FINANCIAL REVIEW
18 Selected Financial Data
19 Management's Discussion and Analysis of
Financial Condition and Results of Operations
26 Consolidated Balance Sheet
27 Consolidated Statement of Operations
28 Consolidated Statements of Changes in
Shareholders' Equity and Comprehensive Income
29 Consolidated Statement of Cash Flows
30 Notes to Consolidated Financial Statements
43 Quarterly Financial Data
43 Stock Data
44 Report of Independent Accountants
TABLE OF CONTENTS
Regis Corporation
Selected Financial Data
The following table sets forth, for the periods indicated, selected
financial data derived from the Company's Consolidated Financial Statements.
- -----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Revenues ..................................... $1,454,191 $1,311,621 $1,142,993 $ 991,900 $ 860,620
Operating income(a) .......................... 133,864 109,281 97,216 65,335 65,858
Net income(a) ................................ 72,054 53,088 49,654 32,205 33,894
Net income, excluding goodwill amortization(c) 72,054 61,954 57,395 38,432 37,975
Net income per diluted share(a) .............. 1.63 1.26 1.19 .78 .83
Net income per diluted share, excluding
goodwill amortization(c) ................... 1.63 1.47 1.38 .93 .93
Total assets ................................. 957,190 736,505 628,355 500,582 408,733
Long-term debt, including current portion .... 299,016 261,558 234,601 166,986 126,960
Dividends declared(b) ........................ $ .12 $ .12 $ .12 $ .10 $ .06
(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 non-recurring activities (see Note 11 to the Consolidated
Financial Statements). Exclusive of nonrecurring items, operating income
would have been $100,156, $81,468 and $67,837 in 2000, 1999 and 1998,
respectively. Exclusive of nonrecurring items, net income would have been
$70,304, $52,380, $43,759 and $35,006 in 2002, 2000, 1999 and 1998,
respectively. The nonrecurring items increased reported net income per
diluted share by $.04 in 2002 and reduced reported net income per diluted
share by $.07 in 2000, $.27 in 1999 and $.03 in 1998.
(b) In addition, Supercuts UK declared dividends of $367, $2,829 and $2,057
during 2000, 1999 and 1998, respectively.
(c) Effective July 1, 2001, Regis changed its accounting to discontinue the
amortization of goodwill. See Note 1 to the Consolidated Financial
Statements.
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,
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2002 2001 2000
- ---------------------------------------------------------------------------------------
Company-owned service revenues(1) ........................ 70.0% 71.2% 71.3%
Company-owned product revenues(1) ........................ 30.0 28.8 28.7
Franchise revenues ....................................... 5.3 4.3 4.4
Company-owned operations:
Profit margins on service(2) ....................... 43.4 43.0 43.3
Profit margins on product(3) ....................... 47.6 47.0 46.1
Direct salon(1) .................................... 9.0 9.0 8.5
Rent(1) ............................................ 14.3 14.1 14.0
Depreciation(1) .................................... 3.5 3.4 3.4
Direct salon contribution(1) .................. 17.8 17.7 18.2
Franchise direct costs, including product and equipment(4) 49.1 37.7 34.7
Corporate and franchise support costs .................... 9.6 9.6 10.1
Depreciation and amortization(5) ......................... 0.7 1.7 1.5
Nonrecurring items(6) .................................... 0.3
Operating income(5) ...................................... 9.2 8.3 8.5
Income before income taxes(5) ............................ 8.0 6.8 7.3
Net income(5) ............................................ 5.0 4.0 4.3
Operating income, excluding nonrecurring items(5)(6) ..... 9.2 8.3 8.8
Net income, excluding nonrecurring items(5)(6) ........... 4.8 4.0 4.6
(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.
(4) Computed as a percent of franchise revenues.
(5) See Note 1 to the Consolidated Financial Statements regarding
discontinuation of goodwill amortization, effective July 1, 2001, and
comparative financial information.
(6) See Note 11 to the Consolidated Financial Statements regarding the
nonrecurring income tax benefit in fiscal 2002 and the nonrecurring items
in fiscal 2000.
18
Regis Corporation
Management's Discussion and Analysis of Financial Condition and
Results of Operations
[BAR GRAPH]
EBITDA
(Exclusive of nonrecurring
items in prior years)
(Dollars in millions)
00 156
01 175
02 $194
Compounded Annual
Growth Rate - 11.5%
SUMMARY
Regis Corporation, based in Minneapolis, Minnesota, is the world's largest
owner, operator, franchisor and acquirer of hair and retail product salons. The
Regis worldwide operations include 8,684 salons at June 30, 2002 operating in
two reportable segments: domestic and international. Each of the Company's
concepts have generally similar products and services. The Company is organized
to manage its operations based on geographical location. The Company's domestic
segment includes 6,618 salons, including 2,224 franchised salons, operating
primarily under the trade names of Regis Salons, MasterCuts, Trade Secret,
SmartStyle, Supercuts and Cost Cutters. The Company's international operations
include 2,066 salons, including 1,684 franchised salons, located throughout
Europe, primarily in the United Kingdom, France, Italy and Spain. The Company
has approximately 43,000 employees worldwide.
CRITICAL ACCOUNTING POLICIES
The preparation of Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America
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. Management bases these
estimates on historical experience and other assumptions believed to be
reasonable under the circumstances. However, actual results could differ from
these estimates.
Management believes the Company's critical accounting policies and areas
that require more significant judgments and estimates used in the preparation of
its Consolidated Financial Statements to be:
- useful lives assigned to long-lived and intangible assets;
- recoverability of long-lived and intangible assets, including goodwill;
- allocation of the purchase price to acquired assets and liabilities,
including goodwill and intangibles;
- various commitments and contingencies.
Depreciation and amortization are recognized using the straight-line method
over the long-lived assets' estimated useful lives. The Company estimates useful
lives based on historical data and industry trends. The Company periodically
reassesses the estimated useful lives of its long-lived and intangible assets.
Changes to estimated useful lives would impact the amount of depreciation and
amortization expense recorded in earnings and potentially the need to record an
impairment charge.
The Company reviews long-lived and intangible assets, including goodwill,
for impairment annually, or at any time events or circumstances indicate that
the carrying value of such assets may not be fully recoverable. For long-lived
assets and amortizable intangible assets, an impairment is evaluated based on
the sum of undiscounted estimated future cash flows expected to result from use
of the assets compared to its carrying value. The Company generally considers
its brands to be reporting units when it tests for goodwill impairment because
that is where the Company believes goodwill naturally resides. If an impairment
is recognized, the carrying value of the impaired asset is reduced to its fair
value based on discounted estimated future cash flows. For goodwill, an
impairment is evaluated based on the fair value of the concept to which the
goodwill relates.
The Company makes numerous acquisitions that are recorded using the
purchase method of accounting. Accordingly, the purchase prices are allocated to
assets acquired, including intangible assets, and liabilities assumed based on
their estimated fair values at the dates of acquisition. Fair value is estimated
based on the amount for which the asset or liability could be bought or sold in
a current transaction between willing parties.
In the normal course of business, the Company must make continuing
estimates of potential future loss accruals related to legal, tax,
self-insurance accruals and uncollectible accounts. These accruals require the
use of management's judgment on the outcome of various issues. Management's
estimates for these items are based on the best available evidence, but due to
changes in facts and circumstances, the ultimate outcomes of these accruals
could be different than management estimates.
19
Regis Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
RESULTS OF OPERATIONS
Revenues
Revenues in fiscal 2002 grew to a record $1.5 billion, an increase of
$142.6 million, or 10.9 percent, over fiscal 2001. Approximately 47 percent of
this increase was attributable to new salon construction and 33 percent to salon
acquisitions, with the remaining increase primarily due to same-store sales
increases. Mall and strip center based salon operations in the United States and
Canada (domestic salons) accounted for $116.7 million of the increase in total
revenues, while franchise revenues increased $21.3 million, primarily due to
International operations, and revenue from company-owned International
operations increased $4.6 million.
Revenues by concept for the years ended June 30, 2002, 2001 and 2000 were
as follows:
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------
Domestic:
Regis Salons ................................................ $ 416,240 $ 401,756 $ 376,709
MasterCuts .................................................. 164,768 155,703 142,865
Trade Secret ................................................ 192,892 181,787 166,652
SmartStyle .................................................. 178,728 125,851 88,313
Strip Center Salons (primarily Supercuts and Cost Cutters)... 382,483 345,572 259,886
International ................................................. 119,080 100,952 108,568
- ----------------------------------------------------------------------------------------------------
$1,454,191 $1,311,621 $1,142,993
====================================================================================================
Included in the table above, primarily as part of Strip Center Salons and
International, are franchise revenues of $77.6 million, $56.3 million and $50.3
million during fiscal 2002, 2001 and 2000, respectively.
During fiscal 2002, same-store sales from all domestic company-owned
salons open more than 12 months increased 3.0 percent, compared to increases of
2.8 percent and 4.3 percent in fiscal 2001 and 2000, respectively. Same-store
sales increases achieved during fiscal 2002 were driven primarily by higher
product sales and a shift in the mix of service sales toward higher priced salon
services, such as hair color. Same-store sales increases achieved during fiscal
2001 and 2000 were driven primarily by increased customer transactions and
market based price increases in certain salon divisions. A total of 125 million
customers were served system-wide in fiscal 2002 compared to 118 million and 106
million customers served in fiscal 2001 and 2000, respectively.
System-wide sales, inclusive of non-consolidated sales generated from
franchisee salons, grew to a record $2.3 billion, $1.9 billion and $1.7 billion
in fiscal 2002, 2001 and 2000, respectively. The increase in system-wide sales
in fiscal 2002 and 2001 was the result of same-store sales increases from
existing salons and net salon openings, as well as salons added to the system
through acquisitions. System-wide same-store sales increased 3.3 percent in
fiscal 2002 and 2001, and 3.7 percent in fiscal 2000.
Service Revenues. Service revenues increased to $963.9 million, $893.5 million
and $779.6 million in fiscal 2002, 2001 and 2000, respectively. The growth in
service revenues in fiscal 2002 and 2001 was driven by new salon construction,
acquisitions and same-store sales growth.
