1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 011230
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Regis Corporation
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(Exact name of registrant as specified in its charter)
Minnesota 41-0749934
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7201 Metro Boulevard, Edina, Minnesota 55439
---------------------------------------------
(Address of principal executive offices) (Zip Code)
(952)947-7777
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of February 2, 2001:
Common Stock, $.05 par value 40,858,196
- ---------------------------- -----------------------------
Class Number of Shares
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REGIS CORPORATION
INDEX
Part I. Financial Information Page Nos.
--------------------- ---------
Item 1. Consolidated Financial Statements:
Balance Sheet as of December 31, 2000
and June 30, 2000 3
Statement of Operations for the three
months ended December 31, 2000 and 1999 4
Statement of Operations for the six
months ended December 31, 2000 and 1999 5
Statement of Cash Flows for the six
months ended December 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7-12
Report of Independent Accountants 13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGIS CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2000 AND JUNE 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE AND SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31, 2000 JUNE 30, 2000
------------------ --------------
ASSETS
Current assets:
Cash $ 23,244 $ 14,888
Accounts receivable, net 17,729 16,220
Inventories 102,200 91,823
Deferred income taxes 9,454 10,160
Other current assets 11,702 10,713
--------- ---------
Total current assets 164,329 143,804
Property and equipment, net 284,424 260,532
Goodwill, net 239,611 208,724
Other assets 18,535 15,295
--------- ---------
Total assets $ 706,899 $ 628,355
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion $ 5,738 $ 9,983
Accounts payable 32,528 34,216
Accrued expenses 64,260 58,845
--------- ---------
Total current liabilities 102,526 103,044
Long-term debt 272,309 224,618
Other noncurrent liabilities 26,295 21,552
Shareholders' equity:
Common stock, $.05 par value;
issued and outstanding, 40,844,897 and 40,702,707
common shares at December 31, 2000 and
June 30, 2000, respectively 2,042 2,035
Additional paid-in capital 155,946 150,793
Accumulated other comprehensive loss (3,154) (2,274)
Retained earnings 150,935 128,587
--------- ---------
Total shareholders' equity 305,769 279,141
--------- ---------
Total liabilities and shareholders' equity $ 706,899 $ 628,355
========= =========
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
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4
REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999
--------- ---------
Revenues:
Company-owned salons:
Service $ 218,286 $ 192,476
Product 92,253 81,129
--------- ---------
310,539 273,605
Franchise income 13,510 12,250
--------- ---------
324,049 285,855
Operating expenses:
Company-owned salons:
Cost of service 125,828 109,739
Cost of product 49,160 43,421
Direct salon 27,385 23,109
Rent 43,209 37,420
Depreciation 10,678 8,955
--------- ---------
256,260 222,644
Selling, general and administrative 33,998 30,371
Depreciation and amortization 5,171 4,106
Nonrecurring items 3,145
Other 3,185 2,687
--------- ---------
Total operating expenses 298,614 262,953
Operating income 25,435 22,902
Other income (expense):
Interest (5,741) (3,988)
Other, net 511 432
--------- ---------
Income before income taxes 20,205 19,346
Income taxes (8,118) (8,539)
--------- ---------
Net income $ 12,087 $ 10,807
========= =========
Net income per share:
Basic $ .30 $ .27
========= =========
Diluted $ .29 $ .26
========= =========
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
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REGIS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999
--------- ---------
Revenues:
Company-owned salons:
Service $ 428,182 $ 374,312
Product 179,661 153,000
--------- ---------
607,843 527,312
Franchise income 26,960 24,651
--------- ---------
634,803 551,963
Operating expenses:
Company-owned salons:
Cost of service 245,991 212,687
Cost of product 96,469 81,975
Direct salon 53,457 45,403
Rent 84,546 72,780
Depreciation 20,512 17,563
--------- ---------
500,975 430,408
Selling, general and administrative 66,278 58,632
Depreciation and amortization 10,234 7,874
Nonrecurring items 3,145
Other 6,120 5,286
--------- ---------
Total operating expenses 583,607 505,345
Operating income 51,196 46,618
Other income (expense):
Interest (10,836) (7,355)
Other, net 861 846
--------- ---------
Income before income taxes 41,221 40,109
Income taxes (16,419) (16,664)
--------- ----------
Net income $ 24,802 $ 23,445
========= ==========
Net income per share:
Basic $ .61 $ .58
========= ==========
Diluted $ .59 $ .56
========= ==========
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
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REGIS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 24,802 $ 23,445
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 24,120 20,415
Amortization 6,855 5,205
Deferred income taxes 306 503
Other 805 (719)
Changes in assets and liabilities:
Accounts receivable (2,266) (2,534)
Inventories (9,091) (6,272)
Other current assets (543) 1,803
Other assets (2,721) (1,647)
