statements, continued
6. Income Taxes, continued:
------------
(Dollars in thousands)
-----------------------
1999 1998 1997
---- ---- ----
Income (loss) before income taxes:
United States 58,567 54,437 23,034
International (3,253) 2,146 1,034
------- -------- --------
$55,314 $56,583 $24,068
======= ======= =======
The provision for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory rate to earnings
before income taxes, as a result of the following:
(Dollars in thousands)
------------------------
1999 1998 1997
---- ---- ----
U.S. statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit 3.4 3.6 5.0
Nondeductible merger and
transaction costs 2.5 9.9
Change in estimate 6.7
Other, principally non-deductible
goodwill 0.9 1.5 4.4
---- --- ----
41.8% 40.1% 61.0%
===== ==== ====
During 1997, the Company recorded a $1.5 million change in estimate
associated with income tax matters related to years prior to 1996
resulting from the completion of an Internal Revenue Service
examination.
7. 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.
21
23
Notes to Consolidated Financial Statements, continued
7. Employee Benefit Plans, continued:
----------------------
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. 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 on the open market, not to exceed an
aggregate contribution of $2.2 million.
Company contributions to the aforementioned plans, which are charged to
earnings in the period contributed, included the following:
(Dollars in thousands)
------------------------
1999 1998 1997
---- ---- ----
ESOP $1,303 $1,146 $662
ESAP 248 301 257
SPP 341 274 223
REGIS 401(k)PLAN:
Effective July 1, 1999, the Company established a qualified 401(k)
defined contribution plan covering substantially all field supervisors,
warehouse and corporate office employees.
STOCK OPTIONS:
The Company's Stock Option Plan (the Plan), as amended, provides for
granting both incentive stock options and nonqualified stock options. A
total of 3,300,000 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. Options granted to employees generally vest over a five
year period. Options may also be granted under this Plan to the
Company's outside directors for a term not to exceed five years from the
vesting date. Options granted to outside directors vest over a four year
period.
22
24
Notes to Consolidated Financial Statements, continued
7. Employee Benefit Plans, continued:
----------------------
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.
In May 1999, in connection with The Barbers merger (Note 3) and
effective termination of The Barbers stock option plans, outstanding
stock options and warrants of The Barbers were converted to options to
purchase approximately 370,000 shares of Regis common stock on the basis
of the exchange ratio established to effect the merger.
In October 1996, in connection with the Supercuts merger (Note 3) and
effective termination of the Supercuts stock option plans, outstanding
Supercuts stock options were converted to options to purchase
approximately 400,000 shares of Regis common stock on the basis of the
exchange ratio established to effect the merger.
Common shares available for grant as of June 30, 1999, 1998 and 1997,
were 611,095, 579,820 and 895,275, respectively.
23
25
Notes to Consolidated Financial Statements, continued
7. Employee Benefit Plans, continued:
----------------------
Stock options outstanding and weighted average exercise prices are as
follows:
Options Outstanding
-------------------
Weighted
Average
Exercise
Shares Price
Balance, June 30, 1996 2,817,452 $ 8.18
Granted 485,250 13.47
Cancelled (150,924) 14.45
Exercised (412,100) 8.71
--------- ------
Balance, June 30, 1997 2,739,678 $ 8.69
Granted 538,505 17.24
Cancelled (272,163) 13.41
Exercised (191,748) 7.20
--------- ------
Balance, June 30, 1998 2,814,272 $ 9.97
Granted 28,500 $19.53
Cancelled (37,275) 14.30
Exercised (309,929) 11.29
--------- ------
Balance, June 30, 1999 2,495,568 $ 9.88
========= ======
24
26
Notes to Consolidated Financial Statements, continued
7. Employee Benefit Plans, continued:
----------------------
At June 30, 1999, the weighted average exercise prices and remaining
contractual lives of stock options are as follows:
$2.10- $5.45- $9.33- $16.67-
Range of exercise prices $5.00 $8.25 $15.50 $24.25 Total
------------------------ ----- ----- ------ ------ -----
Total options outstanding 719,825 646,613 559,050 570,080 2,495,568
Weighted average
exercise price $4.20 $6.52 $13.21 $17.64 $9.88
Weighted average remaining
contractual life in years 3.97 5.13 7.15 8.49 6.01
Options exercisable 539,822 598,801 282,077 142,050 1,562,750
Weighted average price of
exercisable options $3.93 $6.39 $12.75 $17.95 $7.74
The Company measures compensation cost for its incentive stock plans
using the intrinsic value-based method of accounting. Had the Company
used the fair-value-based method of accounting for its stock option and
incentive plans beginning in 1996 and charged compensation cost against
income, over the vesting period based on the fair value of options at
the date of grant net income and net income per share would have been as
follows:
(Dollars in thousands, except per share amounts)
----------------------------------------------
1999 1998 1997
---- ---- ----
Net income:
As reported $32,205 $33,894 $9,377
Pro forma 31,072 33,241 8,728
Net income per diluted share:
As reported $.78 $.83 $.24
Pro forma $.75 $.82 $.22
25
27
7. Employee Benefit Plans, continued:
----------------------
The pro forma information above only includes stock options granted in
1999, 1998 and 1997. Compensation expense under the fair-value-based
method of accounting will increase over the next few years as additional
stock option grants are considered.