Product Revenues. Product revenues increased to $412.7 million, $361.9 million
and $313.1 million in fiscal 2002, 2001 and 2000, respectively. The growth in
product revenue in fiscal 2002 and 2001 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. In fiscal 2002, product revenues as a percent of total
company-owned revenues increased to 30.0 percent of revenues, compared to 28.8
percent and 28.7 percent of revenues in fiscal 2001 and 2000, respectively.
Franchise Revenues. Franchise revenues, including royalties and initial
franchise fees from franchisees, and product and equipment sales made by the
Company to franchisees, increased 37.8 percent, or $21.3 million, in fiscal 2002
to $77.6 million. In fiscal 2001, franchise revenues increased 12.0 percent, or
$6.0 million, compared to fiscal 2000. The increase in fiscal 2002 franchise
revenues was primarily the result of increased franchise royalties and fees
related to the recently acquired European franchise companies, Groupe Gerard
Glemain (GGG) and Jean Louis David (JLD). Increased sales of product to
franchisee salons also contributed to the fiscal 2002 increase in franchise
revenues and was the primary driver of the increase during fiscal 2001.
Cost of Revenue
The aggregate cost of product and service revenues for company-owned salons
in fiscal 2002 was $762.4 million, compared to $700.8 million and $611.0 million
in fiscal 2001 and 2000, respectively. The resulting gross margin percentage for
fiscal 2002 improved to 44.6 percent of company-owned revenues compared to 44.2
percent and 44.1 percent of company-owned revenues in fiscal 2001 and 2000,
respectively.
Service margins improved 40 basis points to 43.4 percent of company-owned
revenues in fiscal 2002 and declined 30
20
[BAR GRAPH]
GROSS MARGINS
00 44.1%
01 44.2%
02 44.6%
basis points to 43.0 percent in fiscal 2001. The fiscal 2002 improvement was
primarily due to improved payroll and payroll related costs as compared to
fiscal 2001. During fiscal 2001, payroll and payroll related costs were slightly
higher than normal as a percentage of company-owned revenues due to certain
fixed cost payroll components increasing in greater magnitude than the related
increase in sales. This resulted in a lower gross margin due to a higher fixed
payroll cost-to-sales ratio and caused the 30 basis point decline as a
percentage of company-owned revenues during fiscal 2001.
Product margins for fiscal 2002, as a percent of company-owned revenues,
improved to 47.6 percent, compared to 47.0 percent in fiscal 2001 and 46.1
percent in fiscal 2000. The fiscal 2002 and 2001 improvements were primarily the
result of a shift in the Company's mix of products sold. Beginning in the latter
portion of fiscal 2001, the product mix changed to consist more heavily of
products with a higher profit margin. Additionally, the fiscal 2002 improvement
was driven by improved purchasing power, enabling the Company to buy retail
product from vendors at lower prices.
Direct Salon
This expense category includes direct costs associated with salon
operations such as salon advertising, insurance, telephone, utilities and
janitorial costs. Direct salon expenses were $123.9 million in fiscal 2002,
compared to $112.7 million and $92.8 million in fiscal 2001 and 2000,
respectively, and remained consistent as a percent of company-owned revenue at
9.0 percent in fiscal 2002 and 2001, compared to 8.5 percent in fiscal 2000.
During fiscal 2002, higher workers' compensation costs were offset by lower
advertising costs on a per salon basis and same-store sales increasing at a rate
faster than certain fixed cost components. The fiscal 2001 costs increased as a
percentage of sales primarily due to higher utility and freight costs, increased
workers' compensation rates and lower same-store sales increases.
Rent
Rent expense in fiscal 2002 was $197.3 million, compared to $176.9 million
and $152.7 million in fiscal 2001 and 2000, respectively. Rent expense increased
20 basis points to 14.3 percent of company-owned revenues during fiscal 2002
primarily due to higher common area maintenance costs. In regional malls,
landlords experienced higher maintenance, insurance and security costs which
they are passing on to their tenants such as Regis. In fiscal 2001, rent expense
increased ten basis points to 14.1 percent of company-owned revenue primarily
due to lower same-store sales increases over which to spread this relatively
fixed cost.
Depreciation--Salon Level
Depreciation expense at the salon level remained relatively consistent at
3.5 percent of company-owned revenue in fiscal 2002, compared to 3.4 percent in
fiscal 2001 and 2000.
Direct Salon Contribution
For reasons previously discussed, direct salon contribution, representing
company-owned salon revenues less associated operating expenses, improved in
fiscal 2002 to $244.8 million, or 17.8 percent of company-owned revenues,
compared to $222.2 million, or 17.7 percent, in fiscal 2001 and $199.4 million,
or 18.2 percent, in fiscal 2000.
Franchise Direct Costs, Including Product and Equipment
Franchise direct costs include all direct costs related to franchise
salons, such as the cost of products and equipment sold to franchisees and
direct costs incurred at the Home Office and in Europe to support franchising
activities. Franchise direct costs increased to $38.1 million, or 49.1 percent
of franchise revenue, during fiscal 2002. The increase was primarily related to
costs associated with the recently acquired European franchise companies, GGG
and JLD. Additionally, growth in the sale of retail product to franchisees
contributed to the fiscal 2002 increase. During fiscal 2001, franchise direct
costs increased $3.8 million to $21.2 million, representing a 300 basis point
increase to 37.7 percent of franchise revenue. The fiscal 2001 increase was due
to acquisitions of two Canadian franchise companies in the second and third
quarters of fiscal 2001.
Corporate and Franchise Support Costs
Corporate and franchise support costs include expenses related to field
supervision (payroll, related taxes and travel) and home office administration
costs (such as warehousing, salaries, occupancy costs and professional fees).
Corporate and franchise support costs increased $13.7 million in fiscal 2002 to
$139.7 million. As a percent of total revenue, corporate and franchise support
costs during fiscal 2002 remained consistent at 9.6 percent. During fiscal 2001,
corporate and franchise support costs increased $10.9 million from $115.1
million in fiscal 2000 and decreased 50 basis points as a percent of sales from
10.1 percent. The 50 basis point improvement for fiscal 2001 was primarily due
to fiscal 2000 results including costs incurred related to the introduction of
the new Regis retail product line as well as costs related to the Company's
transition of the Supercuts UK home office.
21
Regis Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Depreciation and Amortization--Corporate
Depreciation and amortization--corporate was 0.7 percent of total revenues
in 2002, compared to 1.7 percent and 1.5 percent of total revenues in fiscal
2001 and 2000, respectively. The 100 basis point improvement in fiscal 2002 was
related to the implementation of Statement of Financial Accounting Standards
(FAS) No. 142, "Goodwill and Other Intangible Assets," in July 2001, which
discontinued the amortization of acquired goodwill, as discussed in Note 1 to
the Consolidated Financial Statements. The 20 basis point increase as a percent
of total revenues in fiscal 2001 was primarily related to increased amortization
expense due to the increased level of goodwill associated with the Company's
salon acquisition activity, as well as increases in corporate depreciation
related to self-developed software placed in service between periods.
Nonrecurring Items
See Note 11 to the Consolidated Financial Statements.
Operating Income
Operating income in fiscal 2002 increased to a record $133.9 million,
compared to $109.3 million in fiscal 2001 and $97.2 million in fiscal 2000. This
increase was driven primarily by the aforementioned change in accounting for
goodwill. Fiscal 2000 operating income was impacted by merger and transaction
costs associated with the Supercuts UK merger.
Exclusive of fiscal 2000 nonrecurring items, operating income in fiscal
2001 increased by $9.1 million, representing 8.3 percent of revenues, compared
to $100.2 million, or 8.8 percent of revenues, in fiscal 2000. The decrease in
operating income, exclusive of fiscal 2000 nonrecurring items, as a percent of
sales in 2001 was due to higher fixed payroll costs that were not offset by
same-store sales growth as well as increased direct salon expenses due to higher
utility and freight costs, increased workers' compensation rates and lower
same-store sales increases.
Interest
Interest expense improved in fiscal 2002 to $19.0 million, compared to
$21.5 million and $15.8 million in fiscal 2001 and 2000, representing 1.3
percent, 1.6 percent and 1.4 percent of total revenues, respectively. As a
percent of sales, interest expense decreased during fiscal 2002 due to a
reduction in interest rates on the Company's variable rate debt. Interest
expense as a percent of sales increased in fiscal 2001 due to higher debt levels
primarily resulting from the Company's acquisition program as well as slightly
higher interest rates.
Income Taxes
The Company's effective tax rate improved to 37.7 percent of pre-tax
income in fiscal 2002, compared to 40.3 percent in both fiscal 2001 and 2000.
During fiscal 2002, management recognized a one-time income tax benefit of
approximately $1.8 million resulting from the implementation of certain tax
planning strategies. The fiscal 2000 effective tax rate was impacted by
non-recurring merger and transaction costs associated with the Supercuts UK
merger. Exclusive of such fiscal 2002 and 2000 nonrecurring items, the Company's
effective tax rate was 39.2 percent, 40.3 percent and 39.3 percent in fiscal
2002, 2001 and 2000, respectively. The improvement in the fiscal 2002 effective
rate, exclusive of the nonrecurring income tax benefit, was primarily due to the
change in accounting for goodwill, as the permanent add-back for non-deductible
goodwill amortization for stock acquisitions was eliminated. The increase in the
fiscal 2001 annual rate, exclusive of nonrecurring items, compared to fiscal
2000 was due to discrete Canadian acquisitions, structured as stock purchases,
which occurred during the second and third quarters of fiscal 2001.
Net Income
Net income in fiscal 2002 grew to a record $72.1 million, or $1.63 per
diluted share, compared to net income of $53.1 million, or $1.26 per diluted
share, in fiscal 2001, and $49.7 million, or $1.19 per diluted share, in fiscal
2000.
In fiscal 2002, net income exclusive of the nonrecurring income tax benefit
was $70.3 million. In fiscal 2000, net income exclusive of nonrecurring items
was $52.4 million. Nonrecurring items increased reported net income per diluted
share by $.04 in fiscal 2002 and decreased reported net income per diluted share
by $.07 in fiscal 2000. The $.33 increase in earnings per diluted share
exclusive of the nonrecurring income tax benefit during fiscal 2002 primarily
resulted from the change in accounting for goodwill, sales increases, improved
gross margins and leveraging of fixed costs against revenue increases, as
previously discussed. On a pro forma basis, assuming goodwill had not been
amortized during fiscal 2001 or 2000, net income would have been $62.0 million,
or $1.47 per diluted share and $57.4 million, or $1.38 per diluted share,
respectively. See Note 1 to the Consolidated Financial Statements.