Accounts payable (1,588) 1,505
Accrued expenses 4,247 3,827
Other noncurrent liabilities 2,102 3,882
-------- --------
Net cash provided by operating activities 47,028 49,413
Cash flows from investing activities:
Capital expenditures (39,560) (37,648)
Proceeds from sale of assets 322 134
Purchases of salon assets, net of cash acquired (36,290) (31,734)
-------- -------
Net cash used in investing activities (75,528) (69,248)
Cash flows from financing activities:
Borrowings on revolving credit facilities 176,200 163,047
Payments on revolving credit facilities (155,100) (97,528)
Proceeds from issuance of long-term debt 25,000
Repayment of long-term debt (3,009) (24,955)
Increase in negative book cash (4,405)
Dividends paid (2,454) (2,745)
Proceeds from issuance of common stock 776 670
-------- --------
Net cash provided by financing activities 37,008 38,489
-------- --------
Effect of exchange rate changes on cash (152) 175
-------- --------
Increase in cash 8,356 18,829
Cash:
Beginning of period 14,888 10,353
-------- --------
End of period $ 23,244 $ 29,182
======== ========
The accompanying notes are an integral part of the
unaudited consolidated financial statements.
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REGIS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation of Unaudited Interim Consolidated Financial
Statements:
The unaudited interim consolidated financial statements of Regis
Corporation (the Company) as of December 31, 2000 and for the three and
six months ended December 31, 2000 and 1999, reflect, in the opinion of
management, all adjustments necessary to fairly present the consolidated
financial position of the Company as of December 31, 2000 and its
consolidated results of operations and cash flows for the interim
periods. The results of operations and cash flows for any interim period
are not necessarily indicative of results of operations and cash flows
for the full year.
The year-end consolidated balance sheet data was derived from audited
consolidated 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, 2000. PricewaterhouseCoopers LLP, the Company's independent
accountants, have performed limited reviews of the interim consolidated
financial data included herein. Their report on such reviews accompanies
this filing.
COST OF PRODUCT SALES. On an interim basis, product costs are determined
by applying an estimated gross profit margin to product revenues.
2. New Accounting Pronouncement:
Effective July 1, 2000, Regis adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended and interpreted (FAS 133). FAS 133 requires that
all derivative instruments, such as interest rate swap contracts, be
recognized in the financial statements and measured at their fair market
value. Changes in the fair market value of derivative instruments are
recognized each period in current earnings or shareholders' equity (as a
component of other comprehensive income), depending on whether a
derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The adoption of FAS 133 did not have a
material impact the Company's primary financial statements, but did
result in the recording of an unrealized loss of approximately $160,000,
net of tax, in other comprehensive income.
In the normal course of business, the Company is exposed to changes in
interest rates. The Company has established policies and procedures that
govern the management of these exposures through the use of financial
instruments. By policy, the Company does not enter into such contracts
for the purpose of speculation.
The Company's objective in managing its exposure to interest rates is to
decrease the volatility that changes in interest rates might have on
earnings and cash flows. To achieve this objective, the Company uses
interest rate swaps to adjust a portion of total debt, as determined by
management, that is subject to variable interest rates. The Company
designates these instruments as cash flow hedges. Under an interest rate
swap contract, Regis agrees to pay fixed rates of interest. These
contracts are considered to be a hedge against changes in the amount of
future cash flows associated with the Company's interest payments
related to its variable-rate debt obligations. Accordingly, the interest
rate swap contracts are reflected at fair value in the Company's
consolidated balance sheet and the related gains or losses on these
contracts are deferred in shareholders'
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equity as a component of comprehensive income. However, to the extent
that any of these contracts are not effective in offsetting the change
in interest cashflows being hedged, their ineffective portion is
immediately recognized in earnings. The net effect of this accounting on
the Company's operating results is that interest expense on the portion
of variable-rate debt being hedged is recorded based on the fixed
interest rate stated within the swap agreement. No other cash payments
are made unless the contract is terminated prior to maturity, in which
case the amount paid or received in settlement is established by
agreement at the time of termination, and usually represents the net
present value, at current rates of interest, of the remaining
obligations to exchange payments under the terms of the contract. Any
gains or losses upon the early termination of the interest rate swap
contracts are deferred and recognized in income over the remaining life
of the contract.