The weighted-average fair value per option granted during 1999, 1998 and
1997 was $12.23, $7.33 and $5.90, respectively, calculated by using the
fair value of each option grant on the date of grant. The fair value of
options was calculated utilizing the Black-Scholes option-pricing model
and the following key assumptions:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.60% 5.56% 6.41%
Expected life in years 6.0 6.0 6.5
Expected volatility 37.35% 34.16% 35.50%
Expected dividend yield .42% .38% .39%
OTHER:
The Company has established unfunded deferred compensation plans which
cover certain management and executive personnel. The Company maintains
life insurance policies on the plans' participants. The amounts charged
to earnings for these plans were $1.9 million, $0.6 million and $0.4
million in 1999, 1998 and 1997, respectively.
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, for the remaining life of his spouse. The Company has
funded its future obligations under this plan through life insurance
policies on the Chairman of the Board (the Chairman).
26
28
Notes to Consolidated Financial Statements, continued
7. Employee Benefit Plans, continued:
----------------------
The Company has entered into an agreement with the Chairman providing
that the Chairman will continue to render services to the Company until
at least May 2007, and for such further period as may be agreed upon
mutually. The Company has agreed to pay the Chairman an annual amount of
$0.6 million, adjusted for inflation, for the remainder of his life. The
Chairman has agreed that during the period in which payments to him are
made, as provided in the agreement, he will not engage in any business
competitive with the business conducted by the Company. Compensation
associated with this agreement is charged to expense as services are
provided.
Effective July 1, 1998, the Company established a survivor benefit plan
for the Chief Executive Officer's spouse, payable upon his death, at a
rate of one half of his deferred compensation benefit, adjusted for
inflation, for the remaining life of his spouse. The Company has funded
its future obligations under this plan through life insurance policies
on the Chief Executive Officer.
8. Shareholders' Equity:
--------------------
In addition to the shareholder equity activity described in Note 7, the
following activity has taken place:
STOCK SPLIT
In February 1999, the board of directors approved a three-for-two stock
split of its common stock in the form of a 50 percent stock dividend
distributed on March 1, 1999 to shareholders of record on February 15,
1999. All share and per share amounts have been restated to reflect the
stock split.
AUTHORIZED SHARES AND DESIGNATION OF PREFERRED CLASS:
The Company has 50 million shares of capital stock authorized, par value
$.05, of which all outstanding shares, and shares available under the
Stock Option Plan, have been designated as common.
In addition, 250,000 shares of authorized capital stock have been
designated as Series A Junior Participating Preferred Stock (preferred
stock). None of the preferred stock has been issued.
27
29
Notes to Consolidated Financial Statements, continued
8. Shareholders' Equity, continued:
--------------------
SHAREHOLDERS' RIGHTS PLAN:
The Company has a shareholders' rights plan pursuant to which one
preferred share purchase right is held by shareholders for each
outstanding share of common stock. 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 an interest of 20 percent or more. If the
rights become exercisable, they entitle all holders, except the
take-over bidder, to purchase one one-hundredth of a share of preferred
stock at an exercise price of $120, subject to adjustment, or in lieu of
purchasing the preferred stock, to purchase for the same exercise price
common stock of the Company (or in certain cases common stock of an
acquiring company) having a market value of twice the exercise price of
a right.
9. Segment Information:
Commencing with its 1999 fiscal year end reporting, the Company adopted
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information". This new standard requires that public companies report
financial and descriptive information about their reportable operating
segments, generally based on the way that management organized the
segments within the enterprise for making operating decisions and
assessing performance.
Each of the Company's operating segments have generally similar products
and services. The Company is organized to manage its operations based on
geographical location. The Company's operating segments have been
aggregated into two reportable segments: domestic salons and
international salons. The Company operates or franchises 4,650 domestic
salons located within high-profile regional malls and strip shopping
centers under several different concepts including Regis Salons,
MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters brand
names. The Company's International segment includes 372 salons operating
in leading department stores, mass merchants, strip shopping centers and
high street locations.