22
[BAR GRAPH]
OPERATING INCOME GROWTH
(Exclusive of nonrecurring items)
(Dollars in millions)
00 100
01 109
02 $134
Compounded Annual
Growth Rate - 15.6%
Effects of Inflation
The Company primarily 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 concepts, 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.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in Note 1 to the
Consolidated Financial Statements.
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 2002 rose to a record $152.0 million
compared to $110.3 million and $85.4 million in fiscal 2001 and 2000,
respectively. The increases were primarily due to improved operating
performance, as well as continued improvement related to inventory management
during fiscal 2002.
Capital Expenditures and Acquisitions
During fiscal 2002, the Company had worldwide capital expenditures of $73.3
million, of which $7.1 million related to acquisitions. The Company constructed
349 new corporate salons in fiscal 2002, including 61 new Regis Salons, 42 new
MasterCuts salons, 34 new Trade Secret salons, 125 new SmartStyle salons, 69 new
Strip Center Salons and 18 new International salons, and completed 134 major
remodeling projects. All capital expenditures during fiscal 2002 were funded by
the Company's operations and borrowings under its revolving credit facility.
The Company anticipates its worldwide salon development program for fiscal
2003 will include approximately 435 new company-owned salons, 300 to 350 new
franchised salons, 175 major remodeling and conversion projects and 400 to 500
acquired salons. It is expected that expenditures for these development
activities will be approximately $125 million to $145 million, of which $75
million is allocated to new salon construction and salon remodeling and
conversions.
In April of fiscal 2002, the Company announced its acquisition of Jean
Louis David. The acquisition was funded by a portion of the proceeds from the
Company's recent $125.0 million of private placement debt and the issuance of
800,000 shares of the Company's common stock. Other acquisitions during fiscal
2002, as discussed in Note 3 to the Consolidated Financial Statements, were
funded by the Company's operations and borrowings under its revolving credit
facility. See Note 4 to the Consolidated Financial Statements for additional
information on the Company's financing arrangements.
Contractual Obligations and Commercial Commitments
The following table reflects a summary of obligations and commitments
outstanding by payment date as of June 30, 2002:
Payments Due By Period
- ------------------------------------------------------------------------------------------------
Within 5 Years
(Dollars in thousands) 1 Year 1-2 Years 3-4 Years or After Total
- ------------------------------------------------------------------------------------------------
Contractual cash obligations:
Senior long-term debt ........ $ 4,369 $ 87,557 $ 35,345 $ 165,440 $ 292,711
Operating leases(a) .......... 170,626 268,361 153,275 127,235 719,497
Other long-term obligations... 4,050 7,361 12,068 1,872 25,351
- ------------------------------------------------------------------------------------------------
Total .......................... $ 179,045 $ 363,279 $ 200,688 $ 294,547 $1,037,559
================================================================================================
(a) In accordance with accounting principles generally accepted in the United
States of America, these obligations are not reflected in the accompanying
audited Consolidated Balance Sheet.
Operating leases primarily represent long-term obligations for the rental
of salon premises, including franchisee accommodation leases of approximately
$109.9 million, which are funded by franchisees. In the event of default by a
franchise owner, the Company generally retains the right to acquire the related
salon assets net of any outstanding obligations. Management has not experienced
and does not expect any material loss to result from these contractual
arrangements.
23
Regis Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Other long-term obligations that are included in the table above are
composed of the following components:
- $10.2(a) million related to the residual value guarantee of a five-year
operating lease agreement for the Company's distribution center and
various equipment in Salt Lake City, Utah. Under the agreement, the
Company is obligated to pay the deficiency between the residual value
guarantee and the fair market value at the termination of the
agreement. Although the residual value guarantee is included in the
table above, the Company expects the fair market value of the
distribution center and related equipment, subject to the purchase or
remarket options, to substantially reduce or eliminate the Company's
potential liability under the residual value guarantee.
- The Company is the guarantor on $8.9(a) million in lease agreements
between its franchisees and leasing companies. This represents the
undiscounted value of the remaining lease obligations. As of June 30,
2002, the discounted obligation the Company would be liable for is $7.1
million. Under the agreements, the leasing companies may elect to hold
the Company liable if the franchisee defaults on the agreement. In such
cases, the Company retains the right to possess the related salon
operations. Management does not expect any material loss to result from
these agreements.
- $4.0 million related to capital leases and other.
- $2.3 million related primarily to assumed debt from acquisitions.
(a) In accordance with accounting principles generally accepted in the United
States of America, these obligations are not reflected in the accompanying
audited Consolidated Balance Sheet.
The Company does not have other unconditional purchase obligations, or
significant other commercial commitments such as commitments under lines of
credit, standby letters of credit and standby repurchase obligations or other
commercial commitments.
The Company is in compliance with all covenants and other requirements of
its credit agreements and indentures. Additionally, the credit agreements do not
include rating triggers or subjective clauses that would accelerate maturity
dates.
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, and continues to
enter into transactions to acquire established hair care salons and businesses.
Financing
Financing activities are discussed in Note 4 and derivative activities in
Note 5 to the Consolidated Financial Statements.
Management believes that cash generated from operations and amounts
available under its existing debt facilities will be sufficient to fund its
anticipated capital expenditures, acquisitions and required debt repayments for
the foreseeable future. Additionally, the Company received an investment grade
"2" rating in December 2001 from the NAIC, the rating agency that regulates
insurance companies in the private placement debt market. The change in rating
has proven to provide the Company with greater and less expensive access to
long-term senior debt during the third quarter, and the Company expects this
benefit to continue in the future.
The Company operates in international markets and 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.
Dividends
The Company paid dividends of $.12 per share during fiscal 2002, 2001 and
2000. On August 16, 2002, the Board of Directors of the Company declared a $.03
per share quarterly dividend payable September 13, 2002 to shareholders of
record on August 30, 2002.
In addition, Supercuts UK declared and paid dividends of $0.4 million
during fiscal 2000.
Share Repurchase Program
In May 2000, the Company's Board of Directors approved a stock repurchase
program under which up to $50 million can be expended for the repurchase of the
Company's common stock. The timing and amounts of any repurchases will depend on
many factors, including the market price of the common stock and overall market
conditions. As of June 30, 2002, 393,700 shares have been repurchased for $9.2
million. All repurchased shares are immediately retired. This repurchase program
has no stated expiration date.
24
Outlook
Regis Corporation is the world's largest owner, operator, franchisor and
acquirer of hair and retail product salons in the $135 billion hair care
industry. The 8,684 company-owned and franchised salons, which generated $2.3
billion of system-wide sales in fiscal year 2002, are located in the United
States, Canada, France, Italy, the United Kingdom, Spain, Belgium, Switzerland,
Poland, Brazil, and Puerto Rico.
Over the last ten years, the Company has been able to average double-digit
revenue and earnings growth through its strategy of building, acquiring and
franchising salons in high traffic locations throughout North America and
Europe.
Eight times larger than its nearest competitor, the Company maintains just
a two percent worldwide market share, signaling substantial opportunities for
long-term future growth.
The Company's growth strategy will continue to focus on building and
acquiring company-owned and operated salons in convenient locations with good
visibility, strong customer traffic and appropriate trade demographics. It will
continue to focus on the middle to moderately upscale market with its
broad-based salon concepts.
The Company believes that the availability of real estate and quality
stylists will not constrain its ability to achieve its long-term growth
objectives.
Franchising will also be a key component of the Company's future growth.
Through the combination of company-owned and franchise salon growth, the Company
expects to be able to strengthen its presence in existing markets as well as
successfully enter new markets.
In addition to growth in salon services, the Company has been successful in
growing the retail product business. During fiscal year 2002, retail product
sales increased 14 percent to $413 million. Through the offering of the largest
assortment of professional hair care products in the industry and superior
merchandising, the Company is confident that it can continue to successfully
grow its retail product business. Today, the Company estimates that it serves
approximately 10 percent of the U.S. retail product market.
Maintaining financial flexibility is also a key element in continuing
successful growth. With strong operating cash flow and an investment grade
rating, the Company is confident that it will be able to financially support its
future growth.
SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
This annual report, as well as information included in, or incorporated by
reference from, future filings by the Company with the Securities and Exchange
Commission and information contained in written material, press releases and
oral statements issued by or on behalf of the Company contains or may contain
"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
judgment 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. Such
forward-looking statements are often identified herein by use of words
including, but not limited to, "may," "believe," "project," "expect,"
"estimate," "anticipate," and "plan." In addition, the following factors could
affect the Company's actual results and cause such results to differ materially
from those expressed in forward-looking statements. These factors include
competition within the personal hair care industry, which remains strong, both
domestically and internationally, and price sensitivity; changes in economic
condition; changes in consumer tastes and fashion trends; labor and benefit
costs; legal claim; risk inherent to international development (including
currency fluctuations); the continued ability of the Company and its franchisees
to obtain suitable locations and financing for new salon development;
governmental initiatives such as minimum wage rates, taxes and possible
franchise legislation; the ability of the Company to successfully identify and
acquire salons that support its growth objectives; or other factors not listed
above.
25
Regis Corporation
Consolidated Balance Sheet
June 30,
- -----------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 2002 2001
- -----------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash ............................................................... $ 87,103 $ 24,658
Receivables, net ................................................... 26,901 18,861
Inventories ........................................................ 120,259 110,247
Deferred income taxes .............................................. 9,843 10,087
Other current assets ............................................... 12,580 8,794
- -----------------------------------------------------------------------------------------------
Total current assets ............................................ 256,686 172,647
Property and equipment, net ........................................... 318,482 300,990
Goodwill .............................................................. 304,529 236,117
Other intangibles, net ................................................ 54,907 10,854
Other assets .......................................................... 22,586 15,897
- -----------------------------------------------------------------------------------------------
Total assets .................................................... $ 957,190 $ 736,505
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term debt, current portion .................................... $ 7,221 $ 5,438
Accounts payable ................................................... 54,545 37,689
Accrued expenses ................................................... 97,523 68,788
- -----------------------------------------------------------------------------------------------
Total current liabilities ....................................... 159,289 111,915
Long-term debt ........................................................ 291,795 256,120
Other noncurrent liabilities .......................................... 61,441 28,969
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock, $.05 par value; issued and outstanding, 43,040,381
and 41,726,787 common shares at June 30, 2002 and 2001,
respectively ..................................................... 2,152 2,087
Additional paid-in capital ......................................... 194,859 165,489
Accumulated other comprehensive income (loss) ...................... 3,938 (4,815)
Retained earnings .................................................. 243,716 176,740
- -----------------------------------------------------------------------------------------------
Total shareholders' equity ...................................... 444,665 339,501
- -----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity ................... $ 957,190 $ 736,505
===============================================================================================
The accompanying notes are an integral part of the Consolidated
Financial Statements.