At December 31, 2000, Regis had interest rate swap contracts to pay
fixed rates of interest (ranging from 7.07 percent to 7.20 percent) and
receive variable rates of interest based on the three-month LIBOR rate
(ranging from 6.40 percent to 6.81 percent during the first six months
of fiscal 2001) on $30 million and $25 million notional amount of
indebtedness through June 2003 and April 2003, respectively.
3. Comprehensive Income:
Comprehensive income for the Company includes net income, transition
adjustment for the adoption of FAS 133, changes in fair market value of
financial instruments designated as hedges of interest rate exposure
and foreign currency translation charged or credited to the cumulative
translation account within shareholders' equity. Comprehensive income
for the three and six months ended December 31, 2000 and 1999 was as
follows:
FOR THE PERIODS ENDED DECEMBER 31,
---------------------------------------
THREE MONTHS SIX MONTHS
------------------ -----------------
(Dollars in thousands)
2000 1999 2000 1999
------- ------- ------- -------
Net income $12,087 $10,807 $24,802 $23,445
Other comprehensive income:
Transition adjustment relating to the
adoption of FAS No. 133, net of taxes (160)
Changes in fair market value of financial
instruments designated as hedges of
interest rate exposure, net of taxes (574) (872)
Change in cumulative foreign currency 930 (159) 152 86
translation
------- ------- ------- -------
Total comprehensive income $12,443 $10,648 $23,922 $23,531
======= ======= ======= =======
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4. Net Income per Share:
Basic earnings per share (EPS) is calculated as net income divided by
weighted average common shares outstanding. The Company's primary
dilutive securities are issuable under the Company's Stock Option
Plans, as amended. Diluted EPS is calculated as net income divided by
weighted average common shares outstanding, increased to include
assumed conversion of dilutive securities. Stock options with exercise
prices greater than the average market value of the Company's common
stock were excluded from the computation of diluted earnings per share
for the second quarter and first six months ended December 31, 2000 as
they are considered to be anti-dilutive. The number of excluded stock
options were approximately 4,926,905 and 4,541,223, respectively, in
the second quarter and first six months of fiscal 2001, and 596,878 and
554,501, respectively, in the second quarter and first six months of
fiscal 2000.
The following provides information related to the weighted average
common shares used in the calculation of the Company's basic and
diluted EPS:
FOR THE PERIODS ENDED DECEMBER 31,
-------------------------------------------------
THREE MONTHS SIX MONTHS
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- --------- ----------
Weighted average shares for basic
earnings per share 40,799,039 40,529,212 40,759,885 40,462,877
Effect of dilutive securities 1,102,203 1,115,457 924,557 1,139,903
---------- ---------- ---------- ----------
Weighted average shares for
diluted earnings per share 41,901,242 41,644,669 41,684,442 41,602,780
========== ========== ========== ==========
5. Financing:
In September 2000, the Company amended its senior revolving credit
agreement to increase the amount available from $180 million to $250
million, extending the expiration date to August 2003, and modifying
certain debt covenant restrictions.
In October 2000, the Company borrowed $25 million under an 8.39 percent
senior term note due October 2010 to finance acquisitions by the
Company. The note contains certain debt covenant restrictions which are
similar to the Company's existing debt covenants.
9
10
6. Transaction and Restructuring Liabilities:
The following provides additional information concerning the Company's
transaction and restructuring liabilities (dollars in thousands):
Restructuring--International Restructuring--Mergers
-------------------------------- --------------------------------------------
Salon Salon Transaction
Closures & Closures & Charges
Dispositions Other Subtotal Severance Disposition Other Subtotal Mergers Total
------------ ------ -------- --------- ----------- ------- -------- ----------- -------
June 30, 2000 $ 583 $ 67 $ 650 $2,824 $ 23 $ 145 $2,992 $ 35 $3,677
Cash utilization 173 5 178 735 18 39 792 34 1,004
Non-cash utilization 73 2 75 60 3 63 1 139
------ ------ ------ ------ ------ ------ ------ ------ ------
December 31, 2000 $ 337 $ 60 $ 397 $2,029 $ 5 $ 103 $2,137 $2,534
====== ====== ====== ====== ====== ====== ====== ====== ======
7. Segment Information:
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 generally
based on the way that management has organized the segments within the
enterprise for making operating decisions and assessing performance:
domestic salons and international salons. The Company operates or
franchises 5,899 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 370 salons operating in leading department stores, strip
shopping centers, mass merchants and high street locations.
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7. Segment Information, continued:
Summarized financial information of the Company's reportable segments
for the three and six months ended December 30, 2000 and 1999,
respectively, is shown in the following table.