28
30
Notes to Consolidated Financial Statements, continued
9. Segment Information:, continued:
--------------------
The accounting policies of the reportable segments are the same as those
described in Note 1 to the Consolidated Financial Statements. The
Company evaluates the performance of its operating segments based on
direct salon contribution, before supervision and corporate overhead
expenses. Intersegment sales and transfers are not significant.
Summarized financial information concerning the Company's reportable
segments is shown in the following table.
(Dollars in thousands)
-------------------------------------------
1999 1998 1997
------- ------- -------
Company-owned revenues:
Domestic $826,169 $696,303 $613,358
International 118,000 118,352 108,276
-------- -------- --------
Total $944,169 $814,655 $721,634
======== ======== ========
Salon contribution:
Domestic $151,643 $124,137 $101,711
International 17,126 16,332 13,341
-------- -------- --------
Total $168,769 $140,469 $115,052
======== ======== ========
Salon depreciation and amortization:
Domestic $ 27,696 $ 23,108 $ 20,879
International 3,672 3,439 3,299
-------- -------- --------
Total $ 31,368 $ 26,547 $ 24,178
======== ======== ========
Total assets:
Domestic $372,956 $274,192 $226,703
International 26,208 32,227 34,094
Corporate 101,418 102,314 93,219
-------- -------- --------
Total $500,582 $408,733 $354,016
======== ======== ========
Long-lived assets:
Domestic $307,439 $239,423 $198,622
International 18,891 23,423 31,210
Corporate 43,578 39,393 20,359
-------- -------- --------
Total $369,908 $302,239 $250,191
======== ======== ========
Capital expenditures:
Domestic $ 50,445 $ 38,180 $ 32,063
International 4,326 3,728 3,744
Corporate 12,478 16,819 5,557
-------- -------- --------
Total $ 67,249 $ 58,727 $ 41,364
======== ======== ========
Purchases of salon assets:
Domestic $ 50,866 $24,837 $ 9,941
International 151 429
-------- -------- --------
Total $ 51,017 $ 24,837 $ 10,370
======== ======== ========
29
31
Notes to Consolidated Financial Statements, continued
9. Segment Information:, continued:
--------------------
In addition to the company-owned revenues detailed in the table above,
the Company also recorded franchise income of $47.7 million, $46.0
million and $43.5 million, respectively, as part of consolidated
revenues. The expenses associated with the Company's franchising
activities are included in selling, general & administrative and other
operating expenses within the Consolidated Statement of Operations, as
described in Note 1 to the consolidated financial statements.
Corporate assets detailed above are primarily comprised of fixed assets
associated with the Company's headquarters and distribution centers,
corporate cash, inventories located at corporate distribution centers,
deferred income taxes, franchise receivables, and other corporate
assets.
10. Nonrecurring Items:
-------------------
Nonrecurring items included in operating income consist of gains or
losses on assets and business dispositions and other items of a
nonrecurring nature. The following table summarizes nonrecurring items
recorded by the Company:
(Dollars in thousands)
----------------------
1999 1998 1997
---- ---- ----
Restructuring charge - International $5,616
Restructuring charge - Mergers (Note 3) 4,356 $1,500
Merger transaction costs (Note 3) 2,066 14,322
Year 2000 remediation 4,095
Loss on divestiture of Anasazi business
and assets $1,979
Resolution of Supercuts officer litigation 2,909
------- ------ -------
$16,133 $1,979 $18,731
======= ====== =======
During the fourth quarter of fiscal 1999, the Company's Board of
Directors approved a restructuring plan associated with its
International operations headquartered in the United Kingdom. This plan
includes relocating the headquarters out of London to Coventry, England
with the majority of the accounting and information technology functions
transferring to the Company's corporate headquarters in Minneapolis,
Minnesota and divestiture of certain markets and salons which have been
generating negative cash flows.
30
32
10. Nonrecurring Items, continued:
- ---------------------------
The restructuring charge related to the plan described above was $5.6
million. Of the total charge, $1.0 million related to severance payments
due to the elimination of duplicative accounting and information
technology functions, $0.2 million for legal, professional and other
miscellaneous fees, $0.3 million for duplicate rent related to the
relocation of operations to Coventry, and $0.3 million related to the
write-off of assets, primarily at the prior London headquarters, and
$3.8 million related to salon closing and dispositions.
International salons identified for closure or disposition in the
restructuring charge described above, contributed $8.0 million in annual
revenues with associated after-tax annualized operating losses of
approximately $0.9 million.
During 1999, the Company recorded $4.1 million of expense associated
with Year 2000 remediation.
Anasazi Exclusive Salons, LLC, a salon products manufacturing company,
was sold to Curtis Acquisition LLC, which is controlled by two members
of the Company's Board of Directors, one of whom is the Chairman.