26
Regis Corporation
Consolidated Statement of Operations
Years Ended June 30,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share amounts) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Company-owned salons:
Service ................................................................. $ 963,884 $ 893,472 $ 779,604
Product ................................................................. 412,728 361,858 313,125
- ---------------------------------------------------------------------------------------------------------------------------
1,376,612 1,255,330 1,092,729
Franchise revenues:
Royalties and fees ...................................................... 50,745 38,230 36,157
Product sales ........................................................... 26,834 18,061 14,107
- ---------------------------------------------------------------------------------------------------------------------------
77,579 56,291 50,264
- ---------------------------------------------------------------------------------------------------------------------------
1,454,191 1,311,621 1,142,993
Operating expenses:
Company-owned salons:
Cost of service ......................................................... 546,027 508,981 442,198
Cost of product ......................................................... 216,373 191,796 168,787
Direct salon ............................................................ 123,915 112,667 92,841
Rent .................................................................... 197,269 176,947 152,685
Depreciation ............................................................ 48,269 42,720 36,832
- ---------------------------------------------------------------------------------------------------------------------------
1,131,853 1,033,111 893,343
Franchise direct costs, including product and equipment .................... 38,114 21,237 17,443
Corporate and franchise support costs ...................................... 139,654 125,927 115,058
Depreciation and amortization .............................................. 10,706 22,065 16,993
Nonrecurring items ......................................................... 2,940
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses .............................................. 1,320,327 1,202,340 1,045,777
- ---------------------------------------------------------------------------------------------------------------------------
Operating income ...................................................... 133,864 109,281 97,216
Other income (expense):
Interest ................................................................... (19,010) (21,487) (15,839)
Other, net ................................................................. 796 1,085 1,857
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes ............................................ 115,650 88,879 83,234
Income taxes:
Provision .................................................................. (45,346) (35,791) (33,580)
Nonrecurring income tax benefit ............................................ 1,750
- ---------------------------------------------------------------------------------------------------------------------------
(43,596) (35,791) (33,580)
- ---------------------------------------------------------------------------------------------------------------------------
Net income ............................................................ $ 72,054 $ 53,088 $ 49,654
===========================================================================================================================
Net income per share:
Basic ...................................................................... $ 1.70 $ 1.29 $ 1.22
===========================================================================================================================
Diluted .................................................................... $ 1.63 $ 1.26 $ 1.19
===========================================================================================================================
Weighted average shares outstanding:
Basic ...................................................................... 42,283 41,221 40,612
===========================================================================================================================
Diluted .................................................................... 44,172 42,031 41,602
===========================================================================================================================
Effective July 1, 2001, Regis changed its accounting for goodwill. For
comparability purposes, see Note 1 for pro forma amounts. The accompanying notes
are an integral part of the Consolidated Financial Statements.
27
Regis Corporation
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income
Accumulated
Common Stock Additional Other
--------------------- Paid-In Comprehensive Retained Comprehensive
(Dollars in thousands) Shares Amount Capital Income (Loss) Earnings Total Income
- -------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 ................... 40,419,122 $2,021 $ 148,504 $(1,095) $ 84,789 $ 234,219
Net income ............................... 49,654 49,654 $ 49,654
Foreign currency translation adjustments.. (1,179) (1,179) (1,179)
Pooling of interests adjustment .......... (665) (665)
Stock repurchase plan .................... (115,000) (6) (1,419) (1,425)
Proceeds from exercise of stock options .. 329,000 16 1,478 1,494
Shares issued in connection with
salon acquisitions ..................... 69,585 4 1,584 1,588
Tax benefit realized upon exercise of
stock options .......................... 646 646
Dividends ................................ (5,191) (5,191)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 ................... 40,702,707 2,035 150,793 (2,274) 128,587 279,141 $ 48,475
========
Net income ............................... 53,088 53,088 53,088
Foreign currency translation adjustments.. (921) (921) (921)
Transition adjustment relating to the
adoption of FAS No. 133, net of taxes .. (160) (160) (160)
Changes in fair market value of
financial instruments designated as
hedges of interest rate exposure, net
of taxes and transfers ................. (1,460) (1,460) (1,460)
Proceeds from exercise of stock options .. 298,362 16 1,971 1,987
Shares issued through franchise stock
incentive program ...................... 10,662 149 149
Shares issued in connection with
salon acquisitions ..................... 715,056 36 11,860 11,896
Tax benefit realized upon exercise of
stock options .......................... 716 716
Dividends ................................ (4,935) (4,935)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2001 ................... 41,726,787 2,087 165,489 (4,815) 176,740 339,501 $ 50,547
========
Net income ............................... 72,054 72,054 72,054
Foreign currency translation adjustments.. 9,460 9,460 9,460
Changes in fair market value of financial
instruments designated as hedges of
interest rate exposure, net of taxes
and transfers .......................... (707) (707) (707)
Stock repurchase plan .................... (278,700) (14) (7,729) (7,743)
Proceeds from exercise of stock options .. 621,163 31 7,719 7,750
Shares issued through franchise stock
incentive program ...................... 8,198 173 173
Shares issued in connection with
salon acquisitions ..................... 962,933 48 26,253 26,301
Tax benefit realized upon exercise
of stock options ....................... 2,954 2,954
Dividends ................................ (5,078) (5,078)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2002 ................... 43,040,381 $2,152 $ 194,859 $ 3,938 $243,716 $ 444,665 $ 80,807
==============================================================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
28
Regis Corporation
Consolidated Statement of Cash Flows
Years Ended June 30,
- -------------------------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income ............................................. $ 72,054 $ 53,088 $ 49,654
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ........................................ 56,821 49,821 42,483
Amortization ........................................ 2,911 15,097 11,634
Deferred income taxes ............................... 11,890 3,249 (1,003)
Other ............................................... 739 120 (381)
Changes in operating assets and liabilities:
Receivables ....................................... (575) (5,010) 267
Inventories ....................................... (7,759) (16,724) (20,350)
Other current assets .............................. (2,761) 2,669 1,078
Other assets ...................................... (2,460) (3,295) (3,432)
Accounts payable .................................. 7,354 1,369 1,799
Accrued expenses .................................. 13,070 7,766 (1,546)
Other noncurrent liabilities ...................... 755 2,159 5,181
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities ........... 152,039 110,309 85,384
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures ................................... (66,232) (80,224) (80,932)
Proceeds from sale of assets ........................... 873 682 852
Business and salon acquisitions, net of cash
acquired ............................................. (59,925) (45,165) (66,798)
- -------------------------------------------------------------------------------------------------
Net cash used in investing activities ............... (125,284) (124,707) (146,878)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Borrowings on revolving credit facilities .............. 250,800 321,200 413,786
Payments on revolving credit facilities ................ (336,300) (313,900) (321,928)
Proceeds from issuance of long-term debt ............... 125,000 25,000 7,958
Repayments of long-term debt ........................... (5,212) (5,942) (33,842)
Other, primarily increase in negative book cash
balances ............................................. 4,937 695 5,054
Dividends paid ......................................... (5,078) (4,935) (5,191)
Repurchase of common stock ............................. (7,743) (1,425)
Proceeds from issuance of common stock ................. 7,750 1,987 1,494
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities ........... 34,154 24,105 65,906
- -------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash ................... 1,536 63 123
- -------------------------------------------------------------------------------------------------
Increase in cash .......................................... 62,445 9,770 4,535
Cash:
Beginning of year ...................................... 24,658 14,888 10,353
- -------------------------------------------------------------------------------------------------
End of year ............................................ $ 87,103 $ 24,658 $ 14,888
=================================================================================================
The accompanying notes are an integral part of the Consolidated Financial
Statements.
29
Regis Corporation
Notes to Consolidated Financial Statements
1. BUSINESS DESCRIPTION AND SUMMARY OF 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, France,
Canada, Puerto Rico and several other countries. 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 throughout the United States are primarily
located in strip shopping centers. The company-owned and franchised salons in
the United Kingdom, France and several other countries are owned and operated in
malls, leading department stores, mass merchants and high-street locations.
At June 30, 2002, approximately five 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 four percent is owned by management and the Company's benefit
plans.
Consolidation:
The Consolidated 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.
Use of Estimates:
The preparation of Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America
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. The more significant
estimates made by management are the estimated useful lives and net realizable
values of long-lived assets, the fair value of assets acquired in business
combinations and various commitments and contingencies. Actual results could
differ from those estimates.
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. 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. Income statement accounts are translated at the average rates of
exchange prevailing during the year. The different exchange rates from period to
period impact the amount of reported income from the Company's international
operations.
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 a weighted average basis, which approximates 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 (30 to 39
years for buildings and improvements and five to ten years for equipment,
furniture, software and leasehold improvements).
The Company capitalizes both internal and external costs of developing or
obtaining computer software for internal use. Costs incurred to develop
internal-use software during the application development stage are capitalized,
while data conversion, training and maintenance costs associated with
internal-use software are expensed as incurred. As of June 30, 2002 and 2001,
the net book value of capitalized computer software costs was $23.2 million and
$24.1 million, respectively. Amortization expense related to capitalized
computer software was $5.5 million in fiscal 2002, $4.8 million in fiscal 2001
and $3.3 million in fiscal 2000, which has been determined based on an estimated
useful life of five or seven years.
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/amortization accounts are adjusted for property
retirements and disposals with the resulting gain or loss included in
operations. Fully depreciated/amortized assets remain in the accounts until
retired from service.