FOR THE PERIODS ENDED DECEMBER 31,
------------------------------------------------
THREE MONTHS SIX MONTHS
----------------------- ---------------------
(Dollars in thousands)
2000 1999 2000 1999
--------- --------- --------- ---------
Company-owned revenues:
Domestic $ 287,226 $ 247,049 $ 560,978 $ 474,765
International 23,313 26,556 46,865 52,547
---------- --------- --------- ---------
Total $ 310,539 $ 273,605 607,843 $ 527,312
========= ========= ========= =========
Salon contribution:
Domestic $ 51,194 $ 47,030 $ 101,057 $ 88,383
International 3,085 3,931 5,811 8,521
--------- --------- --------- ---------
Total $ 54,279 $ 50,961 $ 106,868 $ 96,904
========= ========= ========= =========
In addition to the company-owned revenues detailed in the table above,
the Company also recorded franchise income as part of consolidated
revenues for the second quarter and first six months of fiscal 2001 of
$13.5 million and $27.0 million, respectively, as compared to $12.3
million and $24.7 million, respectively, for the second quarter and
first six months of fiscal 2000. The expenses associated with the
Company's franchising activities are included in selling, general and
administrative and other operating expenses.
8. Acquisitions:
During the six month period ended December 31, 2000 and 1999, the
Company made numerous acquisitions. 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. Operations of the acquired companies have been
included in the operations of the Company since the date of the
respective acquisition.
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8. Acquisitions, continued:
Costs in excess of net tangible and identifiable intangible assets
acquired and components of the aggregate purchase prices of the
acquisitions were as follows:
SIX MONTHS
ENDED DECEMBER 31,
----------------------------
(Dollars in thousands)
2000 1999
-------- --------
Costs in excess of net tangible and
identifiable intangible assets acquired $ 36,835 $ 52,963
======== ========
Components of aggregate purchase price:
Cash $ 36,290 $ 31,734
Stock 4,051 1,588
Current and noncurrent payables 7,350 25,141
-------- --------
$ 47,691 $ 58,463
======== ========
9. Benefit Plans:
On October 24, 2000, the shareholders of Regis Corporation adopted the
Regis Corporation 2000 Stock Option Plan ("2000 Plan"), which allows the
Company to grant both incentive and nonqualified stock options and
replaces the Company's 1991 Stock Option Plan.
A total of 3,500,000 shares of common stock may be granted under the
2000 Plan to employees of the Company for a term not to exceed ten years
from the date of grant. The term may not exceed five years for incentive
stock options granted to employees of the Company possessing more than
ten percent of the total combined voting power of all classes of stock
of the Company or any subsidiary of the Company. Options may also be
granted to the Company's outside directors for a term not to exceed ten
years from the grant date.
The 2000 Plan contains restrictions on transferability, time of
exercise, exercise price and on disposition of any shares acquired
through exercise of the options. Stock options are granted at not less
than fair market value on the date of grant. The Board of Directors
determines the 2000 Plan participants and establishes the terms and
conditions of each option.
In the second quarter of fiscal 2001, the Board of Directors approved a
special grant of 2,263,000 options for shares of common stock from the
2000 Plan. These options begin vesting in year three at a rate of
one-third per year for three years and expire ten years from the date of
grant.
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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 December 31, 2000, and the related consolidated statements of
operations for the three and six month periods ended December 31, 2000 and 1999,
and of cash flows for each of the six month periods ended December 31, 2000 and
1999. 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 auditing standards generally accepted in the United States of
America, 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 accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of June 30,
2000, and the related consolidated statements of operations, of changes in
shareholders' equity and of cash flows for the year then ended (not presented
herein), and in our report dated August 22, 2000, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
accompanying consolidated balance sheet information as of June 30, 2000, is
fairly stated, in all material respects in relation to the consolidated balance
sheet from which it has been derived.
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
January 24, 2001
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
Regis Corporation, based in Minneapolis, Minnesota, is the world's largest
owner, operator, franchisor and acquirer of hair and retail product salons in
all 50 states, Puerto Rico, Canada and the United Kingdom. The Regis worldwide
operations include 6,269 salons at December 31, 2000 operating in two segments:
domestic and international. The Company's domestic segment includes 5,899 salons
operating primarily under the brand names of Regis Salons, MasterCuts, Trade
Secret, SmartStyle, Supercuts and Cost Cutters. The Company's international
operations include 370 salons located in the United Kingdom. The Company has
nearly 40,000 employees worldwide.