In 1997, the Company recorded an additional $2.9 million charge to
earnings to revise restructuring charge estimates made in 1996 related
to resolution of Supercuts officer litigation. The Company also recorded
a $1.5 million charge associated with identified Regis salon closures
during 1997.
Approximately $4.4 million, $2.0 million and $0.3 million of the
nonrecurring items in 1999, 1998, and 1997, respectively, are non-cash
in nature.
31
33
11. Quarterly Financial Data:
(Dollars in Thousands, Except Per Share Amounts)
Quarter Ended
Year
September 30 December 31 March 31 June 30 Ended
1999
Revenues $231,997 $245,265 $249,660 $264,978 $991,900
Operating income 17,170 18,923 16,086 13,156 65,335
Net income 9,132 10,127 7,939 5,007 32,205
Net income per
diluted share(a) .22 .24 .19 .12 .78(e)
Dividends declared per share(b) .02 .02 .03 .03 .10
1998
Revenues $203,839 $214,928 $212,568 $229,285 $860,620
Operating income 13,731 17,043 15,354 19,730 65,858
Net income 6,790 8,472 7,630 11,002 33,894
Net income per
diluted share(c) .17 .21 .19 .27 .83(e)
Dividends declared per share(d) .013 .013 .013 .020 .060
(a) For the quarters ended September 30 and December 31, 1998, March 31 and
June 30, 1999 and the full year 1999, exclusive of nonrecurring items
(Note 10), net income per diluted share would have been $.24, $.27,
$.23, $.32 and $1.05, respectively.
(b) In addition, Supercuts UK declared dividends of $2,829 during fiscal
year 1999.
(c) For the quarter ended September 30, 1997 and the full year 1998,
exclusive of nonrecurring items (Note 10), net income per diluted share
would have been $.20 and $.86, respectively.
(d) In addition, Supercuts UK declared dividends of $2,057 during fiscal
year 1998.
(e) The summation of quarterly net income per diluted share does not equate
to the calculation for the full fiscal year as quarterly calculations
are performed on a discrete basis.
32
34
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth, for the periods indicated, selected financial
data derived from the Company's consolidated financial statements.
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Revenues $991,900 $860,620 $765,170 $661,383 $561,797
Operating income (a) 65,335 65,858 33,178 29,578 28,785
Net income (a) 32,205 33,894 9,377 11,690 12,794
Net income per diluted share (a) .78 .83 .24 .30 .34
Total assets 500,582 408,733 354,016 320,428 258,403
Long-term debt,
including current
portion 166,986 126,960 120,568 107,242 91,354
Dividends declared(b) $.10 $.06 $.05 $.05 --
(a) The following information is provided to facilitate comparisons of
operating income, net income and net income per diluted share, absent
the impact of certain nonrecurring activities (see Note 10 to the
Consolidated Financial Statements). Exclusive of nonrecurring items,
operating income would have been $81,468, $67,838, $51,909 and $42,401
in 1999, 1998, 1997 and 1996, respectively. Exclusive of nonrecurring
items, net income and net income per diluted share, respectively, would
have been $43,759 and $1.05 in 1999; $35,006 and $.86 in 1998; $24,140
and $.61 in 1997; $19,220 and $.50 in 1996; and $12,089 and $.32 in
1995.
(b) In addition, Supercuts UK declared dividends of $2,829, $2,057,
$1,072, $512 and $160 during 1999, 1998, 1997, 1996 and 1995,
respectively.
KEY RATIOS
FOR THE YEARS ENDED JUNE 30,
1999 1998 1997
---- ---- ----
Net income per diluted share exclusive of
goodwill amortization* 1.20 0.98 0.72
Gross margin percentage 43.8% 43.5% 42.6%
Salon contribution percentage 17.9% 17.2% 15.9%
Product sales mix 28.0% 27.8% 26.6%
Operating income as percent of revenues* 8.2% 7.9% 6.8%
Debt-to-capitalization ratio 41.6% 39.2% 43.6%
* Excludes nonrecurring items (see Note 10 to the Consolidated Financial
Statements)
33
35
ANNUAL RESULTS
The following table sets forth for the periods indicated certain information
derived from the Company's Consolidated Statement of Operations expressed as a
percent of revenues. The percentages are computed as a percent of total Company
revenues, except as noted.