Goodwill:
Prior to July 1, 2001, 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 had not previously been involved,
was amortized on a straight-line basis over 40 years. Goodwill recorded in
connection with acquisitions which expanded the Company's existing business
activities (acquisitions of salon sites) was amortized on a straight-line basis,
generally over 20 years. Effective July 1, 2001, the Company ceased all
amortization of goodwill balances. See discussion under "Recent Accounting
Pronouncements."
30
Goodwill is tested for impairment annually or at the time of a triggering
event in accordance with the provisions of Statement of Financial Accounting
Standards (FAS) No. 142, "Goodwill and Other Intangible Assets." Fair values are
estimated based on the Company's best estimate of the expected present value of
future cash flows and compared with the corresponding carrying value of the
reporting unit, including goodwill. The Company generally considers its various
primary brands to be reporting units when it tests for goodwill impairment
because that is where the Company believes goodwill naturally resides. On July
1, 2001, goodwill was tested for impairment in this manner and the estimated
fair value of each reporting unit exceeded its carrying amount, indicating no
impairment of goodwill. The Company performs its annual goodwill impairment
testing during its fiscal third quarter.
Asset Impairment Assessments:
The Company reviews long-lived assets for impairment whenever events or
circumstances indicate that the carrying value of such assets may not be fully
recoverable. An impairment is evaluated based on the sum of undiscounted
estimated future cash flows expected to result from use of the assets compared
to its carrying value. If an impairment is recognized, the carrying value of the
impaired asset is reduced to its fair value, based on discounted estimated
future cash flows.
Franchise Revenues and Expenses:
Franchise revenues include royalties, initial franchise fees from
franchisees and sales of product to franchisees. Royalties are recognized as
revenue in the month in which franchisee services are rendered or products are
sold by franchisees. The Company recognizes revenue 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 included in franchise direct costs in the Consolidated
Statement of Operations include all direct expenses, such as the cost of product
sold to franchisees. All other indirect expenses associated with franchise
operations are included in corporate and franchise support costs in the
Consolidated Statement of Operations.
Advertising:
Advertising costs are expensed as incurred. Advertising costs expensed were
$31.3 million, $29.5 million and $24.9 million in fiscal 2002, 2001 and 2000,
respectively.
Advertising Funds:
Franchisees and certain company-owned salons are required to contribute a
percentage of sales to various advertising funds. The Company administers the
advertising funds at the directive of or subject to input from the franchise
community. Accordingly, amounts collected and spent by the advertising funds are
not reflected as revenues and expenditures of the Company. Assets of the
advertising funds administered by the Company, along with an offsetting
obligation to spend such assets, are recorded in the Consolidated Balance Sheet.
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 income 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 (EPS) is calculated as net income divided by
weighted average common shares outstanding. The Company's dilutive securities
include shares issuable under the Company's stock option plan and shares
issuable under contingent stock agreements. Diluted EPS is calculated as net
income divided by weighted average common shares outstanding, increased to
include assumed exercise of dilutive securities. Stock options with exercise
prices greater than the average market value of the Company's common stock are
excluded from the computation of diluted EPS.
Reclassifications:
Certain prior period amounts have been reclassified to conform to the
current year presentation. These reclassifications had no effect on net income
or shareholders' equity as previously presented.
Comprehensive Income:
Components of comprehensive income for the Company include net income, the
transition adjustment for the adoption of FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and interpreted,
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. These amounts
are presented in the Consolidated Statements of Changes in Shareholders' Equity
and Comprehensive Income.
Recent Accounting Pronouncements:
Effective July 1, 2001 and January 1, 2002, the Company adopted the
provisions of FAS No. 141, "Business Combinations," and FAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," respectively. The initial
adoption of these Statements did not have a material impact on the Consolidated
Statement of Operations.
The Financial Accounting Standards Board ("FASB") recently issued FAS No.
143, "Accounting for Asset Retirement Obligations," which addresses financial
accounting and reporting for obligations associated with the
31
Regis Corporation
Notes to Consolidated Financial Statements (continued)
retirement of tangible long-lived assets and the associated asset retirement
costs. FAS No. 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. The Company does not expect the initial adoption
of this Statement to have a material impact on the Consolidated Statement of
Operations.
Effective July 1, 2001, the Company adopted the provisions of Statement of
Financial Accounting Standards (FAS) No. 142, "Goodwill and Other Intangible
Assets." This statement discontinued the amortization of goodwill and
indefinite-lived intangible assets, subject to periodic impairment testing. The
effect of the change in accounting during the year ended June 30, 2002 was to
increase net income by approximately $11.1 million, or $.25 per diluted share.
The pro forma amounts shown below reflect the effect of retroactive application
of the non-amortization of goodwill as if the new method of accounting had been
in effect in the prior periods.
- --------------------------------------------------------------------------------
(Pro Forma Amounts) 2002 2001 2000
- --------------------------------------------------------------------------------
Net income (Dollars in thousands)
Reported net income ..................... $ 72,054 $ 53,088 $ 49,654
Goodwill amortization (net of tax
effect) ................................ 8,866 7,741
- --------------------------------------------------------------------------------
Adjusted net income ..................... $ 72,054 $ 61,954 $ 57,395
- --------------------------------------------------------------------------------
Basic earnings per share
Reported basic earnings per share ....... $ 1.70 $ 1.29 $ 1.22
Goodwill amortization (net of tax
effect) ................................ .21 .19
- --------------------------------------------------------------------------------
Pro forma basic earnings per share ...... $ 1.70 $ 1.50 $ 1.41
- --------------------------------------------------------------------------------
Diluted earnings per share
Reported diluted earnings per share ..... $ 1.63 $ 1.26 $ 1.19
Goodwill amortization (net of tax
effect) ................................ .21 .19
- --------------------------------------------------------------------------------
Pro forma diluted earnings per share .... $ 1.63 $ 1.47 $ 1.38
================================================================================
In addition, the remaining estimated useful lives of intangible assets
being amortized were reviewed in accordance with the provisions of the new
standard and deemed to be appropriate.
2. OTHER FINANCIAL STATEMENT DATA
The following provides additional information concerning selected balance
sheet accounts as of June 30, 2002 and 2001:
- ------------------------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001
- ------------------------------------------------------------------------------------------------
Property and equipment:
Land ............................................................... $ 3,817 $ 3,817
Buildings and improvements ......................................... 29,518 29,449
Equipment, furniture and leasehold improvements .................... 479,662 433,374
Internal use software .............................................. 44,186 39,635
Equipment, furniture and leasehold improvements under capital
leases ............................................................ 15,135 15,113
- ------------------------------------------------------------------------------------------------
572,318 521,388
Less accumulated depreciation and amortization ..................... (243,888) (211,722)
Less amortization of equipment, furniture and leasehold improvements
under capital leases .............................................. (9,948) (8,676)
- ------------------------------------------------------------------------------------------------
$ 318,482 $ 300,990
================================================================================================
Accounts payable* ..................................................... $ 54,545 $ 37,689
================================================================================================
Accrued expenses:
Payroll and payroll related costs* ................................. $ 41,769 $ 34,344
Insurance .......................................................... 20,252 15,021
Acquisition purchase price payable ................................. 9,771
Restructuring ...................................................... 713 1,056
Other .............................................................. 25,018 18,367
- ------------------------------------------------------------------------------------------------
$ 97,523 $ 68,788
================================================================================================
Other noncurrent liabilities:
Deferred income taxes .............................................. $ 29,813 $ 1,971
Other .............................................................. 31,628 26,998
- ------------------------------------------------------------------------------------------------
$ 61,441 $ 28,969
================================================================================================
*Accounts payable and accrued expenses include $11,869 and $5,762 of book
overdrafts in fiscal 2002 and 2001, respectively.
32
- ---------------------------------------------------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
Accumulated Accumulated
(Dollars in thousands) Cost Amortization Net Cost Amortization Net
- ---------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Trade names .......................... $ 29,343 $ (425) $ 28,918 $ 3,854 $ (35) $ 3,819
Franchise agreements ................. 22,831 (2,061) 20,770 6,115 (1,482) 4,633
Non-compete agreements ............... 5,132 (4,760) 372 5,029 (4,192) 837
Other ................................ 6,275 (1,428) 4,847 2,525 (960) 1,565
- ---------------------------------------------------------------------------------------------------------------------
$ 63,581 $ (8,674) $ 54,907 $ 17,523 $ (6,669) $ 10,854
=====================================================================================================================
Certain intangible asset amounts set forth above are based on preliminary
purchase price allocations associated with recent business acquisitions, and are
subject to finalization and adjustment.
All intangible assets have been assigned an estimated finite useful life,
and are amortized on a straight-line basis over the number of years that
approximate their respective useful lives (ranging from four to 30 years). The
straight-line method of amortization allocates the cost of the intangible assets
to earnings in proportion to the amount of economic benefits obtained by the
Company in that reporting period. Total amortization expense related to other
intangible assets during the years ended June 30 2002, 2001 and 2000 was
approximately $2.3 million, $1.4 million and $1.0 million, respectively. As of
June 30, 2002, future estimated amortization expense related to amortizable
intangible assets will be:
Fiscal Year (Dollars in thousands)
- --------------------------------------------------------------------------------
2003 .................................................... $3,183
2004 .................................................... 2,948
2005 .................................................... 2,678
2006 .................................................... 2,634
2007 .................................................... 2,634
The following provides additional information concerning the Company's
transaction and restructuring liabilities related to its fiscal 2000 merger with
Supercuts UK, its fiscal 1999 mergers and its restructuring liability related to
its fiscal 1999 restructuring plan for its international operations.
Restructuring--International Restructuring--Mergers
-------------------------------------------------------------------------------
Salon Salon Transaction
Closures and Closures and Charges--
(Dollars in thousands) Dispositions Other Subtotal Severance Dispositions Other Subtotal Mergers Total
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2000 ............. $ 583 $ 67 $ 650 $ 2,824 $ 23 $ 145 $ 2,992 $ 35 $ 3,677
Cash utilization .......... (534) (5) (539) (1,616) (27) (48) (1,691) (47) (2,277)
Foreign currency effect ... (19) (62) (81) (209) 31 (97) (275) 12 (344)
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2001 ............. 30 30 999 27 1,026 1,056
Cash utilization .......... (31) (31) (348) (27) (375) (406)
Foreign currency effect ... 1 1 62 62 63
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 2002 ............. $ -- $ -- $ -- $ 713 $ -- $ -- $ 713 $ -- $ 713
====================================================================================================================================
The restructuring liability at June 30, 2002 relates to the October 31,
1999 merger with Supercuts UK and will be satisfied through periodic contractual
payments by the end of fiscal 2004. In conjunction with the merger, the Company
recorded a pre-tax merger and transaction charge of $3.1 million in the second
quarter of fiscal 2000. This charge included approximately $2.6 million for
severance and other costs principally associated with the closure of Supercuts
UK's headquarters. Severance expense covered the termination of approximately 11
employees of Supercuts UK who had duplicate positions within the corporate
office functions. The charge also included approximately $0.5 million for
professional fees including investment banking, legal, accounting and
miscellaneous transaction costs. See Note 11 for a listing of nonrecurring
fiscal 2000 merger related activity included in operating income.