Second quarter fiscal 2001 revenues grew to $324.0 million, including franchise
income of $13.5 million, a 13.4 percent increase over fiscal 2000 second quarter
total revenues of $285.9 million. Revenues for the six months ended December 31,
2000 grew to $634.8 million, including franchise income of $27.0 million, a 15.0
percent increase over total revenues of $552.0 million in the comparable fiscal
2000 period.
Net income in the second quarter of fiscal 2001 increased to $12.1 million, or
$.29 per diluted share, an earnings per share increase of 11.5 percent from
second quarter fiscal 2000 net income of $10.8 million, or $.26 per diluted
share. For the six months ended December 31, 2000, net income grew to $24.8
million, or $.59 per diluted share. This represents an earnings per share
increase of 5.4 percent over net income of $23.4 million, or $.56 per diluted
share, for the first six months of fiscal 2000.
Prior year fiscal 2000 results include merger and transaction costs associated
with the October 1999 merger with Supercuts (Holdings) Limited (Supercuts UK)
which were nonrecurring in nature. Exclusive of this nonrecurring item,
operating income for the second quarter of fiscal 2001 declined 2.3 percent to
$25.4 million while operating income for the first six months of fiscal 2001
grew 2.9 percent to $51.2 million. Second quarter fiscal 2001 sales and earnings
were adversely impacted by a slow down in the overall U.S. economy as well as
inclement weather in the month of December. As a result, net income in the
second quarter of fiscal 2001 decreased to $12.1 million, or $.29 per diluted
share, an earnings per share decrease of 12.1 percent, exclusive of nonrecurring
items. Net income for the first six months of fiscal 2001 decreased to $24.8
million, or $.59 per diluted share, an earnings per share decrease of 6.3
percent from the prior year, exclusive of nonrecurring items.
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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 total revenues, except as noted.
FOR THE PERIODS ENDED DECEMBER 31,
-------------------------------------------
THREE MONTHS SIX MONTHS
------------------- -----------------
2000 1999 2000 1999
------ ------ ------ ------
Company-owned service revenues (1) 70.3% 70.3% 70.4% 71.0%
Company-owned product revenues (1) 29.7 29.7 29.6 29.0
Franchise income 4.2 4.3 4.2 4.5
Company-owned operations:
Profit margins on service (2) 42.4 43.0 42.5 43.2
Profit margins on product (3) 46.7 46.5 46.3 46.4
Direct salon (1) 8.8 8.4 8.8 8.6
Rent (1) 13.9 13.7 13.9 13.8
Depreciation (1) 3.4 3.3 3.4 3.3
Direct salon contribution (1) 17.5 18.6 17.6 18.4
Selling, general and administrative 10.5 10.6 10.4 10.6
Depreciation and amortization 1.6 1.4 1.6 1.4
Nonrecurring items 1.1 0.6
Other 1.0 0.9 1.0 1.0
Operating income 7.8 8.0 8.1 8.4
Income before income taxes 6.2 6.8 6.5 7.3
Net income 3.7 3.8 3.9 4.2
Operating income, excluding
nonrecurring items 7.8 9.1 8.1 9.0
Net income, excluding nonrecurring items 3.7 4.8 3.9 4.8
- ----------
(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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RESULTS OF OPERATIONS:
REVENUES
REVENUES for the second quarter of fiscal 2001 grew to $324.0 million, an
increase of $38.2 million or 13.4 percent, over the same period in fiscal 2000.
Revenues for the first six months of fiscal 2001 were $634.8 million, an
increase of $82.8 million or 15.0 percent, over the same period in fiscal 2000.
System-wide sales, inclusive of non-consolidated sales generated from franchise
salons, increased to $469.7 million and $925.2 million, respectively, for the
second quarter and first six months of fiscal 2001, representing increases of
13.3 percent and 14.2 percent over the same periods last year. These increases
in company-owned and system-wide sales are primarily the result of the total
number of salons added to the system through acquisitions and net salon
openings.
For the second quarter and first six months of fiscal 2001 and 2000,
respectively, revenues by division were as follows:
THREE MONTHS SIX MONTHS
-------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
(Dollars in thousands)
Regis Salons $100,719 $ 95,398 $197,046 $187,104
Strip Center Salons (primarily Supercuts) 71,942 51,220 137,859 95,920
MasterCuts 38,836 36,108 77,234 70,335
Trade Secret 46,830 43,402 91,778 81,640
Wal-Mart/SmartStyle 28,899 20,921 57,061 39,766
International 23,313 26,556 46,865 52,547
Franchise income 13,510 12,250 26,960 24,651
-------- -------- -------- --------
$324,049 $285,855 $634,803 $551,963
======== ======== ======== ========
Same-store sales for domestic company-owned salons increased 1.4 percent and 3.2
percent in the second quarter and first six months of fiscal 2001, respectively,
compared to 4.4 percent and 4.3 percent in the same periods in fiscal 2000.