FOR THE YEARS ENDED JUNE 30,
----------------------------
1999 1998 1997
------ ------ ------
Company-owned service revenues (1) 72.0% 72.2% 73.4%
Company-owned product revenues (1) 28.0 27.8 26.6
Franchise revenue 4.8 5.3 5.7
Company-owned operations:
Profit margins on service (2) 42.9 42.8 41.7
Profit margins on product (3) 46.1 45.4 45.1
Direct salon (1) 8.6 8.9 9.3
Rent (1) 14.0 14.1 14.0
Depreciation (1) 3.3 3.3 3.4
Direct salon contribution (1) 17.9 17.2 15.9
Selling, general and administrative 11.3 11.5 11.7
Depreciation and amortization 1.3 1.2 1.1
Nonrecurring items 1.6 0.2 2.4
Operating income 6.6 7.7 4.3
Income before income taxes 5.6 6.6 3.1
Net income 3.2 3.9 1.2
Operating income, excluding nonrecurring items 8.2 7.9 6.8
Net income, excluding nonrecurring items 4.4 4.1 3.2
(1) Computed as a percent of company-owned revenues.
(2) Computed as a percent of service revenues.
(3) Computed as a percent of product revenues.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY
Regis Corporation, based in Minneapolis, is the largest owner, operator,
franchisor and consolidator of hair and retail product salons in the world. The
Regis worldwide operations include 5,022 hairstyling salons at June 30, 1999
operating in two segments: domestic and international. The Company's domestic
segment includes 4,650 salons operating primarily under the brand names of Regis
Salons, MasterCuts, Trade Secret, SmartStyle, Supercuts and Cost Cutters. The
Company's international operations include 372 salons located in the United
Kingdom. The Company has more than 31,000 employees worldwide.
During fiscal 1999, the Company's consolidated revenues increased 15.3 percent
to $991.9 million. Exclusive of nonrecurring items, operating income grew 20.1
percent to $81.5 million and net income per diluted share increased 22.1 percent
to $1.05 per share, compared to $.86 per share in the prior year. During fiscal
1998, the Company's consolidated revenues increased 12.5 percent to a record
$860.6 million. Exclusive of nonrecurring items, operating income grew 30.7
percent to $67.8 million and net income increased 41.0 percent to $.86 per
share, compared to $.61 per share in the prior year.
The consolidated financial statements for 1998 and 1997 have been restated to
include the retroactive effects of the March 1999 merger with Heidi's, Inc.
(Heidi's), the May 1999 merger with The Barbers, Hairstyling for Men & Women,
Inc. (The Barbers), these transactions were accounted for as
poolings-of-interests (Note 3).
In October 1999, the Company consummated a merger with Supercuts UK in a
stock-for-stock transaction. The acquisition has been accounted for under the
pooling-of-interests basis of accounting and, accordingly, as discussed in Note
3, the Company's consolidated financial statements have been restated to
retroactively include the accounts and results of operations of Supercuts UK for
all periods presented.
RESULTS OF OPERATIONS
REVENUES
REVENUES. Revenues in fiscal 1999 grew to a record $991.9 million, an increase
of $131.3 million, or 15.3 percent, over fiscal 1998. Approximately 30 percent
of this increase is attributable to increases in same-store sales, with the
remaining increase due to net salon openings and acquisitions occurring in
fiscal 1999 and the full year impact of fiscal 1998 net salon openings and
acquisitions. Mall based and strip center salon operations in the United States
and Canada (Domestic salons) accounted for $129.9 million of the increase in
total revenues. Franchise income increased $1.8 million due to an increase in
sales of franchised salons. These increases were offset by a decrease in revenue
from the Company's International operations. During fiscal 1999, the Company
closed or disposed of its salon operations in South Africa, Mexico, Ireland,
Switzerland and France which resulted in a decrease in revenues when compared to
fiscal 1998.
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Revenues by division for the years ended June 30, 1999, 1998 and 1997 are as
follows:
(dollars in thousands)
1999 1998 1997
---- ---- ----
Domestic:
Regis $356,473 $319,404 $297,454
MasterCuts 123,454 107,821 94,963
Trade Secret 136,874 115,024 91,412
Wal-Mart 63,480 45,908 34,625
Strip Center 145,888 108,146 94,904
Franchise Income 47,731 45,965 43,536
International 118,000 118,352 108,276
--------- --------- ---------
$991,900 $860,620 $765,170
======== ======== ========
During fiscal 1999, same-store sales from all Domestic company-owned salons open
more than 12 months increased 5.6 percent, compared to increases of 5.8 percent
and 3.1 percent in fiscal 1998 and 1997, respectively. Same-store sales for the
United Kingdom salons (U.K. salons) increased 1.2 percent in fiscal 1999.
Same-store sales increases achieved during fiscal 1999, 1998 and 1997 were
driven primarily by increased customer transactions and market based price
increases in certain salon divisions. A total of 99 million customers were
served in fiscal 1999 compared to 92 million and 86 million customers served in
fiscal 1998 and 1997, respectively. 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.