The following table sets forth a reconciliation of shares used in the
computation of basic and diluted earnings per share:
- ----------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------
Weighted average shares for basic earnings per share .............. 42,283,308 41,220,925 40,611,928
Effect of dilutive securities:
Dilutive effect of stock options ................................ 1,867,038 638,153 880,056
Contingent shares issuable under contingent stock agreements .... 21,986 171,895 110,298
- ----------------------------------------------------------------------------------------------------------------
Weighted average shares for diluted earnings per share ............ 44,172,332 42,030,973 41,602,282
================================================================================================================
33
Regis Corporation
Notes to Consolidated Financial Statements (continued)
Stock options covering approximately 55,000, 2,819,000 and 1,070,000 shares
were excluded from the shares used in the computation of diluted earnings per
share for fiscal year 2002, 2001 and 2000, respectively, since they were
anti-dilutive.
The following provides supplemental disclosures of cash flow activity:
- --------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Cash paid during the year for:
Interest .................................... $17,609 $20,534 $14,997
Income taxes ................................ 14,621 37,447 36,866
Significant non-cash investing and financing activities include the
following:
- In fiscal 2001 and 2000, the Company financed capital expenditures
totaling $0.1 million and $2.3 million, respectively, through capital
leases.
- In fiscal 2002, 2001 and 2000, in connection with various acquisitions,
the Company entered into seller-financed payables and non-compete
agreements as well as issuing 962,933, 715,056 and 69,585 shares,
respectively, of the Company's common stock (see Note 3).
3. MERGERS AND ACQUISITIONS:
Supercuts (Holdings) Limited Merger:
Effective October 31, 1999, the Company consummated a merger with Supercuts
UK. Under the terms of the merger agreement, the shareholders of Supercuts UK, a
privately held company, received approximately 1.8 million 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. See
discussion of the related restructuring liability in Note 2.
Other Acquisitions:
During fiscal 2002, 2001 and 2000, the Company made numerous acquisitions
in addition to its merger with Supercuts UK. 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 dates of acquisition. These acquisitions
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. The most significant of
the fiscal 2002 acquisitions were the acquisition of the European franchise
companies, Groupe Gerard Glemain (GGG) and Jean Louis David (JLD). With respect
to these acquisitions, the Company is currently in the process of obtaining
valuations of the identifiable intangible assets.
Based upon the preliminary purchase price allocations, the components of
the aggregate purchase prices of the acquisitions and the allocation of the
purchase price were as follows:
- ----------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------
Components of aggregate purchase price:
Cash ......................................... $ 59,925 $ 45,165 $ 66,798
Stock ........................................ 26,301 11,896 1,588
Liabilities assumed or payable ............... 13,608 7,383 5,225
- ----------------------------------------------------------------------------------
$ 99,834 $ 64,444 $ 73,611
==================================================================================
Allocation of the purchase price:
Net tangible assets (liabilities) acquired ... $ (4,486) $ 11,677 $ 7,576
Identifiable intangible assets ............... 41,181 8,672 --
Goodwill ..................................... 63,139 44,095 66,035
- ----------------------------------------------------------------------------------
$ 99,834 $ 64,444 $ 73,611
==================================================================================
Based upon the preliminary purchase price allocations, the change in the
carrying amount of the goodwill for the years ended June 30, 2002 and 2001 is as
follows:
2002 2001
-------------------------- --------------------------
(Dollars in thousands) Domestic International Domestic International
- ------------------------------------------------------------------------------------------
Balance at beginning of year ... $ 230,716 $ 5,401 $ 200,036 $ 6,361
Goodwill acquired .............. 21,297 41,842 44,076 19
Amortization ................... (13,112) (596)
Translation rate adjustments ... 42 5,231 (284) (383)
- ------------------------------------------------------------------------------------------
Balance at end of year ......... $ 252,055 $ 52,474 $ 230,716 $ 5,401
==========================================================================================
34
Generally, the goodwill recognized in the domestic transactions is expected
to be fully deductible for tax purposes and the goodwill recognized in the
international transactions is non-deductible for tax purposes. The walk-in
customer base of acquired salons was not recognized as an identifiable
intangible asset as the customers are not known or identifiable by the Company.
Therefore, the value of the customer base is recognized as part of residual
goodwill. Internationally, the acquisition purchase price goodwill residual
primarily represents the growth prospects that are not captured as part of
acquired tangible or identified intangible assets.
4. FINANCING ARRANGEMENTS:
The Company's long-term debt as of June 30, 2002 and 2001 consists of the
following:
Interest Maturity
Rate % Dates 2002 2001
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Senior term notes ........................ 6.55- 8.39 2003-2012 $ 237,711 $ 113,163
Revolving credit facilities .............. 2.68- 8.23 2004 55,000 140,500
Equipment and leasehold notes payable .... 7.57-11.56 2004-2007 4,047 6,391
Other notes payable ...................... 5.00-10.00 2003-2009 2,258 1,504
------------------------
299,016 261,558
Less current portion ..................... (7,221) (5,438)
------------------------
Long-term portion ........................ $ 291,795 $ 256,120
========================
During March of fiscal 2002, the Company completed a $125.0 million private
debt placement, with an average life of 8.6 years and a fixed coupon rate of
6.98 percent. Proceeds were in part used to repay approximately $75.0 million of
existing debt from the Company's revolving credit facility. The additional $50.0
million of proceeds were primarily used to fund the Jean Louis David
acquisition, which was completed in April of 2002.
In October 2000, the Company borrowed $25 million under an 8.39 percent
senior term note due October 2010 to finance various acquisitions by the
Company.
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 September 2003, and modifying certain debt
covenant restrictions. The facility bears interest at the prime rate or LIBOR
plus 75 to 137.5 basis points based on the Company's debt-to-capitalization
ratio and allows for multi-currency borrowings. The prime rate at June 30, 2002
and 2001 was 4.75 percent and 6.75 percent, respectively. The revolving credit
facility requires a quarterly commitment fee of 15 to 25 basis points on the
unused portion of the facility. The LIBOR credit spread and commitment fee are
based on the Company's debt-to-EBITDA ratio at the end of each fiscal quarter.
The facility is used for short-term financing of new salon and acquisition
growth as well as to finance the general working capital requirements of the
Company.
In June 2000, the Company extended the term of a $4.0 million note payment
originally due July 1, 2000. The $4.0 million is the final payment due under a
$10.0 million senior term note entered into in October 1996. The maturity on the
term note has been extended to September 2003.
The equipment and leasehold notes payable are primarily comprised of
capital lease obligations totaling $4.0 million and $5.9 million at June 30,
2002 and 2001, respectively. These capital lease obligations are payable in
monthly installments through 2005.
All of the Company's debt instruments are unsecured, except for its capital
lease obligations which are collateralized by the assets purchased under the
agreement.
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 not exceed specified
fixed charge coverage, leverage and debt-to-capitalization ratios.
As a result of the fair value hedging activities discussed in Note 5, an
adjustment of approximately $2.3 million was made to increase the carrying
values of the Company's long-term fixed rate debt. Approximately 47 percent of
the Company's fixed rate debt has been marked to market. Considering the
mark-to-market adjustment and current market interest rates, the carrying values
of the Company's debt instruments, based upon discounted cash flow analyses
using the Company's current incremental borrowing rate, approximate their fair
values at June 30, 2002.
Aggregate maturities of long-term debt, including capital lease obligations
at June 30, 2002, are as follows:
Fiscal Year (Dollars in thousands)
- --------------------------------------------------------------------------------
2003..................................................... $ 7,221
2004..................................................... 76,863
2005..................................................... 15,750
2006..................................................... 12,549
2007..................................................... 22,037
Thereafter............................................... 164,596
- --------------------------------------------------------------------------------
$299,016
================================================================================
35
Regis Corporation
Notes to Consolidated Financial Statements (continued)
5. DERIVATIVE INSTRUMENTS:
Effective July 1, 2000, Regis adopted FAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and interpreted. FAS
133 requires that all derivative instruments, such as interest rate swap
contracts, be recognized in the financial statements and measured at their fair
value. Changes in the fair value of derivative instruments are recognized each
period in current earnings or shareholders' equity (as a component of other
comprehensive income or loss), 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 on 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 (loss).
In the normal course of business, the Company is exposed to changes in
interest rates and foreign currency rates. In addition, the Company has
investments in foreign subsidiaries, and the net assets of these subsidiaries
are exposed to currency exchange-rate volatility. 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 uses interest rate
swaps to convert a portion of its variable rate debt to fixed rates, as well as
to convert a portion of its nonprepayable fixed rate debt to variable rate debt.
At June 30, 2002, Regis had interest rate swap contracts to pay fixed rates
of interest (ranging from 5.1 percent to 7.2 percent) and receive variable rates
of interest based on the three-month LIBOR rate (ranging from 1.9 percent to 3.7
percent during fiscal 2002) on $25 million, $30 million and $11.8 million
notional amounts of indebtedness through April 2003, June 2003 and June 2005,
respectively. These swaps have been designated as cash flow hedges of interest
payments on a portion of the Company's revolving credit facility and rental
payments on the Company's warehouse operating lease. During fiscal 2002, no
hedge ineffectiveness occurred. The pay-fixed receive-variable interest rate
swaps resulted in net settlement loss of approximately $2.7 million and $0.6
million that have been transferred from accumulated other comprehensive income
(loss) to earnings during fiscal 2002 and 2001, respectively. Such amounts are
classified as part of interest expense in the Consolidated Statement of
Operations. As of June 30, 2002, the Company estimates, based on current
interest rates, that approximately $2.7 million of deferred net unrealized
losses on derivative instruments accumulated in other comprehensive income
(loss) are expected to be transferred to earnings during the next twelve months.