Second quarter fiscal 2001 sales and earnings were adversely impacted by a slow
down in the overall U.S. economy as well as inclement weather in the month of
December. Consequently, system-wide same-store sales for the second quarter and
first six months of fiscal 2001 increased 1.4 percent and 3.3 percent,
respectively, compared to 4.0 percent and 3.9 percent, respectively, in the same
periods a year ago. Same-store sales increases achieved are due to an increase
in the number of customers served and market based price increases in certain
salon divisions. A total of 28 million and 56 million customers were served
system-wide during the second quarter and first six months of fiscal 2001,
respectively. The Company utilizes an audiovisual-based training system in its
company-owned 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 in the second quarter of fiscal 2001 grew to $218.3 million, an
increase of $25.8 million or 13.4 percent, over the same period in fiscal 2000.
In the first six months of fiscal 2001, service revenues were $428.2 million, an
increase of $53.9 million or 14.4 percent, over the same period a year ago. The
increase in service revenues is primarily a result of salon acquisitions the
Company has made during the past twelve months and accelerated new salon
openings in the second quarter and first six months of fiscal 2001.
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PRODUCT REVENUES in the second quarter of fiscal 2001 grew to $92.3 million, an
increase of $11.1 million, or 13.7 percent, over the same period in fiscal 2000.
In the first six months of fiscal 2001, product revenues were $179.7 million, an
increase of $26.7 million, or 17.4 percent, over the same period of fiscal 2000.
These increases continue a trend of escalating product revenues due to product
same-store sales growth of 3.6 percent and 6.3 percent in the second quarter and
first six months of fiscal 2001, respectively, a reflection of the continuous
focus on product awareness and promotions, training and acceptance of national
label merchandise. Product revenues as a percent of total company-owned revenues
remained consistent at 29.7 percent for the second quarter of fiscal 2001
compared to the same period a year ago, while product revenues as a percent of
company-owned revenues increased to 29.6 percent for the first six months of
fiscal 2001 compared to 29.0 percent in the comparable period of fiscal 2000.
FRANCHISE INCOME, including royalties, initial franchise fees and product and
equipment sales made by the Company to franchisees, increased slightly to $13.5
million and $27.0 million in the second quarter and first six months of fiscal
2001, respectively. The increase in franchise income is a result of an increase
in royalties due to an increase in sales of the Company's franchisees, which are
not included in the Company's consolidated revenues, and additional franchise
units added through acquisition, as well as an increase in product purchases by
franchisees from the Company. These increases were offset to a lesser extent by
a reduction in franchisee royalty income and product sales due to acquisitions
of franchise salons as company-owned units.
COST OF REVENUES
The aggregate cost of service and product revenues in the second quarter of
fiscal 2001 were $175.0 million compared to $153.2 million in the same period in
fiscal 2000. For the first six months of fiscal 2001, the aggregate cost of
service and product revenues were $342.5 million compared to $294.7 million in
the same period a year ago. The resulting combined gross margin percentages for
the second quarter and first six months of fiscal 2001 declined 30 basis points
and 40 basis points to 43.7 percent of company-owned revenues in both periods
compared to 44.0 percent and 44.1 percent of company-owned revenues in the same
periods in fiscal 2000, respectively.
SERVICE MARGINS declined to 42.4 percent and 42.5 percent in the second quarter
and first six months of fiscal 2001, compared to 43.0 percent and 43.2 percent
in the same periods in fiscal 2000. These 60 basis point and 70 basis point
decreases are primarily a result of higher payroll and related costs as a
percent of service revenues in the Company's fixed cost payroll divisions
(MasterCuts and Strip Center Salons, including Supercuts). Inclement weather and
a slow down in the retail environment which resulted in de-leveraging of fixed
cost payrolls against same-store sales declines adversely impacted these
divisions. In addition, these divisions have been experiencing some wage
pressure causing an increase in payroll costs.
PRODUCT MARGINS improved to 46.7 percent in the second quarter of fiscal 2001
compared to 46.5 percent in the same period in fiscal 2000 while declining 10
basis points to 46.3 percent in the first six months of fiscal 2001 from 46.4
percent in the same period of fiscal 2000. The 20 basis point improvement in
product margins in the second quarter is a result of leveraging fixed cost
payrolls in the Trade Secret division against retail same-store sales growth.
The 10 basis point decrease year-to-date is primarily due to an increase in
retail discounting associated with the introductions of new packaging in several
product lines.