System-wide sales, inclusive of non-consolidated sales generated from franchisee
salons, grew to $1.5 billion, $1.3 billion, and $1.1 billion in fiscal 1999,
1998 and 1997, representing increases of 15.4 percent, 18.2 percent and 10.0
percent, respectively. The increase in system-wide sales in fiscal 1999 and 1998
was the result of same-store sales increases from existing salons and net salon
openings as well as the total number of salons added to the system through
acquisitions. System-wide same-store sales increased 5.4 percent, 5.3 percent
and 2.6 percent in fiscal 1999, 1998 and 1997, respectively.
SERVICE REVENUES. Service revenues increased to $679.7 million, $588.1 million
and $529.5 million for 1999, 1998 and 1997. The growth in service revenues of
15.6 percent and 11.1 percent in fiscal 1999 and 1998, respectively, was driven
by acquisitions, same store-sales growth, and accelerated new salon
construction.
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PRODUCT REVENUES. Product revenues increased to $264.5 million, $226.5 million
and $192.1 million in fiscal 1999, 1998 and 1997. The growth in product revenue
of 16.8 percent and 17.9 percent in fiscal 1999 and 1998, respectively,
continues a trend of escalating product revenues due to strong product
same-store sales growth, a reflection of continuous focus on product awareness,
training and acceptance of national label merchandise and opening an additional
108 Trade Secret salons through new construction or acquisitions between the two
periods. In fiscal 1999, product revenues as a percent of total company-owned
revenues increased to 28.0 percent of revenues, compared to 27.8 percent and
26.6 percent of revenues in 1998 and 1997, respectively.
FRANCHISE INCOME. Franchise revenue, including royalties and initial franchise
fees from franchisees, and product and equipment sales made by the Company to
franchisees, increased 3.8 percent in fiscal 1999 to $47.7 million from $46.0
million in fiscal 1998. In fiscal 1998, franchise revenue increased 5.6 percent,
or $2.4 million, compared to fiscal 1997. The increase in franchise revenue in
1999 and 1998 is primarily the result of an increased royalties on higher
franchise sales, (which are not included in the Company's consolidated revenues)
and an increase in product and equipment sales to franchisees.
COST OF REVENUE
The aggregate cost of product and service revenues in fiscal 1999 was $531.0
million, compared to $460.3 million and $414.2 million in fiscal 1998 and 1997,
respectively. As discussed in the following paragraphs, the resulting gross
margin percentage for fiscal 1999 improved to 43.8 percent of company-owned
revenues compared to 43.5 percent and 42.6 percent of company-owned revenues in
fiscal 1998 and 1997.
SERVICE MARGINS for fiscal 1999 improved 10 basis points to 42.9 percent of
company-owned revenues, compared to 42.8 percent and 41.7 percent in the two
preceding fiscal years. This continued improvement was driven by ongoing efforts
by the Company to control payroll costs in all operating divisions and growth in
the mix of the Company's higher service margin salon concepts, primarily
Supercuts, MasterCuts and Wal-Mart/SmartStyle.
PRODUCT MARGINS for fiscal 1999 improved to 46.1 percent of company-owned
revenues, compared to 45.4 percent and 45.1 percent in fiscal 1998 and 1997.
This 70 basis point improvement was primarily driven by lower product costs in
Supercuts and Trade Secret salons resulting from the benefit of Regis'
purchasing power. Fiscal 1998 product margins also benefited from lower product
costs, primarily in the Supercuts and Wal-Mart/SmartStyle salons.
DIRECT SALON
This expense category includes direct costs associated with salon operations
such as advertising, promotion, insurance, telephone and utilities. Direct salon
expenses were $81.1 million in fiscal 1999, compared to $72.6 million and $67.0
million in fiscal 1998 and 1997, and improved as a percent of company-owned
revenue to 8.6 percent, compared to 8.9 percent and 9.3 percent in fiscal 1998
and 1997. The fiscal 1999 improvement in direct salon expenses is a result of
the Company's increased ability to leverage these costs against strong
same-store sales and a maturing salon base. The fiscal 1998 improvement in
direct salon expenses was due to the closures of under-performing stores,
primarily Supercuts salons, as well as sales leverage.
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RENT
Rent expense in fiscal 1999 was $131.9 million, compared to $114.7 million and
$101.2 million in fiscal 1998 and 1997. Rent expense in fiscal 1999 increased
15.0 percent or $17.3 million from fiscal 1998. Rent expense in fiscal 1999
improved 10 basis points to 14.0 percent of company-owned revenues compared to
14.1 percent in fiscal 1998 and 1997, respectively. The slight improvement is a
result of leveraging this fixed cost against same-store sales increases.
DEPRECIATION - SALON LEVEL
Depreciation expense at the salon level remained consistent in fiscal 1999 at
3.3 percent of revenues compared to 3.3 percent and 3.4 percent in fiscal 1998
and 1997.