Such amounts will be transferred to earnings as interest payments are made on
the variable rate debt. The net loss recorded in other comprehensive income, net
of tax, was $3.4 million and $2.2 million during fiscal 2002 and 2001,
respectively.
During the third quarter of fiscal 2002, the Company entered into interest
rate swap contracts to pay variable rates of interest based on the three-month
and six-month LIBOR rate plus a credit spread (ranging from 3.6 percent to 6.3
percent during the period from March through June) and receive fixed rates of
interest (ranging from 6.7 percent to 8.2 percent) on an aggregate $111 million
notional amount of indebtedness, with maturation dates between July 2003 and
March 2009. These swaps have been designated as fair value hedges of a portion
of the Company's senior term notes. No hedge ineffectiveness occurred during the
year. As a result, the swaps did not have a net impact on earnings.
During the first quarter of fiscal 2002, the Company entered into a
cross-currency swap, with a notional amount of $21.3 million, to hedge a portion
of its net investments in its foreign operations. The purpose of this hedge is
to protect against adverse movements in exchange rates. The cross-currency swap
hedges approximately 14 percent of the Company's net investments in foreign
operations at June 30, 2002. For the year ended June 30, 2002, $1.5 million of
loss, net of tax, related to this derivative was charged to the cumulative
translation adjustment account, which is a component of other comprehensive
income.
6. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Company is committed under long-term operating leases for the rental of
most of its company-owned salon locations. The original 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. All additional lease costs are
passed through to the franchisees.
Total rent expense, net of sublease rental obligations of $30.6 million in
2002, $28.0 million in 2001 and $26.3 million in 2000 that are passed through to
the franchisees, includes the following:
- --------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Minimum rent ............................. $138,480 $124,261 $105,876
Percentage rent based on sales ........... 14,661 14,270 14,996
Real estate taxes and other expenses ..... 44,128 38,416 31,813
- --------------------------------------------------------------------------------
$197,269 $176,947 $152,685
================================================================================
36
Future Minimum Lease Payments:
As of June 30, 2002, future minimum lease payments (excluding percentage
rents based on sales) due under existing noncancellable operating leases with
remaining terms of greater than one year are as follows:
Corporate Reimbursable
Fiscal Year Leases Franchisee Leases
- ------------------------------------------------------------------------------------
(Dollars in thousands)
2003 ............................................. $138,595 $ 32,032
2004 ............................................. 120,797 27,627
2005 ............................................. 98,778 21,159
2006 ............................................. 76,279 13,788
2007 ............................................. 56,417 6,791
Thereafter ....................................... 118,781 8,453
- ------------------------------------------------------------------------------------
Total minimum lease payments ..................... $609,647 $109,850
====================================================================================
In addition to the amounts listed in the table above, the Company is
guarantor on a maximum of $8.9 million remaining payments in lease agreements
between its franchisees and leasing companies.
The Company entered into a five-year operating lease agreement in June 2000
related to its distribution center and various equipment in Salt Lake City,
Utah. The future minimum lease payments, which are included in the table above,
are estimated to be $1.8 million based on the cost of the distribution center
and the related equipment. Under the agreement, the Company is obligated to pay
the deficiency between the residual value guarantee and the fair market value at
the termination of the agreement. The Company expects the fair market value of
the distribution center and related equipment, subject to the purchase or
remarket options, to eliminate or substantially reduce the Company's maximum
potential liability of $10.2 million under the residual value guarantee. Thus,
the impact of the guarantee is not included in the table of future minimum lease
payments.
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, and continues to
enter into transactions to acquire established hair care salons and businesses.
Contingencies:
The Company is a defendant in various lawsuits and claims arising out of
the normal course of business. As of June 30, 2002, in the opinion of the
company counsel, the ultimate liabilities resulting from such lawsuits and
claims are not anticipated to have a material adverse effect on the consolidated
financial position, the results of operations or the liquidity of the Company.
The Company is self-insured for most workers' compensation and general
liability losses subject to per occurrence and aggregate annual liability
limitations. The Company is insured for losses in excess of these limitations.
The Company is also self-insured for health care claims for eligible
participating employees subject to certain deductibles and limitations. The
Company determines its liability for claims incurred but not reported on an
actuarial basis.
7. INCOME TAXES:
The provision for income taxes consists of:
- --------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Current:
United States ....................... $ 27,815 $ 31,272 $ 32,176
Nonrecurring federal benefit ........ (1,750)
International ....................... 2,891 2,228 2,407
Deferred:
United States ....................... 14,640 2,291 (885)
International ....................... (118)
- --------------------------------------------------------------------------------
$ 43,596 $ 35,791 $ 33,580
================================================================================
37
Regis Corporation
Notes to Consolidated Financial Statements (continued)
The components of the net deferred tax asset are as follows:
- --------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------
Net current deferred tax asset:
Insurance ................................... $ 1,677 $ 4,638
Payroll and payroll related costs ........... 3,015 2,538
Nonrecurring items .......................... 680 788
Other, net .................................. 4,471 2,123
- --------------------------------------------------------------------------------
$ 9,843 $ 10,087
================================================================================
Net noncurrent deferred tax (liability) asset:
Depreciation and amortization ............... $(38,126) $ (8,996)
Deferred rent ............................... 3,221 2,986
Payroll and payroll related costs ........... 5,345 4,398
Other, net .................................. (253) (359)
- --------------------------------------------------------------------------------
$(29,813) $ (1,971)
================================================================================
The components of income before income taxes are as follows:
- --------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Income before income taxes:
United States ......................... $108,116 $ 83,484 $ 79,041
International ......................... 7,534 5,395 4,193
- --------------------------------------------------------------------------------
$115,650 $ 88,879 $ 83,234
================================================================================
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) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
U.S. statutory rate .......................................................... 35.0% 35.0% 35.0%
Nonrecurring federal benefit ................................................. (1.5)
State income taxes, net of federal income tax benefit ........................ 3.3 3.3 3.4
Nondeductible merger and transaction costs ................................... 0.8
Other, primarily meals and entertainment, and nondeductible goodwill ......... 0.9 2.0 1.1
- ---------------------------------------------------------------------------------------------------------------
37.7% 40.3% 40.3%
===============================================================================================================
As of June 30, 2002, undistributed earnings of international subsidiaries
of approximately $2.1 million were considered to have been reinvested
indefinitely and, accordingly, the Company has not provided U.S. income taxes on
such earnings.
8. 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.
The ESOP is a noncontributory defined contribution plan and contributions to the
ESOP are at the discretion of the Company. Prior to January 22, 2002, such
contributions were invested in common stock of the Company. Subsequent to that
date, such contributions may be invested in a broad range of securities.
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 and pays all expenses of the SPP and its
administration, not to exceed an aggregate contribution of $4.0 million. At June
30, 2002, cumulative contributions to the SPP totaled $3.0 million.
38
Franchise Stock Purchase Plan:
The Company has a franchise stock purchase plan (FSPP) available to
substantially all franchisee employees. Under the terms of the plan, eligible
franchisees and their employees may purchase the Company's common stock. The
Company contributes an amount equal to five percent of the purchase price of the
stock to be purchased on the open market and pays all expenses of the plan and
its administration, not to exceed an aggregate contribution of $.7 million. At
June 30, 2002, cumulative contributions to the FSPP totaled $54,100.
Amounts expensed for company contributions to the aforementioned plans,
excluding amounts paid for expenses and administration of the plans, for the
three years in the period ended June 30, 2002, included the following:
- --------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
ESOP ..................................... $2,689 $1,900 $1,358
ESAP ..................................... 711 600 242
SPP ...................................... 455 455 459
FSPP ..................................... 7 6 7
Stock Options:
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 (1991 Plan).
Total options covering 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.
The Company also has stock options granted under the 1991 Plan. The terms
and conditions of the 1991 Plan are similar to the 2000 Plan. Total options
covering 5,200,000 shares of common stock were available for grant under the
1991 Plan and, as of June 30, 2001, all available shares have been granted.
In fiscal 2001, in addition to the regular options granted, the Board of
Directors approved a special grant of options covering 2,263,000 shares of
common stock from the 2000 Plan. These options begin vesting after two years at
a rate of one-third per year for three years and expire ten years from the date
of grant.
In addition to the regular options granted during fiscal 2000, a special
grant of 1,700,000 shares of common stock was approved by the Board of
Directors. These options are fully vested five years from the date of grant and
expire after ten years.
Common shares available for grant under the Company's stock option plans
were 819,650, 952,750 and 58,695 shares as of June 30, 2002, 2001 and 2000,
respectively.
Stock options outstanding and weighted average exercise prices are as
follows:
Options Outstanding
- --------------------------------------------------------------------------------
Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Balance, June 30, 1999 ....................... 2,495,568 $ 9.88
Granted ...................................... 2,492,750 17.25
Cancelled .................................... (57,821) 16.87
Exercised .................................... (329,000) 4.61
- --------------------------------------------------------------------------------
Balance, June 30, 2000 ....................... 4,601,497 $ 14.15
Granted ...................................... 2,583,250 15.56
Cancelled .................................... (64,666) 15.54
Exercised .................................... (298,362) 6.68
- --------------------------------------------------------------------------------
Balance, June 30, 2001 ....................... 6,821,719 $ 14.97
Granted ...................................... 301,500 29.60
Cancelled .................................... (360,749) 16.27
Exercised .................................... (621,163) 12.48
- --------------------------------------------------------------------------------
Balance, June 30, 2002 ....................... 6,141,307 $ 15.85
================================================================================
39
Regis Corporation
Notes to Consolidated Financial Statements (continued)
At June 30, 2002, the weighted average exercise prices and remaining
contractual lives of stock options are as follows:
Range of Exercise Prices $2.66-$15.00 $15.13 $15.15-$16.50 $17.00-$29.60 Total
- ------------------------------------------------------------------------------------------------------------------------------------
Total options outstanding ........................... 948,644 2,086,500 1,722,350 1,383,813 6,141,307
Weighted average exercise price ...................... $8.46 $15.13 $16.41 $21.32 $15.85
Weighted average remaining contractual life in years.. 3.40 8.08 7.39 7.63 7.06
Options exercisable .................................. 733,242 11,433 142,850 508,723 1,396,248
Weighted average price of exercisable options ........ $7.62 $15.13 $15.49 $18.52 $12.46
All stock option plans have been approved by the shareholders of the
Company.