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DIRECT SALON
This expense category includes direct costs associated with salon operations
such as advertising, promotion, insurance, telephone and utilities. For the
second quarter of fiscal 2001, direct salon expense of $27.4 million increased
to 8.8 percent from 8.4 of company-owned revenues when compared to the prior
period. For the first six months of fiscal 2001, direct salon expense of $53.5
million increased as a percent of company-owned revenues to 8.8 percent from 8.6
percent in the same period in fiscal 2000. The 40 basis point and 20 basis point
declines in direct salon expense as a percentage of company-owned sales in both
the second quarter and first six months of fiscal 2001 are a result of lower
same-store sales volumes in the second quarter of fiscal 2001 over which to
spread the fixed cost components within this category.
RENT
Rent expense for the second quarter of fiscal 2001 was $43.2 million or 13.9
percent of company-owned revenues, compared to $37.4 million or 13.7 percent of
company-owned revenues in the same period in fiscal 2000. Rent expense in the
first six months of fiscal 2001 was $84.5 million or 13.9 percent of
company-owned revenues, compared to $72.8 million or 13.8 percent of
company-owned revenues in the same period in fiscal 2000. The slight increase in
rent expense as a percentage of company-owned sales is a result of lower
same-store sales volumes over which to spread this relatively fixed cost.
DEPRECIATION -- SALON LEVEL
For the second quarter and first six months fiscal 2001, salon depreciation
expense was 3.4 percent of company-owned revenues compared to 3.3 percent in the
same periods a year ago.
DIRECT SALON CONTRIBUTION
For the reasons described above, direct salon contribution, representing
company-owned salon revenues less associated operating expenses, increased in
the second quarter of fiscal 2001 to $54.3 million, or 17.5 percent of
company-owned revenues, compared to $51.0 million or 18.6 percent of
company-owned revenues in the same period of fiscal 2000. For the first six
months of fiscal 2001, direct salon contribution was $106.9 million, or 17.6
percent of company-owned revenues, compared to $96.9 million or 18.4 percent of
company-owned revenues in the same period a year ago.
SELLING, GENERAL AND ADMINISTRATIVE
Expenses in this category include field supervision (payroll, related taxes and
travel) and home office administration costs (such as warehousing, salaries,
occupancy costs and professional fees). Selling, general and administrative
(SG&A) expenses were $34.0 million, or 10.5 percent of total revenues in the
second quarter of fiscal 2001, compared to $30.4 million, or 10.6 percent of
total revenues in the same period in fiscal 2000. For the first six months of
fiscal 2001, SG&A expenses were $66.3 million, or 10.4 percent of total
revenues, compared to $58.6 million, or 10.6 percent of total revenues in the
same period in fiscal 2000. The 10 basis point and 20 basis point improvements,
respectively, are primarily related to cost synergies created by the Supercuts
UK pooling consummated in the second quarter of fiscal 2000.
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DEPRECIATION AND AMORTIZATION -- CORPORATE
Corporate depreciation and amortization increased to 1.6 percent of total
revenues in both the second quarter and first six months of fiscal 2001,
compared to 1.4 percent in the same periods in fiscal 2000. This increase is
primarily related to an increase in the level of intangible assets, primarily
goodwill, associated with the Company's acquisition activity during the past
twelve months and an increase in depreciation related to enhancements to the
corporate infrastructure.
OPERATING INCOME
Operating income in the second quarter of fiscal 2001, excluding nonrecurring
items, declined to $25.4 million, a decrease of $.6 million or 2.3 percent over
the same period in fiscal 2000. Operating income, excluding nonrecurring items,
as a percentage of total revenues was 7.8 percent in the second quarter of
fiscal 2001 compared to 9.1 percent in the same period in fiscal 2000. Operating
income in the first six months of fiscal 2001 improved to $51.2 million, or 8.1
percent of revenues, an increase of $1.4 million, or 2.9 percent over the prior
year period operating income of $49.8 million or 9.0 percent of total revenues,
exclusive of nonrecurring items.
INTEREST
Interest expense in the second quarter and first six months of fiscal 2001 was
$5.7 million and $10.8 million, respectively, representing 1.8 percent of total
revenues in the second quarter and 1.7 percent of total revenues in the first
six months of fiscal 2001, compared to $4.0 million and $7.4 million, or 1.4
percent and 1.3 percent of total revenues in the same periods in fiscal 2000.
Interest expense as a percent of total revenues has increased slightly because
of higher debt levels primarily resulting from the Company's acquisition program
and an increase in interest rates between the two periods.
INCOME TAXES
The Company's effective income tax rate for the first six months of fiscal 2001
is 39.8 percent compared to 41.5 percent in the same period a year ago.