DIRECT SALON CONTRIBUTION
For reasons previously discussed, direct salon contribution, representing
company-owned salon revenues less associated operating expenses, improved in
fiscal 1999 to $168.8 million or 17.9 percent of company-owned revenues,
compared to $140.5 million or 17.2 percent in fiscal 1998 and $115.1 million or
15.9 percent in fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expenses include field supervision
(payroll, related taxes and travel) and home office administration costs (such
as warehousing, salaries, occupancy costs and professional fees). SG&A expenses
increased $13.1 million in fiscal 1999 to $112.4 million, compared to $99.3
million in fiscal 1998, but improved as a percent of total revenue to 11.3
percent in 1999 from 11.5 percent and 11.7 percent in fiscal 1998 and 1997,
respectively. The 20 basis point improvement in SG&A in 1999 is a result of the
Company's ability to leverage the fixed cost components of this category against
revenue increases. The 20 basis point improvement in SG&A in fiscal 1998 was
primarily driven by cost reductions associated with the amalgamation of the
Supercuts administrative office functions.
DEPRECIATION AND AMORTIZATION - CORPORATE
Depreciation and amortization-corporate was 1.3 percent of total revenues in
1999, compared to 1.2 percent and 1.1 percent of total revenues in fiscal 1999
and 1998, respectively. Amortization expense increased in fiscal 1998 and 1997
due to the increased level of goodwill, associated with the Company's salon
acquisition activity. Fiscal 1999 depreciation expense increased over fiscal
1998 and 1997, primarily due to increased depreciation levels associated with
the Company's fiscal 1998 purchases of additional corporate office buildings and
new distribution center.
NONRECURRING ITEMS
See Note 10 to the Consolidated Financial Statements.
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OPERATING INCOME
Operating income in fiscal 1999 was $65.3 million, compared to $65.9 million in
fiscal 1998. Fiscal 1999 operating income was impacted by merger and transaction
costs associated with the Heidi's and The Barbers mergers, a nonrecurring charge
related to restructuring the Company's International operations and nonrecurring
costs associated with the Company's year 2000 remediation program.
Operating income increased to $65.9 million in 1998 from $33.2 million in fiscal
1997. Fiscal 1997 was significantly affected by Supercuts-related merger and
transaction costs, and restructuring charges (nonrecurring items).
Exclusive of nonrecurring items, operating income in fiscal 1999 improved 20.1
percent to $81.5 million, or 8.2 percent of revenues, compared to $67.8 million
and $51.9 million in fiscal 1998 and 1997, respectively. The annual improvements
were driven by improved gross margins and the overall leveraging of fixed costs.
INTEREST
Interest expense in fiscal 1999 was $11.6 million, compared to $10.5 million and
$10.7 million in fiscal 1998 and 1997, representing 1.2 percent, 1.2 percent and
1.4 percent of total revenues, respectively. Although debt levels have
increased, interest expense as a percent of sales has remained relatively
consistent due to the benefit of reduced interest rates and the Company's
ability to leverage this cost against revenue increases.
INCOME TAXES
The Company's effective tax rate in fiscal 1999 was 41.8 percent of pre-tax
income compared to 40.1 percent and 61.0 percent in fiscal 1998 and 1997. In
fiscal 1999, the Company's effective tax rate was negatively impacted by
nondeductible merger and transaction costs associated with the Company's mergers
with Heidi's and The Barbers, and the UK restructuring charges. In fiscal 1997,
the Company's effective tax rate was negatively affected by nondeductible merger
and transaction costs associated with the Supercuts merger.
Exclusive of nonrecurring items, the Company's effective tax rate was 38.7
percent, 40.1 percent and 42.3 percent, respectively, in fiscal 1999, 1998 and
1997. In fiscal 1999, the Company's effective tax rate benefited from net
operating losses utilized by Heidi's prior to the merger and an increase in
international pre-tax income during the fourth quarter of fiscal 1999 which is
taxed at a lower rate. The fiscal 1997 effective tax rate was negatively
affected by the Company's inability to fully utilize the income tax benefits of
Supercuts operating costs in certain states. Additionally, as part of its June
30, 1997 income tax provision, the Company recorded a $1.5 million change in
estimate associated with income tax matters related to years prior to 1997.
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NET INCOME
Net income in fiscal 1999 was $32.2 million, or $0.78 per diluted share,
compared to net income of $33.9 million, or $.83 per diluted share, in fiscal
1998, and $9.4 million, or $.24 per diluted share, in fiscal 1997. Exclusive of
nonrecurring items, net income in fiscal 1999 increased to a record $43.8
million, or $1.05 per diluted share, compared to net income exclusive of
nonrecurring items $35.0 million, or $.86 per diluted share, in fiscal 1998 and
$24.1 million, or $.61 per diluted share in fiscal 1997. Earnings per diluted
share, exclusive of nonrecurring items, increased 22.1 percent and 41.0 percent
in fiscal 1999 and 1998, respectively. These increases primarily resulted from
sales increases, improved gross margins and leveraging of fixed costs, as
previously discussed.