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) 2002 2001 2000
- -------------------------------------------------------------------------------------------------
Net income:
As reported .......................................... $ 72,054 $ 53,088 $ 49,654
Pro forma ............................................ $ 67,796 $ 49,178 $ 47,371
Basic net income per share:
As reported .......................................... $ 1.70 $ 1.29 $ 1.22
Pro forma ............................................ $ 1.60 $ 1.19 $ 1.17
Net income per diluted share:
As reported .......................................... $ 1.63 $ 1.26 $ 1.19
Pro forma ............................................ $ 1.53 $ 1.17 $ 1.14
The pro forma information above includes stock options granted from 1996
through 2002.
The weighted average fair value per option granted during 2002, 2001 and
2000 was $14.31, $8.43 and $7.86, 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 weighted average assumptions:
- --------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------
Risk-free interest rate ....................... 4.86% 5.80% 6.33%
Expected life in years ........................ 6.50 6.55 6.00
Expected volatility ........................... 43.27% 41.08% 39.34%
Expected dividend yield ....................... .49% .83% .64%
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 $1.2 million, $1.0 million and $0.9 million in 2002, 2001
and 2000, respectively.
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. The Company has also agreed to pay the Chief Executive Officer an
amount equal to 60 percent of his salary, adjusted for inflation, for the
remainder of his life. Compensation associated with these agreements is charged
to expense as services are provided.
The Company has a survivor benefit plan for the Chairman of the Board of
Directors' (the Chairman) 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 company-owned
life insurance policies on the Chairman.
40
The Company has 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
company-owned life insurance policies on the Chief Executive Officer.
9. SHAREHOLDERS' EQUITY:
In addition to the shareholders' equity activity described in Note 8, the
following activity has taken place:
Authorized Shares and Designation of Preferred Class:
The Company has 100 million shares of capital stock authorized, par value
$.05, of which all outstanding shares, and shares available under the Stock
Option Plans, 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.
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 takeover
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.
Stock Repurchase Plan:
In May 2000, the Company's Board of Directors approved a stock repurchase
program under which up to $50 million can be expended for the repurchase of the
Company's common stock. The timing and amounts of any repurchases will depend on
many factors, including the market price of the common stock and overall market
conditions. During the years ended June 30, 2002 and 2000, 278,700 and 115,000
shares were repurchased for $7.7 million and $1.4 million, respectively. No
shares were repurchased during the fiscal year ended June 30, 2001. All
repurchased shares are immediately retired. This repurchase program has no
stated expiration date.
10. SEGMENT INFORMATION:
The Company operates or franchises 6,618 domestic salons and 2,066
international salons. The Company executes its domestic operations through five
primary concepts: Regis Salons, MasterCuts, Trade Secret, SmartStyle and Strip
Center (primarily Supercuts and Cost Cutters) salons. Each of the concepts
offers similar products and services, concentrates on the mass-market consumer
marketplace and have consistent distribution channels. All of the salons within
the North American concepts are located within high traffic retail (destination)
shopping locations and the individual salons generally display similar economic
characteristics. The Company's international operations, which are primarily in
Europe, are located in salons operating in malls, leading department stores,
mass merchants and high-street locations. Based on the way in which the Company
manages its business, it has presented its domestic and international operations
as two reportable operating segments, domestic and international.
The accounting policies of the reportable operating segments are the same
as those described in Note 1 to the Consolidated Financial Statements. The
Company evaluates the performance of its concepts 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
operating segments is shown in the following table as of June 30, 2002, 2001 and
2000:
- --------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Total revenues:
Domestic ........................... $1,335,111 $1,210,669 $1,034,425
International ...................... 119,080 100,952 108,568
- --------------------------------------------------------------------------------
Total ............................ $1,454,191 $1,311,621 $1,142,993
================================================================================
Salon contribution*:
Domestic ........................... $ 267,523 $ 244,171 $ 215,519
International ...................... 16,701 13,102 16,688
- --------------------------------------------------------------------------------
Total ............................ $ 284,224 $ 257,273 $ 232,207
================================================================================
*Includes franchise revenue less franchise direct costs.
41
Regis Corporation
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Depreciation and amortization:
Domestic ............................. $ 44,949 $ 39,947 $ 33,735
International ........................ 3,320 2,773 3,097
Corporate ............................ 10,706 22,065 16,993
- --------------------------------------------------------------------------------
Total .............................. $ 58,975 $ 64,785 $ 53,825
================================================================================
Total assets:
Domestic ............................. $577,230 $538,055 $457,948
International ........................ 130,922 13,048 14,470
Corporate ............................ 249,038 185,402 155,937
- --------------------------------------------------------------------------------
Total .............................. $957,190 $736,505 $628,355
================================================================================
Long-lived assets:
Domestic ............................. $510,591 $475,008 $402,631
International ........................ 114,047 17,197 17,538
Corporate ............................ 53,280 55,756 49,087
- --------------------------------------------------------------------------------
Total .............................. $677,918 $547,961 $469,256
================================================================================
Capital expenditures:
Domestic ............................. $ 54,444 $ 62,072 $ 48,944
International ........................ 4,792 3,914 4,015
Corporate ............................ 6,996 14,238 27,973
- --------------------------------------------------------------------------------
Total .............................. $ 66,232 $ 80,224 $ 80,932
================================================================================
Purchases of salon assets:
Domestic ............................. $ 26,060 $ 64,422 $ 73,611
International ........................ 73,774 22
- --------------------------------------------------------------------------------
Total .............................. $ 99,834 $ 64,444 $ 73,611
================================================================================
Included in the table above are franchise revenues of $77.6 million, $56.3
million and $50.3 million during fiscal 2002, 2001 and 2000, respectively, as
part of consolidated revenues. The expenses associated with the Company's
franchising activities are included in franchise direct costs, and corporate and
franchise support costs within the Consolidated Statement of Operations, as
described in Note 1 to the Consolidated Financial Statements. The current year
presentation has been changed to reflect total revenues and salon contribution
including franchise revenues and direct costs in order to show total segment
operating results. In fiscal 2001, only company-owned operations were reflected
in this disclosure.
Corporate assets detailed above are primarily comprised of property and
equipment 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.
11. 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) 2002 2001 2000
- --------------------------------------------------------------------------------
Merger transaction costs (Note 2) ........... $3,145
Change in estimate, merger costs ............ (548)
Severance ................................... 343
Nonrecurring federal income tax benefit ..... $(1,750) $0
- --------------------------------------------------------------------------------
$(1,750) $0 $2,940
================================================================================
In fiscal 2002, the Company implemented certain tax strategies resulting
in approximately $1.8 million of economic benefit, which has been recognized as
a nonrecurring income tax benefit in the third quarter, thus reducing fiscal
2002 income tax expense. The majority of the nonrecurring benefit will be
realized through the amendment of previous tax filings.
There were no nonrecurring items during fiscal 2001.
In fiscal 2000, the Company evaluated the outstanding merger and
restructuring accruals and determined that an adjustment of $0.5 million to the
Restructuring charge--Mergers was appropriate based on remaining expected
expenditures.
42
Regis Corporation
Quarterly Financial Data
(Unaudited)
Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) September 30 December 31 March 31 June 30 Year Ended
- ------------------------------------------------------------------------------------------------------------------------------------
2002(a)
Revenues .......................................... $349,668 $358,534 $361,578 $384,411 $1,454,191
Operating income .................................. 30,152 32,585 32,866 38,261 133,864
Net income ........................................ 15,356 16,967 19,334 20,397 72,054
Net income per diluted share(b)(c) ................ .36 .39 .44 .45 1.63
Dividends declared per share ...................... .03 .03 .03 .03 .12
Quarter Ended(a)
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts) September 30 December 31 March 31 June 30 Year Ended
- ------------------------------------------------------------------------------------------------------------------------------------
2001
Revenues .......................................... $310,754 $324,049 $330,910 $345,908 $1,311,621
Operating income .................................. 25,761 25,435 26,375 31,710 109,281
Net income(a) ..................................... 12,715 12,087 12,533 15,753 53,088
Net income per diluted share(a)(b) ................ .31 .29 .30 .37 1.26
Dividends declared per share ...................... .03 .03 .03 .03 .12
(a) Effective July 1, 2001, Regis changed its accounting to discontinue the
amortization of goodwill. For the quarters and year ended 2001, assuming the
non-amortization of goodwill was applied retroactively, pro forma net income
was $14.8, $14.0, $14.8, $18.4 million and $62.0 million, respectively, and
pro forma earnings per diluted share was $.36, $.33, $.35, $.43 and $1.47,
respectively.
(b) The summation of quarterly net income per share does not equate to the
calculation for the full fiscal year as quarterly calculations are performed
on a discrete basis. (c) For the quarter ended March 31, 2002 and for the
year ended June 30, 2002, a nonrecurring income tax benefit (Note 11)
increased reported net income per diluted share by $.04.
Regis Corporation
Stock Data
June 30, 2002
Regis common stock is listed and traded on the Nasdaq National Market under
the symbol "RGIS."
The accompanying table sets forth the high and low closing bid quotations
as reported by Nasdaq for each quarter during the previous two fiscal years. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
As of June 30, 2002, Regis shares were owned by approximately 27,476
shareholders. The common stock price was $24.48 per share on August 27, 2002.
- -----------------------------------------------------------------------------
2002 2001
----------------- ----------------
High Low High Low
- -----------------------------------------------------------------------------
1st Quarter ..................... $21.24 $17.77 $15.72 $12.41
2nd Quarter ..................... 27.94 20.23 16.32 13.14
3rd Quarter ..................... 28.30 24.59 15.73 13.20
4th Quarter ..................... 30.46 25.82 20.99 13.92
43
Regis Corporation
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, of changes in shareholders'
equity and comprehensive income and of cash flows present fairly, in all
material respects, the consolidated financial position of Regis Corporation at
June 30, 2002 and 2001, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 2002, in
conformity with accounting principles generally accepted in the United States of
America. 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 auditing standards generally accepted in the United States of
America, 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 our opinion.
As discussed in Note 1 to the consolidated financial statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
August 27, 2002
44