Management expects the underlying effective tax rate for all of fiscal 2001 to
be between 40 and 41 percent, influenced by discrete Canadian acquisitions
occurring during and subsequent to the second quarter of fiscal 2001.
NET INCOME
Net income in the second quarter of fiscal 2001 grew to $12.1 million, or $.29
per diluted share, compared to $10.8 million, or $.26 per diluted share in the
same period in fiscal 2000. Exclusive of nonrecurring items, net income in the
second quarter of fiscal 2000 was $13.7 million, or $.33 per diluted share.
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For the first six months of fiscal 2001, net income grew to $24.8 million or
$.59 per diluted share, compared to net income of $23.4 million or $.56 per
diluted share in the same period in fiscal 2000. Exclusive of nonrecurring
items, net income in the first six months of fiscal 2000 was $26.3 million or
$.63 per diluted 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 for the first six months of fiscal 2001 was
$47.0 million compared to $49.4 million during the same period in fiscal 2000.
The decrease between the two periods is primarily due to an increase in net
working capital needs in the first quarter of fiscal 2001 primarily related to
inventory increases to support growth in salons and seasonal inventory.
During the first six months of fiscal 2001, the Company had worldwide capital
expenditures of $48.9 million, of which $9.4 million related to acquisitions of
509 salons. The Company constructed 19 new Regis Salons, 15 new MasterCuts
salons, 21 new Trade Secret salons, 62 new Wal-Mart/SmartStyle salons, 59 new
Strip Center salons and 23 new International salons, and completed 64 major
remodeling projects. All capital expenditures during the first six months of
fiscal 2001 were funded by cash flows from the Company's operations and
borrowings under its revolving credit facility.
The Company anticipates its worldwide salon development program for fiscal 2001
will include the construction of approximately 430 to 450 new company-owned
salons, and 150 major remodeling and conversion projects. It is expected that
expenditures for these new salons and other projects will be approximately $85
million to $90 million in fiscal 2001, excluding capital expenditures related to
acquisitions.
In light of the current economic environment, the Company plans to temporarily
reduce its salon growth beginning in fiscal year 2002 with the objective of
strengthening its balance sheet. Capital expenditures for fiscal 2002 are
expected to be approximately $70 to $75 million, or 15 to 20 percent below the
levels for this year's budget. Plans also call for the construction of 375 to
400 new salons and an acquisition budget of $25 to $30 million. This compares
with approximately 450 constructed salons and an $80 million acquisition budget
in fiscal 2001. By moderating its real estate strategy the Company plans to
reduce leverage and thereby increase its flexibility to maximize future growth
opportunities.
Financing
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.
See discussion in footnote 5 to the Consolidated Financial Statements.
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Dividends
During the first six months of fiscal 2001, the Company paid regular quarterly
dividends totaling $2.5 million, or $.06 per share. On January 24, 2001, the
Board of Directors of the Company declared a $.03 per share quarterly dividend
payable on February 22, 2001 to shareholders of record on February 7, 2001.
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of the federal securities laws, including statements concerning
anticipated future events and expectations that are not historical facts. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The forward looking
statements in this document reflect management's best judgement at the time they
are made, but all such statements are subject to numerous risks and
uncertainties, which could cause actual results to differ materially from those
expressed in or implied by the statements herein. Additional information
concerning potential factors that could affect future financial results is
included in the Company's Form S-3 Registration Statement filed with the
Securities and Exchange Commission on December 1, 2000.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk exposure of the Company relates to changes in interest
rates in connection with its debt, some of which bears interest at floating
rates based on LIBOR plus an applicable borrowing margin.
As of December 31, 2000, the Company had $179 million of total floating rate
debt outstanding. The Company manages its interest rate risk by balancing the
amount of fixed and variable debt. In addition, on occasion the Company uses
interest rate swaps to further mitigate the risk associated with changing
interest rates. Generally, the terms of the interest rate swap agreements range
from two to three years with settlement on a quarterly basis. As of December 31,
2000, the Company has entered into interest rate swap agreements covering $55
million of the floating rate debt, as discussed in Note 2 to the Consolidated
Financial Statements.
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Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 15 Letter Re: Unaudited Interim Financial Information.
(b) Reports on Form 8-K:
The following report on Form 8-K was filed during the three months ended
December 31, 2000:
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGIS CORPORATION
Date: February 8, 2001 By: /s/ Randy L. Pearce
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Randy L. Pearce
Executive Vice President
Chief Administrative and Financial
Officer
Signing on behalf of the
registrant and as principal
accounting officer
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