EFFECTS OF INFLATION
The Company compensates its Regis and International salon employees with
percentage commissions based on sales they generate, thereby enabling salon
payroll expense as a percent of revenues to remain relatively constant.
Accordingly, this provides the Company certain protection against inflationary
increases as payroll expense and related benefits (the Company's major expense
components) are, with respect to these divisions, variable costs of sales. The
Company does not believe inflation, due to its low rate, has had a significant
impact on the results of operations associated with hourly paid hairstylists for
the remainder of its mall-based and strip center salons.
LIQUIDITY AND CAPITAL RESOURCES
Customers 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 1999 rose to $76.4 million compared to $74.3
million in fiscal 1998. The increase in fiscal 1999 is due to improved operating
performance during the year partially offset by cash paid for merger costs
associated with The Barbers and Heidi's mergers of $3.0 million and the UK
restructuring of $.3 million.
Capital Expenditures and Acquisitions
During fiscal 1999, the Company had worldwide capital expenditures of $77.1
million, of which $6.4 million related to acquisitions of 280 salons and $3.5
million for equipment acquired under capital leases. During fiscal 1999, the
Company constructed 282 new salons. The Company also completed 95 major
remodeling projects. All capital expenditures during fiscal 1999 were funded by
the Company's operations and borrowings under its revolving credit facility.
The Company anticipates its worldwide salon development program for fiscal 2000
will include approximately 360 new salons and 125 major remodeling and
conversion projects. It is expected that expenditures for these new salons and
other projects will be approximately $66.0 million in fiscal 2000, excluding
capital expenditures associated with acquisitions.
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Financing
Financing activities are discussed in Note 4 to the Consolidated Financial
Statements.
Subsequent to the Company's fiscal 1999 year end, the Company replaced both of
its existing revolving credit facilities with a new senior credit facility which
allows for borrowings of $180 million due in July, 2002, and bears interest at
prime rate or LIBOR rate plus .50 percent to 1.00 percent based on the company's
debt to capitalization ratio.
Merger and transaction costs are discussed in Note 3 to the Consolidated
Financial Statements.
Nonrecurring items are discussed in Note 10 to the Consolidated Financial
Statements.
The Company translates the financial statements of its international
subsidiaries to U.S. dollars for financial reporting purposes, and accordingly
is subject to fluctuations in currency exchange rates.
Management believes that cash generated from operations and amounts available
under its existing debt facilities will be sufficient to fund its anticipated
capital expenditures and required debt repayments for the foreseeable future.
Dividends
In February 1999, the board of directors approved a three-for-two stock split of
its common stock in the form of a 50 percent stock dividend distributed on March
1, 1999 to shareholders of record on February 15, 1999. All share and per share
amounts have been restated to reflect the stock split.
The Company paid dividends of $.10 per share during fiscal 1999 and $.06 per
share during fiscal 1998. On August 24, 1999 the Board of Directors of the
Company declared a $.03 per share quarterly dividend payable September 22, 1999
to shareholders of record on September 7, 1999.
In addition, Supercuts UK declared and paid dividends of $2.8 million, $2.1
million and $1.1 million during fiscal 1999, 1998, and 1997, respectively.
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Year 2000
The Company previously initiated a comprehensive project to prepare its computer
systems for the Year 2000. The Company has completed all phases of the project
including the awareness, assessment, validation and implementation phases.
Accordingly, management believes the Year 2000 will not have a significant
impact on operations. As part of the overall project, the Company is in the
process of developing a contingency plan to mitigate the Company's risk that
primary vendors or other external forces could have an impact on the Company's
operations.
Costs associated with the Year 2000 are expensed as incurred and are funded
through operating cash flows. The Company has incurred $4.6 million related to
Year 2000 project costs from the project's inception in fiscal 1998 through
fiscal 1999, of which $4.1 million was incurred and charged to earnings during
fiscal 1999. No significant additional costs are anticipated to be incurred in
the future.
The Company has contacted critical suppliers of products and services to assess
whether the suppliers' operations and the products and services they provide are
Year 2000 compliant or to monitor their progress toward Year 2000 compliance.
The results of the Company's inquiries have indicated that the majority of our
critical suppliers are either compliant or have a plan in place to be compliant
by the end of 1999. There can be no absolute assurance that another company's
failure to ensure Year 2000 compliance would not have an adverse effect on the
Company.
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